The Perfect Storm

According to Merriam-Webster, "the meaning of PERFECT STORM is a critical or disastrous situation created by a powerful concurrence of factors."

Alexander Graham Bell said, "When one door closes another opens." Did you know that more millionaires were made during the Great Depression than at any other time in American history? Some of the names you may have heard of... names like Colonel Sanders, Bill Hewlett and Dave Packard, John Deere, Reynolds Metals and Douglas Aircraft, just to name a few, may not have been known if the Great Depression hadn't occurred at all.

The statement "A Storm Is Coming" continues to sound more and more appropriate in our current situation. I could bore you with the elements, but you probably have a list of your own, so let it be suffice to point out the fact that we are about to experience the greatest adjustment we have seen in our lifetimes.

As retailers, it would be advisable to start making changes to offset the effects of threats that seem to be affecting all of us in varying degrees of seriousness? America is destined to go through a massive reset in the not too distant future, and if you're young an ambitious and not afraid to put in the hard work, your time may have finally arrived.

I don't want to talk about doom and gloom today, because doom and gloom almost always leads to the stifling of creativity. What separates doom and gloom from creativity is optimism, knowledge and preparedness. Therefore, my overall emphasis is on the latter, and if I can get you to stop trying to fix yesterday's problems and concentrate on tomorrow's solutions, the future just might usher in the greatest revolution in the history of mankind.

I'm talking about Artificial Intelligence (AI) and I can make you two promises. First, all the tools you need to employ AI in your business are available today, and second, most of you have no idea what I am talking about.

When I started selling computers to small businesses in 1978, I sold computers to companies who didn't care what those mystery machines did. They just wanted to show their competitors and potential customers they had one. A mere 44 years later, computers have infiltrated every aspect of our lives.

But before we can set out to fix something, we need to take a look at what we're dealing with. A shortened set of the major factors involved include a collapsing supply chain, higher energy prices, the untimely push for electric cars, inflation, the recent pandemic, war in Eastern Europe, the shutdown of energy exploration in the United States, primarily in the areas of oil, gas, and coal, a weakened economy, uncontrolled immigration, difficulty in finding employees who are willing to work, and the national debt racing toward $30 Trillion Dollars. I'm sure you can cite other factors, but these are adequate to demonstrate my point which is, "We could be in serious trouble."

As retailers, there is not much we can do to battle against the aforementioned influences. It is what it is, and we had only two options, we can continue to charge ahead with our damn the torpedo's, full speed ahead attitudes, or we can turn our attention to making significant changes in the way we operate our businesses, and by doing so, I believe we can not only survive, but we can thrive far beyond our wildest imaginations.

I began focusing on the rise and fall of small retailers, especially the convenience store industry in 1981. Convenience stores originally provided 'convenience items' and are like most other retailers on jet fuel. The average customer in a convenience store spends two minutes in the process of entering, at the POS and exiting the store, and two minutes shopping. It's a stretch of the tongue to even call it shopping. That's why there are no grocery carts in convenience stores. Most purchases consists of products that can be carried with two hands. For awhile, there seemed like nothing was going to slow it down. There are quite possibly more convenience stores in the average city than there are any of other types of business you can name.

Setting up a convenience store (with the exception of fuel), is a matter of renting a 2,000 to 3,000 sq. foot space, getting a supplier to sell you some stock on credit, and hope people will come in to buy it. Abandoned convenience stores are everywhere, so you can usually lease a store similar to one like the one described above and let a local fuel distributor manage your fuel.

Convenience stores survived, even under poor management, because the profit in the non-fuel inventory was so high. Who wants to park at Walmart and enter a huge warehouse to stand in a checkout line for ten minutes to buy a coke and a bag of chips, when you can spend four minutes in a convenience store and get the same results?

How did it all begin?

I was there in the late seventies and early eighties when Big Oil decided that if Farmer Brown needed 500 gallons of diesel fuel and a case of spindle grease, they didn't want to deal with the delivery and bookkeeping to service such a small customer. So, scores of uneducated bobtail drivers were given the keys to local oil company distribution warehouses and encouraged by major oil companies to carry on as independent businessmen and women.

I was there as these same people became interested in putting groceries in their 'filling stations' to make a little extra from the crowd that came to get gas and have their oil changed, I was there when these new retailers approached grocery suppliers begging them to supply them with candy, gum, soft drinks and tobacco, because they had no experience in consumer packaged goods, let alone retail items of the food variety.

I was there in 1986 when congress closed the tax loopholes that allowed oil jobbers to deduct many expenses that were necessary for them to prosper, and then again when the Federal Government made them pay their fuel taxes to their suppliers and shortened the time from when they received their fuel and when they had to pay for it. I watched helplessly as my customers saw their bank accounts drop by half overnight and prevented them from paying their bills and their employees.

I was there to see many Mom & Pop fuel distributors sell out to large, well financed Super Jobbers who took over their business for a mere pittance of their perceived value and forced many to go home with little to retire on.

I watched my customers grow old and die and leave their businesses to their sons and daughters who grew up thinking they were set for life and found out in a hurry that this 'wasn't your father's oil company', and learned they actually had to work hard for a living. Walmart stole their motor oil business, their tires and battery sales, and almost everything except the few pennies they earned from buying fuel and carrying it to customers.

Through all of this, enormous challenges continued to be thrown at the feet of Convenience Store businesses who continue to carry on a valiant fight against food suppliers that are milking these businesses of every penny they can squeeze out of them. But, it's not just convenience stores that are affected. Gift shops, grocery stores, book stores, clothing stores, everyone that provides products to the general public are trying to maintain their balance on a slippery slope. They live on hopes that things will change. They are right to know that things will change, but if left to chance, things are more likely to get worse, not better.

I heard the approaching thunder in 1986, when a customer called me who had recently returned from a trade show and was introduced to scanning items at the point of sale for the purpose of pulling the correct price from the cash register. I began to investigate. But in the installations I ran into, none of them appeared to be working satisfactorily and the idea didn't quite catch on. It wasn't until later in the nineties did the technology become sophisticated enough to be of value.

I created the first complete solution that ran 100% on the Internet and launched it on March 3, 2000. It was a decade later before what I was doing had a name. They called it simply, "The Cloud". In 2003, I began to work on a project to collect millions of sales records from thousands of stores from several states and used that data to make predictions and follow trends. Armed with this data. I and my associates were able to predict sales for the coming week with 97% accuracy. Artificial Intelligence was beginning to tap us on the shoulders and asking questions like:

"Excuse me, but why do you have enough Orbit Wintergreen Chewing Gum in your store to last you for 2 years, 8 months and 13 days?"

Why? Because retailers were allowing their suppliers to provide them with inventory in much the same way they were operating in the late 1970s. Suppliers had no idea what stores were selling. How could they? They only knew what stores were accepting. And if they accepted three months worth of any product every month, they just kept sending the same order over and over again. Company management relied upon individual store managers to make decisions, and then limited those decisions so that store managers became nothing more than lowly paper pushers unable to manage an unruly crowd of minimum wage robots.

Suppliers attempted to help the retailers manage their inventories by sending salesmen to the stores to determine the stores' needs. These 'pre-salesmen' were paid based upon how much inventory they could push into the stores, and offered perks like, free trips to Hawaii to the salesman that can get the most junk out of the warehouse by the end of the quarter.

It didn't take us long to realize that every convenience store we went to had at least twice the inventory required to meet customer service level. So if you had $60,000 of inventory (at cost) in a store, most likely you only needed $30,000, and if you had 100 stores you had $3 Million tied up in inventory you would never sell. Yes, it really is that bad.

Category Management

The industry perceived they needed help with this problem, so a college professor envisioned a method know as "Category Management". Even though Category Management had been around for over 100 years, it suddenly became "THE NEW THING" in retail store management.

Category Management was immediately picked up as a cash cow by the industry and companies began to offer Category Management ideas to retailers and their suppliers. But, Category Management only cares about the "kinds" of inventory you stock, not the specific brands, or the volume of inventory. By messing around with the contents of a category, you can certainly affect a store's performance, but it only tells you how a category is performing, and pays little or no attention to the items that make up a category.

In Category Management, the item itself is of no consequence whatsoever, and only the fast moving high profit items are examined closely... about 5% of the store's stock. Using this type of method of managing inventory causes you to lose track of the items the instant they are placed on the shelves. You really can't find out what an item costs without going through a current "price book" supplied by the vendor when the items are received; however, the cost of an item is wrong most of the time, because new inventory is mixed in with old that was purchased at a different price, and gives you an incorrect cost for accurately reporting profit.

When I began my research in 2003, I was able to identify a commonality I found in every store. 30% of the items in the store produced ALL of the profits (white), 15% were dead (red), and the remainder, 55% (blue) was either costing the store money, or marginal at best. Now these percentages may vary slightly from one store to another, but the average proves to be near the same in the majority of stores.

The major outcome of using Category Management is OVERSTOCK and OUT-OF-STOCKS

When I began auditing the stores as part of my project, as I said before, I discovered the average store contains roughly twice the inventory to satisfy customers service level. The average store contained 3,000-4,000 SKUs. To acquire the same volume of sales, most stores could reduce their SKUs by one-third, or even half and produce the same amount of sales.

In my research, I studied the items that sold one item or less over the previous 90 days and proved that simply removing those items from the stores would have a significant impact on the number of items the store purchased and stocked. On some occasions the item(s) in question could be repriced, moved or both, but if you don't have a way of tracking items sold, you'll never know that.

I also learned that EVERY item in a store has a relationship with every other item in the store. Category Management actually prevents this. Is it important to know how wieners, bread and mustard are related? Of course it is. But, if you are not tracking items sold, you only discover these relationships by accident.

The great fear of some retailers seems to be removing items from the stores makes the stores look picked over. I would challenge you to consider that there are more ways to make a store look full than by decorating it with bought and paid for expensive inventory that will not sell. Removing a gondola or two does wonders to lowering stock without getting that "picked over" appearance. Remember, researchers agree that having inventory in your stores that will not sell costs you 33% Carrying Cost annually.

In summary, becoming more profitable isn't just about sales, it's also about costs, and if increasing sales means increasing cost equally, what have you gained? In times like these, becoming more profitable means "Losing less money". We also have to consider that currently, 45% of all sales transactions are NOT profitable and that depends upon the type of clientele you attract to your stores.

How Do Convenience Stores Calculate Their Profit?

It seems like there should be a simple answer: Sales - Cost of Sales = Gross Profit. From that figure you subtract Salaries, expenses, depreciation, etc, But, how does a convenience store determine a true cost of sales at the department level, or better still at the item level?

Most convenience store get a paper invoice with each delivery that is left at the store. It list the items that were shipped and the cost and selling price. Usually items are sorted and subtotaled by the department the vendor supposes the items are assigned to in your store. In most cases, it is the retailer's job to tell the supplier what items are assigned to which departments but it is often fraught with errors. If the invoices are not delivered electronically and you receive an invoice containing 200 unique SKUs each week, the cost of the labor involved in buying the inventory by item is generally prohibitive with the result that you lose the true cost of the items immediately.

You might start out saying that we want to maintain a profit margin of 50% on all items purchased within a category, but why would you want to do that? If you have an item that turns 20 times a month and another only turns 1 time per month, you might want to lower the price of the slower moving item to increase it's turns. It has never made sense to me why retailers raise the price of items that are not selling. If you keep an item like that in your store that only one customer buys, shouldn't that customer have to pay more for it?

I once had a retailer who purchased three cans of Campbells Octopus soup because a customer asked for it. Those three cans sat on the shelf for three years before someone finally threw them out. I would have sold them for a dime each, and at least got part of my investment back long before they expired.

It is common practice for a retailer to raise all items in the candy category by 10 cents when he notices the price of some bars has increased... but that's another story.

The only way to get a true cost of sales is to track the cost of the actual product you sold and not the average cost (as a percentage) of everything in a category.

The costs of every item in your store can be tracked easily. But since item identification only goes to the UPC level you cannot know whether a new item was sold that you paid more for rather than an older items that cost you less (or the other way around), so the average cost must be kept at the UPC level and that means re-averaging the cost a product with every purchase. For example: If you have 10 units of an item with a value of $0.50, and you receive 10 more that cost you $0.60 each, you now have 20 at $0.55. This keeps your cost accurate per each item in a particular store.

Does it matter than the cost of a particular can of soup may be more or less in one of your stores than in another store in your chain? Yes it matters. During times of inflation, in stores that are moving items quickly, the costs of these items are actually higher than for other stores that sell less inventory at costs that were less when the items were acquired. The opposite is also true.

What is the value of this?

Not only do you maintain a true cost of your items, it puts you in a more competitive position as prices go up and down. Why is this important? Because the sheer volume of sales multiplied by the cost percentages can make the difference between a profitable store and an unprofitable one.

How Important Is Your Type of Clientele?

The importance of who you attract to your stores is much more important than the amount of traffic. Why? Because research has proven that nearly half of the sales inside convenience stores are not profitable. We know that 30% of the sales produce 100% of the profit, at least 10% is dead, and the remaining 60% percent is either a wash or slightly unprofitable.

It reminds me of an incident I experienced in a Chinese buffet in 1968, where a large, overweight construction working went through the line everyday and bought nothing but meat, and lots of it. I was there the day the Chinese man that owned the buffet refused to serve him, screaming, "Why you eat only meat? Why you no eat vegetable?" Some nonprofitable foot traffic can ruin your business if it takes over your business. Unprofitable sales slow down checkout lines. Remember: Most promotions are engineered to make the suppliers and manufacturers money. You are merely an afterthought.

In summary

I could go on and on about the little mistakes that retailers make that keep them from making a profit, but the truth is, we are about to enter an era that may be talked about for 100 years. It's going to become more difficult for retailers to make a profit over the next decade than most of us have experienced in our lifetimes. We can get prepared now by paying better attention to where we're losing money now, because we may very well need that extra money to keep our stores afloat in the years to come. If you are among the first to address these issues, you will stay far ahead of your competitors rather than fighting to catch up.