Retail Margins: Why marking down your ‘dogs’ will be a big win for gross profits and cash flow
This is the first in a series of episodes designed to help independent retailers improve cash flow and gross profits by managing inventory more efficiently. Cash flow is the lifeblood of any business, for independent retailers cash flow management can be the make or break. Geared towards Fashion retailers, this article can be applied to many brick-and-mortar businesses.
This is the first in a series of educational articles designed to help independent retailers improve cash flow by managing inventory more efficiently. During hard economic times when customers are more likely to buy gas than clothing, it’s extremely important to manage cash. Cash flow is the lifeblood of any business, for independent retailers cash flow management can be the make or break. Geared towards Fashion retailers, this article can be applied to many brick-and-mortar businesses.
Retailers have high fixed costs such as rent, payroll, utility bills, and more. One thing that most people don’t take into account is that a large portion of your cash will be tied up in inventory, after all, you need a product to sell. Being a small business, you may not find many vendors who are willing to give you credit, and even when you get to that point, sometimes the 30 days of credit is not long enough to sell the product. Most times, you’ve been forced to lay out cash for a product before you sell it.
Some owners will resort to carrying balances on credit cards when buying merchandise, which then brings interest payments into the equation, making the cost of goods even more expensive.
This brings us to the importance of selling your products quickly, or maybe, more importantly, knowing that you are stuck with a “dog” and when it’s time to dump it.
So what is a “dog”?
It’s a product that you bought that just isn’t selling. Say you’ve purchased 6 pieces of 5 different styles from a vendor, and in the first month you sell through half of 4 of the styles but in one style you’ve sold 1 or 0, that’s your “dog”. Every business needs to identify when to consider a product a “dog” a good rule of thumb is if something is selling half as quickly as average.
For example, if your average inventory turn is 6x per year, it should take you 2 months to sell through a product. If after 1 month, you’ve only sold 1 of the 6 pieces you’ve purchased in that style, you are on pace to sell through the product in 6 months, which is 3x worse that your average product.
Okay so I’ve identified a “dog” What do I do with it?
Well, now here is where retailers run into trouble, many retailers make excuses for why the item isn’t selling. Sometimes they are valid, for example, you bought sweaters in August and it’s still 85 degrees on the east coast, in that case, you can wait. However, sometimes the excuses are emotional and not valid, for example, ‘my good customers haven’t come into the store yet’ or ‘if I just put the item in the window it’ll sell forsure!’ Thinking like this and creating excuses for why items haven’t sold yet can be keeping money out of your pocket.
Okay now, what?
Mark the product down, be fast, and be aggressive. Go straight to 50% off. Just get your money back.
But why would I do that, if I wait 6 months I can sell the product at full price for just 10% off?
Wrong, let’s look at the math and see what you can do. First, for a dog, you’ve sold slowly.
- First, you buy 6 pieces of an item for $20 each costing you $120
- In the first month, you sell 1 at full price — $50,
- Then in the second and third months, you sell another 2 for 10% off — $90,
- Then in month four, you sell another 1 at 20% off — $40
- Then in month six, you sell another two at 50% off — $50
- So in 6 months, you’ve done $230 in sales and made $110 in gross profit dollars.
Now let’s look at a product you’ve identified as a dog and aggressively marked down.
- First, you buy 6 pieces of an item for $20 each costing you $120
- In the first month, you sell 1 at full price — $50,
- In month two, you sell the next 5 at 50% off — $125
- So in two months, you’ve done $175 in sales and only $55 in gross profit.
- Now you take that same $120 and go buy another 6 pieces of a style for $20 each, this style happens to be a decent seller.
- In month 3 you sell 2 at $50 — $100
- In month 4 you sell another 1 at $50
- In month 5 you sell another 2 at $40 — $80
- Finally, in month 6, you sell the last one for $25
- In total for the second style, you’ve done $255 in sales and $135 in Gross profit dollars.
- In six months you did $430 in sales and $190 in Gross profit dollars.
Summary, please! How is that even better?— Sure let’s compare the two.
Let's focus on gross profit dollars, in the first example, when you were hesitating to aggressively mark down the dog, you did $110 in gross profits in 6 months, in the second example, you did $190 in gross profit dollars, that's a 72% increase. Do that 100 times a year and you’ll notice a big difference when you look at your income statement. I guarantee it.
So from this exercise, what we learn is really important! Here are the three main takeaways.
- Don’t get emotionally invested in your inventory, it’s all about numbers. If the numbers are not showing strength, you have your signal to start taking markdowns aggressively.
- Once you identify a dog, be very aggressive in marking it down and getting it out of your store
- Just because you sell something cheaper than you wanted, doesn’t mean you’ll make less money, it means you’ll be freeing up cash and space in store to get a new good style that you can sell at a strong margin.
Looking to learn more about running a retail business profitably? Schedule a call here https://calendly.com/elliot-9/shoptiques
