Must Retailers Pass Through the "Valley of Bankruptcy" in Order to Change?

Last week, we received an email from a long-time follower of The ROI. It included a comment and a question that you, too, may have wondered:

"How do you go about changing the mindset of the owner/CEO about GMROI, inventory management best ideas, etc?

Our CEO stills buys by intuition, hunch, seat-of-the-pants. He likes to use phrases like: stack-em-high, watch-em-fly. One-to-show, one-to-go.

Can CEO's go from mediocre to great, or do they have to pass through the valley of bankruptcy first?" 

Quite a question, isn't it? Speaks volumes about the underlying concerns.

Thanks to what we call "Retail Darwinism", those Owners & CEOs who still "stack-em-high, watch-em-fly", who buy by hunch and intuition, are in fact disappearing.  They are not making the "mediocre to great" transition. Is the "valley of bankruptcy" the only alternative?

"Am I running this business...or is it running me?!?" 

Every case is different, of course. In our work with retailers in "turnaround" situations, we've found that the fear of impending failure, the acceptance of being on the brink of bankruptcy, can prompt changes.  Of course, sometimes it is too little, too late.

Then there are the times that fear is more paralyzing than motivating. These retailers simply do not appreciate how much control they could have!  Not able to recognize their alternatives, they become frozen in the headlights. This is especially true for those who have delegated the "accounting and financial stuff."

So, how can Owners and CEOs be motivated to change? It starts with increasing their financial skillset and confidence. Enabling them to have a positive answer to "Am I running this business…or is it running me?!"  Knowledge IS power! 

That's not to say that Owners & CEOs need to do all of the accounting and bookkeeping themselves. Far from it!

But since Owners are responsible for projections, for playing "what if…?" about their business, they must understand the cause-effect financial levers in their business. That's how they can be empowered, better able to respond as the business environment changes.

Emails such as this one cause us to redouble our dedication at The Retail Owners Institute® to help retailers "Turn on their financial headlights!"  The ROI's goal remains: "Eradicate retail bankruptcies!"

Congress, Consumer Confidence, and Holiday Spending

In the last 90 days, we've done training workshops for retailers of all sizes in Orange County, Kansas City, Cleveland, and Indianapolis. In private conversations with many of them we've repeatedly heard the same refrain: "Those turkeys in D.C. are scaring the bejeebers out of our customers! Consumer confidence is being ruined!!!"

As readers of this blog know, we believe that consumer confidence is the true leading indicator of retail performance. Uncertainty about their economic future undermines consumer confidence. The continuing Congressional stand-off on economic policy is only heightening this uncertainty.

Then today we read this report from Yahoo! Small Business Advisor. The last paragraph should be used by demonstrators on The Mall in D.C. Here's the key quote by a retailer from Maryland: 

“We’re finally about to have a Christmas season tacked onto the end of a good year. The last thing I want is to have the news dominated by fear-mongering to scare the heck out of all my customers,” he said.

 Some background leading up to the testimony, as reported by Yahoo! Small Business Advisor.

The Small Business Majority flew in 14 entrepreneurs from around the country for two days of meetings with House Minority Leader Nancy Pelosi, Senate Small Business and Entrepreneurship Committee Chair Mary Landrieu, and members of the U.S. Small Business Administration. They discussed access to capital, healthcare reform, clean energy policies, and legislative solutions to economic issues such as jobs creation. And the entrepreneurs urged Congress to pass bipartisan legislation allowing more credit unions to lend to small businesses.

Mike Brey, president of the Laurel, Md. business Hobby Works and a member of the Small Business Majority's Network Council, told Yahoo! Small Business Advisor that he built his company on the back of SBA 7(a) loans. He said he told legislators that, “While things have gotten better, the way banks use SBA loans have changed. It appears to us that banks are using the SBA to guarantee loans that in a different economic climate they would have been making without SBA.” Brey told legislators and SBA officials that he’s had a good year and would like to open two new stores now and asked, “How can we free up some of those loans that used to be [available] again?” 

Brey recalls how much stronger his business was when the federal budget was balanced. He said he would be willing to pay higher taxes if it helped get the economy on track and pay down the debt. “For me, going back to those tax rates is the tradeoff for having a stronger economy and more customers. It’s a trade off I am absolutely willing to make,” he told Yahoo! Small Business Advisor. 

During his visit to the White House this week, Brey told officials that his toy and hobby supplies retail business does best when customers have confidence that they will have money in the future. 

“We’re finally about to have a Christmas season tacked onto the end of a good year. The last thing I want is to have the news dominated by fear mongering to scare the heck out of all my customers,” he said. “It’s so important that the economic policies get the country back on a path to fiscal solvency.”

Wow! Leave it to a retailer to tell it like it is! Let's hope it's not in vain.

New Approach to Employee Bonuses?

Seattle Times columnist Jerry Large cited some interesting research on performance bonuses: 

Researchers at the University of Chicago took advantage of the brain's strong aversion to the loss of anything it values.

They gave teachers a bonus at the beginning of the school year and told them they would have to give the money back if student performance didn't improve.

By the end of the year, students did significantly better on an academic test than demographically similar students. The experiment was done in a high-poverty district.

Previous studies have shown that the lure of a reward at the end of a successful year produced no academic gains. The fear of losing what we already have motivates people more.

Wow! What an intriguing incentive compensation program this could be for retailers! Here's why.

• Focus. It requires clear definition and agreement on what performance earns the bonus. 
• Measurement. Both employer and employees must be able to know where they stand vis-a-vis keeping the bonus. 
• Motivation. The research found that the fear of losing something we've already received - in this case, an upfront bonus payment - is more motivating than a bonus paid after the fact!

Why Not Try It?

You don't have to totally revamp your incentive compensation program to give this a try. Just pick your spots. 

In fact, it may be more appropriate for some of your management team, rather than front line sales associates. The key:

• Have a clear understanding and consensus about what is to be accomplished. 
• Decide what that is "worth"; that is, what should the bonus be?
• Pay the bonus upfront.
• Enforce it! If the results are NOT achieved, take back the bonus!

The "Loyal Retail Army" at Apple Stores

The Apple Stores' Approach: Can It - or Even Should It - Work for You?

The lengthy front-page article in the Sunday, June 24 New York Times about "Apple's Retail Army: Long on Loyalty But Short on Pay" sought to explain why Apple Store employees - who each generate on average $473,000 in sales while earning about $25,000 per year - show such loyalty to the company.  The average tenure at an Apple Store is 2-1/2 years. The annual retention rate for those working the "Genius Bar" is 90% (versus the average turnover rate of 70% for the retail industry as a whole!)  How do they achieve this kind of loyalty?

Our sense is that Apple has a very good understanding of what motivates the people they most wanted to hire: the computer-savvy, college educated Millennial Generation. Here are some things that jumped out at us. 

1. From the start, Apple chose to not pay commissions, believing that "such incentives would work against the company's primary goals – finding customers the right products, rather than the most expensive ones, and establishing a long-term rapport with the brand. Commissions would foster employee competition, which would undermine camaraderie."  
2. Apple's pay scale is still higher than many retailers, plus they offer benefits particularly appealing to those they seek to employ: health care coverage, 401(k) contributions, employee discounts on Apple products, Apple stock purchases, etc.
3. Apple does not use the word "sales" to describe retail jobs; they're called "specialists". 
4. Apple seeks job candidates who are "affable and self-directed rather than tech-savvy. (The latter can be taught, is the theory, while the former is innate.)"  Such confidence about training is especially easy with employees who have been successful in school.
5. Clear expectations and accountability: Job candidates selected from online applications are invited to a hiring seminar. Those 3 minutes late are turned away! 
6. "If there is a secret to Apple's sauce, it is this: the company ennobles employees. It understands that a lot of people will forego money if they have a sense of higher purpose."

What's the downside, according to former Apple employees? As quoted in the New York Times article, "Disillusionment settles in not because of pay, though pay is a part of it. The problem: there is no career path."  Yet, for many of those college-educated Millennials, it turns out they weren't looking for a career in retail Instead, they wanted a "hip job" before their "full-on dive into the white collar world."

Are there lessons here for other retailers? We think so. The most important take-away: know what matters to your employees! And many studies support that wages are not the #1 priority. For more thoughts on this, see "Beyond the Paycheck: Motivate Employees with Creative Compensation"  on The ROI site. 

Think about your very best employees, and then consider what qualitative factors are a priority for them.  And remember, there is no one-size-fits-all solution. Mimicking the specifics of Apple's policies would be a mistake. But, applying their approach  to create a customized solution in your stores could be very useful.

Raise Turns...and Raise Cash!

Looking for ways to get more cash out of your retail business? Start focusing on raising turns! Here's why.

For every $1 million of annual sales, assuming 40% Gross Profit (Margin), the difference between 2 inventory turns and 3 turns is…$100,000 in cash!   

(Have a $3 million operation? That's $300,000. $5 Million in sales? That would be $500K cash. And so on.)

The dynamics of improved inventory turnover are impressive indeed!  And well-known to successful merchants. The Retail Owners Institute believes that all retailers should know and use this powerful cause-effect lever.  

Want an Example? Here Are Two: H&M and Zara 

Consider two retailers that are re-inventing apparel retailing worldwide, H&M and Zara.  By effective use of technology, both are raising inventory turns in their stores to unprecedented heights. And now, consider the ripple effect of that management focus:

• The high turns have reduced markdowns
• thus raising margins. 
• Meanwhile, stores always full of very fresh merchandise 
• excite and please their customers! What a concept!

Cause-effect, cause-effect. It all starts at the top, with the discipline to focus on ever-increasing inventory turns. H&M and Zara offer powerful examples for all retailers.

Or, as Michael Gould, Chairman of Bloomingdale's, so famously said:

"No retailer ever filed bankruptcy because their turns were too high." 

"So, what should my turns be?"

Wonder what your turns "should" be? Or, how your store compares to others like yours?

The ROI posts 5-year trend charts of 6 Key Ratio Benchmarks that retailers should be monitoring. These trend charts are available for 55 retail verticals. One of those key benchmarks is inventory turnover. 

To see how your operation compares to other stores like yours, check out the Key Ratio Benchmarks at The ROI site. Go to this page on The ROI site to find your retail segment.