The problem with all of the ongoing news reporting about tariffs is that there is only conjecture, not news. None of us know what will happen with tariffs, which countries will be affected, to what degree and how that will affect all our businesses. President Trump asked the Supreme Court to weigh in as fast as they can and they said that the fastest they can get to this will be next month. That didn’t make things any easier for those of us running businesses — and trying to plan for the future.
That said, there is plenty run specialty retailers can do to prepare for the upcoming storms. We can secure our financial futures, prepare our inventories and do our best to predict the impact that tariffs might have on us.
I have always said, “The antidote to worry is a plan.” So let’s make a plan together.
Marketing Review
One of the things we learned during COVID, and during the recession of 2007, is that retail survives, no matter what else is happening. That said, the ones that do best in difficult times are ahead of the marketing curve. That does NOT mean more technology. In fact, I’m going to suggest the opposite. You don’t need a bunch of fancy tools for your marketing — what you need is better messaging and better planning.
We are living in an age where AI seems to be taking over everything. However, consumers are recognizing messages sent by AI, and they don’t like it. They want genuine, human connection. I believe you can use AI to help you create ideas, but then you have to make those ideas your own. Write messages, posts, ads, etc., from your heart, with your own words.
E-mail marketing is still the number one driver of sales, but it must be done properly. The most successful email campaigns are about fresh, new, fun inventory, not about the sale. The more you talk about the great new inventory you are receiving, the more excitement you’ll create, and that will translate into foot traffic.
Also, this is a time to plan out your in-store events for the rest of the year. Shoppers want to look at your website, but want to shop in your store to get your expertise and opinions. They want an in-store experience and will go places where fun things are happening — like your running store
So take some time to plan out the fun things you can do and promote for the next six months. Make sure the plan has detailed dates and all the steps needed to execute that plan, so that your store becomes the “ray of sunshine” during difficult times.
Financial Review
If tariffs are going to make things more expensive, and if that has an overall affect on store volume, now is the time to review your expenses. This is a great time to do a breakeven analysis (or redo it – it really should be done every year) and get a deeper understanding of all your operating costs.
Can any of these become variable costs? Can you change your incentive plans so that you reward great selling and do more to motivate your employees to sell (reducing your selling cost)?
This is also a good time to review your debt structure. If you have taken out expensive loans with high interest rates, this is the time to consider getting those refinanced (might be easier than you think!).
After all of that, you need to make sure you’re getting the proper initial markup (IMU) on the goods you are receiving. Here’s a great formula for that:
IMU= (Desired Profit Percentage + Expenses as a percentage of sales + Markdown percentage +Shrinkage percentage) divided by (100 + Markdown percentage).
Here’s an example. Assume:
Desired Profit percentage is 8%
Expenses as a percentage of sales is 41%
Markdown percentage is 15%
Shrinkage Percentage is 1%
The formula would be:
(8+41+15+1)/(100+15) = 56.5%
That is the average IMU you need to achieve across all the departments in the store. Some can be higher, some can be lower, but if your overall IMU is 56.5% or greater, you can still pay your expenses, take your markdowns, have normal shrinkage and still make a profit.
The Tariff Impact
We don’t know how the tariffs will continue to kick in — and even if they do happen to an ongoing extent we don’t know how much they will be. While that’s true, it doesn’t mean that we have to be in complete mystery. Here’s what you can do now to anticipate the potential effect of tariffs on your merchandise cost.
1. Run a report of what you received last year, by vendor. Look at your top 10 vendors to start.
2. Ask those vendors the following:
a. Where are you manufacturing your goods?
b. Are you already facing tariffs, and if there are increases, how will you address it? (Some vendors are absorbing them, but most are passing along the increases).
c. Are you considering moving production to avoid the tariffs?
d. If you do see increases in our costs due to tariffs, can you give us at least 90 days’ notice so we can prepare?
3. As you look at each vendor’s responses, consider which departments have their merchandise and determine their importance to your business. If they are important, you can use the above formula to think about how you can absorb this increase without sacrificing sales.
4. This is a good time to also rethink your merchandise mix. Have we been buying the same stuff all the time, just because it’s what we’re used to? Maybe we need to rethink what we’re offering customers and surprise and delight them with something new.
Merchandise Review
As a merchandise planner, I can tell you that one of the most important things any retail store can do is to have a valid open to buy plan. By valid, I mean one that has great sales forecasts, but also includes planning for your store to turn inventory faster. Over the many years that I have worked with retailers, I find the emphasis on Turn to be one of the best ways to ensure profitability. Look at this chart, as an example:
What does this tell us? It tells us that a store making $1 million in sales per year, turning their inventory 2.50 times, could find $41,000 in cash if they improved their turns by a half turn. It means that they could generate more cash without having to sell more!
This is a perfect time to figure out how to turn faster, how to really forecast your sales properly and how all of that can result in better cash flow, even if sales decrease.
Of all the advice I have given above, I think this is the most important.
We really don’t know the future of tariffs, but if we take a broader view we can see that we’ve been through rough times before. The Recession of 2007 and COVID had the potential to destroy many businesses — and, indeed, some did not make it through. The plans I wrote above will help you survive that, or any other downturns in business.
Dan Jablons is the president of Retail Smart Guys, which provides the finest in merchandise planning, open to buy, and retail consulting for stores in 18 countries today. He can be reached at [email protected]
