Hedging for the Holidays
To ensure a joyful yuletide season, pet specialty retailers will need to do a lot of careful planning, yet stay flexible enough to respond to what may still be an unstable economy.
No time of the year ranks higher in importance to retailers than the holiday selling season. In some cases, the fourth quarter can represent upwards of 30 percent of a store’s annual sales. With so much at stake, it’s no wonder why, even in the midst of the best economic conditions, most pet stores begin planning months in advance for this all-important period.
Considering the fact that overall fourth-quarter retail sales were down an estimated five to eight percent last year, and the U.S. economy has worsened since then, it’s clear that selling conditions will be far from ideal this holiday season. But that’s not to say that there haven’t been some positive signs that better times could be on the horizon. In late May, The Conference Board, an economic monitoring organization, reported that its Consumer Confidence Index had risen significantly. However, this study relied heavily on speculation by consumers. What’s more, even if taken at face value, the index only reports confidence levels that are in line with where they were in September 2008–a bar that isn’t set very high.
In the face of all of this uncertainty, the fourth quarter will be critical for pet stores. “[The holiday selling season] is an incredibly short window of high-velocity sales,” says William Lechtner, founder of The Lechtner Consulting Company in San Diego. “While it’s relative to the overall economy (so if everything is contracted, that may contract also), it’s still a key part of the store’s sales and profit for the year.”
Of course, regardless of the prevailing economic conditions, every retailer faces a unique set of challenges in planning for the coming holiday season. But there are a number of tried-and-true methods of devising a fourth-quarter strategy that are transcendent and can be particularly useful in a tough sales environment.
A Matter of Time
The first thing that retailers must consider when coming up with a holiday sales plan is the composition and size of their fourth-quarter inventory. In order to take advantage of the broadest possible selection and early-ordering discounts, many pet stores make a significant portion of their holiday purchasing decisions as early as July or August. This is a tradition that Deb Wilson, director of retailer development for Animal Supply Co., a Federal Way, Wash.-based pet product distributor, knows well.
“We do a fall pre-booking program that starts in August,” she says. “We’ll book through the middle of September, and the ship dates run from the middle of September through the middle of November. We give customers an early order discount to close the deal, and then they can basically forget about it and their merchandise will start shipping when they need it-and, of course, they don’t have to pay until it’s delivered.”
Obviously, committing to major purchasing decisions months in advance can be daunting, especially in the face of so much uncertainty. But Wilson says that retailers shouldn’t necessarily be concerned that they’ll find themselves painted into a corner if the store experiences a negative change of fortune sometime between pre-booking and delivery.
“To be honest, we’ve never had anybody cancel a pre-booked order,” she says. “But if it was a real case of hardship, of course we would work with [the retailer] and we’d find somebody else to buy the merchandise. The last thing we would want to do is force a customer to do something that would impair or hurt their business.”
Still, some retailers may prefer to play things a bit closer to the vest and wait a little longer before they commit to a significant holiday order. While these stores won’t enjoy the same early-bird discounts as their more proactive counterparts, Michael Levy, president of Pet Food Express, an independent pet food and supply retail chain with 34 stores in the Greater San Francisco Bay Area, says that there will still be some deals to be had in later months.
“Distributors may have an early-buying discount, but I don’t think the discounts will go away completely,” he says. “[Distributors] are going to need to drive their sales, so they’re going to have to continue offering discounts to independents; and manufacturers are going to push discounts down through the distributors as well.”
Wilson confirms that retailers will still find some opportunities to benefit from discounts, even beyond Halloween, but notes that they are significantly smaller than what is available in late summer. “If [retailers] pre-book in August, they’ll get 20 - 30 percent off,” she says. “If they wait until November, they’re probably going to get 5 - 15 percent off.”
According to Wilson, another area in which retailers could miss out by ordering late is the range of products available through distributors. “We will still have inventory, but a lot of it is ‘while supplies last,’ so the selection might not be as good,” she says.
This is something that retailers should expect to hear echoed by other pet industry distributors, says Lechtner. And rightfully so, since every segment of the supply chain is feeling the squeeze of recession. “In this economy, nobody wants to carry over dead and slow-selling merchandise,” he says. “So if the retailer is going to be stocking up on best sellers and reducing their inventory of secondary and tertiary items, it’s likely that their suppliers are doing the same. As a result, there will be a much narrower assortment available.”
There are steps that can be taken to combat this narrowing product availability, though. The key to ensuring the maximum product selection late in the game is to diversify the store’s supply chain. “A sharp retailer will plan multiple sources for their best-selling items and stay in contact with those suppliers so you know who to call,” Lechtner says.
The Right Product Mix
While it can sometimes seem like an overwhelming process, crafting the perfect product mix to bring into a pet store for the holiday selling season can be made much more manageable by carefully analyzing recent and past holiday sales trends.
“The first thing that you have to look at are the overall numbers,” says Levy, noting that both positive and negative shifts within specific product categories should also be factored. In the case of Pet Food Express, things have been decidedly positive on this front, but Levy is still practicing, and preaching, a cautious approach to holiday ordering.
“Given where the economy is now, my advice to independent retailers is to be a little cautious,” he says. “We’ve been experiencing double-digit same-store growth, so our holiday orders will be bigger than last year. However, we are trying to err on the side of caution; we’re not jumping up as much as we’d like to. And if I wasn’t experiencing same-store growth, I would absolutely be ordering flat.”
According to Wilson, however, too much caution can be a bad thing for pet specialty retailers. “We’re encouraging our retailers to avoid pulling back themselves, partly because it becomes a self-fulfilling prophesy; if they don’t have it to sell, they won’t sell it and their sales will be down,” she says.
One way in which pet stores can insulate themselves from the risk associated with aggressive holiday orders is by being conservative in their mix of holiday-specific merchandise. Wilson suggests a ratio of 30 percent holiday-themed and 70 percent non-holiday-themed merchandise. This type of ordering strategy should help retailers avoid painful markdowns, which sounds good to Levy.
“I think that would help a lot,” he says of Wilson’s suggestion. “We’ve done that in the past, but we are a lot more focused on it now because even though we had a very good finish last year, there was holiday stuff that we had to dramatically discount–up to 78 percent off. You prefer not to do that if you don’t have to.”
“There’s some stuff that you have to have as holiday-specific, but there are a lot of treats and toys that don’t have to be a reindeer or Santa.”
Not surprisingly, Wilson agrees that a product doesn’t necessarily need a yuletide theme to drive holiday sales. “We are going to bring in more non-holiday-themed toys, because we’ve found in years past that while stores want to have some holiday-themed merchandise, people buy toys–impulse toys–whether it has a Santa hat or not,” she says. “The nice thing about those toys is that you can hold them over after the holidays if they don’t sell.”
Noting that pet stores have to stock at least some holiday-themed merchandise, Lechtner proposes that retailers use the same principals that they apply to their everyday product assortment. “You should approach the holiday business the same way you approach the regular business,” he says. “In holiday [merchandise], there are some triple-A items that are the best sellers every year. Then there is a second level, which comprises the items that might not be the best sellers but you own them at a good enough price that you can make money even after they’re put on clearance. Then you have a third component, which is made up of items that you’re testing for the next year. If you don’t test during the holiday for the next year, you’re not going to get any direction on what customers are looking for.”
“What retailers want to do first is identify their triple-A items and make sure they don’t run out of them–those are your bread-and-butter items. Secondary level items should be pulled back considerably, and you still have to plan for the future of your business, so you have to look at some of the new items. With that in mind, if the test items typically make up 10 percent to 15 percent of your assortment, you should pull that back to approximately five percent this year.”
While Lechtner says that it’s important to test some interesting new items in a pet store’s holiday product mix, he and many other experts agree that considering the current state of the economy, this year wouldn’t be the best time to start dabbling in entirely new product categories.
“It would be a mistake to try out a new product category right now,” says Levy. “There is so much uncertainty in the known, why jump into the unknown?”
Another key element of managing a pet store’s holiday inventory is the careful monitoring of what is and isn’t moving off the shelves, and responding accordingly with merchandising changes and well-timed markdowns.
“How [retailers] manage their inventory from [Halloween] forward is going to be very important,” says Levy. “They have to look at what’s selling and what isn’t, and what they need to perhaps mark down or reposition within the store. Don’t stick your head in the sand; be active. If you need to take prices down, take them down.”
Planning Beyond Purchasing
While getting the store’s holiday merchandise orders in early is an important component, a sound fourth-quarter selling strategy will require retailers to go even further and devise a plan months in advance for just about every aspect of their store’s operations-from a cohesive merchandising scheme to in-store events and promotions.
“Plan early; plan now,” says Levy. “That doesn’t necessarily mean you have to make a buying decision now, but create a plan for the holiday season now. What rescue can you work with? Are you going to do Santa photos? How are you going to merchandise the store and [when will you put that merchandising plan in place]? If you have a mailing list, what kind of specials are you going to release, and what’s the optimum time to release them? Consider all the clutter that starts hitting customers’ mailboxes right before Thanksgiving... you don’t want to get lost among that clutter.”
As Levy mentions, one important element of fourth-quarter planning is deciding just how early the store’s holiday merchandise should be brought out on the sales floor. While a retailer may be worried about jumping the gun, experts agree that getting a store’s holiday mix in front of customers early can be quite useful.
“Part of the reason for doing an early setup is to give you some indication of what you’re customers are looking at and buying,” says Lechtner. “This way, you have more information earlier so you can do a reorder, plan a last-minute promotion or figure out which categories you’re going to have to mark down earlier in the season to make sure you clear them.”
Levy also sees value in getting holiday merchandise on the sales floor, as it gives shoppers more time to consider a purchase. “If customers see something in mid to early November, it doesn’t mean they’re going to make a decision right away,” he says. “But pet food customers are probably coming in once every three to four weeks, so when they come back into the store during the second week of December, they may be ready to make the purchase.”
Understanding that retailers will probably want to avoid giving their customers holiday fatigue by inundating them with red and green packaging and images of reindeer well before Thanksgiving, Wilson says that her suggested 70/30 product ratio will help. “A lot of our retailers probably don’t want to push the holiday stuff as early as some of the bigger chains like Target or Walmart,” she says. “Doing the 70/30 ratio gives you the best of both worlds. That way, you don’t have the Santa hats out on the first of November, but you still have plenty of merchandise.”