Natelsons

I need to close an underperforming branch store this season. How much additional business can I generate with a Store Closing Sale?

A: This is perhaps the most frequently asked question we get from retailers—and with good reason, since from this forecast come decisions relating to the duration of the sale, markdown plans, advertising budgets, inventory augmentation plans and modified commission structures.

The sales multiplier, i.e. forecasted sales compared with last year’s sales, is the most common measurement used to quantify promotional sales events. Sales multipliers for Store Closing Sales can vary greatly, however, ranging from 1.5 to 3.5, depending upon the duration of the sale, the seasonality and most importantly, by how much business the store can do on day one and week one following the initial announcement.

Regarding the critical question how much business the store can do on day one and week one, and how long the sale should run, consider the following factors:

1. Sales trends. Track the previous 36-month sales history, month by month, highlighting unusual occurrences and up or down blips.
2. Timing. Depending upon whether the sale takes place early, in the heart of the season or during the season’s end there will be repercussions in terms of duration, sales potential and initial markdowns.
3. Customer list. The size and ongoing maintenance of a core customer list is critical towards estimating the response to initial marketing efforts.
4. Promotional history. The less promotional the store, the more unique the event and the higher the forecast.
5. Market/competition. The size of the market will have implications beyond week one (i.e. the smaller the market, the shorter the duration); competition is generally a positive, allowing a Store Closing Sale store to increase market share by virtue of its more appealing offer.
6. Freshness of inventory. The fresher the inventory, the less the initial markdowns and the more desirable the offering.
7. Merchandise quality. The higher the price points, the greater the opportunity to maintain momentum with markdowns in subsequent phases.
8. Fashionability factor. The more contemporary, fashionable the store, the less opportunity to augment with off-price goods and the less price-sensitive the customer will be to markdowns as the sale progresses.
9. Store reputation. Commonly referred to as goodwill, the stature the store maintains in the community is perhaps the single most important factor in estimating first day and first week sales. This assessment relates to the years the store has been in business in that location, as well as most of the above factors, e.g., sales trends, freshness of inventory, promotional history, quality of customer list.

Cash flow issues often pressure owners to start the sale prematurely. This is a mistake. Understanding the critical importance of week one to the overall success of the event makes it advisable to be patient, to ensure the store is sufficiently inventoried at the break, with the proper mix of goods, and to carefully plan the initial marketing towards the store’s core customers. If the event gets maximum excitement at the outset, positive word of mouth will naturally follow, and combined with other media marketing and merchandise fill-ins, will maintain strong momentum throughout. This is the formula for maximizing the financial benefits of the Store Closing Sale.

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You guys have seen as many failed specialty stores close up as anybody. What are the most common characteristics of these shutdowns?

It’s true that we’ve seen and worked with hundreds of specialty stores that close, and as you might imagine, each circumstance is unique. Most cases, however, fall into one of three general characteristics:

1. Inadequate capital;
2. Failure to adapt to change;
3. Loss of focus.

Cash is king. Adequate capital and sound financial prowess, while vital for all successful businesses, are particularly essential for ensuring an ongoing flow of fresh, desirable inventories for retail customers. Failure to realistically forecast sales, control inventories or budget expenses often lead to credit issues with valued suppliers, naturally followed either by late shipments or secondary resource purchases. Costly renovations or overexpansion, without sufficient capital backing, leaves financially strapped stores at the mercy of one bad selling season. While good fashion sense is helpful to picking the right goods, lack of business acumen makes running a store more a hobby than an ongoing business.

While it’s easy to follow the successful playback of seasons’ past, change is a constant in today’s world. If there’s not a continuous effort to reintroduce yourself to your customer, identify his/her needs and shopping options, the competition will surely pass you by. If a downtown store’s customer base has moved, has the merchandise changed to reflect the new customer’s taste, or has the store moved to where the old customer now shops? Have new technologies profiling your customer lists or marketing via the internet been utilized effectively? Has custom clothing and direct selling been introduced to respond to “business casual” demands? Have buying patterns with old resources continued season after season without regard to gross profit performance?

Retail is not a business for the faint of heart, and given long hours, reduced consumer buying and limited margin for error, if there’s a slack in commitment or loss of focus by taking too much for granted, it’s not surprising for a store to fail. Stores that kid themselves by falling in love with their merchandise and falsely assume high net worth despite excess depreciating inventories should not be surprised when they ultimately can’t pay their bills timely. Choosing to stay in less desirable locations because of low rentals, despite the ongoing loss of customer base, will lead to declining sales. Store-owned properties that allow lower-than-market occupancies in high rent districts should warn break-even owners that their store is actually losing money. If there’s a need to cut expenses in a declining business, owners who don’t look in the mirror first may see the resulting loss of key personnel followed by disappointed customers.

Rick Natelson can be reached by email at mlnate@natelsonsInc.com.

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I am planning to retire and close my store in Fall ’09. I have good credit and plenty of friends in the business. Why should I hire an outsider to help me?

Closing a business in which you have invested a lifetime of blood, sweat, and tears should never be a “hit or miss” proposition. Realizing maximum recovery for your elusive asset “goodwill” requires a solid homerun in what may be your one and only appearance at the plate. While some have analogized handling a sale of this nature on your own to removing your own tonsils, we recognize and salute the rare “do it yourselfer” who can confidently answer all of these questions:

• When and what should I tell my employees, my landlords, my vendors, and my customers?
• What should I call my sale?
• When should I start it and for how long should I run it?
• How should I advertise and how much money should I spend?
• How should I price my merchandise and how often should I change prices?
• Should the amount of inventory on hand determine my sales projection, or does my sales projection dictate the amount of inventory I should have?
• How should sales and inventory levels vary from week to week throughout the promotion?
• How do I get rid of everything, including furniture and fixtures?

The answers to these and many other critical questions will vary from client to client, based on rigorous due diligence and comprehensive review of day-to-day results. When you do a normal month’s business in two days, your sense of time needs to contract proportionately. More important decisions need to made in shorter time frames.

Most established apparel businesses can sell considerably more inventory in a closing sale than they normally carry. Managing this opportunity optimally requires the “do it yourselfer” to temper his enthusiasm with deference to the dangerous risk of debilitating markdowns and ending inventory. Loading up with available consignment merchandise from cooperative vendors may help, but the goods need to be hand selected (not necessarily what the vendor must move), costed properly to allow for acceptable margin at deep discount and deployed across classifications that blend with existing inventory to present to the customer a proper balance of what he seeks. The best outside experts provide balanced enhancing consignment inventory across clothing, furnishings, sportswear, women’s, and kids’ apparel when appropriate to their client stores running promotional sales.

David Natelson can be reached by email at dhnate@natelsonsInc.com.

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After my December Winter Clearance, January Further Markdowns, and February President’s Birthday events, I still have unwanted goods left over. What should I do with them?

One of the casualties of the current downturn is the virtual disappearance of the jobber market for “store stocks” or merchandise that has previously been sold in stores. What once may have attracted offers of 10% to 20% of retail would now be better donated to the charity of your choice. We have seen similar erosion in recoveries from Consolidation Liquidation Sale Events (off premises joint effort commingling), Consignment Outlet Stores, and EBay type internet auctions.

The answer, then, is to take the necessary steps BEFORE the first Winter Clearance Sale begins so that all your merchandise goes out the front door of your store in a customer shopping bag. Borrow two pages from the liquidation specialist’s handbook: Perfect merchandising is defined as every s.k.u. moving at the same rate of sale, and the first markdown is always the least costly.

Common mistakes to avoid:

1. Labelling your store as strictly “regular price” and not displaying markdown inventory at certain times of the year.
2. Taking across the board % markdowns at clearance time without regard to the desirability of the item.
3. Letting your cost dictate your markdown price instead of what the customer will pay.
4. Allowing vendor substitutions or short shipments without demanding return or markdown allowance.
5. Ignoring the capability of your merchandise information system to broadcast early warnings and target for you the best customers for your worst goods.

David Natelson can be reached by email at dhnate@natelsonsInc.com

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My store can use a facelift, and I know that a Renovation Sale can drive additional business and help my cash flow. When is the best time to plan the construction and the sale?

The best-case scenario for planning construction or any other interruption of normal business always takes its lead from how to best maximize gross profit dollars or, more aptly in this instance, how to minimize the potential loss of gross profit dollars. The key question is during what time frame would business disruption have the most adverse effects on the business? Arguably, interruption at the commencement of the retail season will do the most harm to the business; accordingly, that’s the time not to plan construction.

Given the limited window to sell goods at full margin anyway, shortening the retail calendar due to construction would put the renovating retailer at risk with the financially strapped store that has new season shipments held back for credit reasons. In both cases, competitive disadvantages will be caused by the late start to the season—whether it be shortened opportunities for high margin selling (or conversely, a longer % of the season goods sell on sale), or worse, losing customers to competitors that fill the demand for fresh product early in the season. Accordingly, for a conventional mens store this means that construction, depending upon the season, should be completed no later than April 1st or October 1st, and preferably 15-30 days prior to that, given likely set backs in construction schedules.

The flip side to the construction schedule is how to maximize gross profit dollars prior to the period when business is disrupted. The anticipation of significant changes in the store environment creates an opportunity to conduct an extraordinary promotional sale. A Renovation Sale serves both to give advance notice to customers about the exciting upcoming plans for the store as well as to realize a competitive advantage by offering earlier-than-usual markdown opportunities due to the shortened retail calendar.

The best time to plan the sale has much to do with the financial health of the store. The healthier the store, the later the sale should commence and the shorter the sale period. Depending upon how long construction is expected to take, commencing a sale 15-30 days before typical clearance time will provide unique opportunities to capitalize on store goodwill to drive sales far in excess of last year business. If the store is experiencing downward sales, using a longer promotional period under a legitimate renovation theme will maximize the chance to thwart downward trends and raise cash.

Rick Natelson can be reached by email at mlnate@natelsonsInc.com.

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Several weeks ago I read with interest your comments of common characteristics of failed stores. What do I need to do so my store doesn't become one?

Thanks for your interest. Securing adequate capital, adapting to change and maintaining proper focus are the goals. Like most well-intentioned disciplines, the problem is figuring out how to prevent falling off the wagon. I’ll suggest a few tips for your consideration.

First, keep your eye on the ball… and the name of the ball is ROI. Loyalty is a fine characteristic in personal relationships; however, loyalty that doesn’t provide adequate return on investment, whether it be an old-time vendor, employee or associate, does not perpetuate a business. Watch your markups, identify your fast and slow sellers, budget your expenses and measure your marketing strategies. Keep your customer motivated to frequent your store by flowing exciting new product and creating a satisfying shopping environment. And most importantly, control your inventories and don’t buy more than you can sell profitably.

Second, ask the right questions. The “SPICE” test (store, profits, inventory, customers, employees) is a good starting point. Is my store enhancing customer traffic, whether through unique events or positive shopping experiences? Have financial arrangements been secured to guarantee timely payments to vendors? Are classification sales forecasts being revisited monthly based on what customers are buying (or not buying)? Have initial markups been competitive? Have alternatives for high markdown items been explored? Are customers adequately profiled with respect to their individual wants, needs and circumstances; and do you communicate with them on a regular basis? Do employees understand the store mission and are they team players? Is the selling staff incentivized with realistic sales goals?

Third, pass the “not about me” test. Treat your store as a business, not a trophy. Ask yourself what I need to learn next, not how much I already know. Pick others’ brains and gather enough information to make smart, business decisions. Identify change quickly and don’t get captivated by old habits. Come to the realization that the best ideas often won’t be your own.

Rick Natelson can be reached by email at mlnate@natelsonsinc.com.

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Your company, Natelsons, has worked with retailers on hundreds of sales; but a sale is a sale. What makes one sale more productive than any other?

A: Every retailer conducts promotional sales events to convert inventory into cash. Some stores utilize sales events only during seasonal clearance times; others tend to run sales more frequently throughout the year. Some sales events, however, fall outside the normal course of business and generate extra revenues over and above the norm. We call this occurrence the monetization of goodwill.

Goodwill is vaguely defined as what a willing buyer would pay for a business in excess of its book value. Even without a willing buyer, a store owner can tap into the value of its goodwill by conducting an extraordinary promotional event. All things being equal, customers will prefer to buy at their store of choice. Typically, however, unless the customer’s need arises, there is no sense of urgency.

Milestones or major changes, e.g., a retiring owner, an expiring lease, a move to a new location, an unusual shortage of cash to pay creditors, create unique cash raising possibilities by motivating present and potential customers with a distinct sales pitch yielding unusual benefits. But this only happens if management takes the initiative to recognize the opportunity, define it and send that message to the community of prospects.

The size and quality of the store’s customer list enhances goodwill because it provides the most efficient access to an audience that already has a favorable bias toward the store. If the message is compelling, the customer will plan a visit as soon as possible. He or she may phone a friend before or after the visit. Ideally a buzz will filter through the community with a ripple effect beyond the core customer population.

The message conveyed must be credible in both tone and substance. Honesty is a virtue—whatever the scenario, the stated facts must ring true. A personal telephone call, a first class letter in a sealed envelope, an e-mail message all have the potential to convey sincerity and urgency from a familiar source. These media have the advantage of exclusivity and intimacy.

The storehouse of goodwill, of course, can be depleted inadvertently. Whenever a customer is disappointed, i.e. something about the offering was either overplayed or otherwise appeared less than expected, store credibility and likewise goodwill will have been damaged. If, for example, the merchandise on hand is not up to standard, expectations will have been dashed and goodwill dissipated. The most damaging of all disappointments is the event that turns out to be a sham.

Appraising the goodwill of the store is necessary for an accurate forecast of the sales potential of the event. From the forecast flows the budget for merchandise, advertising and other expenses. From the initial concept and themed message flow the window and banner signs, the point-of-sale signs, the newspaper publicity and the more strident media advertising.

The amount of cash realized from these out-of-the-ordinary promotional sales events is directly related to accumulated store goodwill. By monetizing goodwill, these sales differentiate themselves from ordinary clearance sales.

Rick Natelson can be reached by email at mlnate@natelsonsInc.com.

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In the new spirit of retailer/supplier partnership, my vendors are offering to ship me goods "on wheels." Should I take them up on the offer?

A: Consignment arrangements have always existed, but for a number of reasons the concept has become more in vogue lately. Arrangements vary. Vendors either expect to take returns of unsold goods and payment for sold goods after a specific time, or they receive regular payments for sold goods with a preference for markdown allowance over returns. In either case vendors can comfortably distribute inventory in credit-starved stores by securing their share of the proceeds with UCC filings. And regardless of credit, the “no risk” element of the sales pitch can jump the vendor ahead of competition for shrinking open-to-buy. The savvy retailer needs to consider more than just the attraction of receiving a jag of goods without a burdensome invoice.

Successful retailers think of themselves as “landlords” of their square footage, carefully selecting the highest rent paying “tenants” for their property. Though it may feel like flowing deliveries is the challenge of the day, the more important challenges are selling for profit and turning inventory. Stores who find themselves with more space than their customers can support will see added value in a consignor, but unless margin per sq. ft. exceeds the overhead the retailers may be better served reinventing themselves in a downsized format.

Consignment can be a necessary hedge as a test, or a way to comfortably enter unproven high-ticket classifications. Inventory management consultants are confused by consignment, unsure how to weigh the consignment goods against tight plans. Freight costs in and out are negotiable items that need to be agreed on ahead of time, and both sides should factor in the hidden cost of managing the relationship.

Most importantly, whatever a vendor is satisfied to consign at price X, he is willing to sell at X minus something. So if sales per sq. ft, margin, and turnover are the barometers for success, how does overpaying for consignment goods that you’re not sure enough about to buy really help you to win the battle?

David Natelson can be reached by email at DHNate@aol.com

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