Retail Cash

Retail Cash

Merchandising Strategy For Independent Retailers

For just about every independent retailer, cash is king. Whether the focus is on daily and weekly sales to assure that there's money in the bank to meet payroll and other expenses, or on building a cash balance during the busy season to get you through the slower times, most independent retailers keep a very close eye on cash flow.

Obviously, there are many factors that determine whether a small retailer is meeting, or exceeding, its cash requirements and building cash balances on an ongoing basis. But for most, the cash profile of the business can be traced directly back to a series of fundamental decisions concerning positioning and merchandising strategy. 

The critical strategic advantage of any independent retailer is the ability to focus on, and respond quickly to, customer needs, while providing a superior level of customer service and state-of-the-art product knowledge. The one thing that the big-box retailers excel at is driving down costs and offering their customers the lowest price for commodity or near-commodity goods. They understand that for these items the vast majority of shoppers are highly price sensitive. 

But for any item, and especially for those that are not commodities, there is a critical segment of customers who are not price shoppers, who focus instead on product quality, service, and a relaxed, friendly experience. 

In other words, independent retailers should avoid competing on the basis of price, because there will always be a competitor with larger, deeper pockets who will be able to undercut you. Competing on the basis of product quality, product knowledge, and customer service enables a small retailer to present to their customers a compelling value proposition and maintain critical price integrity. 

Strategic positioning, therefore, leads directly to product selection and pricing policy. Selling higher quality, specialty products on the basis of their intrinsic value, and the product knowledge and customer service that accompany them, insulates a small retailer from price competition, and enables the retailer to obtain a higher initial markup, and avoid corrosive sales, price promotions, and other incentives that eat into margins.

How is this done? Here are a few specific ideas to help position your store as a premium destination for the finest products, knowledge and service, and generate the margins you’ll need to assure continuing positive cash flows: 

• Adopt a better/best pricing structure, rather than a good/better/best structure. The classic retail pricing structure for any product category is three-tiered, with an opening priced "good" quality item, a mid-priced "better" quality item, and a higher-priced "best" quality item. The nature of contemporary retailing is that for most any product category, there is a big box who is seeking to lock up the opening price point. Let them. They are more than happy to trade margin for volume, and have the deep pockets to do it. Instead, protect your margins by focusing your efforts on better quality goods, using a "better" quality item as your opening price point, and focusing your energies around the quality and features of the "best" item.

• By the same token, avoid carrying the same items as the competing big-box store. This may not always be possible, but if you must, think of those items as accommodations to your customers, rather than key items that you are trying to maximize the sale of. Rather, build your business around unique items and unique product categories in niche markets to a carefully targeted clientele.

• Keep your inventories lean to minimize markdowns and their impact on margins. The instinct of many small retailers is to have enough stock to never miss a sale, but all that inventory carries tremendous markdown risk, which can decimate margins and cash flow. Bring fresh inventory into your store as close to the time of anticipated sales as possible. That way, you'll also always have something new and exciting to offer your customers.

• Don't get locked into standardized pricing formulas, like keystoning. Your pricing should not be merely a function of what you paid your vendor for the item, but rather the intrinsic value of the item, and the accompanying service you provide your customers. The product knowledge and customer service that comes with your product offerings has a value to your customers. Don't be afraid to include that value in your pricing.

• Avoid price-item advertising at all costs. Focus your advertising on building the brand cache of your store, not specific sales or promotions. When customers think about you, make sure your advertising has left them with the thought that you are a destination for premium quality and selection, state-of-the-art product knowledge, and outstanding customer service, and not price.

• From a customer's perspective, customer service and product knowledge are the means to resolving problems. Whether a customer turns to you for something to knock back the pesky weeds in their vegetable garden or for a truly unique anniversary gift for their favorite aunt, customers are willing to pay for solutions. Make sure you and your staff are armed with state-of-the-art product knowledge and the offer your customers the very finest service.

Define your mission around offering your customers premium specialty products, state-of-the-art product knowledge, and the finest customer service, and you will insulate yourself from corrosive price competition, while protecting your margins and cash flow.

About the Author

Ted Hurlbut is the Principal of Hurlbut & Associates, a retail consulting and business advisory firm based in Foxboro, Massachusetts. He is focused on helping his clients increase sales, margins, profitability, and cash flow, and is particularly attuned to the challenges facing smaller, independent, entrepreneurial retailers. You can learn more about Ted, and Hurlbut & Associates, at http://www.hurlbutassociates.com

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