Do You Know Where Your Profits Are?

– Mort Haaz

If you’re like most retailers this is a question that is constantly on your mind, but one that rarely gets a good answer. You work long and hard and certainly should be compensated for your efforts, but where are the profits to make that happen?

Retailers cut all kinds of costs in an effort to increase their bottom line. One of the most frequent cuts is the cost of labor. This is a mistake. Your most valuable asset is your help. You should select them with care, train them to care and compensate them so they will care. Your staff provides the first and last impression your customers take from your store. They also make the difference between marginal sales and exceptional sales. Cutting your labor cost is generally not in your favor.

Obviously, if you want to have any chance of being profitable you must generate sales. Your advertising program must consistently bring people into your store. Once they are inside, your store layout, your displays, and your personnel take over to sell the merchandise you have bought. For most retailers, the merchandise you have bought creates your profit problems. Not so much that you have bought the wrong items, but that you have bought the wrong quantities. If you are having problems with your cash flow, it’s more than likely because your working capital is in excess inventory rather than in the bank.

This is not a new problem, but it is a big problem. Retailers love to buy merchandise. We are happy to see reps and to go to shows because it gives us a chance to deal with what we became retailers for in the first place -- merchandise. We get to see all the new items first and order it. And order it we do!  Retailers want their stores to be full of merchandise. Time and time again retailers feel if they cut back their inventory, even slightly, their customers will think they are “out of business.”

To be a successful (profitable) retailer, you must buy the right quantities of merchandise and display it properly. The most expensive thing you can put in your store is merchandise. Filling your store to the brim with more and more merchandise is not to your advantage. It becomes difficult for your help to deal with and confusing to your customer.

Consumers need visual suggestions as they navigate your store. You need to lead them around by your displays. Displays tell a story, and they do it better than more merchandise. Now, this article is not about displays, but bear in mind their importance to your sales and your inventory position.

This article is about buying the right quantities. Your buying should always be to support your anticipated sales and never to fill space. You may find that your store is physically too large for the amount of business you do. In this case you can “cut off” a portion of your store to reduce the sales floor. You can also increase the number and size of your displays which will make your store more interesting, more exciting, and require less merchandise to “fill” it up.

Now, if the right items bring in the customers and the right quantities bring in the profits, how do you know what are the right quantities?  The answer is open-to-buy planning. The concept has been around for many years in one form or another. Many retailers use bits and pieces of open-to-buy, but the majority of small to medium sized retailers feel they can buy by the “seat of their pants” and don’t want to devote any time to working on a formalized buying plan. This is a bigger mistake than trying to improve your profits by cutting your labor costs!

Retailing is an artistic endeavor that must be built on a solid foundation of numbers. Most retailers are happy to deal with the artistic aspects of their store— design, displays, advertising, buying, and customer relations, but few want to deal with the numbers. However, the numbers provide the map that will enable a retailer to find the most effective route to their desired destination— profits.

Open-to-buy is this map. It will tell a retailer exactly how many dollars to commit for future delivery merchandise. This will enable you to receive the correct amount of merchandise to support your anticipated sales at desired turn rates and maintain a positive cash flow and maximize profitability.

Open-to-buy planning is a process that requires some set-up and a little monthly upkeep and then rewards retailers with knowledge that allows them to buy properly and profit mightily. By keeping your buying under control you will keep your inventory properly balanced and turning at ever increasing rates. You will find your sales improving, your markdowns declining and your cash flow greatly increased.

And you will finally know where your profits are, in your bank account where they belong!