As signs points to the idea that the “middle-class” as we know it is disappearing, the truth is that in the business world small and mid-sized independent retailers have given way to big business for decades. I will discuss tactics on how independent clothing retailers can survive in a market dominated by multimillion dollar companies.
Let me start by defining what I consider to be a small business. Some statistics consider a small business to be those that have less than 500 employees. In finance,
small capitalization stocks are considered to be business enterprises with a market capitalization of between $300 million and $2 billion. However, my personal definition of a small business is closer to the idea of a “mom and pop” store. A sole proprietorship or small partnership, running off of its own personal funds or possibly a small loan. There are those clothing retailers who would love to position themselves as a small business, such as ModCloth, but when they have received over $25 million in funding they are far from running on a shoe string budget.
From a technical standpoint, there is only one way that a business can become more profitable or, in other words, lose less money. That is by reducing your expenses in relation to revenues. For example, if a dress sells for $50 and it costs $20 at wholesale, then you can obviously make more money if you can lower you wholesale cost to anything below $20. Even though financial accounting is actually incredibly complicated at the CPA and financial analyst level, the income statement is still a simple equation.
Of course, this is a commonsense approach, but what most small business owners fail to do is take this to the next step by actually looking at your cost structure. The cost structure is simply the percentage of all income statement line items in relation to total revenues. For example, assume revenues are $100, cost of goods sold (COGS) is $40, marketing expense is $3, other expenses are $44, and your net income is $13. Therefore, your cost structure would be calculated using $100 as your denominator (numerator/denominator) and your line items as the numerator. So, total revenue = $100/$100 = 100%, COGS = $40/100 = 40%, marketing expense = $3/$100 = 3%, other expenses = $44/$100 = 44%, and net income = $13/$100 = 13%.
The actual dollar amounts will vary from one business to another, but with enough discipline any business, small or large, can stick with a profitable cost structure. Of course, budgeting your expenses is widely dependent on being able to project your future revenues. In fact, inaccurate revenue projections are usually the cause of loses at the end of the fiscal year. For example, if a business spend 3% of projected revenues on marketing, but actual revenues turns out to be much less, then marketing expenses will end up being over our budgeted 3% of revenues. This will also go for any other expense earmarked to projected revenues. So, for a business in survival mode, projected revenues should be conservative. It is important to note that a business in survival mode is not positioning itself for growth.
On a bit of a side note, it is sticking to a cost structure that causes large corporations to layoff employees or hand out pay cuts. Of course, they are not necessarily firing employees who should be fired, but the reason is because they are sticking to a cost structure to ensure survival. Nonetheless, it should give you an idea on how important sticking to a cost structure is.
For retailers, especially apparel, another step for survival is to look at your inventory. Even though inventory is not considered an expense, but rather an asset, it still effects your cash flow. Additionally, there is nothing worse than having dead stock for an on trend fashion retailer. What most major retailers have done in difficult economic situations is scale back their purchases and providing fewer items with possibly a wider range of colors. For example, BlueFly decreased inventories approximately 38% from December 31, 2007 to December 31, 2009. Even though it is always tempting to grow your inventory to try and compete with larger retailers, it may be prudent to think twice and rethink your merchandising plan. Developing a merchandising plan is beyond the scope of this article, but a merchandising plan must be reviewed in times of economic hardship.
Even though we have only scratched the surface on how to survive in a highly competitive market, it should give you a starting point. First, review your cost structure and compare it to successful competitors. Second, consider scaling back your purchases to decrease dead stock and increase inventory turnover.
