Retail Business “Killers”

Today I want to point you to an article called “The Top Five ‘Killers’ of Retail Businesses” from the Retail Owners’ Institute.  You have to keep in mind that the ROI is a group focused on the financial aspects of retailing.  Consequently their “Top 5″ don’t include things like marketing, salesmanship, customer service or any number of other things that would appear on my list.  In fact, the article begins with this rather remarkable statement”  Hint: (Declining Sales’ is NOT One of them!)

Again, these guys are in the business of counting retail beans so their list focuses on the financial.  With that disclaimer, here are their “Top 5”:

5.  Out of Control Growth

4.  Out-of-Control Expenses

3.  Failing to Manage Gross Margins

2.  Out-of-Control Inventory

1.  Being Out of Cash

Like I said, from the bean-counter’s perspective there isn’t much to argue with here.  There’s no doubt that if you run out of cash, you’re most likely out of business.  Read the original article to see ROI’s comments on each business killer for some good insights.

It’s a good article but, in my humble opinion, it misses some very important elements of a successful retail business.  Even the most devout bean-counter should be willing to admit that until you bring the beans in through the front door, the rest is just academic.

Small Business Negotiation

I may not be able to post new material for the next few days so I will be running some “best of” posts.  I hope you enjoy this stroll down memory lane.  This post originally appeared on January 20, 2009

It’s days like today that I appreciate being an independent blogger rather than a corporate employee.  I doubt that I would have covered this topic in my past position.  As it is, I may step on a few toes with this post, but I’m not worried about that.  My job is to help you.

In an article at the Wall Street Journal online, Raymond Flandez points out that in the current economy almost anything is negotiable.  In a recent survey, 15% of small business owners and managers said that they had recently renegotiated long-range fixed-cost supply contracts.

As Flandez points out, money talks.  If you have traditionally paid on time you stand a better chance of cutting a better deal. Vendors have inventory and they need cash, making it a buyers’ market for companies with good payment history and cash flow.

Here’s where I may rub some people the wrong way.  Now is the time to ask your vendors for concessions. They need sales to pay their own bills, especially fixed-costs like rent.  They also have payroll to meet.  If you can help them turn inventory into cash, you’re in the drivers’ seat.

The Journal piece offers some case studies of companies who got very creative in their negotiations with key suppliers, including Atlanta Refrigeration Company who got their supplier, Heritage Food Service Equipment, to actually hire four Atlanta Refrigeration employees in exchange for an exclusive supplier agreement.

The key thing to remember here is that every negotiation should end in a win/win situation.  Atlanta Referigeration saved four employees jobs while Heritage Food got additional business right away and the promise of much more when the economy improves.

The days of “us vs. them” negotiations are over.  But, if you can put together a package that reduces your costs and offers an advantage to your suppliers, you stand a good chance of saving a lot of money, if the suppliers can count on you to pay your bills.  If your current suppliers balk, then maybe it’s time to shop around.

Multiple Channels of Distribution

This may get a bit long, so I apologize in advance, but it’s a complicated issue.

I’ve been following a discussion on another forum on the subject of multiple channels of distribution.  Here’s the gist of the conversation.  A company who manufactures consumer goods in the United States offers two protected lines to independent retailers.  There are restricted dealer territories for each line and Internet advertising is prohibited.  The company does not sell to mass merchants.

However the manufacturer does market its products through other channels which normally don’t interfere with their indy retailers.  Products for these other channels are cosmetically different from the retail product.  Only lower-end items are sold through the other channels, with the more expensive top-of-the-line reserved exclusively for the indy dealers.

The question is, should the manufacturer be selling through these other channels?

Disclaimer:  I used to work for the manufacturer in question, albeit in another division.  I have had this discussion/argument many times, both with dealers and within the company.  Since I no longer work there, I believe I can shed some impartial light on this issue.

hammerYou don’t have to be a rocket scientist to figure out what product I’m talking about, but to keep the blog industry-neutral, we’ll say the product is hammers.  I’ll admit I know very little about hammers except that they’re used to drive nails and that you hold onto the handle and hit the nail with the other end.

First, it’s very difficult to be a supplier exclusively to independent retailers and any manufacturer deserves a lot of credit for trying to do it.  Face it, one order from a big box chain can account for more units than hundreds of indy dealer orders.  Considering the fixed costs of manufacturing, either domestic or off-shore, the chain store numbers are hard to ignore, especially if you want to keep your work force employed and make a decent return on your investment.

On the other hand, it’s very costly to do business with most chains.  The low prices they brag about are usually made possible by their predatory purchasing, payment, and return policies.  If a vendor isn’t careful, he may end up paying dearly for the privelege of having his product stocked on the big boxes’ shelves.  More than one manufacturer has gone broke trying to do business with the big guys.

So, if a company makes the decision to stay out of the chains, how does it generate enough volume to keep the factory running?  One way is through multiple channels of distribution which don’t include the Marts and Depots.

not a hammerLet’s say I’m a manufacturer and I produce a line of hammers that I only sell to independent hardware stores.  I have a full line of these consumer tools including claw hammers, ball peen hammers, and others.  I’ll call this the Alpha Homeowner line.  Within the Alpha line I offer a basic assortment and a deluxe, gold-plated assortment.

To keep production going I also sell a line of professional hammers through industrial supply houses that sell directly to carpenters and other professionals.  I call this the Beta Builder Line.  It has all the same type of hammers, but they’re cosmetically different from the Alpha line.  I don’t offer the gold-plated line-up to this channel.

The problem is that consumers (and builders) are very savvy today.  It’s fairly common knowledge in the tool community that Alpha and Beta are made in the same factory.  It doesn’t happen often, but once in a while, a carpenter will come into one of my retail dealers with questions about  his Alpha hammer.  Some dealers will take it in stride, answer the questions, and maybe sell the customer other merchandise.  Others will be highly offended that they missed a hammer sale, refuse to help the customer, and raise heck with me for selling his “competition.”

The dealer’s suggestion to me is that I stop selling in these other channels.  He argues that with less competition he’ll sell more Alpha hammers, making up for the loss of sales of the Beta line.  But will he?

If I stop selling the supply houses, they’re just going to find another supplier.  Typically, the supply house’s customers don’t shop in hardware stores.  And, consumers usually don’t shop in the supply house either.  So, I lose the business from the secondary channel and gain no sales in my primary channel.

So, putting on my small business hat, should I, an independendent retailer, buy from a manufacturer whose products are available trrough other channels?  I’d say the answer is “yes” with qualifications.  Of course, the big qualification is whether I can make money selling the line.  Or better yet, can I make more money selling that line versus something else?

The Alpha hammer may be available through the supply house, maybe at a local auto parts store, and a few other places.  I may lose an occasional sale.  But, looking at the big picture, is it a profitable line for me, day in and day out?  Is it a quality product?  Do I get support from the manufacturer?  If the answer is yes, then I’d say you’ve got yourself a good line.

Taking off my indy hat and putting my manufacturer hat back on, there’s another 500 pound gorilla in the room that often doesn’t get talked about.  More than three fourths of my retail dealers carry another line of hammers.  They want to offer their customers a choice.  Of course, I have enough hammers in my line between the regular items and the gold-plated series, but the majority of my dealers still devote 1/2 their hammer shelf space to another brand.

All of my competitors do sell the big box stores.  Yet, more than 75% of my customers still sell their lines.  While I give my dealers a protected territory and keep my line 90% competition-free, these dealers still carry other lines.

If my dealers gave me the same protection that I give them, I wouldn’t need the other channels.  Of course, that might mean adding additional models and features, and possibly spending more money on advertising.  It’s really a Catch 22.

In the end, wearing both hats, or no hat at all, I have to say that this whole issue comes down to profitability of the line and to manufacturers and dealers working together.  Both sides have to ask each other (and themselves) how can we reach an agreement that lets both of us make a reasonable profit?  Dealers, do you really need that second line?  Manufacturers, what can you do to make the second line unnecessary?  How can we make this a win/win situation?

In a tough economy, the manufacturer has a responsibility to satisfy all of its stakeholders and keep everyone working.  I say “kudos” to any company who can do that without getting in bed with the big boxes.

Retailers have the same responsibility to themselves and their staff.  Again, I say “kudos” to those of you who can do that and support quality manufacturers who do their best to support you.

Small Businesses Cut Costs by Renegotiation

It’s days like today that I appreciate being an independent blogger rather than a corporate employee.  I doubt that I would have covered this topic in my past position.  As it is, I may step on a few toes with this post, but I’m not worried about that.  My job is to help you.

In an article at the Wall Street Journal online, Raymond Flandez points out that in the current economy almost anything is negotiable.  In a recent survey, 15% of small business owners and managers said that they had recently renegotiated long-range fixed-cost supply contracts.

As Flandez points out, money talks.  If you have traditionally paid on time you stand a better chance of cutting a better deal. Vendors have inventory and they need cash, making it a buyers’ market for companies with good payment history and cash flow.

Here’s where I may rub some people the wrong way.  Now is the time to ask your vendors for concessions. They need sales to pay their own bills, especially fixed-costs like rent.  They also have payroll to meet.  If you can help them turn inventory into cash, you’re in the drivers’ seat.

The Journal piece offers some case studies of companies who got very creative in their negotiations with key suppliers, including Atlanta Refrigeration Company who got their supplier, Heritage Food Service Equipment, to actually hire four Atlanta Refrigeration employees in exchange for an exclusive supplier agreement.

The key thing to remember here is that every negotiation should end in a win/win situation.  Atlanta Referigeration saved four employees jobs while Heritage Food got additional business right away and the promise of much more when the economy improves.

The days of “us vs. them” negotiations are over.  But, if you can put together a package that reduces your costs and offers an advantage to your suppliers, you stand a good chance of saving a lot of money, if the suppliers can count on you to pay your bills.  If your current suppliers balk, then maybe it’s time to shop around.

We’re All on the Same Team!

Doug Fleener, he of the Retail Contrarian blog and The Daily Retail Experience newsletter has been attending a conference in Phoenix.  The purpose of the conference was for retailers and vendors to get together and talk to each other, something that we probably don’t do often enough.

Doug writes: 

"* Communication, communication, communication.  Over and over I heard vendors tell retailers that they want to work with them.  Vendors know they can only succeed if their retailers succeed.  So why is it that sometimes we act like we’re not on the same team? We retailers need to partner with vendors on ordering, sell through, and events.  I think there are times we retailers don’t ask enough of our vendors.  And I’m not talking about discounts, dating, or free shipping, I’m talking about asking them for honest opinions and feedback on what we’re doing well and not doing well."

I consider myself the retailer’s advocate, but I do work for a vendor and I can assure you that Tacony Corporation along with the huge majority of vendors want to work with our retailers.  We’re on the same team.

Some retailers (and, sadly some vendors) believe that there’s a pile of money that represents the difference between the cost to manufacture an item and the price the consumer pays; and that the size of that pile of money is fixed.  They view the relationship between vendors and retailers as a tug-of-war.  We’re all fighting for the same dollars.

Tug_o_war

Nothing could be further from the truth.  Vendors need retailers.  Retailers need vendors.  If we work together, we’ll all make more money.  If there’s an enemy, it’s the competition.  Instead of fighting over our pile of money, we should all be trying to get some of their pile. 

Here’s a good example.  At a meeting this morning, Ken Tacony read us a letter from a dealer.  Since I don’t have permission to use his name, I’ll just give you an outline of what he said.

Two years ago one of our sales professionals convinced him to take on our Simplicity line of vacuums.  In just two years, his business has tripled.  He’s reinvested the profit from the Simplicity vacs in his business and has changed the course of his business and his life. 

Did we make money on the deal?  Of course we did.  Was it a win-win?  You’d better believe it.  Did this dealer make money buying our vacs?  No.  He made money selling our vacs–and we helped him with training, marketing materials, and other tools.  That’s what a good vendor does.

As Doug points out, retailers often don’t ask for help.  Or they view vendors offers of help with suspicion.  After many years of selling, I can back him up.  I can’t tell you the amount of advertising and promotional funds I’ve seen go unused; the number of point-of-sale materials I’ve found collecting dust in back rooms; the non-functional displays I’ve repaired or replaced.

Right now you and your customers are being bombarded with negative news.  Gas prices are up.  Housing sales are down.  We’re turning food into fuel and now there’s not enough to eat.  The sky is falling!  Run for your life!

But, unless there’s an oil deposit under your store, you’re going to have to keep doing what you’re doing, only better.  And the best place to find out how to do it better, and to get help doing it,  is from your vendor partners.

But it’s not a one-way street.  Vendors need your help, too.  If you see a better way to do something, let us know.  If you see a way to make a product better, let us know.  (See No More Lost Straws!)  If a competitor is doing something better than we are, let us know.

If we all work together, we’ll all come out ahead.

If you have something you’d like to share, comment below.

Product Sourcing

This is number fourteen in our series based on Challenges of the
Future: The Rebirth of Small Independent Retail in America
, a 64 page white paper by Jack Stanyon, underwritten by the George H. Baum
Community Charitable Trust, the Illinois Retail Merchants Association, and the
National Retail Federation Foundation.  Today we take a look at Stanyon’s second Challenge (opportunity).

Challenge #2

Difficulties in product sourcing and merchandise acquisition.

If you’re a Tacony Corporation customer, this shouldn’t be a problem for you.  Stanyon cites (1) shrinking vendor structure (2) vendor minimum orders for single shipments and minimum annual purchases and (3) quantity pricing as issues which make it difficult for the independent to compete.

He says that "Manufacturer and distributor consolidation and the channel crossing of products are causing many problems for small independent retail."  Standardized products and the pressure for manufacturers to sell through multiple channels are two problems that Stanyon mentions.

He goes on to say that independent retailers can take advantage of sourcing new manufacturers and suppliers who are looking to establish themselves with innovative new products.  We couldn’t agree more. 

This may be shameless self-promotion, but Tacony Corporation began as an independent retailer sixty years ago.  Through the years we’ve grown our business by providing protected brands that the independent retailer can sell without fear of their customers seeing the same thing at the big box store down the street.   To be fair, we’re not the only manufacturer to do this, but many others have chosen a different approach to the market.

As a family-owned company, we don’t have the pressure from stockholders to constantly increase the value of their holdings.  We put pressure on ourselves to continually come up with new, innovative products and better, more efficient ways to serve our customers.  Our goal is to be the best, not the biggest.

Stanyon says that "another important aspect of the product sourcing challenge is often the need to establish an anchor brand to provide added credibility for other desired suppliers."  Unfortunately, many of those "anchor brands" are sold through multiple channels and offer profit margins that aren’t acceptable.  They become victims of their own success.  Their credibility comes from national advertising and wide distribution, which drives the price down making the product unprofitable for the smaller store.

One of the means for a dealer to increase profit margins is membership in a buying group.  Buying groups provide purchasing power and other benefits.  Their downside is that the dealer loses a certain amount of control by being a member.  A diversified supplier who specializes in the independent retailer market, not selling protected brands to mass merchants, provides many of the benefits of belonging to a buying group without the limitations.

In summary, it’s important that the successful retailer be a good shopper.  Work with your vendors, whoever they are, to increase your business.  Keep your inventory fresh by bringing in new products whenever possible.  Work with your manufacturers’ sales force to come up with new promotions, new in-store displays, and anything else that will increase your business.  Ask them what’s working for other dealers in other towns.

Network with other retailers at trade shows and conventions and don’t overlook those in other, non-competing industries.  The lawn and garden store, or the bicycle shop, or the bakery has many of the same problems that you do and you might just be able to brainstorm and give/get some good ideas.