The Inventory Guessing Game

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For many pet retailers, decisions about inventory come down to a matter of space.

You have a certain number of square feet in which you want to display chew toys. So you procure enough chew toys to fill the space – and your retail floor looks the way you want it to look.

But often, your cash flow doesn’t. That’s because every item in inventory represents cash that’s been converted into non-cash, and is waiting to be converted back into cash. Experts in retail inventory management say it’s a common mistake of retailers to make inventory decisions by sight or by feel, rather than by hard data. And the only data that really matters, they say, is sales data.

“What we typically see is that they’re over-inventoried,” Ani Collum, a partner with CITY-based Retail Concepts, said. “And that they don’t have the right handle on what is the right amount of inventory they need to turn the sales so their floor and their back room isn’t over-inventoried.”

Decisions about how much of each item to procure must be tied to sales figures.
“Say dry pet food represents 15 percent of your sales, but it represents 45 percent of your inventory,” Collum said. “That would indicate you need to cut back on the amount you buy. At the same time, dog collars for whatever reason are doing 10 percent of your sales volume but they’re only one percent of your inventory. You need to go get more dog collars.”

A useful method might be to break down inventory by classification – possibly pet food, accessories, clothing, treats, etc. – and then analyze within each classification the percentage of inventory on hand, and its relation to sales.

That seems obvious enough, but many retailers have trouble managing through the process, especially when sales patterns change along with seasons.

“There are different cash flow cycles, so in July and August, when you’re purchasing all your fall and holiday goods, you’ve got cash that’s tied up in inventory,” Collum said. “Payroll and things like that become much more tricky. In January, you’ve gone through all this so hopefully you have cash on hand. But if it’s just sitting on your floor taking up time, energy and space, you can’t convert it to cash, and you need cash to run your business.”

According to Ted Hurlbut, a retailer consultant, retailers often get tripped up over the fear that too little of an item in inventory will cost them sales.

“They’ve merchandised their stores,” Hurlbut said. “They like the way the stores look, and they’re doing business but they’re chronically short on cash, or to put it another way, they’re short on working capital. They’ve got too much of what they don’t need and not enough of what they do.”

But if inventory should be based on sales, how does a retailer just getting started know what sales will be? Hurlbut said there are ways of answering that question that are more sophisticated than merely trying to guess.

“It’s taking the knowledge you do have and making estimates and establishing benchmarks, then measuring how you’re doing against those benchmarks,” Hurlbut said. “Before long, you’re evolving from estimating to developing some really insightful forecasts.”

The newly established pet retailer can also gain insight by asking established stores what how they seen in their own sales patterns. Not that your competitor up the street will necessarily share that information with you, but you can probably find someone, somewhere, perhaps in a different part of the country where you wouldn’t have to worry about competitive considerations, who would.

“Maybe you’ve been to some trade shows and you’ve connected with some key vendors, and they can help you based on their knowledge and contacts to develop a set of initial sales plans that you can work off,” Hurlbut said. “But it’s got to come from somewhere; otherwise you’re just throwing stuff against the wall to see what sticks.”

If struggles with inventory management are more prevalent than usual in the pet retailing industry, it may ironically be a product to some degree of pet retailers’ passion for what they do. In a lot of industries, people with cold, hard profit-driven brains, get into the business solely because they see an opportunity and know how to convert it into cash. How many people do you see in the manhole cover industry who is really passionate about manholes?

But many pet retailers are huge animal lovers, and that’s why they get into the business. Is there anything wrong with that? Not in and of itself, but if their love of animals was the sole motivator for them to open a pet retail operation – and didn’t come with a commensurate base of business knowledge – such people might be susceptible to making inventory choices based on their heart rather than on data.

That doesn’t mean passion for pets is all bad – not at all. It just means you still need to be able to make rational business decisions in the pursuit of your passion.

“I have a client that is deeply passionate about fly fishing,” Hurlbut said. “And the real business driver is that passion, because customers respond to that passion. But that doesn’t mean there’s a complete skill set in place. The challenge of these retailers is being able to develop the quantitative analysis to apply the concepts.”

Dan Calabrese is a freelance journalist and syndicated columnist based in Wyoming, Mich. He covers a wide variety of industries, including pet retailing.