Many retailers have had to deal with an excess of product due to lower demand. Unfortunately, holding on to old merchandise can kill your profit margins. That’s why it is important to learn about open-to-buy when running a retail store.
When I was just out of college I had a couple of roommates. We shared getting groceries, each taking a turn at buying based on need. One day I poured a glass of fermented milk into a glass. My roommate’s excuse was he couldn’t see it.
Think of your inventory like you would fresh milk. Unless you look at it, you end up with spoiled, unsellable merchandise. Selling your inventory is the only way to make money. If you buy too much and it doesn’t come and go on a regular basis, it will go bad.
When buying merchandise, your orders have to be based on more than a hunch that it will sell in order to grow your business. That’s called an open-to-buy system.
Your stock levels must correspond with your most recent sales trends. For example, you can order 10 per cent more merchandise if sales grew by that amount in the previous two months.
Here’s how to figure out your open-to-buy.
How to Make an Open-to-Buy Plan
Take a physical inventory of all your merchandise at full value. Be sure to count any returns, holds and so on. Next, run a year-end report. Divide it by 12 to arrive at how much you sell per month on average. Then divide your average monthly total sales by your on-hand inventory. Some months will be higher than others so perform a complete store inventory at least twice a year to be accurate.
Let’s say your physical inventory is $500,000 at retail. Last year’s total sales were $1.5 million. Divided by 12, average monthly sales was $125,000. When you divide total inventory ($500,000) by average monthly sales ($125,000) you get the number four. This means you have approximately four months’ worth of on-hand inventory.
That’s bad. Generally, you want a merchandise turn of at least two. In this example, you should have no more than $250,000 at retail on your sales floor at any one time.
When you have too much unsold merchandise, it means you have zero open funds to buy new products or an open-to-buy of zero. In that case, and any time you are overbought, you should look for alternative ways to increase merchandise turnover.
If looking for direction in 2023, given a recession is expected as the full effects of tightening monetary policy to combat high inflation weighs on the economy, look to the last major downturn in 2008 (outside of the Covid-19 pandemic). Nordstrom decided to shrink its year-end inventory per square foot by 12 per cent from the previous year, thereby reducing supplies in line with declining demand. That poised the retail giant for future growth with new merchandise rather than stockpiles of unsold goods like Macy’s, which was practically giving away products at 70 to 80 per cent off.
Don’t Hold on to Past Failures
If a product didn’t sell when it was new, don’t think it suddenly will six months later. It’s best to identify as quickly as possible what is not performing, move it out and bring in fresh merchandise. That allows you to get more of the right products to grow profits.
Use your category sales report from your point-of-sale system to determine correct inventory levels. Otherwise, you might think a product being out of stock is reason to reorder when missing stock could be due to demand or theft.
All of your categories should be able to be profitable. Again, shopworn merchandise is like sour milk — people avoid it.
Take aggressive markdowns now while you have shoppers coming in rather than waiting to have a clearance sale when few are entering your doors.
Bob Phibbs is CEO of The Retail Doctor. He is a leading expert on brick-and-mortar retailers, internationally recognized business strategist, customer service expert, sales coach, marketing mentor, author of three books and motivational business speaker. In 2021, Bob launched an expanded version of his SalesRX training, SalesRX2022. The online learning management system offers on-demand sales training for physical retailers.