I’ve been in MI retail longer than most people stay in a single job and, while that’s probably not at all an uncommon feat in this industry, I feel like I’ve been witnessing a shift the entire time I’ve been here. When I began, we were in the heyday of the catalog sales battles, and starting to see internet sales become a factor. Retailers were dealing with MAP policies that were first going into effect, and watching margins drastically shrinking for the first — and certainly not the last — time. Burgeoning internet sales and catalog sales had not only caused price battles, but stores that tried to price match were also eating state and local sales tax to even out the pricing. That was 16 years ago, and we’re still trying to figure out how to navigate many of these same issues today. And those issues aren’t the only ones.
While the industry has seen these disruptive trends grow and create tectonic shifts in how we do business, many stores have struggled to keep up. First-generation storeowners trying to hold on to the way the business used to be have been slow to adopt new strategies and new technologies. Some have done exceedingly well, flourished even. Many new retailers have sprung up, using the internet as a tool to great success, and have grown sizable multimillion-dollar businesses, and were seen in the recent list of top retailers in an industry magazine. Others, some who once graced those same lists, have fallen to recessions, bad strategies or being overleveraged.
A few years back, while I was working a pretty normal day, someone walked in and told me a well-known Ohio chain, which was an early internet adopter and seemed to be on the cusp of becoming the next big thing, had been completely shut down. “The bank guys just walked in and said, ‘we’re shutting you down,’” is what we heard. This was due to being overleveraged, having too much debt on the books and not being able to meet the payment on that debt. That thought popped into my head again, as I read an article about future Guitar Center financial wizardry and how it will be necessary to concoct something to deal with upcoming payments on its debt load. I’m not sure why, as the store I work at has always had an aversion to debt. Plenty of stores still avoid having a debt load, and most don’t have a private equity fund backing them. So. I’ve been thinking a lot about inventory lately, and some of the policies that tie up retail stores’ cash flow. In the first column I ever wrote for the Retailer, one of the things I touched on, as a point of friction, was stocking requirements.
Stocking requirements aren’t unique, nor are they uncommon in our industry. The idea of a minimum dollar amount or assortment of products isn’t, in and of itself, a detriment to the success of a business. In theory, it’s a benevolent thing, designed to make sure stores carry a decent assortment of what a brand offers and don’t buy just the cheap stuff, or a couple of items and never order again. Under those circumstances, stocking requirements seem innocuous enough. But in reality, what started out as a way to ensure a minimum of brand representation has become a way to artificially bloat dealer inventory, which in turn holds dealers’ cash flow hostage. No one knows what sells better in a region than the dealer who lives and works there, and many brands have simply come to rely on this policy as the cost of doing business.
“If you want to be a dealer, here’s all the stuff you have to carry. Oh, you don’t like this amp? Don’t make enough margin on it? Too bad, it’s required to be a dealer.” This also applies to high-end vs. low-end product mix. Dealers mostly sell lower-end and mid-range product. There’s value in carrying high-end products, and having a good mix of those is worthwhile, but in many cases is vastly inflated, and having money tied up in things that don’t turn as fast limits how much stores can reorder.
For many vendors, stocking requirements are an alternative to expensive master orders, ensuring that a certain product mix stays on the shelves, so customers can experience the brand. However, we live in the internet era, where buyers are seeking more and more products online, not because their local store doesn’t have them, but because the cultural shift in shopping trends has made commoditized items an easy online purchase. You don’t have to think about making a trip to the local shop after work when you can simply order your strings from your phone on your lunch break. And, while many buyers want to see and touch things, an increasing amount of the public are 100-percent willing to purchase large-ticket items online, as indicated by the fact that Sweetwater is now the No. 2 retailer in MI retail.
So how do small independent stores stay competitive? How do they grow and gain market share? For starters, we should start re-thinking the way stocking requirements are determined and make sure they properly serve the dealer, as opposed to being “the cost of being a dealer.” We can partner with forward-thinking brands, and I don’t just mean so-called “off brands,” who see the need for changes in the way we do business so that small independent stores can remain a viable destination. We can stop trying to be a one-stop shop and focus in on the things we do really well, and that generate the majority of the business’s profit. Embracing the niche can be a pathway to growth, as opposed to trying to chase the same business strategy as private-equity-funded giants or internet superstores, neither of which most stores have the resources for. All stores can make time to leverage their best market segments and be more active on social media — where we can engage customers — and utilize the internet via verticals like Reverb, as a way to pad our in-store sales.
What are some of the strategies you employ to overcome the burden of stocking requirements? How are stocking requirements affecting your growth and bottom line, and how do you plan to reconcile that with your future plans?
Write to me at gabriel@larrysmusiccenter.com.