Lowering Inventories Intelligently

The protracted reduction of consumer spending and traffic has created a new reality for retailers. One aspect of this reality is a much lower base inventory level, one that is lower than most retailers have experienced in their careers. The big issue is that, while inventory levels have shrunk, the sales floors has not.

So how do you lower inventories intelligently?

First, keep the benefits of a lower inventory level in mind. Financially, you'll have a lower cash requirement, your markdowns will be lower giving you higher margins, and all the inventory-related expenses like freight, distribution and handling will go down. Also, this will require you to really focus your assortments and create a clearer selling proposition on the sales floor. All good things.

Next, challenge the validity of the historical base. There was an interesting discussion on the other day about this topic. The key question - are customers just buying less or are they buying differently. If they're buying differently (which is likely), the validity of the history as a guide to allocating purchase dollars by category or classification becomes very questionable. Instead of taking each major category down by the same percentage based on an aggregate drop (the axe approach), each category needs to be reviewed independently and adjusted based on what your customer is telling you today. Some businesses (say luxury) may need to be cut deeply or exited altogether. Others (say moderate or value) may need to be expanded. Also, look at your top selling "key items". Have they changed? Are you consistently in stock? The guiding objective must be to reflect what's your customers are telling you. Show your customers you "get it". They'll appreciate it.

Speaking of showing your customer you "get it", this is also an excellent time to simply ask them what they want. In another post on , there is a reference to Asda (Walmart in the UK) selecting 18,000 customers as the "Pulse of the Nation" and engaging them via e-mail to give feedback on potential buys, before they make them.  While there are obvious risks in taking the feedback literally, this is a great way to get a sense of what the customer wants (including what you're not carrying) before you commit dollars to it.

Next, take a look at price points.  Putting less inventory in the same space can lead to a "Going Out of Business" look that must be avoided. First, go for better costs from your vendors that you can pass on to your customer. Your vendors need you more than ever, so negotiate harder. Secondly, based on the analysis above, look at bringing in lower cost merchandise with lower retails if it makes sense. In both cases, lower retails mean more units and a fuller look. The key word here is thoughtfully. You want to communicate more value, not lower quality.

Finally, spend a lot of time on your sales floor. If your customer is looking for Value, is that what is being communicated by the features. Is there creative use of the space to look fuller? Are you "storing" merchandise or "presenting" merchandise?  If you carry garments, try facing them out instead of shoulders. Try cross-merchandising multiple categories together to offer a solution or a lifestyle statement. Take a trip to a Bed, Bath, and Beyond. They are masters at this. Are you buying and featuring something fun or new?. The customer is cutting back, but they're not dead. For more on the topic of making assortments more interesting, take a look at an earlier post on "Where's your Kindle?".

Cutting inventories is never fun, even if it's unavoidable. Done intelligently, however, it can not only improve your profitability, but clarify your selling proposition as well.

As always, please use the comments section below to add your ideas and experiences.