Strategic Merchandising / Open to Buy
Merchandising your store to maximize profits doesn’t just happen. All too often retailers believe, “If I buy it, they will come.” Not true. Merchandising approached in a strategic and systematic way will yield a much higher turn rate, and therefore, higher profits.
It is easy to attend a trade show and just buy what we like. Unfortunately, sometimes you find upon returning to the store you already had three similar items or ten at the same price point. Worse yet, is not even realizing this mistake and putting it in the case hoping it sells.
One of the most important aspects of owning a retail business is merchandising your store. Effective merchandising is having the items your clients are seeking when they are ready to purchase. This is achievable. Many retailers feel as though no matter what is in the case the customer is going to want something different. If you are feeling that way, there are two issues. One, you didn’t stock your cases in a strategic way, or your sales associates are not selling, just clerking. Strong merchandise assortment, higher turn rates and more profits are achievable.
First, identify what customers are coming to your store for.
Examine your past sales looking at what percentage is attributed to what categories. This will tell you your reputation in the market, areas of opportunity, and potentially expose product that should be abandoned. To determine this, you should analyze what your customers have bought over a period of time (one year is a good place to start). To see this more clearly, break merchandise into categories. Categories are simply groupings of similar merchandise such as diamond rings, diamond earrings, bridal, colored stone rings, etc. A category could also be a specific brand, or something as detailed as diamond hoop earrings. Your analysis should answer the following questions:
- Which category has the most sales dollars?
- Which category has the greatest number of unit sales?
- How much gross profit did each category generate and which one is the highest?
- What is the average retail sale of each category?
Now you can begin to get a picture of what your customers have been buying from you, which will help you determine what they will be seeking in the future.
However, this is a more important question that most stores cannot answer and that is, “what did my clients want that we didn’t have”? In other words, customers walked out without buying because they didn’t find what they were looking for. The best way to keep track of this is to have a wish book in which sales associates write down why people left without making a purchase. Were they looking for a particular brand and couldn’t be convinced to purchase an alternative item? Were they looking for a basic such as diamond stud earrings, but stock hasn’t been replenished so you have no 2 CT TW? Also, look at your special orders. Is there a trend of items you are consistently bringing in because you don’t have it available in your cases?
More often than not, if you don’t have the item your customer is looking for, they will simply walk. Sadly, we find 8 out of 10 customers leave a store without buying because they didn’t find the right item. This may sound shocking, but we challenge you to count the number of customers and number of purchases on a given day to determine your close ratio (repairs do not count). You may be surprised. If you can stock a few more items specific to what your clients are looking for and you then sell just one more of the 8 people that are leaving without buying, you could increase your sales by 50% or more.
The second step, after identifying what your clientele is coming to you for, is to look at your existing inventory. Focus on the categories in your store that have the highest sales and gross profit dollars. These are areas where you cannot afford to be missing merchandise. Clearly, they will have the highest impact on the profitability of your store. As you are analyzing the inventory in each category, answer the following questions:
Do I have merchandise in every price range for this category?
Does my current inventory correspond to what my average sale is for the category?
Am I missing merchandise that sold quickly? (i.e. basics like diamond earrings or fast-moving styles)
Do I have too much dated or slow -moving inventory in a category?
Should the merchandise be buffed, cleaned, and retagged to look fresh and new?
Next, look for areas that are under-performing. The fact that it is not moving is a call for help. Don’t ignore it— address it. Is the product out of style, not a good design, overpriced, shopworn, or displayed poorly? By dealing with this problem merchandise you free up open to buy dollars to replace with new, better selling product.
Next, make a list of items by price points you need to fill in. If you are short on cash, you may need to redesign some of the old merchandise or put it on sale to generate cash with which to make new purchases.
Before buying at a trade show or even in your store you should always know what area of your business is driving your sales and your profit. This is where you should focus your investment.
Now that you know what you need by department the third step is to see what you can afford. We discussed the importance of an open to buy in a previous article. Retailers should never make purchases without a confident open to buy budget. This is the single biggest way to find yourself overbought and with a stressed cash flow. By strategically planning your purchases you reduce the upcoming problem of holding dated inventory, which slows downturn and cash flow. As mentioned in the previous article, the key is to buy carefully with a plan and not overspend that plan.
A good guide for your open to buy is to look at your cost of goods sold for the period you are buying for from last year. Most jewelers should spend less than this number because they already have too much inventory. To estimate what you should spend, take for example your total cost of goods for August, September and October last year. Let’s say that number was $210,000; then you should only spend $210,000 for that same period this year. It is imperative that you also hold out dollars for your memo and special orders, so you have the cash to pay for these as you go.
The fourth step in merchandising with a plan is to start at the top of your prioritized merchandise needs list and apply estimated dollar spending budgets. You may find you do not have enough money to purchase everything you would like. However, committing to spend only the amount you have allocated will increase your company’s financial stability.
The key to merchandising is to buy what will sell. Carefully analyzing what you have sold and sales that you have missed will help to focus your plan. Comparing this to your current inventory mix will identify the merchandise, that you need to purchase. Finally, by specifically allocating your spending budget to the price points and styles you have identified as missing from your assortment you will soon realize an increased turn rate. It is equally important to replenish those items that sell quickly so your merchandise assortment stays in balance.
This may sound overwhelming but breaking it down into pieces makes this a very manageable task. The results are astounding, and what you find in your case may shock you as well. Don’t think that if you have had a piece for five years that one day someone will actually buy it. Move it out whether by selling it at cost or melting if necessary. Old merchandise takes up valuable real estate in your cases and freeing up those dollars to purchase fresh styles will impact your bottom line.
If you merchandise with a plan instead of by what looks good that day, your assortment will be rounded out, by covering both style and price point you will find that more often than not, you have exactly what your customer is looking for.