Balancing Act

Science can certainly help, but for maximum profitability it works best with a little intuition.

A while ago, we braved the dry but nevertheless useful subject of stock turn. We tried to highlight how it can be used to monitor performance of products and identify areas for improvement. Stock turn alone, however, can often not be informative enough to help you drive sales and marketing strategies. So in this article, we’ll look beyond stock turn, to other indicators that can drive better-informed decisions.

Be prepared for a little more dryness, but if you’re a retailer and making money is your wish, read on…

To summarise, stock turn essentially tells you how many times you buy your stock, sell it, then repeat the process. So you might think the higher that number, the better you’re doing but that isn’t always the case. Having a super high stock turn probably means you’re not holding a great deal of stock but instead, you are regularly replenishing a smaller stock holding.

This is great in terms of not having a load of capital stuck in aged stock that you’re not profiting from but it could also mean you’re missing out on profit by being priced too low or missing sales opportunities when you’re out of stock between replenishments.

So if you’re not aiming to get stock turn either as low or as high as possible, where is the sweet-spot in the middle? That depends what it is that you’re monitoring with stock turn. So let’s take a step back and look at what you’re trying to achieve.

Ultimately, you want to sell all stock at the highest possible profit margin. It’s all about balancing supply and demand. It’s usually best to break it down into manageable chunks, so monitoring it by brand (maybe product type too or instead) is usually the best approach.

Forecasting and buying correctly has a big part to play in this game of balancing supply and demand to maximise profitability. It’s undeniably difficult, especially for new products or brands. But hopefully, your knowledge of industry trends, the opportunity in your target market and previous sales performance will guide you to smart buying decisions.

Forecasting methods and buying strategies aside, once an order is placed, you’ve bought or have committed to buying a certain quantity of stock at a certain price. Sometimes you’ll get it just right, sometimes you’ll miss a good thing and kick yourself for losing out on a bigger slice of the pie and sometimes you’ll buy a real stinker and want to drop it by any means before it sticks and leaves a nasty stain on your balance sheet. Fear not, there are strategies that can be employed to maximise (or salvage) the profitability of even the worst purchase.

Remembering we’re going to look at it by brand and/or product type, the next thing to consider is that stock generally has a finite period in which it can be sold profitably, usually a season or a year. After this time, demand drops off because it’s already been met or there’s a new exciting alternative on the horizon. If it sells too slowly throughout that time, you’ll be left with stock that more than likely needs discounting to move it. Otherwise, that stock will age ever further into the depths of obsolescence, forever tying up capital that could be better invested in other more profitable stock. The more those leftovers need to be discounted the more it decreases the overall profitability of that brand for that season.

On the other hand, if it sells too quickly during that time, you’ll end up having zero stock before that season and demand has ended.
So how do you know if a product is selling too quickly or too slowly?

You need to monitor the rate of sale compared with how much time (demand) you’ve got left to sell it. Stock turn is essentially your rate of sale but as mentioned, it’s often difficult to interpret the number. So you can further use stock turn to measure ‘weeks cover’. In other words, based on the current rate of sale, how many weeks will your current stock holding last for?

You then make use of this number by comparing it to how many weeks are left in the season (or however you define that time period of saleability in which there is still a demand for those products). If you’ve got cover for more weeks than there are left in the season, this indicates a slower rate of sale than you require. If you’ve got cover for less weeks than there are left in the season, this indicates a faster rate of sale than you require.

It can take a while for this data to build so that stock turn and weeks cover is accurate. Generally speaking, it’s not worth reviewing this more frequently than monthly.

Where brands or product types are new to you, in the absence of accurate stock turn for them, you can use your store’s average stock turn across all products over the past year, to calculate your weeks cover. You just need to keep this in mind when reviewing the results. You can also look at ‘sell-through percentage’ to sense-check your calculations.

‘Sell-through percentage’ is the total stock you’ve sold for that brand and season, expressed as a percentage of the total stock you have received and plan to receive for that same brand and season. You make use of this by comparing it to how far progressed you are through the season, expressed as a percentage. If you’re 50% through your season and 90% through your stock, you’re selling faster than required. If you’re 50% through your season and 20% through your stock, you’re selling slower than required.

There is no all-in-one retail report from any provider that will tell you how to run your business without you having the insight and intuition to apply reasoning to it and factor that into your subsequent decision making. However, something is always better than nothing and if you can find a provider who will give you guidance on the factors outside of the data that require consideration, you’re onto a winner.

For example, the basic concept of the previous method of analysis, assumes demand remains consistent throughout the season and you want your rate of sale to remain consistent too. In fact, you actually want your stock availability (supply) to ebb and flow with demand throughout the season. It might be OK to have 8 weeks cover left with 4 weeks of the season to go if you know there’s some reason the rate of sale is likely to double in the last 4 weeks. Hence, ‘intuition required’.

Other factors to consider are:
– What’s happening in wider national and global economic trends
– How consumer buying habits are changing and the rapid pace at which this occurs
– Important points in the season that will cause a sharp change in demand or competitive pricing, such as Black Friday
– How easily you can replenish the stock throughout the season
– Additional drops due in of the same brand and season
– New alternative products that could cause a drop in demand
– Even the weather!

So with the numbers assessed and intuition applied to the decision of whether you’re selling at the correct pace, how do you adjust your sales and marketing strategy to influence the balance of supply and demand to maximise your profit margin?

If all this information came packaged in a box, it would have a label slapped on it that reads ‘INTUITION REQUIRED’!

Before price, consider marketing and promotion. If you’re selling too slowly:
How do consumers with demand for the product know you’ve got it? Most consumers shop online with their mobiles first. Will they see your offering? Have you got an effective Google Shopping campaign in place for it? How well is that brand merchandised in-store? How well are your staff trained on the brand and how much are they pushing it? Would it benefit from some promotional cross-selling or upselling? Could the supplier be doing more to market the brand? Is a competitor better presenting themselves as the go-to retailer for that brand?

If you’re selling too quickly:
Are you spending a disproportionate amount on marketing that brand? Perhaps if you slightly scaled back your marketing spend for that brand, you would see a better return on investment and therefore net profit margin.

Consider pricing.
If you’re selling too slowly: Is a competitor selling at a lower price? If they are, decide whether there will be sufficient demand remaining after they’ve cleared their stock (consider their buying power). If so, you might be able to maintain your higher price until that time and resume your sales at a good margin thereafter. If not, consider reducing your pricing and accepting the loss of margin to clear the stock while there’s still demand. It’s better to break even or make a slight loss instead of suffering a bigger loss by getting stuck with stock that won’t sell at all.

Perhaps more related to your buying process but consider how well the brand is managed by the supplier – will it be made available to a competitor with the buying power to achieve a more competitive cost and therefore selling price than you? Keep your ear to the ground for this happening throughout the season. For example, if the supplier is stuck with slow moving stock and offloads it in bulk to such a powerful competitor, you may want to pre-empt that and act early to capitalise on the remaining demand.

Hopefully, the supplier chooses their stockists carefully and sets a clear expectation that brand value needs to be protected. A price war can often kill a brand, so before you slash prices, it’s probably worth a chat with the supplier about how the brand is being managed. Also, refer to the above – can you wait it out?

If you’re selling too quickly:
Are you priced too low? Perhaps you could increase your price to achieve a higher profit margin throughout the season, especially if you can’t replenish that stock. If you can replenish your stock, consider whether you can achieve more profit by selling less stock at a higher price instead of more at a reduced price.

The different formulas for stock turn, weeks cover and sell-through percentage are well-documented online, so I haven’t included them here. There are plenty of ways to legitimately calculate these values. The important thing is that you understand the numbers and apply your intuition to what can influence them. If you keep the method consistent you’ll have useful tools to drive your sales and marketing strategy.