Don't fall into a Retail DEATH SPIRAL! 3 common mistakes to avoid.

Every retailer makes mistakes, and usually those mistakes are easily fixed. A bad hire can be resolved by a quick fire. A highly charged exchange with your business partner can be mitigated by a sincere apology. However, there are other mistakes that can prove to be much more damaging to the vitality of your business.

What is The Crafty Retailer to do?

Avoid those mistakes, of course!

PITFALL #1: Failure to control expenses. Most business owners have a working understanding of their fixed expenses, but are less tuned in to the insidious expenses that eat away at the bottom line. Every time that you cut $10 in expenses, it is tantamount to ringing up a $100 sale.

There are a number of changes that you can make right now to save money without sacrificing the customer experience. Consider the following:

1. Purchase generic shopping bags rather than custom imprinted ones. Use a colorful bag and attach a business card without sacrificing style. In fact, choose something that is eco-friendly and save the environment as well. Let your customers know the thought behind the change...they will appreciate your thrift AND your environmental awareness.

2. Negotiate better rates with your Merchant Services provider. You probably get an annual letter filled with legalize to apprise you of a rate increase. Don't accept the increase as inevitable---Get some quotes from several credit card companies. Your bank might beat your best quote in an effort to keep your business. A quarter of a percent doesn't sound like much of an increase, but when you extrapolate it out, you might be surprised. For example, you will pay an extra $250 when you process $10,000 in sales. Forget that!

3. Some vendors use "Shipping" as a revenue source. If your shipping costs appear high, ask your vendors for a discount. Are you using Fed Ex? Ask UPS for a quote, and vice versa.

4. Shave an hour off of your sales day. My local Home Depot is shutting the doors an hour earlier each day. I am sure that will change if business picks up, but right now it is saving them a bundle. It might work equally well for you.

5. Eliminate employee over-time.

6. Time is money. Order office supplies online. We used to have weekly, and sometimes daily, trips to Office Depot to get paper, ink cartridges, etc. until we tired of paying staff to make the run. It is an inefficient return on the dollars spent. Many big box office supply stores offer free delivery for orders over $50. While we are on the subject of office supplies, switch to cheaper copy paper. No one will complain about the brightness of the paper used to print a newsletter!

7. Target your advertising so that you are not wasting dollars. I recently read about a gift store owner who analyzed her customer data and learned that 40% of her "bottom feeders" came from one zip code! A bottom feeder is a customer who only comes around when you are having huge markdown clearance events. What a great bit of information! Now she has no need to pay for routine advertising in that market; rather, an e-mail newsletter announcing the big sale should suffice.

PITFALL #2: Failure to manage gross margin. This is particularly dangerous in a sour economy. After all, you can lose money despite record sales numbers if your margin is too low. "50% Off" sale signs are everywhere. I hear retailer after retailer complain that customers won't even consider a full price purchase. OUCH. That sort of discounting might improve short term cash flow, but it will quickly lead to your demise. Moreover, it cheapens the value of your product and gives the impression that you were overcharging the customer in the first place. Do yourself a favor and reserve the deep discounts for those items that have outlasted their prime sell date. Frankly, while Consumers may have come to expect crazy discounts, they are going to pay a high price for that gratification. The bitter reality is that the favorite local craft shop, with the cozy chairs and helpful staff, could soon go the way of the dinosaur if the only sales made are low margin sales. Ohio yarn shop owner Jackie Goff put it brilliantly in a newsletter to her customers.

Jackie, the owner of Uptown Fibers in Sylvania, Ohio, had seen several competitors close their doors. When her own customers started to question whether she would be following suit, she told them that it was up to them. She then gave them the following short and sweet economics lesson:

It’s happening all over the country. Every day our hearts break as we see another “OUT OF BUSINESS” sign on the door of our favorite businesses. A great restaurant, delightful bread store, or especially our favorite yarn shop; here one day and gone the next. The fiber community is still reeling from the closing of Vintage Yarns and Fiberworks, and the question asked of me every day is, “So, how is your business. . .really? You won’t be closing too will you?”

To honestly answer your questions, I am not PLANNING on going out of business, but it all depends on sales. Plain and simple. And, quite honestly, sales are significantly below what was expected and what is needed for long-term survival of the shop as it exists today. The last thing I want to do is break your heart. . . and mine, and I’ll do anything to try to keep that from happening. Which is why I have information to share with you.

Last week, one of my yarn distributors told me that 3 out of every 5 shops in his territory have closed since September ‘08, and that probably one out of every remaining two will not survive this summer. His territory is Michigan, Ohio, Illinois, Wisconsin and, I think, Minnesota. It includes Chicago, Detroit, Cincinnati and other cities bigger than Toledo. He reports this trend happening across the US.

Why Shops Don’t Survive
1. Customers stop buying. No explanation needed.
2. Profit margins fall below what is needed to re-stock. Example: a skein of yarn is sold at $10. The first $5.00 is needed to pay rent, taxes, salaries, utilities and the remaining $5.00 is left to re-buy another skein of the same yarn to restock. If the yarn goes on sale, the first $5.00 still has to pay rent/salaries/taxes, and now there is not enough money left to re-buy yarn because it still costs $5.00. Suddenly there is less to sell, customers get bored or already have it, and stop
buying. (not all “sales” create this condition, but most do, unless the item was greatly discounted to the LYS at the time the shop purchased it)

The above is a very simplistic explanation, and there are things a small shop owner can do to increase the profit margins somewhat, but the two items listed here are the major components to success or failure for retailers.

Jackie then went on to ask each of her customers to spend $40 a month with her. She was referencing the 3/50 Project, the brainchild of retail consultant Cynda Baxter of Retail Speaks, which encourages consumers to spend $50 per month with the three independent retailers that they would be miss the most if the stores disappeared. Jackie spent some time running the numbers and decided that she didn't need $50 per customer since $40 could keep the lights on. I was a little bit surprised by the frankness of Jackie's entreaty. Most sales people are conditioned to avoid anything that could be a downer so I found her forthrightness quite refreshing. Fortunately, her customers agreed. Most had little insight into the retail experience so Jackie's newsletter was a real eye opener for them. She reports that many customers come in the shop telling her that they are "here to spend their $40." Read Jackie's entire newsletter.

PITFALL #3: Too much inventory. There are two sides to the excess inventory pitfall. First, there are those who have too much inventory because they like to shop more than they like to sell. They buy what they like and what customers request. This owner special orders ten gross of crystal beads (in a color she knows is slow moving) because a customer needs 12 to finish a product. The owner would be better served by checking her ego at the door and procuring them from a competitor, reselling them to the customer at a loss. The loss would be less than $1 and result in a happy customer and a happy you, as opposed to the happy customer and unhappy you. You are unhappy because your spent $75 on iffy stock and now can't afford to buy the same bead in Swarovski's latest color, Cyclamen Opal. Bummer. The second inventory pitfall is when there is a plethora of inventory in a few store categories, and a dearth of inventory in others. The empty shelves indicate the most highly sought after items...you know...the items that you cannot afford to replace because you have so much money in the slow moving stock. Bummer.

Inventory is the engine that keeps your business running, but you must have sufficient inventory turns to justify the expense of the product. The delicate balance is hard to achieve in good times. It is even more difficult--but critical to your survival-- in a poor economy.

Work hard, work smart and you will survive this economy. You can do it!


Other News:
We have a new candy template for the month of
November. The "Save a Turkey, Eat More Chocolate" template fits the mini Hershey candy bars and is something nice to pop into a shopping bag as a surprise treat for your customers. Remember...it is all about creating the customer experience. Send me an email if you would like a copy.