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Positive Spin: The four pillars of retail profitability

Editor’s note: David DeKeyser and his wife Rebecca Cleveland owned and operated The Bike Hub in De Pere, Wisconsin, for nearly 18 years. Last year, they sold the business and real estate to another retailer based in a nearby community. This is the third Positive Spin column by David DeKeyser. 

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As a retailer you may be feeling like you are fighting a never-ending uphill battle. As you looked over your main vendors’ programs for next year there may have been some margin reductions, freight increases, or commitment increases. Perhaps all three! The constant uncertainty about whether you will lose even more margin over tariffs, employee wage increases and increased pressure from emerging distribution models from your “partners” continually reveals how the retail landscape is riddled with hazards.

I still feel that you can make great profits, however grim all the battles appear to be. My last two articles (here and here) stirred the pot a little bit, and some questioned whether the profits I was touting were possible. What follows are four things to look at closely in order to begin achieving higher profits.

Number one and number two: Location and payroll.

The first two items are pretty unsurprising as they account for the lion’s share of expenses for most retailers. What you pay for your storefront and everything related (such as taxes, utilities etc.) should typically be under 10%. Your payroll expenses should be about 25% including owners’ wages. 

These numbers have been repeated over and over for years and still are relevant today. Wages and storefront expenses are rising quickly right now for a variety of reasons, making them harder and harder to control. To be profitable you need to pay very close attention to these two items. Be constantly vigilant of your payroll, as it is your single biggest expense. With a tight labor pool, general wage inflation and the growing demand to raise mechanics’ wages, payroll is not going to become an easier issue.

Numbers three and four: Inventory and debt

With your two biggest expenses only controllable to a point I feel that there are two other areas that can really destroy or enhance profitability. You can exert great control over them, which makes them that much more important. 

First up is inventory. Inventory shows up in your financial reports as an asset. In my mind, it is really your biggest liability. Too much and you will get behind in payments, begin discounting and become stale with little or no open to buy. If you decide to reload with the new stuff on top of it, you start circling the drain. 

Talk to dealers and you will get wildly different opinions about the appropriate level of inventory. Typically a little better than two inventory turns is considered OK. Well, I’m going to argue that is too low. I personally like 3 1/2 turns or better.

“But Dave, I’ll lose customers because I don’t have anything! You’re nuts!”

Maybe I am, BUT, if you agreed with me that inventory is a burden that ages, becomes obsolete, or just ends up being the wrong size, color or model, then give me some latitude here. 

Remember when your vendor surprised you with a big sale when you were loaded from preseasons, or made your inventory obsolete overnight by releasing something new just as your season kicked in, saddling you with suddenly “old” inventory?

You are in the driver’s seat when you are lean.

The best thing about running lean is you can buy more today and it will be here tomorrow. If your vendor decides they need to boost sales, you can take advantage of the discounts and lowered freight incentives. You are in the driver’s seat when you are lean. 

Can you get 3 1/2 or more turns? Maybe not, but can you get one more full turn above your current level? Sit down and starting planning and see where you end up. 

Some dealers have the cash, excellent data to back up buying decisions, and confidence in their merchandise. For them, two turns feels safe to me. 

But if you, at times: struggle to pay invoices on time, are needing to discount to move product, or always having to hold off on new product because you have inventory to move first, then running leaner on inventory will be a great benefit.

So now we get to the elephant in the room: debt. Do you have any? Not paying your shop credit card(s) in full each month? A little behind on some vendor invoices? Long-term note that you are still chipping away at? Debt needs to be taken care of as quickly as possible to stop paying interest. 

And that brings us back to inventory for a minute: Let’s say you thought I was crazy about turns and running lean. So you order a bunch of bikes, get net-never next spring/summer terms, maybe bump up your level with that vendor and of course get that sweet free freight. 

You are feeling pretty proud of yourself until spring comes on the calendar but not yet in your neighborhood. Sales are languishing and that first BIG payment is coming due … and then you miss it. The fine print says you lose that free freight, which adds a huge number back into that invoice. On top of that, you now are subject to credit card-sized interest charges. Inventory that can’t be turned becomes debt.

Do not go down that road. Retail is hard enough without adding the pressure of paying for the past when you need money for today and tomorrow.

To finish, if you want to get to those high levels of profits you will have to cut expenses. You may consider moving if your rent is too high, deciding if you really need that extra person or two hanging around, and whether you need to take on the incredible risk of carrying too much inventory. You also should think long and hard about taking on debt, especially if you have to simply in order to operate — a very big red flag. 

Profitability isn’t luck, and it requires constant dedication to understanding your business. The average retailer can add tens of thousands of dollars to the bottom line by carving out a few percent of the major expenses. It’s possible and retailers prove it every year. 

Even with retail becoming harder, there are still those out there refining their businesses on a daily basis by implementing simple changes in key areas to become better and more profitable. I again highly recommend you join the NBDA and use their tools to understand your business. Please reach out to me at david@nbda.com if you have questions or would like to talk further about increasing your store’s profits.

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