That Tax Basis Ain't Gonna Lower Itself

In small specialty retail, we want to have as much inventory as possible right up until the days before Christmas, and then we want as much of it gone as we can manage, before the last day of the year.  This is because we want the most possible holiday sales, and then we want to avoid being stuck with a bunch of extra inventory because growth on that ledger counts as income at tax time.  I could avoid this pinch if I simply reset my fiscal year to begin and end on some other date, but we're not nearly at the kind of scale where such a logistical upheaval pays off.

In practice, what this requires is good forecasting.  Based on the sales numbers of past Decembers, we're able to project sales for this December, and starting in late November we tailor our ordering so that the inventory asset ledger tapers off right on time and then we can do some modest after-Christmas year-end sales event and shed down to the number we want.

It's rare to hit the mark perfectly or even within a few percent.  If I'm wildly off on the low side, my shelves are barren and I've got that nice low tax basis, but we probably missed a lot of potential sales.  If I'm wildly off on the high side, I've got overloaded shelves that I'm about to have to pay for twice, as it were.  The latter is the situation in 2017, since holiday sales came in well short of projections, even after hedging from spotty results last year.  In fact, if you took DSG's numbers from last week and erased the dates and mixed them up with a bunch of other weeks of the year, I'd have a hard time telling them apart from an average week in April or June.  It was disappointing, likely an ongoing effect from our move, coupled with the fact that holiday shopping is far more volatile against online and big box volume than our day-to-day bread-and-butter business is.

This meant our end-of-year sale for 2017 had to be a little more aggressive than I might prefer, while still protecting products I know I can't restock reliably in the first quarter of 2018 because half the factories on the planet shut down for Chinese New Year.

[Link to the Facebook event page]

So I figured this blog post might be a good time to look at the when, how, and why of sales.  It's a topic I've covered before, but always good for a refresher.

WHEN: 
The best answer is "almost never."  Sales in small specialty retail should be rare, limited in scope, and unpredictable.  If the public knows what's going to go on sale and when, they'll respond to that incentive by never buying those items any other time.  Black Friday and end-of-year are the biggest danger spots here.  A good way to mitigate this problem is to avoid storewide "everything" sales and be more focused, and that's in the "how."  But in terms of "when," only the mass market with its vast economies of scale and automation is able to benefit from keeping rolling sales underway seemingly every week.  Small specialty is always safe to hit the major sales periods, and shouldn't hold big prominent sales otherwise unless there's a tie-in event like a grand opening, store move, expansion, or what have you.

HOW:
The best answer is "purposefully."  Either attach a simple rule to an entire product line or category (such as Buy Two, Get One Free), or attach a simple sale scheme to select items.  Those are the two winning plays really.  Blanket percentages off are logistically easy but also tend to result in narrowing the dynamic range of your stock -- don't do that to categories that have big jackpot items or super-rare stuff in them, or that's all that will get bought and you'll lose the most money possible.  I like to take the clearance rack that already exists and get really aggressive there as a sale promotion, because it's stuff we already wanted gone.  Importantly, you have to set up the terms of a sale and set up boundaries so the promotion is contained.  If you don't, you have the same problem as with frequency.  People will start to speculate that you'll go blanket-dump on board games or singles or what have you, and they will stop buying and wait you out.  Conversely, players will happily buy WarDoggies models the week before Thanksgiving if they have no specific reason to believe you're going to knock the floor out from under WarDoggies prices on Black Friday.

WHY:
The sale should never be just to bring people to the store.  Small specialty retail can't use sales that way; once again, you lack the economies of scale and automation that the mass market uses to do that, and moreover, you don't want to curate a customer base of the most price-sensitive customers you can find, because they won't be back during ordinary time.  Sales need to have purposes that, once achieved, allow the store an unambiguous benefit and a chance to return quietly to normal operation.  My end-of-year sale is driven by tax policy and is among the more obvious "good reasons" to "devalue" my own goods.  Clearance/closeout are probably the most common purpose and as long as you're not expecting to continue turns on that stock, it's pure cash recouped when you sell it, even if it comes with the regret that the BattleDucks Core Set never caught on and did not become evergreen as you had hoped.  Overstock sell-downs are a store correcting partial mistakes; we don't enjoy having to have such sales, but a bad overbuy can put a store in real danger if it ties up enough cash flow, even though you plan to keep the game itself around after that.  There are other niche reasons to put a product on sale, such as ding-and-dent or a new edition announcement, and anything you do in those scenarios is probably safe.

Anyway, if you're an industry peer, I'm sure you're nodding along and I hope your end-of-year reduction sale, if any, is successful.  If you're a customer reading this, allow me to quote from the late Peter Steele: "Please buy our products."

That about puts the wraps on 2017 here at DSG and the Backstage Pass!  May all of us have a better 2018 than the last twelve Godforsaken months have been!  Cheers!