By JERRY WHITEHEAD
Many of the operations I have modeled recently have increasing inventory levels due to more aggressive lending, buying and forfeitures.
Some of us like to sell our stuff, and some are genuinely afraid to let go of something. It never ceases to amaze me that so many operators still price their product to the moon. You would think they have never been to a Home Depot or Target in their lives.
Typically our inventory falls into four general categories:
(a) Premium inventory — hard to get, hard to keep, rare
(b) Average inventory — run of the mill generic, mass-produced goods
(c) Obsolete — aging or outdated, broken, missing pieces, less than useful
(d) Gold — Scrap or resalable
Once we properly identify product by category, we can develop a plan to control our inventory levels.
The yield is the overall return on a particular asset category, such as loans or inventory. Here, we’re focusing on the inventory yield.
The simplest way to calculate your yields are your average inventory turns (amount of $ cost rotations) of your inventory for any particular period sampled X your margins. Here are some examples:
• 100,000 cost of inventory turned 2 X a year with a 50% margin = 100% yield
• 100,000 cost of inventory turned 3 X a year with a 40% margin = 120% yield
• 100,000 cost of inventory turned 4 X a year with a 35% margin = 140% yield
To understand the yields better, if my annualized yield is 100 percent, then every average dollar of cost inventory I have in my store would return me my dollar plus another dollar. If my yield was 150 percent, then my return goes up to a $1.50 back on every $1 of cost.
Every day your inventory sits on the shelf you are loosing money. Inventory can become outdated, stolen, broken. If you operate on borrowed money, then your rate of return diminishes each day you look at it. Your cost of capital has to come into play — cleaning, pricing, displaying, merchandising, transferring, inventorying, testing and insuring all cost us money!
Decreasing Inventory Yields means our level of profitability decreases with slower inventory turns as a result of inventory build ups in most cases or a lack luster desire to dispose of it.
Recently in one of the multi-unit groups that I consult with, one of their area managers said, “There is so much out-dated and other inventory on the floors, we are unable to put the nice new stuff coming out on the floor.”
If your store is tight for space front and back, this poses several problems. For starters, back rooms housing overstock reduces your back room storage capabilities. This equates to less return off your back room. It has been my experience that it is difficult to sell stock in the back rooms. This coupled with other product becoming dated, broken and stolen on the front end exacerbates the problem.
Why are companies like Wal-Mart and Target so successful? They sell massive amounts of product at very low margins. They’re all about inventory turns.
I believe all of us can concur that the economy is not improving and will only continue to get worse. As a result, we will need to remain vigilant in our efforts to offset continuous decreases in overall consumer spending. If we can make our inventory pricing structure attractive enough, we will be able to continue to carve out opportunities.
Inventory is a game of averages. In some cases we must take hits or lose our investments on poor inventory acquisitions. These can be bad loans, broken product, outdated product and so on.
Having said all that, here are some strategies for your consideration.
a. Premium Goods
Premium goods attract consumers. This is typically product that is in very short supply and in high-demand. It should receive reasonable shelf life to illustrate the types of goods we take and offer.
Many team leaders tend to over qualify B goods as premium goods. Large high-end flat panels, Rolex watches and other assorted product that is rare in availability falls into this category. DVD players, receivers, speaker systems, tools and other general merchandise doesn’t.
Our strategy for premium goods should be to keep it reasonably priced after doing our market study. There are a variety of ways to determine market values — eBay, Google and Froogle, to name a few.
These items should have some reasonable shelf life before more aggressive discounting should apply.
b. Average Inventory
Average inventory is just that, average generic product that we generate on large levels on a daily basis. Too many times organizations get all wrapped up in margins and stop paying attention to their climbing inventory levels.
Creating a sense of urgency because of limited availability creates more demand. If I came in to shop for DVD players and saw that you had 50 of them for sale, I could assume that if I came in next week, next month or even next year, you would probably still have 50 for me to choose from.
If you have only five of them, then the sense of urgency comes into play. The customer then feels he had better get it while it lasts.
c. Obsolete and Aging Inventory
More of the inventory I see lately falls into the obsolete product category. Some examples would be:
- Digital Cameras — anything less than 8 to 10 mega pixels is already on the extinction list.
- 35MM Cameras — few to no Options with these, with the exception of high-end manual SLRs — some schools offering photography courses do like their students to learn about their eye and the camera eye and so encourage the use of film — but this is diminishing. Exceptions are wide format or other high end cameras of yesteryear.
- Computers, Printers, Scanners — all this type of product is almost outdated the day it rolls off the assembly line. As we accumulate them, it will become increasingly difficult to dispose of them. Recently I saw an APPLE IIC (my first computer) in a pawnshop for $199, with no software, and the operator was serious.
- DVD – VCR Systems — Even HD DVD players are now outdated, since Blue Ray won the HD race. Systems that are not HDMI or SCSI capable are dinosaurs. We saw an end to 4-track and 8-track players, cassette players and VCRs — soon we’ll see the end of CD and DVD players, and much more!
- DVDs and VHS Movies — VHS is about done and soon DVDs will be as well.
- CDs — The IPod and cell phone have just about eliminated CDs as we know them. I can put the equivalent of 5,000 CDs in my telephone and plug it into my car stereo, computer or TV. Recently, one of my multi-store operator clients had hundreds of thousands of CDs and VHS tapes in their inventories. They were going to scan UPC codes and list them on online. The effort required to scan, list, box, ship, inventory and get paid for this stuff is enormous. In the end they will lose a lot of the money they have invested in this dying inventory product. It also slows down their turns and yields. They have even lost income-producing storage space in their back rooms.
- Tools — construction around the United States has dropped off the cliff. Tools and general contracting tools are busting the seams of many shops.
- Obsolete — anything that is missing equipment or pieces, outdated, damaged, broken or simply obsolete. Your highest priority should be getting it out of your store. It looks bad on the shelves and reflects badly on you. You can donate much of this stuff to Goodwill, the Salvation Army or technical schools. You can get a tax write-off on your income statements, receive goodwill in your community and clean up your store at the same time.
- Aging — as inventory ages, many other things begin to happen. It increasingly becomes attractive for theft, gets broken and costs us money to continuously display, test, insure, inventory and or sell. This product should go through continuous write downs until it is disposed of. In a number of my past operations we would charge our team leaders an asset-carrying fee and a penalty against their bonuses for being so in love with this stuff. This has an amazing effect for liquidating this stuff.
Gold is liquidable. Unlike televisions and tool boxes, you can convert this asset back to cash instantly and daily.
I prefer to sell off gold assets every 30 days no matter what the market is doing. This is called cost averaging.
In the case of buying the product, if my hold periods are 30 days or less, why could I not pay up to 80 percent or 90 percent of melt value to buy it and try to get all or most of the business in my market area?
To put it another way, would you pay $80 or $90 for a $100 bill? Look at gold the same way. If you pay more to buy or obtain the gold in your market, you are really investing in yourself.
The secret is to sell frequently. This produces good cost averaging and will allow you to take little to no risk in paying premium dollars to acquire this product and gain on your competition.
If I only made a 20 percent margin on my scrap, and I sold it every 30 days (or 12 times a year), that would be a 240 percent return on my annualized dollars invested. Sure beats a 0 to 1 percent CD from the bank, doesn’t it?
This covers the four categories of product as I have described them. Considerations on how to treat these products are as follows:
- Identify premium goods and maintain good retail dollars for the rare and or exotic goods
- Identify your general run of the mill product, and begin aggressive inventory mark downs on this stuff. You can create in-store special areas, where you can stack up overstock goods and place them all in a sale price of $X categories, thus letting the customers choose and pick from the assortments. You sell one or two, you move one or two more in. This can be applied to overstock of anything — cameras, DVD players, tools. Recently I merchandised a group of stores in California. We created some $19.95 to $39.95 categories for DVD players and saw them fly out the doors. Pricing your product correctly will create demand. Price motivation determines our true ability to dispose of product.
- Obsolete product can be handled in a number of ways. One option is to put all this stuff into one area of the store. Customers who spend more than XX dollars can pick one or two items out of these sections. Charge the items off on their sales receipt. You see only negligible hits to your overall margins dumping it this way, and customers love it.
You may also create in-store areas where you put ridiculously low prices on obsolete products. This still leaves you with having to identify merchandise, reprice, move around and inventory it as well.
Last but not least, you can look at donating electronic products. Imagine the news cameras following one of your trucks over to a non-profit school and filming you donating thousands of dollars of product to help schools and students. The press value could be immeasurable, and you still get the benefit of the tax write-off. That’s a win-win scenario.
- Gold — churn and burn it. The Titanic will not float again, and yes gold may go to $2,000 an ounce this year, next year, or no year. Don’t attempt to play the markets and time when it goes up or down, just sell it and don’t be emotional about making money on your inventory consistently and with precision across the board.
In the end, you all have to find the blend that works for you best. But don’t get caught holding the bag on product as our economy slides down even further.
On the other hand, those who remain fortunate may still seek to spend their precious dollars more wisely. It is our duty in retail to try to get and keep all the customers we can. Don’t follow the old-school trend of pricing it to the moon in hopes that when the Titanic floats, ghosts of yesteryear will come in and buy your overpriced junk.
A very wise study concluded some years ago that many businesses may spend $10 to get a new customer, but don’t spend a dollar on the ones they already have! Let’s invest in the customers that we do have and try to make everybody a deal. Pawnshops should be seen as alternative retail solutions in a declining economy. Nothing could be worse than non-traditionals coming into your stores and thinking that most of your stuff is overpriced and that you are indeed a collector. I see this all the time!
Make your store clean, pretty and friendly. For those of you who think looking like something out of the Great Depression era is sexy, I can assure you, you are wrong. Today the biggest challenge for our industry is image. You can either be part of the solution or part of the problem.Jerry Whitehead is head of the Pawnshop Consulting Group. Reach him at firstname.lastname@example.org or (954) 540-3697.