That Other "Obesity Epidemic": 80% of Retailers Are Over-Inventoried Some or All of the Time!

Retailing is different from all other industries. Why? Because inventory is the only engine of profitability. Managing the inventory is truly the #1 responsibility of top management in retail.

And yet, about 80% of all retail operations are over-inventoried or out of balance some or ALL of the time!

• As such, these retailers become short or out of cash. 
• Or they are forced to cut margins drastically to get rid of non-selling merchandise. (Ahh, which is worse? Out of cash or out of profit??)

The reasons for this rather sad situation are many, but two major issues stand out.

• The sellers of merchandise, the vendors, are very well trained at their job - selling! And meeting sales quotas.
• Meanwhile, the retail buyers of the merchandise, who may be excellent selectors of product, are not so well schooled at the management part of their job: setting and meeting buying budgets.  

(The reps usually know that budgeting inventory purchases is simply a four-part formula, called "Open-to-Buy". But do you think they want the buyers - their customers - to use a budgeting system? Of course not! "Are you kidding?! We don't want them that smart!")

But are the buyers really the weak link? Not usually. 

Instead, the problem is traceable to senior managers who are under-trained – or under-committed – to their #1 responsibility: managing and controlling that inventory!!!

"Fitness Center" for Out-of-Shape Inventories

Those days now can be over! With some humble delight, we love that thousands of retailers from around the world are benefiting from this (cheap!) online resource from The Retail Owners Institute®: the Open-to-Buy Center. 

• Those who use the Open-to-Buy Center learn the basics of Open-to-Buy.
• Plus, they generate their own buying plans, all online, with the Open-to-Buy Calculator . Easy and fast for retailers. 

Click here. Go to the Open-to-Buy Center  See how this "fitness center" for out-of-shape retail inventories is helping to combat that other "obesity epidemic".

Knowledge is power! Some day soon, the playing field may be level!

Retailers as Unpaid Tax Collectors: Enough Already!!

The debate continues over the "Marketplace Fairness Act". You know, whether sales tax should be levied on internet purchases.

A major issue for retailers, of course, is the administrative burden that would be thrust upon them to remit tax payments to thousands of jurisdictions across the country. That is a tremendous expansion of the retailers' obligation as an unpaid tax collector.

Is it just us, or are the assurances that "free software will be provided to make it easy" seem not all that reassuring? 

One Idea for Easing the Burden

Raymond L. Dever, a retired accountant in Tucson, offered one solution:

"My suggestion would make it the responsibility of a state agency to ensure that these taxes are reported and remitted by their residents.

"Have each state designate one agency to receive once-a-year online submission from each Internet retailer that lists the name and address of every person who made a purchase in that state, the item purchased, and the amount of the purchase. After that submission,the Internet retailer is done." 

We think this is a thoughtful concept. But of course, the retailers still have to compile and report this data. And receive no compensation for providing this service!

Heightens Privacy Issues

Moreover, these suggestions illuminate and magnify privacy concerns: even though the credit card companies and merchants have all this transaction data, how many shoppers want their internet purchases reported item-by-item to a state agency?  

(We will save for another day the discussion of the monetization of shopper data by Amazon, Google, FaceBook, etc, without any recompense for us, the shoppers.)

If the goal – in the interests of fairness – is to collect the taxes at the point-of-sale in order to "protect the consumer's privacy" (that is, not have the information aggregated and reported to public agencies), then retailers should be compensated for providing this "combo service" of tax collecting and privacy protection.  

Another Option: the Credit Card Companies

Here's another option: the credit card companies should be remitting the tax payments directly to the appropriate jurisdictions. 

This is instead of sending those funds back to the retailers, who then must assume the administrative costs of transferring the appropriate amounts to the proper taxing authorities throughout the country.

Saves time, save steps, and just makes more sense!

• They, the credit card companies, already have all the transaction data
• They know where the card holder resides
• They know which items are taxable, and which are not
• They already are distributing funds and keeping records

Say "Yes!" to Fairness...for Retailers!

What do you think? Please let us hear from you.

J.C. Penney Dilemma

Well, What Would YOU Do?!

There's not a more compelling retail dilemma going on right now than the J. C. Penney turnaround. "Will they or will they not survive?!" Surely, 116,000 employees (down from 150,000 a year ago) are anxious to find out.

Before you quickly answer, "Here's what I would do to turnaround Penneys" (everybody's a retail consultant, after all...), consider some facts:

• Brain drain: A high percentage of the best brains have either been fired or decided to quit in the last year;
• Sales have been declining 25% or more for the last six months;
• Gross margin dropped in 2012 to 31.3% from 36% the year before;
• A monster operating loss in 2012 eroded 20.9% of the owners' equity.

Now, let's read their financial status the way it is taught at The Retail Owners Institute:

• The Current Ratio ("the ability to pay vendor bills on time") dropped from 1.8 to 1.4. Hmmm; no wonder they are begging for loans at ANY cost!


• The Debt-to-Worth ratio ("the number one measurement of financial strength") rose from 1.8 to 2.1.  Ahhh; of every three dollars in assets, two dollars are "owned" by OPM, other people's money.


• GMROI (Gross Margin Return on Inventory Investment, the #1 inventory productivity measurement) dropped from $2.13 to $1.74.  Oh my; both profits and cash flow have been hammered.

But, look at a few, but very major, intangibles:

• Mike Ullman, the ex-CEO that the Board brought back, is reputed to have remarkably good relations with key vendors and factors. Question: Can he restore enough confidence that the Back-to-School orders now being placed will get shipped?!!  

• With 1400 stores, there are a huge number of landlords that will do all they can (that's a key word) to prop up Penneys.  

• There may well be some equity in the Penney name and 100+ year history. But, only if the "value" of the name and history as an asset is greater than any "liabilities" associated with the name and heritage; the Balance Sheet MUST balance!   

(For more perspective on JCP's performance compared with the Department Store retail segment, see this Retail Benchmarks page on The ROI site.)

So, if you had a billion dollars sitting around, would you be inclined to loan it to Penneys?!!

This New Normal Demands New Strategies

Yes, We Know. We Have Previously Advised Otherwise...

For retailers needing money, Outcalt & Johnson and The Retail Owners Institute® have long advised these 3 key steps:

1. Make your business bankable
2. Keep your business bankable
3. And never expect your vendors to "bank" you!!  

That still is very good advice.

Problem is, in today's economic climate, banks simply are not inclined to loan to retailers of ANY size, shape, or form! (We know; we've been trying to help retailers get financing, but with little or no success.)  Yet, to fund growth, successful retailers badly need loans.

What's a retailer to do?

Adapt! Be like The ROI. Recognize that, in this New Normal, some vendors(!) may be willing to be your new "bank".

Of course, there are caveats! To borrow from vendors, retailers must:

• Do all of the preparatory work that they would do for a bank loan (Get a quick overview from this TOPICAL TUESDAYS webinar.)  

• Treat this proposed transaction as formally (that is, at arm's length) as you would with a difficult bank.

• Offer to the vendors personally guaranteed promissory notes for all loans. (Yes, folks. This is not slow pitch!)

• Prepare and share integrated Cash Flow projections for the year(s) the loans will be outstanding.

• Make darn certain that you repay these loans on time, or preferably, early!

• Remember, if you disappoint your vendors, your "lender of last resort", you're toast!  

Okay, for those of you with good memories who are about to shout "What?! You're now telling us to ask vendors for loans?!!", we reply, 

"Yes, that's true. 

Time's have changed, and so have we. In retail, as in life, adapt or perish!"

Know About This? (re Amazon, eBay, Google) You Should!

Amazon's dominance as the e-commerce platform for "third-party sellers" may be showing some signs of decline. There is unrest among its "small merchants" about fee hikes, and now a class-action lawsuit has been filed by some merchants.

• "Third-party sellers alleged in the lawsuit that, by holding sellers' money longer than allowed (often well in excess of the 90 days), Amazon racks up interest and uses the extra cash to support its operations."

• "Amazon has skewed the relationship to best suit its own operations," noted one observer. 

• "The suit estimates the total merchandise value of third-party sales last year at Amazon averaged more than $160 million a day. By holding on to this daily cash flow for only a few days or weeks, Amazon is able to invest this money in money market funds, marketable securities and other investments, and utilize the cash as working capital in the operation of its business,' the lawsuit says."

• "Amazon has been hiking fees for its third-party sellers over the past year-and-a-half. The hikes are shrinking smaller sellers' margins to increasingly uncomfortable and untenable points. The fact that Amazon is a direct competitor to those merchants stings even more."  

This resentment of the online retail giant's actions by some of its third-part sellers seems to have emboldened Amazon's competitors. Consider these observations from some recent news articles and commentaries (again, not us):

• "eBay and Google have both offered to reduce costs and transparency for third-party sellers. The companies are naturally hoping to trigger a merchant exodus from Amazon."  

• "eBay said that it will overhaul fees for sellers on its online marketplace, lowering them for many sellers as it steps up competition with Amazon.com."

• "Google seems to be preparing for an e-commerce battle with Amazon and eBay."

• "A brewing conflict between Amazon.com and its merchants over fee hikes could benefit rival eBay, and provide an opening for Wal-Mart Stores and Google, which are just getting into the space."

• "This battle of the giants - eBay, Google, Amazon - is just getting started. Though many smaller retailers could be hurt by these three large companies squeezing their way into traditionally physical retail distribution channels."  

While some independent retailers will welcome the benefits of heightened competition for Amazon, we think it behooves all "third-party sellers" to be well aware that the true cost of doing business with any of these platforms is exposing all of your sales and customer data to your "digital landlord".
Here's what some experts warn: 

• "Knowing exactly what sells, for how much and to which customers, means Amazon can adjust its own assortment and set prices to undercut the competitors it hosts, all based on actual sales."

• "Through its third-party sellers, Amazon can also collect Customer Relationship Management data on customers who have never bought a single item from Amazon."  

Your customer database may well be the most valuable asset of your retail business. Those customer relationships represent yourcompetitive edge. Retailers must manage, protect and preserve this important asset, which increasingly has monetary value. 

Additionally, the sometimes very slow payments from Amazon to some of their merchants (exceeding 90 days) can cause cash flow havoc, especially for the "small merchants."

It always comes back to that other Golden Rule:

"Whoever has the gold, rules!"

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Reminder: all of the quotes above are from people not associated with The ROI.  We have compiled them for you strictly as an FYI.