Most people in operational roles join retail companies with the goal of driving revenue growth and increasing profitability within product categories. It’s exciting to see KPIs outperform expectations, customers sign up for product waitlists, and inventory turns that are quick and productive. While managing a growing business requires alacrity and the optimization of opportunities presented, managing a declining business presents unique challenges that truly test a planner’s problem-solving abilities. A tough decision that planners and buyers sometimes must make is whether to exit out of a business. Let’s take a look at some of the ways to revive a poor performing business and what to do when it’s time to cut ties with a dying category.
What Constitutes Sustained Bad Business Performance?
Identifying the poor performing gluts in your business is the first step in determining an exit strategy.
As we know, a business goes through ups and downs due to a variety of issues including shifts in customer traffic, poor inventory positioning of key driver styles, and unpredicted weather changes impacting category performance. These are short term fluctuations that are usually remedied through meaningful actions made by the buyer and planner or just a realignment in environmental patterns (i.e. weather normalizes).
Long-term, sustained poor business performance can be characterized by consistent misses to forecast and target, heavy reliance on promotional levers to move through inventory, drop in retail productivity, high return rate, and a divergence from total company performance (i.e. all categories are performing well with the exception of yours).
It is also important to understand the full P&L (profit & loss) of a potential exit category. As a planner, you are exposed to the metrics presented in the OTB, however, for a full picture of a category’s health, it’s wise to reach out to cross-functional team members to understand the true bottom line of a category, which includes shipping costs, returns, etc. This information can often present negative profit products and categories lurking under the covers.
An example of this is the following: Your eCommerce company decided to sell heavy furniture pieces to enhance its Home Decor presence. Customers only purchase these items if there is a site-wide promotion or category-specific coupon. After looking into your P&L statement for these furniture pieces, you discover that these high ticket, high-cost items are actually selling below cost and delivering negative profits due to the high shipping costs coupled with diluted AIR from the promotional impact. This insight is alarming, and a clear red flag that this is potentially an unsustainable product category.
Resuscitate your Gluts
So you’ve identified your poor performing business segments—what’s next? The next step is to try and resuscitate your category. You probably already address these poor performers during your weekly business reviews, however, it’s important to try other novel approaches to drive sales and rightsize inventory before you decide to completely exit out the category. Some ideas include reshooting product to showcase different end-uses on your site catalog, updating retail tickets to align better with competition, reallocating inventory to other channels if you are seeing better traction on a different channel, and partnering with marketing on SEO opportunities.
If the above suggestions fail, it’s probably time to make a complete exit out of a product category. This category has down-trended for nearly a year and is not profitable for the company. Here are some different exit strategies that can be used to liquidate your inventory. Be clear on your exit date before assessing these options as these options incur different timelines.
- Steep Markdown: A quick and dirty steep markdown at a 50 percent or greater depth can be a fast and effective way of liquidating inventory. From a customer experience perspective, however, your sale section will be muddied by your exit items and can signal a “fire sale.” This will hit your margins hard, however, it is generally easy to execute (particularly online) and forecast.
- Third Party Reseller: If you do not want to sully your brand’s image by taking steep markdowns on exit items, you can sell your unwanted inventory to resellers such as TJX and Ross. Pending the size of your company and existing relationships with resellers, this process may involve quite a bit of communication and logistical planning. Once again, this will involve a margin hit, however, it is a “behind the scenes” method of getting rid of poor performing inventory.
- Donation: Take the tax right off and donate your inventory to a charity of choice.
After your exit strategy is put in place, remember that your historical data will reflect this action. Be sure that your category hindsights and forward-looking plans take into account this liquidation so that you plan your product margin and sales comps accordingly!
For more information on the metrics inventory planners need to track, and how to track them, download our Retail Math Guide. For more information on the inventory planning role and how to do it effectively at your retail business, download A Guide to Inventory Planning.