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Question: Is it better to discount extra Christmas inventory, or hold on to our margins and carry that extra inventory over until next year?
Jill, Gift and Christmas Buyer
Answer: This is a great question considering the time of the month in which you are reading this. By mid-December, you should be able to determine how much inventory you will sell before Christmas, what you have to do to sell it and how much you should have left to carry over until next year.
The answer lies in the benchmarks we discussed in this column in past months. The carrying cost of inventory at 29 percent annually is the first indicator that you should get rid of all Christmas inventory before the end of the season. No need to carry old inventory at that rate.
The second indication is margin. Leftover inventory from last year generally is discounted the following year (after carrying it at a 29 percent interest rate), so your margin takes a hit. Paying garden center expenses at reduced margins just doesn’t work.
The third benchmark to consider is inventory turns. As a seasonal, one-shot item, Christmas hard lines should be turning in the five to seven times range.
Christmas is much easier (and generally more profitable) in the poinsettia, fresh greens and Christmas tree categories. Buyers tend to conform much better to past history and their intuition knowing that on December 26, they cannot pack up the excess and put it away for another year. If it doesn’t sell, it’s thrown away and you take a margin loss for the throw-aways. Buying tightens up when the thought of pitching inventory comes to mind.
The hard lines (gift, ornaments, lighting, etc.) aspect of Christmas is tough. It’s basically a 60-day season in which you have to manage full-margin sales, markdowns and final clearance while you still have customers coming through the door. And you’re not going to throw good inventory away just because it is left over. So the key to a profitable Christmas season is good buying. Buy what you can sell 80 percent to 90 percent at full margin, and then go through planned markdowns to eliminate the rest. Next year it’s all new, fresh inventory to sell.
The final answer — sell it all, and at whatever margin you have to. If you are discounting too much to do so, you’re buying too much. Make your buying and inventory levels match your revenues.