Savvy ways to finance holiday inventory
Strategic ordering helps small businesses keep inventory financing on track
By Elaine Pofeldt | Published: November 25, 2013
As consumers draw up their holiday budgets, retailers are doing their own calculations about how much inventory to stock. Careful planning can make the difference between a holiday that finishes in the black and one that's covered in not-so-festive-red.
Strategic ordering is key, say experts. While it's important to make the most of holiday demand, retailers need to be careful to avoid financing inventory they are not sure they can sell, which can leave them stuck paying interest on goods they'll have to mark down in January.
That's especially true for merchants who don't have access to a low-cost line of credit from a bank and have to rely on more costly forms of short-term financing, such as credit cards, say experts. "Right now, I'd like to see them be a little bit pessimistic and not over-order," says Alice Bredin, the small business adviser for American Express OPEN.
Pessimism does seem to be plentiful this season. A survey done in late October and early November by American Express OPEN found that just 30 percent of retailers think their holiday season will be strong, compared to 41 percent last year.
There's good reason for those expectations. Shoppers generally aren't planning wild buying sprees. A new Gallup poll found that consumers estimate they will spend $704 on Christmas gifts this season, compared to the $786 worth of holiday spending they predicted in October.
Contingencies for sell-outs and gluts
It's easy to order more inventory than you really need if you let the pressure to make the most of the holiday season overtake you, says Bredin. Before placing that extra order, have a brief chat with your accountant to review whether the cost of financing it is likely to pay off -- just as you would if you were taking out a bank loan to finance inventory. "It's prudent to look at credit card expenditures the same way," says Bredin.
If you think there is a chance you may sell out, set up a way to keep in touch with customers when you replenish inventory, advises Bredin. Say you're a merchant who sells gourmet olive oil and customers clean you out the first couple of weeks after Thanksgiving. Don't turn away empty-handed latecomers without some contact information, says Bredin. You could have them sign up to receive a set of recipes using the olive oil, to keep it top of mind, and set up a text messaging list so you can ping them when the new oil comes in, she advises. "You've got to keep your efforts narrowly focused," she says.
Tony Ellison, founder of Shoplet, a 73-employee online office supply store based in New York City that does a bustling business selling gifts like notebook computers and iPad accessories at holiday time, has found that looking at last year's sales records and inventory turnover rates is the best way to identify the 20 percent of merchandise that makes up 80 percent of holiday sales. He focuses his holiday ordering on merchandise that turns over the fastest. "Those are the items you really want to stock," Ellison says.
Of course, what shoppers snapped up last year may not be as hot this year, and even a new trend can peak before the holidays are over. Last year, when Shoplet was trying to capitalize on iPhone and iPad mania by stocking a variety of cases for the gadgets, Ellison found that demand for these items was softer than expected. "We slowly reduced prices," he says.
To limit the amount of merchandise Shoplet has to mark down, Ellison negotiates arrangements with suppliers that enable him to return a certain portion of the merchandise if he can't sell it.
Timing is everything
Making your shipping times extremely clear can minimize the chances that online customers stay away out of fear that gifts won't arrive in time for the holidays, according to Richard Demb, co-founder of AbesMarket.com, a 24-employee online business based in the Chicago area that sells natural gifts. "People get nervous around holidays," he says. "Any clarity you can provide your customers around shipping and arrival times is very important."
It's also important to pay attention to what's happening in your market, so you can time promotions to hit when you can no longer expect to get full price. This can help you avoid having a lot of merchandise to unload after the holidays.
"In most markets, you are moving very quickly," says Carole Irgang, president of Red Shoes Marketing in Westchester, N.Y.
If you over-anticipate demand, it helps to have a Plan B. Irgang, for instance, arranged for one of her clients, Godiva, to sell chocolate truffle Easter eggs through Active International, a corporate trade network, which sold the sweets at full price to its own "friends and family" network, in exchange for credits in its corporate trade network that Godiva can use to buy advertising. "They ended up being a good partner in helping us find an outlet for them," she says.See related: Using gift card exchange sites to stretch your holiday budget, 3 ways to curb pre-holiday money stress, 6 ways NOT to pay off credit card debt
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