Sunday, May 8, 2011

The Case Against Category Management –Exercise #4 -1

Unfortunately, we can’t use all of George’s tricks (nor would we want to) to get people to buy products in our stores, but we CAN be a lot more selective as to the customers we attract. There are many well documented approaches for getting to know your customers better; customer relationship management (CRM) being only one of them. Note: More about this later.

If 25 percent of your transactions are unprofitable, and 30-40 percent of all items within categories are also unprofitable, we certainly need to do something to tilt things in your favor.

Category Management (CM) is the broad-brush approach to retailing… and it’s NOT working. If doctors just told their patients to go home and take an aspirin, sooner or later they would run out of live patients. Like doctors, you may need to become a diagnostician in your field to keep your stores alive.

According to NACS, the average turn-rate for a store’s inventory is around eight times per-year. That means $100,000 worth of retail inventory in a store produces annual sales of about $800,000 and yields a gross profit of around $168,000. Further research points to a net profit before taxes of around $16,000. That’s terrible. It means it cost about $152,000 a year to run that store. Note: None of these figures include fuel sales.

If we could increase the number of turns from eight to only ten, and increase cost by only the cost of the extra inventory we bought, it could result in net profits of $58,000; an increase of $42,000 over and above what we had before. That’s more than a 250% increase.

In order to increase your turns, you must increase the number of times an item sells. You can’t do that with CM. It’s a hit or miss proposition. No sir, you’ll have to drill down into those categories and find out what’s keeping those turns so low.

The turn-rate is the SINGLE MOST IMPORTANT INDICATOR of how a store is performing. If increasing sales means selling 30 to 40 percent of the inventory at a loss, you haven’t gained much have you?

One of the reasons your turns are so low is because of the dead inventory on your shelves. If an item turns at NACS’ national average (eight times per-year), you should seriously think about getting that item out of your store. Looking at the figures, it easily explains why you’ve got twice the inventory you should have. Not only do you have too much inventory, obviously you’ve got too much of the wrong stuff.

If you’ll follow the simple rules I’m going to lay down for you in Exercise #4, you can correct that situation in the first ninety days, and return a large percentage of the cost of that dead-weight back into your operating capital. By following my advice, if you own ten average-size stores, I can just about promise you a $250,000 increase in operating capital within the first ninety days or less… and that’s only the beginning

Of course you may have to convince your suppliers to take some of it back, but with the ammunition you’ll have on your side, you will be able to show them why you’re through warehousing their unsellable stock.

Trust me. In the long run you’ll be doing your supplier a favor, because with all the dead stock clogging up the supply channel, he’s losing money from it being there too.

I’ve got to say this one more time, and it may not be the last time you hear it from me. THE KEY FACTOR THAT ALLOWS A SUPPLIER TO REMAIN IS TO INCREASE THE CUSTOMER’S PROFITABILITY ON THE SUPPLIER’S PRODUCTS.

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