There’s three things I think brands and retailers need to start getting better at if they want to improve business right now. We know you have to create great product and you have to have an awesome marketing campaign, but you also have to manage the amount of product you produce and create a sense of demand.
I cannot even begin to tell you how many times I’ve listened to people say that this product didn’t sell well or that item was a bomb. Team after team, brand after brand, and retailer after retailer continue to over develop, over assort, and under perform. It’s not because of uncooperative weather or bad product or new trends or whatever excuse is made at the time; it’s because too much product was made and bad bets were placed against the wrong styles within that inventory. Too much, too often, not focused…
Here’s an important fact: no brand or retailer has ever gone out of business because they had too little inventory–it’s the opposite.
Here are three things to get serious about if you want to be a player and have a product, brand, or business that consumers want with passion.
#1 GET REAL ABOUT YOUR SALES ESTIMATES. First things first, sales are the amount of products consumers buy of the things you make. It doesn’t matter if it’s consumed online or in store. It also doesn’t matter if you’re a wholesaler or retailer. You have to know how much goods you sell to consumers. If you don’t, figure it out fast.
Now that that’s out of the way, let’s recall Sir Isaac Newton’s first law of motion, which is a body in motion tends to remain in motion unless acted upon by an outside force. If you need further insight on this matter, I’d recommend reading the amazing book by Neal Stephensen called Seveneves. In it you can read all about orbital paths and the forces necessary to disrupt those paths and cause meteors or other bodies to behave like a good pet and do as you say. It’s a book recommended by Bill Gates for crying out loud so you know it’s awesome–and geeky.
Anyhow back to reality, like the first law of motion, the same is effectively true with sales. Something big had to happen to go from selling nothing to selling something. You had to create or disrupt another force. Trends fade due to other trends gaining momentum. Think of trends like friction–it just is and you have to account for it.
Now don’t be fooled, sales are highly predictable especially when you have an existing business with data. They are like orbital paths. I’ve worked with teams and we have consistently projected sales 18 to 24 months into the future that have actuated at plus or minus 2% (that’s freaking amazing) barring any major events like 9/11. In all the years of estimating forward sales, we have found that unless something significant and meaningful happens, those sales continue along a very predictable path much like a body in motion against the normal forces of gravity and friction–economics and trends.
Another point here is that the larger the body, or sales volume in our case, the more of an outside force or action is needed to change its course. For physics buffs, this is Newton’s second law of inertia–big stuff needs a greater force to move it than does little stuff. You should be able to quantify any meaningful effort to change the path of your business—new shops, stores, distribution, market reach, etc. More inventory and more iterations of the same products does little to affect change. It’s just more mass. In order for change to happen, the disruption has to be material and it has to be an investment in time, money, and resources.
As the saying goes, “hope is not a strategy”. You cannot “will” your way into gaining more sales anymore than you can use your mind to move a stone.
Get real about your estimates and know that hope is not a strategy.
#2 CUT INVENTORY IN HALF. Yes you heard me and no I’m not kidding. The global apparel industry produces more than 150 billion garments every year and there’s only around 2 billion people with the means to consume those goods! The ratio of what you produce to what you actually sell at margin probably isn’t much better. Take a look and see how many units you make in a year compared to how many units CONSUMERS purchase at viable margin in a year. I promise it will be staggering.
If you took the time and figured out how much you honestly expect to be able to sell in a year or period, why would you buy 2 or 3 times the inventory you need to generate those sales? It’s a waste of money and resources plus it stunts demand. When we buy too much inventory, we flood the marketplace with goods and destroy any sense of demand. Don’t be afraid to let your consumers WANT your products.
As a rule of thumb, what you plan to sell plus how much you can responsibly take in markdowns, equals the amount of receipts you need to deliver. It’s just math. Don’t make it complicated. If you expect to do sales of $100 and want a markdown rate of 30%, buy $130 worth of product. Why would you buy $500 worth of stuff to sell $100 worth of products?
Hear’s a cheat sheet: if the product you produce has a lot of sizes, e.g., footwear and apparel, you should buy no more than 1.4x sales. If your products don’t have sizes, e.g., handbags and jewelry, receipts should be no more than 1.2x sales.
This shouldn’t be looked at as tough medicine. It should be viewed as religion. It should be CORE to your business acumen. You can do sales with a lot less goods. And guess what? Doing that only creates demand, it generates a lot more gross margin, let’s more people keep their jobs, and it’s the right thing to do for our environment.
Stop being afraid and do more with less.
#3 PLACE MEANINGFUL BETS. A lot of brands and retailers hedge their buys. Instead of taking big bets, they buy a little bit of everything–and a little bit of everything results in a whole lot of nothing.
After you’ve completed step 2 above and buy a lot less goods in general, now you have to buy more of the right stuff and less of the wrong stuff. If you have data and if you’re engaging your customers, this is easy. Don’t make it more complicated than it is.
Here’s the point, you have to figure out what is going to drive sales and buy a lot of those products. You also have to figure out what is going to excite your audience and splash those products around. Don’t buy all your SKU’s equal. Don’t even let them get close. Pareto’s principle states that 80% of effects come from 20% of causes, which in our case means 20% of your SKU’s will likely generate 80% of your sales. Don’t fight it. It works. The beauty of this also is that it doesn’t mean you can’t or shouldn’t have breadth of an assortment. Go at it. Have a broad assortment of goods. Just make sure that a small portion of those SKU’s account for most of your inventory. What consumers see and what you have in the stockroom should be two completely different things–an optical illusion. That’s what inventory management is all about.
If you’re not buying your top SKU’s exponentially deeper than your bottom SKU’s, you’re destroying your business and it’s your fault. It’s not the weather. It’s not the economy’s. It’s not the design team’s fault. And it’s not trends. It’s you, and I mean that if you’re a planner who figures out how much to buy for when, an allocator that distributes the product, a merchandiser that figures out what to buy, a marketer that looks at what to promote, or a leader that looks to build a healthy business that people want to be a part of. If you were a portfolio manager at an investment company, which essentially we all are in some manner or another, your success would depend on how well you place your bets and beat the market or your competition.
HERE’S THE GUARANTEE. If you are realistic and honest about how much consumers are likely to buy of your products, buy just enough inventory to generate those sales, and place big bets inside that inventory, I guarantee you will drive significantly more sales, capture more gross margin than you know what to do with, and your consumers will want your products more than ever before.
Final food for thought: if we produced 10% fewer garments each year, that would equal 15 BILLION fewer garments going to landfill. That’s 15 billion less in materials production, which results in waste, pollution and toxins. Furthermore, none of that would be lost sales. All of it would be an increase of profit in terms of margin, our environment, demand from consumers, and strength of our industry.