Herding Cats: Those Ever-Changing Demands of Retailing

Warren Buffet, the "Oracle of Omaha", is widely considered the most successful investor of the 20th century. But what is his "Achilles heel"? What investments does he self-describe as "failures"? According to Mr. Buffet, it is his investments in the retail industry. 

The problem? The constant change in retailing makes it difficult to achieve economies of scale. 
"Mr. Buffet has said that retail is challenging because shopping habits and sales channels are constantly changing, making it difficult for businesses to build and maintain competitive advantages, or what he calls 'economic moats,'" reported Anupreeta Das in the July 17 Wall Street Journal.
Meanwhile, there is Amazon. At one point, in their postings for retail jobs, Amazon stated their goal was to "Turn the art of retailing into the science of retailing." Oh really?! They, too, believe that retail should be easily reduced to an algorithm.

Retailing defies predictability. There are no straight-line projections. And, not everyone has the stomach for retailing's unpredictability.  

Today, it is common to cite the internet as the major competitive threat to retailing. Indeed, e-commerce has challenged retailing.

But, so did the big box stores. And mail order. And before that, outlet malls. Before that, regional shopping malls. And shopping centers. And before that, department stores. 

Responding to change is not news to seasoned merchants. In fact, it is this dynamism of retailing that attracts so many people into the industry! 

The true merchants thrive on this ever-changing environment. Instead of being dismayed by change, they relish its challenges.

In retailing, being nimble and responsive offers a decided competitive advantage. And with today's technology, any retailer, anywhere, can gain that advantage, and compete far more effectively. 

Quickly Assess a Retailer's Financial Viability

The Retail Owners Institute® is well-known for its focus on GMROI - Gross Margin Return on Inventory (Investment). 

In our view, this dynamic tool is the #1 measure of inventory productivity. And frankly, if you are in retail, you had best be focused on inventory productivity!
As a reminder, GMROI tells us this: "How many Gross Margin dollars am I getting each year for every dollar I have invested in inventory during that year?"

Why Is GMROI So Important?

  • It is multi-dimensionalInstead of looking only at margins, or only at inventory turns, it combines them. That's why some call it "earn 'n turn". It shows you which merchandise is delivering the most bang for your buck.
  • It is quick to calculate, and a wonderfully objective measurement, whether you are comparing stores, departments within stores, or, especially, vendors!

New, Insightful Application of GMROI

Quick • Verifiable • Sophisticated • Uniquely Retail

When used to compare a given retailer's performance versus their retail segment, we suggest that GMROI can be the single-most-telling measure of a retailer's financial viability.

To make this new use of GMROI easy and fast, The ROI has built an online calculator - the GMROI Growth Rater (go here). Available for free, 24/7, at The Institute. 

In just 2 quick steps, you can:
  1. instantly calculate GMROI for a specific retail operation;
  2. compare that GMROI to the average for that retailer's segment. 

And, here's what that comparison reveals (in just seconds!)
If your GMROI is below the average for your retail segment, beware. A cash crunch or weakening profits could be in the offing. 
Is your GMROI above the average? Inventory productivity is strong; positive cash flow and/or strong profits are very likely!  

Revealing Insights About Any Retailer

This works for any retailer for which you have the numbers, whether your own stores or publicly-traded companies. Or, of course, you can see how your operation compares.

Just go here on The ROI site to test this for yourself. Free!

The Competitive Edge of Specialty Retailing

What makes "specialty retailers" special? 

The special shopping experience they deliver.

How Specialty Retailers Differentiate Themselves Beyond "Customer 9Self) Service"

It doesn't matter what a retailer is selling – tires, hardware, electronics, books, apparel. Or, how big or small they are; Nordstrom, after all, is a specialty store!  

A specialty retailer's distinctive competitive edge is the special value they add to the shopping experience. 

See above for some quick examples of the difference between just "customer service" – which, increasingly, is customer self-service – and the specialty store retail experience

"Bank Lending Loosens", Say the Reports. Opportunity for Retailers?

According to an Associated Press report on June 18,
"Banks are making it easier for small businesses to get loans, and they're giving companies better terms and lower interest rates. 
"Banks are taking more steps to persuade small businesses to borrow,' said Dun & Bradstreet Credibility Corp. CEO Jeff Stibel. 'Interest rates are falling. Banks are willing to lend for longer terms. We're entering a New Normal,' he said."
This sentiment was echoed elsewhere.
"As the economy improves, businesses are able to get funding from traditional sources, and they are less desperate. We are starting to see a flight away from short-term, high cost money," stated Biz2Credit CEO Rohit Arora on their May Lending Index. 
Well. That sounds encouraging, doesn't it? It also might mark a fine opportunity for retailers looking to refinance, expand, or even acquire other stores.

How to take advantage? As always, especially as retailers, it is essential to do your homework.

  • Make a strong case for where your business is now
  • Show how your business compares favorably to others in your retail segment (the Retail Benchmarks at The ROI can help)
  • Prepare a cash flow plan, showing how and when you will repay the loan 

Approach Banks That Actually Lend to Small Business

And, not to be overlooked, search out those banks most likely to lend to retailers: the community banks. 

Here are 2 useful links for you from the Resources for Retailers page of Retail Startup (one of our microsites.)

  • Independent Community Banks Locator, from the Independent Community Bankers of America. Just enter your ZIP code, say how many miles you are willing to travel (from 25 to 100), and they immediately identify all the community banks in that area.
  • Banking Grades.  Based on data provided by the banks to the FDIC, this organization assigns a letter grade (from A to F) to banks for their small business lending. You can search by bank name, by ZIP code, by City & State, or by county. 

And here's another one from The Retail Owners Institute site:

All 3 of these resources might save you time, and hopefully, frustration! And, they're all free!

Are You Growing Jobs...for Your Customers?

The "Job" of the Customer Just Keeps Growing

Think about some of the programs  becoming more commonplace in retailing, either for their promised cost or time-savings:

  • More "self-service" (e.g., less staff on the selling floor)
  • Self check-out by the customer
  • Online searches by the customer for product information
  • Price lookup kiosks in the store
  • Online shopping   

Hmm.  Time savings – for who? Generally, not for the customer. They are being asked to take on more and more of the work.

This is happening in many retail settings, whether the shopper is buying coffee or blouses or tires. It requires the customer to use their own time and effort. And their smart phone! 
"Attention Shoppers: Bring your own cash register."  

Focus Now on the Transaction

Many of these technology “advances” are focused on the transaction. And as they become more commonplace, sure enough, it seems to us that the pendulum might be starting to swing back. 

Consider these two news items from early June:

  • “Legendary Los Angeles retailer Fred Segal is going global. They envision a ‘major reinvention’ of the luxury shopping experience, under the Fred Segal brand. which will combine fashion with dining, entertainment, cultural events and health and wellness programs.”
  • “Target names a new senior vice-president of media and guest engagement. Target continues to accelerate our efforts to innovate and evolve, and connect with Target’s guests in new and different ways.”

Showcasing Your Competitive Edge

But, here's the deal. “Customer engagement” is already alive and well in most specialty stores. It's what makes you "special". It does not need to be re-invented. However – it may need to be exploited! 

Especially in today's technology-driven environment, the customer engagement and shopping experience you already deliver differentiates your stores. It puts the "special" in specialty retailing. 

So, since you've got it, flaunt it! Dust it off a bit, spruce it up, bring it front and center, and shine a light on it!

And since it is difficult for many prominent retailers to match that (in fact, some are just getting started thinking about it), for you it can be a great competitive edge. 

Will "Retail Democracy" Impact All Retailers?

A newly announced "global study" by Oracle, the international hardware and software data management firm, of "what customers expect today", leads to what Oracle dubs "Retail Democracy." 
“The newly-emerging ‘access anywhere, commerce anywhere’ consumers are demanding access to availability, product information and price in a variety of ways."
Oracle's notion of Retail Democracy is an interesting concept, and, in our view, a likely harbinger of an important trend in retailing. (In fact, we see it as a continuation of the power shift we called "Retail Populism" some years ago, as online commerce was bursting onto the scene.) 

This is all well and good for analysts, consultants, bloggers, futurists, academics, etc. And for retailers who enjoy thinking about lofty issues.

But, once Oracle suggests that this study “requires that retailers re-orchestrate their operations”, we really slow up. Yikes! Such sweeping prescriptive "shoulds" for retailers must be viewed very carefully.
  • You see, asking survey participants about their preferences and aspirations just produces their wish list.
  • Similarly, asking how they would act in a hypothetical future situation elicits their good intentions. 

Predictions for Business Decisions

In our experience, wish lists and good intentions seldom – if ever! – translate into actual buying behavior. (Steve Jobs, among others, understood this very well.) 

While we relish reading about studies such as Oracle conducted, we always encourage retailers faced with business decisions to examine and learn from the actual behaviors of their present (and coveted prospective) customers. We find that past actions and behaviors are far more telling predictors of future actions.

Best of all, doing so does not require an international market research project. Instead, you can glean a great deal from the data you already have about your customers.

This “data mining” of your POS and ZIP code data, for instance, can provide new, invaluable insights – for free! Yes, it will take some time, especially at the start. Tally and analyze the numbers, compare-and-contrast the findings, and give thought to what it tells you and how to get the most benefit from it.

Have fun discovering more about your customers. But base your business decisions on their behaviors, NOT their wish lists or good intentions!

Remember, when it comes to your decisions about business spending, what your customers actually do is far more telling than what they say they will do. 

For more on the Oracle study, go here

Inventory Turnover...So What?!

We had an inquiry recently from a three-store owner asking about inventory turnover.
"Is it really important?" he asked.
Our reply, after being struck by the question, started out as less than adequate, to be sure. We explained the formula (Cost of Goods Sold divided by Average Inventory @Cost) and he politely agreed.

Then we explained the difference that turnover rates can make:

  • "For example, for every $1 Million in sales at 40% margin, the COGS would be $600,000. If turns were 3, average inventory would be $200,000.
  • "But – if turns were 4", we continued, "inventory would be $150,000, helping cash flow by $50,000."

Again, he politely agreed. Then, after a pause, he asked, "But, is it really important?" 

Finally, we got it! And our answer improved.

Key Number Each Month

An Open-to-Buy system that uses turnover rates as the "governor" projects not only the buying budget for each month. It also projects the targeted ending inventory levels for the end of each month.

"Like the white or yellow lines on highways," we offered.
"Wow!" came his reply. "You mean that our buyers should steer their inventory levels to hit those planned ending inventory numbers?"
"Well, that's what the pros do," we responded.
"Hmmm.  Now I see how it's all connected!
"Hitting those ending inventory targets will control my inventory levels. That will help the cash flow. And that will reduce our debt. All of which will help me get some sleep at night!! 
"Guess turnover IS pretty darn important!"
Then we tossed out the classic line from Michael Gould of Bloomingdales, who so famously told his buyers: "No retailer ever filed bankruptcy because their turns were too high."

Just a Retailer? Or, a True Merchant?

Everyone, and anyone, can be a retailer.

If you put on a garage sale, you are in retail; you are selling to the ultimate consumer. By selling on eBay or Amazon or Etsy or a farmer's market or your own stores, by definition, you are a retailer. And every day, The ROI is helping many of them worldwide.

But, just as in education, or in sports, there exists a highest, ultimate level of professionalism. In retailing, this is to be a "Merchant".

Acres of Merchants

A few weeks ago, we visited the huge outdoor Orange County Market Place® in Southern California.
  • It covers acres!
  • Open Saturdays & Sundays only, 7 a.m. to 4 p.m. 
  • The vendors sell all new merchandise – everything and anything – to the throngs that come each weekend. 
  • And, each year, in the 100 or so days it operates, it attracts 2 million visitors! 
It was absolutely fascinating to watch! 

We came away with a great deal of respect for the Orange County Market Place vendors who survive. They are pure Merchants. And, in our view, retailers who become Merchants will survive. (The others will contribute to the deplorable 8-9% annual failure rate.)

How Do We Define a "Merchant"?

These are the attributes that separate Merchants from "just retailers":
  • Merchants source for a particular group of customers. They are agents for the customers, not agents for - or beholden to - any vendor. 
  • Merchants closely monitor any changes in their customer group. 
  • Merchants judge every piece of inventory they own on whether it (still) appeals to their customer group. 
  • Merchants dispassionately add or delete products, services, locations, personnel as needed to best serve "their" customers. 
Think of retailers around you. 
  • Clearly, some are or have been led by Merchants: Starbucks, Costco, Nordstrom, Crate & Barrel, etc. 
  • Now, think of recent or pending retail failures.
See the difference? Whether large or small, the distinction between success in retail or failure is traceable to the Merchant-instincts between the ears of the top people.

Can any retailer become a Merchant? 
Indeed, yes! But to do so, 110% of their mindset must be on getting and doing what a specific group of customers will pay for. And to do that better than the competitors.

Want to see lots of Merchants?

Go to the largest Farmer's Market or Street Fair you can find. In that environment – as in yours – only the Merchants survive!

Mother's Day Promo That's Really About the Millennials

Retailing is a wonderful spectator sport. We pay attention  to retailers of all sizes, in all merchandise segments, at all price points.

And often, what we see is inspiring! The creativity and resourcefulness of merchants is a major part of the magic of retailing. We enjoy sharing examples of creativity in one segment to retailers in other segments.

For instance, consider the cleverly multi-faceted way one retailer, in this case Nordstrom, is approaching Mothers Day.

First, they're using major window displays that feature likely Mothers Day gifts. But what sets them apart is the intended audience for these displays: those "digital natives", the Millennials. 

Here's the message Nordstrom has on these windows:
"Here's How to Wow Your Mom. 
Download our app, scan the barcode on the window display of the item you want, and order by May 1 for delivery by Mothers Day."

In our view - (Note: We're just speculating; we've not discussed this with anyone at Nordstrom) - the Mothers Day merchandise Nordstrom will sell through these windows is secondary. We suspect that Nordstrom's #1 priority for this two week time frame is to connect with more of the Millennials.
  • This is a powerful prompt for Millennials to download the Nordstrom app. That's the key metric!
  • The emphasis is on ease and speed. That's spot on for this group! No need to go into the store. Just make your choice from the window display (or the app itself.) They barely need to slow down while walking by!
  • And then there's the reassurance angle. These time-pressed 20 to 35 year olds being targeted are the offspring of Nordstrom's established customer base. (So a Mothers Day gift from Nordstrom is a safe choice. Or, of course, it always can be returned!)

The Benefit for All Other Retailers

But, as clever as we think this is, here's why we are describing it: 
How might you be able to leverage this kind of thinking in your own stores?
You don't have to have an app, or a full time window display department. Just some inspiration, and a good idea of who you want to reach.
Then, 3 basic steps:
  • reach them, connect with them on their terms
  • make shopping easier for your desired customers
  • reassure them that they're making the right choice