What sells the best, fresh merchandise for the upcoming season or leftover inventory? With even a remedial understanding of the concepts of turnover and gross margin return on investment (GMROI), it should be easy to determine that new goods always trump old merchandise when it comes down to what will sell the fastest. The longer an item remains on the floor unsold, the more it costs you. Not only in real dollars, but in “missed opportunity” costs. In the past, I have discussed both turnover and GMROI in this column, so I thought we could use a fresh approach to discuss The Power of New!
Out with the Old Inventory in with the New Merchandise
Early in my career as a young merchandise manager, I was assigned the task of improving the shoe sales of the department store in which I worked. Our shoe buyer was an older man that had been in the shoe business longer than I had been alive, and we both knew it. In the process of reviewing our falling sales and heavy inventory, I convinced him that a tour of the stock room would be an eye opening experience for both of us. I was looking for leftover sizes, bad colors, poor fitting models, discontinued vendors and other slow sellers that could be immediately slashed to generate cash and open-to-buy dollars, which in turn would be used to reorder fresh merchandise. He proudly pointed out complete size runs of shoes that the store owned for longer than I am willing to admit in print. When I mentioned that we really needed everything on sale that had been in our store longer than six months, he looked at me like I had two heads. When the purging was complete, our inventory had been reduced by about one third, both in dollars and pairs. Sales volume in the shoe department grew at a rate of about 20 percent per month, and margins improved because we sold newer goods at full price instead of out of season product that we were lucky to sell for “cost.”
Even today some retailers are very skeptical when they hear me say that sales volume and margins can increase with a decrease in their inventory position. Did I mention that cash flow improves because new customers find their way to your store and existing customers buy more? I am currently working with several retailers in this exact situation. One merchant in particular comes to mind. The store is turning its women’s shoes 3.2 times more, all the while enjoying a 49.5 percent margin and a 15 percent sale increase over last year. Also, over 98 percent of this merchant’s inventory is less than three months old. My discussions with this store are different from others that I often have. There is no complaining about the poor economy, how $4 per gallon gasoline is keeping customers from the store, what the competition is doing, or which vendors didn’t ship this or that. Instead, we constantly review current fast selling models for possible reorder and slow sellers that can be reduced in season with a small markdown. Remaining open-to-buy dollars are used for off-price goods to add freshness to the assortment and bolster the margin. The Power of New has changed this retailer’s total approach to his business.
Grocery retailers have a greater understanding of The Power of New than shoe retailers do. They have to, if not they must throw away their inventory, literally. Next time you are in your neighborhood grocery store look at how the bananas are merchandised. Typically the newer fruit has a bit of green on the tip. These are the bananas that will be ripe enough to eat in the next few days. On the other hand, the old bananas have already begun to show their age by virtue of the dark spots on the skin. These will soon be bagged and discounted as their value to the store is diminished and their only remaining purpose is as an ingredient for banana bread. My point being, no one comes into any store purposely looking for old merchandise unless they are bargain hunters. Here’s a money saving tip that can help you now. Identify anything in your store that is over six months old.
If more than 20 percent is older than six months you have a potential problem. If over 30 percent of your stock is old, it is no longer a potential problem, it IS a problem that needs to be addressed now. Mark it down and clear it out. Reorder items that are selling well, and search for promotional inventory if your open-to-buy will permit.
Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at firstname.lastname@example.org or 816-505-7912.Sayner at email@example.com or 816-505-7912.