Show me the money
An Open To Buy plan can be the key to successful and profitable retailing, says Thierry Bayle.
1 March 2013
Image: Thierry Bayle, managing director at Global Fashion Management.
Implementing an Open To Buy (OTB) plan can be the key to successful and profitable retailing, says business consultant Thierry Bayle. Here he outlines the key principles and how they can be applied to independent fashion boutiques.
Forgive the direct question, but do you know exactly how much you’ve got to spend on stock for the new season? Yes, I’m talking about sales forecasting. Most of the larger fashion chains and major department stores use a forecasting approach called an OTB plan. There is no reason why independent retailers shouldn’t use it too - in fact, many of you already do, for the very good reason that it helps to ensure cash flow, profitability and customer traffic for your boutique.
The OTB plan is a unique and powerful buying and merchandising tool that uses your stock and sales data and creates questions and answers (ie solutions) on every aspect of running a profitable retail business: sales, marketing, buying, customer service, expenses. It is geared towards improving cash flow and creating growth opportunities.
If cash flow is tight and you do not understand why and how to fix it then you need an OTB plan. Let’s analyse the different aspects of the OTB and how it applies to your business:
OTB starts with an accurate sales forecast that breaks your business down into micro-shops for each class of goods you sell. The point is, the rate of sale for blouses might be very different for that of dresses, which again is different from jeans. Your point-of-sale system shouldhelp you break your business down into these mini-businesses and each one needs a forecast.
All too often, boutiques plan their business by “buying what we sold last year or last season”, or “we expect to be up two per cent”. These are not forecasts, they are wild guesses and can lead to lost sales and missed opportunities. If you buy only what you sold last year, then the most you can sell is what you sold last year, or even less. Why? Because you are bringing in less stock to capture the growth and you will lose sales.
If you forecast your sales by saying, “We will be even with last year,” then you are making the mistake of generalising all your micro-shops into one number. That means you’ll miss sales in the classes that could grow, and you’ll have too much stock in the classes that are declining.
Your business’s forecast should be broken down by month and adjusted by season. It should accurately represent the sales of a/w clothing, but should also identify when a/w stops selling and s/s takes over.
Reliable forecasting does take into account what you did last year, but that is not the most important factor. Forecasting must also take into account current trends, both inside and outside your business. We produce accurate forecasting because we look into what is happening in a business over the past 60-90 days. OTB forecasts should react properly when new trends emerge and enable you to take advantage of those trends by buying into them or getting out of them if they are trending down and squeezing out as much cash as you can.
We spend a huge amount of time focusing on our sales forecasts. Good OTB systems do that, because it’s a key part of planning your stock. Unfortunately, it’s not the sort of thing that’s easy to do for your own boutique. Big retailers have very expensive systems, however, independent retailers can buy forecasting services more cost effectively from consultants who can bring that technology and/or expertise to their shops.
So, what do you buy and how much should you spend? If the forecast says you should be selling £1,000 worth of tops in March, it’s not just a question of putting £1,000 worth of tops out. You need to put a sufficient level of stock on the floor in order to offer a good choice. Knowing how much stock to put out to achieve your sales forecast is, of course, the key to making money. Too little and you’ll miss sales, but too much and you’ll end up having to discount to move the goods.
So, how do you know? You apply a stock-to-sales ratio, which is the amount of pounds in stock you need to have available in order to reach your sales goal. For example, if in jackets and coats you are operating on a three stock-to-sales ratio, that means you need £3,000 of stock to reach your £1,000 sales target.
Once you have your sales forecast, you then determine the proper stock-to-sales ratio. That will tell you how much stock you need to have on hand to meet your sales forecast with maximum profitability. Again, there should be a different stock-to-sales ratio for each class of goods. By determining how much stock you need to have on hand, you will know how much you need to buy, month after month, to achieve the best level of stock for your business.
If you do this, class by class, and diligently follow that plan (adjusting where necessary), you will have cash. Retail businesses we work with that follow the plan have cash. Those we speak to who do not follow the plan run out of cash and usually fail. It is that dramatic a difference.
Of course there are lots of nuances, such as achieving the proper profit margins, planning your discounts/markdowns and ensuring your stock is fresh and new. Remember you need to bring fresh goods every month. The OTB plan should become the centrepiece of evaluating your business.
In independent fashion boutiques it usually falls to the same person to buy and plan. Better retailers realise more objective planning will get them higher profits, that is why there are external OTB planning companies (like mine) for fashion boutiques. The good ones bring a vast array of knowledge and expertise that helps them to grow businesses. Most of all, it should be fun and you should enjoy what you are doing. Planning like this should help to make retailing enjoyable and rewarding. Get it right, and you’ll be as happy as the customers walking through your shop door. Happy retailing!
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