Furniture World asked frequent editorial contributor David McMahon to speak about practices that separate successful home furnishings retailers from their struggling competitors. McMahon has travelled the world for the past 15 years working with hundreds of retail operations as a Consulting CFO and performance group leader. He analyzes business productivity, determines processes to improve, and trains in specific tactics to accomplish results.
Question: What do you think is the most important factor for retail success?
Success Secret #1 - Attitude: I have seen companies in the same market area producing the same volume with totally different results. Here is an example of two businesses in the same town. Each had $5 million in sales on average for the past three years. One had huge cash flow, happy employees, and satisfied customers. The other had stressed out employees, upset customers, and eventually went out of business after 25 years. The driving factor that set them apart was attitude.
The attitude came from the top. The successful owner believed in a culture of continuous improvement. He was one of the smartest business people that I have encountered but he did not think that he was that smart. He continually sought ways to innovate his business and was willing to do things that his competition would not. He kept learning, surrounding himself with people he respected who shared his goal for improvement.
The owner of the other operation thought he knew it all. He believed in the philosophy of, “if it ain’t broken don’t fix it.”
Eventually a gap widened over time between these two businesses. One sank more money into advertising and big sales to produce leads while the other focused on improving sales professionalism, inventory flow, and customer service. Guess who survived?
Question: OK, so for businesses that commit to continual improvement, where do you see the biggest opportunity?
Success Secret #2 - Pricing Policy: I see that many businesses leave too many dollars on the table. Smart managers understand that gross margins are a state of mind. Unless you are selling a commodity and delivering the exact same product and service as your competition, there is price flexibility. Pricing should be based on value perception and filling the price points desired. Those managers that strictly use a cost mark up pricing strategy end up with odd ball pricing ending in .44, .09, and .75. That’s garbage pricing. All new pricing for items of over $200 retail should end in $99, in my opinion. Do you think if someone wants something for $557 they would not pay $599? Or, what about if you see something priced at $809? That is not a price – come on - it is $799 or $899!
Question: How about sales? What do you see businesses doing to increase sales volume?
Success Secret #3 - No Gimmicks: Most businesses are not "great" businesses. Below average performers just use the latest advertising gimmicks to hopefully increase door swings. Then they close their same percent of leads. That is fine, but the great businesses are the ones who can increase sales while keeping customer traffic the same. When these businesses experience an uptick in traffic, they are very profitable. They do this by focusing on improving the selling process. They track traffic, selling opportunities, average sale, close rates, and other metrics. They know their numbers so they are able to set benchmarks for sales management. You can’t manage sales on volume only. The factors that make up the volume are what matters. Managers who get it are using CRM systems so they can improve the follow-up between salespeople and clients. There is a much greater close rate per customer as opposed to per traffic using this approach.
Question: So, there is no silver bullet then to increasing sales?
Success Secret #4 - Systems: The CRM system is the silver rocket launcher. Many stores need to get off the media cocaine somewhat. It is like a tax businesses pay. I believe in investing some of that marketing money into improving the process and servicing customers more professionally.
Question: Seeing that you are skeptical of media, what advertising do you recommend?
Success Secret #5 - No Fear: I am more skeptical of the general practices out there. There are some businesses that are very successful with media marketing. Do you want to know their secret?
Those that are successful are not afraid to fail! They try over and over again. They fail sometimes but eventually succeed. They play a numbers game. They then become masters, get a formula, and succeed more often. Those that can pull traffic in from TV get good at penetrating the market. Their media has mass. Those that are good at internet, advertise a lot on internet. Those that are good at circulars, advertise a lot with circulars. If they are good with direct mail advertising, it is because they do a lot with direct mail. Radio people are radio people. They also get a better cost per ad due to their volume.
Alternatively those that look for a magic advertising bullet and try something once then go to another media and try something else, never really break into the market, and, they pay more for nothing. They have not failed enough in one place and have not built mass exposure. Also, if you are up against businesses that own the media channel, unless you have some deep pockets, forget about it. Marketers need their niche.
My same theory applies to other things too. Do you want to be good at selecting new merchandise? Well, you better have good inventory management so you can buy as often as possible. Or, do you want to be great at selling a certain product? Well you better try and try and try until you get it.
Question: Other than the top line, which other areas are people improving in?
Success Secret #6 - Focus On Areas That Improve Profitability: There really are countless ways. It depends on the specific operation. People should seek to improve the area of their business that will have the greatest effect on profitability and be the easiest and least costly to do so. I’ll give you a few examples outside of sales and gross margin:
Delivery – some companies are able to offset all their delivery expenses with delivery income. They figure out exactly what the delivery costs them as a percent of sales and then figure out a fee structure that produces the income. The simplest way that I have seen is to charge a dollar amount up to a certain volume and then a percent of the sale afterwards. I would even go so far as to say that if a salesperson needs to give a discount on delivery to make the sale, that’s fine, but it comes out of their commission.
In addition, with respect to deliveries, many are starting to streamline routing and the paperwork process by using mobile products that are available.
Warehousing – Everyone should have 99.9% inventory accuracy. Bar coding is the only way to accomplish this. If you have over $1 million in annual volume or $500,000 in inventory at cost, you should make the investment. It pays off easily and quickly. Smart operators invest money to protect their assets.
Purchasing Inventory – this is an area even business veterans continue to struggle with. If you carry too little, your selection thins out and there is less to show customers. If you carry too much, your cash flow suffers. Many see inventory as a double edge sword. But it does not have to be! Take emotion out of the equation. Intimately know the GMROI (GM$ Annualized / Inventory Average) of your overall business each month. Track GMROI by Category and Vendor. Then track GMROI by categories within vendor and vendors within categories. This will show you where to buy and where to hold or drop. It will help you create a better mix. For businesses that are over inventoried overall, they need to have a buying freeze on new merchandise but still buy top margin producing items.
And don’t be afraid to discount merchandise that does not sell - fast. It is a SUNK cost. That means that the money has been spent and the cost should not really be considered. The non-selling merchandise costs you more in lost valuable floor space. Would you return it to your vendor for cost, if they would pay you back? I never heard anyone answer “no” to this question.
Profitability – many businesses are so top line focused that their vision is hidden from the bottom line. They need to have one eye on the top line and the other eye on the bottom line. Acceptable standards should be set for operating in all cost areas. A business structure needs to be in place that delivers at least a 5% bottom line during a bad sales month. Anything less than this over time eventually causes liquidity issues. The businesses in the CEO performance groups that I lead strive for double digit bottom lines. That means 10% + of sales in net income. Great performing retailers are getting this profitability.
Question: Are there any areas of people’s businesses that they have trouble improving?
Success Secret #7 - Reporting: There are a lot of independent businesses that have questionable financial reporting. I find this concerning because the ultimate management reports are the Financial Statements. They provide the executive management team with a scorecard each month. They are the basis for future improvement. Without accurate or timely information, businesses lose focus and run by the seat of their pants. They become reactive rather than proactive – fighting fires as they blow up. It is the CEO’s or owner’s responsibility to ensure the best business decisions are being made. If their business is not large enough to afford an experienced Certified Accountant or MBA as a professional CFO then they should get a great bookkeeper or controller. They should contract with a Consulting CFO that works on a part time basis to provide them
with the required financial council.
Question: So where would you advise a business to start improving?
Success Secret #8 - Strategy & Tactics: I believe a business needs to start with looking at their master management reports: that is, their balance sheet, profit and loss statement, and statement of cash flow. Then, they need to figure their break even and compare their performance indicators with standards. From there, opportunities show themselves. If the opportunity is gross margin, set a strategy and focus tactics on that. If the opportunity is underperforming sales, set a strategy and focus tactics on that. If the opportunity is purchasing practices and merchandise management, set a strategy and focus tactics on that. Track the results – eventually the improvements will show on the bottom line and in your bank account!