It’s time to start enjoying the change of season and receiving new merchandise...but...um...where do we put all the great new stuff? There’s no room since the clearance section is still looming over us.
Retailers, raise your hand if you’re tired of dealing with this situation! We just wrapped up such a successful season, but we’re sick of looking at the leftovers and it’s taking away from our happy mood as the weather continues to change.
Explore and learn 3 ways to shrink your end-of-season clearance section and save valuable margin dollars.
In order to minimize the clearance section, we have to understand how we got it to begin with. I discuss these common mistakes at length in my last article.
In summary, clearance sections are spawned from not reacting to changes in business and/or mis-managing inventory. The root cause is embedded in an imbalance one of three reasons: inventory, receiving, and sales. Understanding the relationship between these 3 components is crucial to understanding the health of your current merchandise context & environment.
Let’s talk through 2 extreme situations.
Inventory low, receiving low, sales high.
In this first situation, we’ve created an environment where Inventory is low, Receiving is low, and Sales are high.
What does this mean for our business? It means we’re selling out of merchandise, we’re not replacing it, and we’re losing sales. This is not a sustainable place for our business to exist and live in long term. Why? We’ll eventually run out of inventory. The (small) upside is we’re making cash monayyy...but since inventory is already low, and we’re not reinvesting it into new receipts, our future is bleak because we’ll run out of stock to sell!
Do you identify with this situation? You probably spend too much money on monthly expenses (payroll, rent, marketing, ecommerce fees). All of your cash goes to the bills you HAVE to pay. And very little of it goes to actually paying vendors. And you’re on credit hold with your best selling brands. And you’re not receiving new, exciting, fresh merchandise. This is a common environment for businesses that are cash poor and have little additional cash to invest in their operations.
What eventually happens if we sustain this environment? Our shoppers get bored shopping with us because we don’t have new or interesting products. Shoppers perceive our merchandise as outdated. They stop visiting us and spending their valuable dollars with us. Yikes!
Inventory high, receiving high, sales low.
Let’s flip this situation on its head to the opposite environment: Inventory is high, Receiving is high, and Sales are low. What does this mean?
Inventory is high at this point of the season because we either 1) STARTED last season with a large clearance section and/or 2) received much more than we could sell during the last season. THIS is the source of your clearance section.
Receiving is high at this point because we’re excited for the new seasonal merchandise and our traditional mentality is, “if we don’t have a full selection NOW while shoppers are just browsing, then they won’t come back when it’s time to buy.” We’re getting all the colors, full size runs...the full kit & caboodle. And we’re okay with sitting on all these goods for 3-6 months before they sell. (?!)
Spatial constraints are another, very real, pain point with receiving massive amounts of new merchandise when existing inventory is already huge. Where do we put all of this new stuff? I guess we have to box up some of the old stuff and put it in storage… (AH!)
Sales are low because it’s the time of year when seasonal traffic patterns decrease and we all question WHY are we in retail?!
Our business is incredibly exposed to risk right now. We have tons of aging merchandise that we’ve already paid for. We just received massive amounts of new goods that we need to pay for soon. And sales are dipping because traffic is dipping. We’re cash crunched, and we’re basically left naked and exposed until our next high season (whether it be the summer sales peak or the holiday sales peak). As soon as revenue increases again, we can pay for the majority of our latest receipts...just in time to start the vicious cycle all over again.
MAKE IT STOP!
Can you identify with one of these retail inventory descriptions? Neither one is an easy place to be, and it’s easy to find yourself in either situation. As part of our Outside Looks retail consultancy, we use RetailORBIT©️ merchandise planning (the best platform that we’ve found & vetted) to make your inventory-related decisions easier and, better yet, it’s all customized for your business. AI (artificial intelligence), big data, and our retail experience unite to formulate priceless guides for you and your business to follow to maximize the return on your inventory investments. Finally, you can take the guesswork out of establishing inventory goals, creating sales forecasts, and determining budgets for your preseason buys. It’s all laid out in front of you! Learn more about me, using a consultant, and this program.
If you’re not quite ready to take the leap into this money & time saving tool, here’s some pointers on how to reduce your clearance section.
1) Take the time to plan
No matter what people or processes you use, just make the time to establish a plan! When it comes to your shop’s future, taking the time to realistically plan your merchandise strategy is the foundation to a strong in-season sell through.
Financial Merchandise Plans should include these elements:
Beginning inventory ownership
Preseason receiving budget
ASAP receiving budget
Plan for discounting (triggers, when, & how much)
Ending inventory ownership
Metric Goals (turn, sell thru, etc)
This type of seasonal plan focuses on financial merchandise management. It is meant to be paired with a number of different planning tools, including strategic plans centered around customer targeting, product assortment, visual branding, and marketing.
The goal with this Merchandise Plan is to create an environment where we define our future business in the most realistic and accurate way possible. Do we have enough inventory to make sales? Are we receiving the right amount in season? Will we need more product? What’s the plan for excess product? If we don’t find the correct synergy between inventory, receipts, and sales, then profitability isn’t maximized.
Insider Tip: don’t grossly receive more than your forecasted sales. Simple retail math tells us that when receipts>sales = a large clearance section is manifested!
By thoughtfully creating a realistic financial inventory guide to lead our actions, we’ll be in much better shape than just winging it. We’re establishing starting points and pairing them with goals that seem reasonable. We now have a basis to judge our own performance and make adjustments for a better future.
2) React to sales
Now that we have sales goals established in our Plan (that our budget was based off), we need to hold ourselves accountable to reaching said sales goals!
Sales goals can be tricky since our surroundings are constantly changing, consumers are shifting behaviors, and trends change constantly! Our partner RetailORBIT©️’s merchandise plans are 94% accurate and immensely vital to our consulting practice.
From the executive / finance / cash flow level, if sales don’t go according to plan, then we need to react! If we miss sales plan by 6k, we should consider different ways to “make it up” so that we still achieve our month's ending inventory goal. Maybe we reduce an incoming order, so the end results is we reduce receiving to be more in line with actual sales, which keeps sell through % strong. Maybe we entice shoppers to purchase with a new marketing initiative, improved visual merchandising, more robust education, improving service or other ways to increase traffic.
However you decide to react to top-level sales, take action and hold yourself accountable! If revenue doesn’t catch up soon, then we might be stuck with that clearance section all over again!
From the buyer product / assortment level, if products don’t sell through at your goal rate, then they will sit around the store forever! Think about what your goals are with your carefully created product assortments. How do you really achieve sell through goals? How should we approach establishing a goal and how do we track it?
On seasonal items, do you want them to last for a few weeks or 6 months? If you buy 50 units of a sku that’s in season for 3 months, your goal is to sell 3.85 units a week to hit 0 inventory at the end of 3 months (or 13 weeks). This is a weekly sell thru rate of 7.7%.
If your styles aren’t hitting these very straightforward goals, then it’s time to change something!
For reference, the simple way to calculate sell through is SOLD/RECEIVED.
Let’s say after 4 weeks on the floor, this style is 38% sold thru. That exceeds our expectation of 31% (7.7% * 4 weeks). Great! That’s a solid sell through at this time. Let’s check in on this style again at 8 weeks.
At 8 weeks, we review sell through again. 7.7% * 8 weeks = 62% sell through goal. Our actual sell through isn’t as hot as it once was: it’s only at 42% sell through. If we don’t react, we will have this style longer than the 3 months that we planned it for. Since the weather is starting to change, this style will be out of season quickly, and we decide to put it on sale to boost the sell through.
We anxiously check the sell through again at 10 weeks (our goal is 77%) and we pleasantly discover that we’ve boosted the actual sell through to 80%! Hooray! We’ve reacted to in-season selling, the seasonality of merchandise, and we’ve cashed out on the investment of this product so we can buy something new and stylish from the latest season!
Check out our Sell Thru Calculator tool to learn more about sell thru rates and taking action to improve the terminal dates of your stock.
By keeping our products accountable to performing the way we intended them to perform, we’re planning for success and chipping away at the amount of stock left over at the end of the season! Imagine that we use this practice every month to cleanse our store of lack-luster inventory. No more massive, overbearing clearance / discount / sale area in the shop! Maintenance is key!
3) Don’t overbuy
If we typically sell 300 every year, and we have an itch to grow, we decide to receive more. Let’s grow sales by having more inventory. Let’s increase receiving! (explore this concept more) So we lick the finger, stick it up in the air, and blindly decide receive 500 because that’s what the wind told us to do.
After it’s all said & done, sales grow from 300 to 350. Simple sell through math tells us: if we buy 500 and only sell 350, then we’re left over with 150. What do we do with that extra 150? We have to re-merchandise it, re-sticker it, put it on sale, throw an event, spend money on advertising, spend money on payroll… all of this added effort, time, and expense just to cash out on a product with minimal return on profit dollars. Plus, all this fuss over old product is taking away from the attention that all new shiny product that’s flowing into the store! We made a few extra dollars, but not much more once we consider the additional expense we incurred by selling those last 150.
Wouldn’t it have been easier to grow a bit more responsibly? A bit more slowly? With a bit more patience? I mean, I’m all about finding the sales ceiling, but let’s do it intelligently. Let’s work smarter, not harder. Let’s pursue profitable sales that build our reputation and our customer loyalty. It’s expense to keep the discount customer coming back.
Do you want to know the exact balance that inventory, purchases, and sales you should follow? Reach out to Carrie@outsidelooks.com and ask for a (no cost, no obligations) inventory diagnostic to discover low hanging fruit, and how to start improving your cash flow and profitability metrics.