Many retailers spend more time planning their vacations than they do planning their inventory. Of course I can’t prove this, but it stands to reason given the fact that the average shoe store still turns inventory twice annually and is accepting of a gross margin return on inventory (GMROI) of less than $2. If we accept as fact that proper inventory planning is a key component to maximizing profitability, it makes sense that more time spent planning would lead to increased profits. Given that most open-to-buy dollars are allocated to initial or advance purchasing and the remaining funds are spent on in-season fill-ins and replacement orders, little or nothing is available for the purchase of off-price merchandise.
What is off-price merchandise?
Quite simply, it is merchandise made available from a vendor at a discount taken from the original line price, hence the term “off-price.”
Benefits to the Retailer
When a store is able to procure off-price merchandise from a supplier, it can serve to generate several benefits. If used effectively and the product is in-season, better margins, faster turnover, and increased volume all result. If the special buy is used as a traffic builder and the “savings” passed on to the customer, a good will element also is generated.
From time to time, I have heard retailers say that they don’t buy off-price because they have either tried it once and it didn’t work well or they felt that they were buying someone else’s problem. Both arguments are faulty.
First of all just because something was tried once doesn’t mean that it won’t work the next time. Several questions must be asked in order to determine if the buy was good or not. For example, how much was purchased? What was the price? Was it a good item from a vendor you usually by from? Was the merchandise timed right? How was it marketed once it was received? Regarding the second point, often-times retailers get an opportunity to buy into the very goods that they purchased originally. Other times a popular style becomes available for any number of reasons. By its very nature, off-price buying has a certain element of risk, but so does retail in general.
When It Works
The benefits of off-price merchandise can best be realized when a retailer plans for the buy in advance. It is not always easy to predict what exactly is going to be available. This goes for vendors, quantities, price, sizes, colors, and delivery timing. hat being said, when a retailer is in a healthy financial position and keeps open-to-buy dollars available for such buys, more often than not deals can be found. Sometimes an off-price purchase can be negotiated in advance when an initial order is being considered.
When It Doesn’t
If a store is overbought to begin with, buying more merchandise is generally not advisable no matter what the price is. You already have your own markdowns to worry about, let alone someone else’s. This would be like pouring gasoline on an already blazing fire. If you buy more off-price merchandise than your company can absorb, you will be defeating the purpose and will not be able to benefit fully from the buy. Additionally, if you buy product simply because the price is attractive yet it won’t stand up to the rest of your criteria, you are doing your company a disservice. Remember, the objective is to resell this merchandise quickly and make money. If you buy based on price alone you run the risk of getting burned.
If you are one of those folks who visit the gym once every quarter, you probably don’t see much value. The same applies to buying off-price merchandise. Make it part of your regular merchandising strategy. A basic open-to-buy strategy that you might consider would be to spend 60 percent of your money on initial or advance orders, 20 percent for fill-ins and reorders and keep 20 percent available for opportunistically-priced merchandise. An open-to-buy plan that is prepared by month, store and classification would greatly simplify this process. By allocating a portion of your open-to-buy dollars specifically for promotional merchandise, you will become more disciplined about seeking it out instead of waiting until it is offered to you. Be persistent in asking vendors what merchandise is available. Ask them to contact you immediately when they break price. You may not always be able to buy, but you should always take the time to look. Once you find merchandise that would be good for your store, and you have confirmed that open-to-buy dollars are available, don’t be afraid to pull the trigger. Buy the Best, and Pass the Rest!
Read more of Ritchie Sayner’s articles on inventory and open-to-buy planning.