Article by Ryan J Bell
One of the key advantages that small retailers enjoy over the megastores and discounters is the ability to provide specific products that their customers want. To be sure, independent retailing is about satisfying the customer in a way that the big-box chain stores cannot. It’s about the experience which begins the moment a customer walks in the door.
A lot of independent merchants take the path of least sales resistance and offer their existing customer base a continuous supply of new items. That’s how it should be. Selling to people who know your employees and trust your store will always be easier than coaxing new people to buy something for the first time. The problem is that the constant supply of assortments can get out of hand.
If the small store owner isn’t careful, assortments can slowly become a large part of the inventory without turning over and producing revenue. Remember, every dollar invested in inventory is a dollar that isn’t generating sales. That means new items that don’t turn over trap capital needlessly. Below, I’ll briefly explain how this problem happens and how the small retailer can avoid the trap.
The Slow Growth Of Inventory Selection
It’s important to realize that assortments can be lucrative, especially if the new items are closely related to a store’s main product lines. For example, a pet supply shop that specializes in breed-specific dog foods might add a small selection of dog toys to the floor. In this case, the new items fit well with the main product. There is a high likelihood that the dog toys will contribute to the shop owner’s profit.
The trouble begins when the selection of new items expands without review. Let’s suppose the pet supply shop owner, after seeing the high margins generated by the dog toys, wants to further expand his assortments. He adds dog beds, ramps, collars, and several other toys. Each of these items has the potential to generate profit. The key is to review whether they actually do over time.
If the shop owner neglects to review the profitability of each assortment, he may never realize that certain products are failing to turn over at an acceptable rate. Moreover, he may never realize that his cash flow is being allocated inefficiently and his profit is being hampered.
A further problem occurs if the owner chooses to expand his assortments into categories that are unrelated to his main product lines. For example, suppose he begins carrying cat toys or bird cages. It’s safe to say that, given his specialization in breed-specific dog foods, most of his existing customer base is not interested in such products. In this case, his new items will likely create a significant drag on profits until he takes a markdown on them.
How To Avoid The Trap
Admittedly, we’ve made a few assumptions regarding our poor pet supply shop owner and his customers. The items mentioned above may sell splendidly, even if they seem unrelated to his main products. To that end, the value of testing cannot be overstated. Whether an independent retailer has one store or several, new assortments should be added to the existing inventory on a regular basis. But, realize that risk is involved and those items, potentially lucrative, end up consuming valuable cash flow.
The key to avoiding the trap of an ever-growing selection of unprofitable assortments is to constantly review each item’s contribution to the bottom line and on inventory productivity. Are they turning over quickly enough? Are customers buying them? If they are, what replenishment quantities will they support? Are the margins sustainable?
Assortments can fit perfectly with a small retailer’s business growth strategy. But, independent shop owners should be wary of allowing those new items to monopolize their cash flow.
About the Author
G.A. Wright specializes in high-impact quitting business sales that produce big increases in sales volume and attract big audiences. Check out their website for more information: http://www.gawrightsales.com
