1) How did the past year’s sales compare with sales in the past three to five years? If your business has a history, use the archived statistics to your advantage. Look for trends within your sales performance. Hoagland-Smith emphasizes, “You can predict, based on the analysis, what will happen in the future.”

2) How did the past year’s profits compare with profits in the last three to five years? When measuring profitability, add up revenues and then subtract expenditures. Every little bit counts, and if you are saving/earning a little more each day, week, month or year, you are making a profit. Profitability is the key to sustainability.

3) Did your business meet its goals? While most retailers share a similar goal in making a profit and increasing customer traffic, each store owner may have a list of goals they were hoping to meet and exceed for the year. These goals could be in sales, marketing, management, or finances. Meeting goals shows determination, innovation, and makes next year’s goals that much easier to attain. If you haven’t made goals in years past, consider this an opportunity to start your success off on the right track.

4) Are repeat sales up, down or flat? Remember, the target is not only new customers, but loyal customers who continue to add to your bottom line and provide free marketing through recommendations. Hoagland-Smith mentions, “Encouraging repeat business increases profitability, because you don’t have to spend to bring in new customers.”

5) Is overall equity up, down or constant? While your business may seem like your life, as you continually pour your blood, sweat and tears into it, the real value can’t be determined by sentiment. Looking over balance statements and considering items such as the property’s worth, sales figures and the current customer base may help give a more accurate perspective. However, as time is critical in the retail industry and you have products to purchase, inventory to check and your first sale to plan, there are three simple considerations to help you better understand the business numbers, and grow profits in the upcoming year.

First, think of expenditures as assets, and not always as a negative. It can be beneficial to cut out expenses, but not if that expense helps improve your efficiency, build future revenue, or is enhancing your business as a whole. Second, create a smart budget that tells you how much you can afford. If you don’t spend all the budgeted money, you haven’t necessarily done something wrong. Any penny saved may help out with those unexpected seasonal expenses (i.e., energy in the winter or tax season accounting). Lastly, recognize the strategies that work, but more importantly, abandon those that don’t. As Intuit Blogger, Peter Vessenes, writes, “Especially for newer businesses, some strategies will inevitably go awry. A failed strategy does not have to mean a failed business, as long as you know when to pivot or pull out.”

Sales planning, projecting, forecasting or whatever label you wish to assign to it, needs to be done at the classification level and not by brand. Most independents almost always want to plan for an increase in business, whether warranted or not. An unrealistic sales forecast will generally lead to an overbought situation, which in turn will lead to increased markdowns at best, and decreased turn and cash flow at worst. Classifications get planned up based on profitable sales and trends, and down when the reverse happens. Merchandise planning that originates at the class level and rolls up to the department and then store level is referred to as bottom-up planning, as opposed to top down planning, which emanates from a total company plan and works its way down to the class level.

Planning the needed stock level to support the sales plan is the next phase. This is accomplished by the use of stock/sales ratios. A stock/sales ratio is simply the relationship between stock and sales. It is related to the turnover and the proper timing of deliveries. Stock/sales ratios are different for each classification and for every month. This is perhaps the single most compelling reason for automating the planning process. For example, a classification that is planned to turn three times would have a stock/sales ratio of 4. This can also be viewed as a number of months of supply to have in stock. (12 months/3 turns = 4 months of supply). If a classification holds more than it can sell for a given period of time, the stock/sales ratio increases, and over time, turnover will decrease. In severe examples, this can lead to higher markdowns than usual, reduced margins and an overall reduction in gross margin return on inventory (GMROI) as well.

Suffice to say, getting the inventory planned correctly is vital. When using the retail method of accounting, as we are assuming in this discussion, stocks are planned at the current retail value. This means that markdowns are recognized when they are taken, as opposed to when the merchandise is actually sold. This reduces the “market” value of the inventory by the amount of the markdown, which increases turnover and generates additional OTB dollars to land new merchandise. Some systems do a much better job at handling this than others; you can trust me on that.

Sales and inventory forecasting are the two most important elements in the creation of an OTB plan. If errors are made in either of these areas, the OTB plan is going to be wrong. Results of poor OTB planning or no planning can be quite costly, and generally lead to inventories that are out of balance. Under planned classifications lead to lost sales, while over planned categories typically end up less profitable due to markdowns and slower turnover. Attention also needs to be given to reporting accuracy, since inventory variance can substantially alter the merchandise plan. The capture of markdowns and transfer reporting is a good first place to look if you encounter an inventory variance that is outside of industry norms. Not using an open-to-buy plan is like driving a car without insurance or building a house without a blueprint. It is dangerous and sometimes the outcome can be disastrous.

Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions

Making resolutions for the upcoming year is a time honored tradition with roots tracing back to Babylonian times.  In 153 BC, Janus, the mythical King of early Rome was placed at the head of the calendar. Janus was always depicted with two faces, one looking back on past events, the other forward to the future. The early Christians believed the first day of the year should be spent reflecting on past mistakes and resolving to improve oneself in the coming year. Today, many people look at the New Year as a chance to start over, to rid themselves of bad habits and take on a fresh, positive way of life. Hence the modern day New Year’s resolution that generally encompasses everything from self improvement to improved finances.

As you reflect professionally on the past year and look forward to the next, take time to recognize past accomplishments that had a positive impact on your business.  As you consider areas you would like to improve on for the upcoming year, focus on goals, objectives and initiatives that are attainable and realistic. I want to avoid offering up a smorgasbord of suggestions that would most likely be forgotten as quickly as last season’s markdowns. However, here is one resolution that every merchant should make each and every year.

Resolve to: Sell more merchandise more quickly!

That’s it! Resolution making, at least from a business standpoint, is over. Here’s why.  Selling more of your inventory more quickly achieves a multitude of favorable results.  First, you have resolved to have a sales increase. This increase will be driven not by profit-stealing markdowns of old goods, but by fresh new products, which by now we all should recognize is the catalyst to increased revenue.  Second, we have resolved to sell said products more quickly, which translates into faster inventory turnover. Supporting this resolution is accurate open-to-buy planning by store and classification, properly timed deliveries, identification of hot selling items for timely reorders when possible, and dealing with slow selling inventory through stock balancing or in-season markdowns as soon as problems arise.

Added byproducts to increased sales and faster turnover are better margins, stronger cash flow, reduced operating expenses as a percentage of sales, and an elevated Gross margin return on investment (GMROI). Gross margin is enhanced for the simple reason that the newer the products, the greater likelihood of the product selling at full price. Every retailer should be cognizant of the fact that new goods, timed properly have the best chance of selling quickly.  Allow me to explain turnover in the simplest way possible: preferred several small invoices for deliveries on a consistent basis versus a few large ones due all at once. If you can accomplish this, turnover can be improved, providing you are not a chronic over buyer due to poor inventory planning, lack of discipline, or both. Operating expenses are expressed as a percentage of sales. When sales go up, operating expense percentage goes down, and net profit goes up. GMROI increases due to additional gross margin dollars being generated through more profitable sales along with a lower average cost inventory. Simple arithmetic.

Just as the early Romans approached each new calendar cycle by looking both backwards and forwards, if we embrace the benefits gained through retrospect to help guide our future path, we will be better prepared to receive the challenges of the coming retail year.

Here’s wishing you a Happy, Healthy and Prosperous New Year!

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 rsayner@rmsa.com or 816-505-7912.Sayner at rsayner@rmsa.com or 816-505-7912.

“October retail sales support the assertion that consumers have a distinct desire to spend, bolstering hopes for solid sales growth in November and December,” said Jack Kleinhenz, Chief Economist, NRF. “This momentum bodes well for the upcoming holiday season.”

Wholesale Prices Dropping

In addition, U.S. wholesale prices in October fell at the fastest monthly pace since February 2010, with the producer price index dropping a seasonally adjusted 0.3 percent from a month earlier. Consumer confidence continues to rise, as Thomson Reuters/University of Michigan’s preliminary gauge of consumer confidence taken last week improved to 64.2 for November, from 60.9 in October.

Retailers Think the Recession Is Still a Serious Reality

However, according to the American Express OPEN® Small Business Monitor, a semi-annual survey now in its tenth year, economic sluggishness is only slightly impacting the psyche of entrepreneurs and business owners, as a small 27 percent say they do not plan to grow in the next six months (up from 21 percent in the spring). The other 77 percent describe themselves as glass half-full optimists (down from 85 percent a year ago). Below are some signs that have reassured these glass half-full optimists that a state of recovery in the retail sector is on its way:

Cash flow is more under control: 55 percent have concerns, down from 66 percent in the spring

There are plans for capital investments: 48 percent plan investments, up from 44 percent in the spring

Hiring is still in the cards: 31 percent say they will hire over the next six months, down slightly from the spring (35 percent). According to the latest Intuit Small Business Employment Index, retailers and small businesses in general are starting to interview and hire an influx of interested candidates. July alone marked an addition of 50,000 employees to the payroll of small businesses nationwide. Theupward trend in job openings and affiliated hires began in October 2009, and as the economy continues to recover, retailers and other small business operations are responsible for the addition of 715,000 jobs.

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To read more of the American Express OPEN® Small Business Monitor results, click HERE.

Develop a Pricing Structure to Bring in Profits

1) Competitors are charging more for inferior products. Lowering prices to beat out a well known competitor always seems to be the first strategy when opening up a new business, or possibly a fall back for those retailers experiencing sluggish sales. While consumers would love to purchase your products for next to nothing, you have to ask yourself how such a strategy will keep you in business. Is there really a need to drastically lower prices? The products or services you supply are the only thing that will set your business apart from the competition, and hopefully provide you with a sustainable advantage when it comes time for your customers to make purchasing decisions. If your competitor is charging more for an inferior product or service, you are doing yourself an injustice. Girard recommends, “Only if you can produce a product more cheaply and maintain a decent profit should you consider a lower price.”

2) Your storefront is covered with sale signs. The intention of opening a store was to service a certain kind of customer. Sales and promotions boost foot traffic, but can also alter the intended clientele. It’s about fitting the budget of your target market. As Girard suggests, “Look at the purchasing motivation and requirements of your target market, and set prices based on how much the customers in that market are willing to pay.”

3) Your cash on hand takes a dive at the end of the fiscal year. If you aren’t seeing the signs, the cash you have at the time the books are closed at the end of the fiscal year will tell you a thing or two about your prices. Chances are your costs aren’t getting smaller, so if you have less this year than last year, your prices may need to be altered. The rule of thumb, according to Girard, is that when your costs go up, your prices should too.

4) Business is attracting bargain hunters. This goes hand in hand with the advice given about too many sale signs and promotions. Your prices are attracting customers only looking to pay cheap. Profit margins will be thin, and any plans you had to market your products will be unsuccessful. Don’t let pricing set the value of your products and your store.

This article was adapted from Entrepreneur.com.

Working Towards Recovery

Independent retailers are forewarned to keep an eye on the well-known competitor. Walmart is currently looking for resolutions to prevent any further decline in sales. Among these resolutions are:

1) Replacement of non-essential items such as clothing and home furnishings. Budgeted shoppers have increasd their spending on groceries and household goods. As CNN reports, “Recognizing these shifts in how consumers are shopping at its stores, Walmart this year started to add more groceries and household goods to its shelves, and said it would get even more aggressive on prices in order to grab more of its customers’ dollars in every shopping trip.”

2) The introduction of a buyback plan. For investor reassurance, Walmart has initiated a $15 billion share buyback plan. Shareholders involved in the program are no longer burdened by dropping stock price, but those holding on to their stock are watching as the Walton Family’s control increases. As the Bloomberg report states in a recent article, “Repurchases have boosted the founding Walton family’s ownership to about 48 percent as of March. It’s estimated the family may gain a majority of the shares by the end of next year.”

3) The effort to be green. And while most green initiatives and products are associated with high prices, Walmart doesn’t think its customers should have to choose between a product that is better for them and one they can afford. Leslie Dach, EVP of Corporate Affairs for Walmart, says in a recent interview with Fortune, “Being green will actually save money for all parties involved, the stores and customers. It will fuel the productivity loop, which helps Walmart lower costs and in turn, prices.”

4) The initiative to open smaller stores. As Walmart is running out of locations for its big shopping centers and running out of ideas to boost its declining revenue, the company is looking to roll out a nationwide implementation of small express stores. These 15,000 square-foot express convenience stores will allow Walmart to enter urban markets, as well as some rural towns.

The suggest sale of fries must work for most consumers or they wouldn’t continually do it. Knowing the nature of sales people (especially in retail), suggestive selling is a technique that must constantly be reinforced. I would assume that to not suggest fries is met with some mild admonishment at the very least and with a much harsher reprimand or some equally punitive reminder at worst.  The bottom line is that the margin on fries must be outstanding.

The Power of Suggestive Selling

The lesson here is that suggestive selling not only works, but can add significant percentage to store sales volume and margin. When practiced consistently, suggestive selling not only adds additional sales and profits, but also demonstrates improved service and therefore VALUE to the customer. Inexperienced or poorly trained sales associates are happy when a customer simply makes a buying decision for a primary item.  The only other decision that needs to be made in their mind is method of payment.  The seasoned sales person on the other hand, sees the selling process as just beginning when the primary item is agreed to.

Getting sales associates to remember to offer additional items to a customer requires constant attention.  Making a game out of suggestive selling can make for a lively morning meeting with the sales staff.  Give the same item to several different sales people at the same time and allow them each thirty seconds to pick up as many additional items as they can think of.  Thirty seconds is about the time you have to take a customers purchase to the check out area. Have each associate explain what items they found, why they felt they would be a good complimenting purchase and add up the total value.

Give the winner who has come up with the most profitable list of add-on sales some small recognition ($5 or $10).  This is all about more sales and you want to instill the fact that the more you sell, the more everyone makes. Watch how this simple little exercise translates into more added sales during the days that follow.  Better yet, use it as a kick off to a week long contest on suggestive selling. Give prizes for first, second and third place.

I have heard store owners complain that some sales people feel that they might be pushing something on the customer that they don’t want. My answer to that is always the same, if the customer doesn’t want it, she will let you know. If you don’t ask you will never know.  One of the main responsibilities of the sales associate is to give the customer the opportunity to make the purchase. After all, isn’t that what they are being paid to do?

Retailers continually struggle to reinvent themselves, refine assortments and closely manage expenses and inventory. I encourage all retailers to pay more attention to suggestive selling practices. Next time someone asks you if you want fries with that, you will be able to recognize suggestive selling for what it is, more sales and profits.

Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at rsayner@rmsa.com, or 816-505-7912.

Most folks in the retail business have an inherent disdain for the very word. Taking too many markdowns represents failure in some area or another.  Overbuying, duplication, poor timing of deliveries, bad assortment planning, are all recognized causes of markdowns.  Excessive markdowns raise the cost of goods sold and result in a reduction in gross margin.  When margin levels fall below those of operating expenses, the store has a net loss.

To more fully understand this retail nemesis, let’s uncover some truths about markdowns.

Truth 1: Markdowns are the tuition retailers must pay for the education they receive from their customers.  A lot can be learned about how to buy and price merchandise from past mistakes.  If you really want to know where you screwed up, carefully survey your markdown rack.

Truth 2: Since markdowns are a way of life, as well as an important part of the retail business, it is important that a markdown plan be established.  Base the markdown plan around the turnover goals of the company.  For example, if your turnover goal is three times, it is important to make sure that stock is sold within a seventeen-week period.

Truth 3: Always explain the markdown to your customer. If you fail to inform your customer that the markdown is for a special buy, end of season clearance, weekend only promotion, etc. you risk customers not believing your prices and every sale turning into a mini auction.

Truth 4: Overbuying is the number one cause of excessive markdowns. Stores don’t go out of business because of high markdowns, they go out of business because they can’t pay for their overbuying. If your turnover goal is three times, you should be careful not to buy more than you can sell within a four month time frame.

If you buy more than you can sell, you are predestined to experience either excessive markdowns and reduced margins, or slow turnover and poor cash flow. Faced with this option, it is always better to take the markdowns, clear the inventory and generate cash.  I have never seen a store go out of business because turnover was too fast and cash flow was too strong. On the contrary, I have seen several stores go under with healthy gross margins on their profit and loss statement.

Truth 5: Most retailers have heard of, and would agree with, the axiom that the first markdown is the cheapest. What this really refers to is that the first price reduction is an effective one. A “cheap” markdown does not refer to a low percentage reduction that does not significantly generate increased sales.  A markdown of 30 percent that moves merchandise is therefore “cheaper” than a 20 percent markdown that does not produce the desired results.

Truth 6: The price you paid has nothing to do with the markdown price.  The customer does not care what you paid for the product, nor should you.  When you get to this point in the sales cycle, your only concern is how quickly you can convert the inventory to cash.  From time to time, I encounter stores that are reluctant, and in some cases even refuse, to mark anything below cost. I have never been able to understand the logic behind this thinking. I suppose the mindset is that money is being lost, when in reality much more lost revenue is at stake by not getting cash out of slow selling stock and replacing it with new product.  Worse yet is packing goods away in the back room and dragging them out again next year. Remember, your cost is not relevant in a markdown pricing decision.

Truth 7: In most cases, it is a good practice to keep markdown merchandise at the back of the store. You want your customers exposed to new full price products at every opportunity.  Exceptions to this would be storewide sale events or seasonal clearance time when a large majority of items are on sale.

Truth 8: Nurture your good customers who do not shop you on price alone.  This is where added value comes into play.  The cosmetics industry does a great job of this by offering gift with purchase items.  Thank-you notes to good customers also go a long way in showing a customer that you value their patronage.

Understanding these truths and employing sound markdown management should help turn markdowns from a negative part of business into a positive.

Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at rsayner@rmsa.com or 816-505-7912.

Understanding Markup Language

Let’s make sure we are all speaking the same language.  When I say, “initial markup,” I am referring to the markup percentage placed on the goods when they are received from the manufacturer.  Maintained markup is what is left after taking into account the cost of the markdowns. Stated differently, maintained markup is the difference between net sales and the gross cost of the merchandise sold.  Gross margin is the difference between net sales and the net cost of the merchandise sold.  Total merchandise costs include the cost of the goods, freight inward, any workroom costs, and any adjustments for earned discounts. It is clearly a different number than maintained markup.

The Correct Initial Markup is Crucial

Having the correct initial markup is the cornerstone to achieving the desired maintained markup.  Have you ever wondered what the determining factors for initial markup are?  Why do we double the cost?  What does the term “keystone markup” mean, and where did it originate? My quest into the origin of keystone markup did not yield any definitive answers.  One source at the National Retail Federation (NRF) seemed to think that there was an actual “markup key” in the early days of cash registers. This practice predated individually ticketed items, and pricing was oftentimes handled at the point of sale. One expert thought the term began in the jewelry business. Another thought more closely follows the dictionary definition of the word, which is a stone at the top of an arch that locks the other pieces in place.  I suppose this makes sense, since 50 percent of a keystoned item is cost and the remaining half is markup. Regardless of origin, keystone pricing refers to a percentage markup applied to a product’s cost, although it is becoming an outdated term due to rising markups.

In my work as a retail consultant, I continually ask retailers to define their initial markup.  The answers are quite interesting, and run the gambit from doubling the cost to adding $1 or $2 dollars to a multiplier of 2.2 or 2.3, as an example.  These answers over time have led me to the conclusion that most retailers truly can’t explain what initial markup was intended to cover.  There are three areas that IMU must satisfy: 1) desired net profit, 2) operating expenses, and 3) markdowns. Outlined below is a formula for determining initial markup given the objectives above.

IMU = (desired net profit % + operating expense % + markdown %)

100+ the markdown %

Example:  Let’s say that our net profit goal is 7 percent, operating expenses are 40 percent and markdowns are 18 percent of sales.  Given the formula above, the IMU percentage would have to be 55 percent to cover the markdowns, pay the overhead and still contribute 7 percent to the bottom line.  If the store average is say 52 percent on average, net profit would decrease to 3.4 percent right from the start, given the example above. If you do the math, that is nearly a 50 percent reduction in profit. To restate the message, initial markup is directly related to net profit.  You must begin with enough markup in the beginning, in order to have something left at the end.

It is a good practice for all stores to review pricing practices on a regular basis.  Competitive pressures, changes in operating expenses and availability of promotional goods all come into play when deciding on a markup goal. Are you making markup decisions based on what a product will sell for, or what you paid for it?  One way to avoid falling into the trap of cost-based pricing can be done when buyers are at market.  The best time to determine what the actual selling price will be is at the time the order is written.  In my previous retail career, I would often have our buyers decide what they thought they could sell a certain item for, prior to knowing the cost. Once we knew the cost, we would make a decision to buy or pass the item. Basing the retail price around the intrinsic value of the merchandise, instead of it’s cost, helped us to increase our initial markup.  Perhaps this strategy would work for your store as well.

Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at rsayner@rmsa.com or 816-505-7912.