To Promote or to Liquidate: Considerations as Retail Gets Way Worse
There is no shortage of apocalyptic insight into the current trends of the retail industry as weekly updates surface of stores being shuttered, bankruptcies being filed, distressed retail bonds being issued and store liquidations being implemented. However, while the retail correction has become inevitable, and there is no end in sight, brick and mortar retail will retain a market presence for those businesses with high-demand products and scalable concepts, healthy balance sheets, steady cash flow, optimal performance management, and an omni-channel presence.
While many retail owners and managers may choose to hold out, it is prudent for proactive leaders and their professional advisors and lenders to take a hard look at shared challenges retailers are facing and start planning strategies to promote the business or effectively exit the market through a liquidation sale before sales further decline, expenses increase, and inventory values are further compromised. Challenges to consider include:
- Economic Trends by Industry and Product Lines
- Changing Customer Tastes
- Border Adjustment Taxes
- Ineffective Marketing and Declining Market Penetration
- Poor Cash Flow and Excessive Debt
- Insufficient Sales and Declining Profitability
- Lease Expiration
- Minimum Wage Increases and Productivity Stalls
- Lack of Innovation
- Excessive or Dated Inventory and Low Turn Rates
- Insufficient Inventory Mix
The Promotional Sale
If management determines that the retail concept is sustainable, current and upcoming costs are manageable, and performance is robust enough to remain in operation through the correction, it is prudent to consider executing an immediate storewide promotional sale to stay ahead of competitors who may be facing liquidation of the same or similar goods selling at even lower prices.
When effectively executed, a storewide sale will result in increased awareness of the business, increased market-share penetration, a broader customer base, and surplus inventory sold off to drive cash flow that can be used to purchase new and updated merchandise. When a storewide sale is implemented twice a year, recurring inventory challenges will be minimal and operational performance will remain optimal.
An effectively executed storewide promotional sale will often achieve 2 to 3 times or more the typical sales of the business.
The Liquidation Sale
The cost of operating a retail business will not become more efficient and scalable in the immediate future. When a retailer is facing inevitable decline, is insolvent or facing bankruptcy, liquidating the business through a store closing sale will help monetize the inventory and assets quickly and at a higher return rate than alternative monetization strategies. A liquidation sale is particularly effective when selling the business ceases to be an option or selling the inventory becomes more valuable than selling the business.
An effectively executed liquidation sale will often achieve sales-to-inventory cost return rates of 90% to 110%.
Stay Proactive to Minimize Losses
Electing to execute a promotional or liquidation sale is not a decision to be made without sufficient understanding of projected outcomes from the results. The retail environment is changing more rapidly than expected, and management is challenged with making the correct decisions quickly based on the available strategies to address negative trends. Some decisions will systemically affect suppliers, vendors, labor and real estate.
As more retail businesses decline and more time elapses, inventory values will steadily diminish and capital unnecessarily will be lost. Proactive leaders are examining strategies to stave off losses now.