Monday, September 13, 2021

How to Add 50% More Inventory

Steve Martin has a bit about how to be a millionaire and never pay taxes. It starts: "First, get a million dollars." That's where we begin this post, in mid 2020, with ridiculous amounts of government loan money, the question was how to intelligently increase inventory. The first question is why should we?

Why increase inventory? In the face of a crisis, inventory is safe. Provided the world doesn't come to a crashing end, you can be certain even bad inventory will make you some money. If people have jobs, they will buy games. That's the rule of thumb. 

At liquidation, you can often get your money back, at the very least. Here's an example: Invest $1000 in inventory. If it does very well, say six turns, your $1000 becomes $6000. If it does poorly, you'll probably double your money, and if it was a mistake, it's unlikely you'll sell it for less than $1000. The booming stock market of 2020 would have given you the equivalent of four turns a year. Inventory is safer and you are the Subject Matter Expert when it comes to inventory.

I've had this discussion with investors and they're like, "Great! Let's put a bajillion dollars into inventory!" And I'll say, "Not so fast, it's not that easy to just add a lot of inventory quickly." Adding inventory is normally something you do gradually. But this was anything but normal. We were fighting for our survival. If we had to add inventory quickly, how would we do it?  

Here's how I added 50% more inventory, how I measured performance, and the end result. The caveat is sales are stratospheric right now, so that inventory was fed to a ravenous customer base with a tremendous bankroll in pent up savings. Without that ravenous base, I could have just locked in a bunch of money with a much slower return on investment (still better than the S&P 500).

Go Deep on Market Leaders. Each department has a market leader. You've got your 40K, D&D, Magic, Asmodee. You really can't go wrong with these product lines. These are safe. The first thing I did was made sure I had the full line of each of these leaders (Asmodee less so, since they have a lot of garbage, but you get the picture). I did this as best I could, as shortages became a huge problem pretty quickly. At the moment, I have four restock orders pending at Games Workshop and I recently received a pallet of D&D in anticipation of price hikes and shortages for the holidays. I admit I mostly missed the boat on Pokemon, because it was on clearance in mid 2020 and on fire by the end of that year. I wasn't paying close enough attention.

Add New Lines Carefully. I've made the mistake before when expanding with new, untested lines that were more diversification than expansion. I added 20% more inventory in 2007, mostly toys, and it was a disaster that took a couple years to unwind. In a crisis, diversifying or expanding too far felt wrong. The new lines I added were adjacent to existing product lines, like new Pro Acryl paint, products from Foam Brain and geeky items from Darrington Press. There is the concept of "Flight to Quality" where consumers gravitate towards the familiar and safe. I played flight controller during this crisis and made sure I wasn't suggesting a cruise or a train ride when what they wanted was a comfortable flight. 

Safety Stock. This is a term used to describe stock acquired to avoid anticipated outages, and boy do we have those. Retailers have been building safety stock early enough to essentially be a holiday stock up at the same time. I was getting warnings as early as May that now was the time to stock for the holidays. With a big enough bankroll, I spent time identifying opportunities and bought deep on those items. This didn't happen a lot, but if I had an inkling of problems and quantifiable past demand, I went deep.

Depth of Stock. This is where I took a big chance and spent most of my money. When an item would sell, I would look at its total sales over the past year and divide by my average turn rate (six). That gave me a safe number to stock on the shelves. This was done on a daily basis, rather than all at once, but the stock began to grow quickly. This was a bit seat of the pants, because I didn't actually know if the expansion would grow beyond my bankroll. I tracked inventory values carefully with open to buy and wondered if the strategy would expand beyond my budget and what I would do when it did. It leveled off at a 50% increase.

How Did I Measure This? Within the first six months, inventory performance had not surprisingly decreased by 50%. This was a little disappointing. The advantage of this inventory without strong demand was I at least wasn't missing the opportunity to sell product. When demand finally picked up, our turn rate went from a lackluster four or so to our previous performance of six. And of course, that meant more money, more opportunity, the ability to pay back all those loans, and ... more inventory expansion. We've added another 10% for 2021 and if sales continue, we'll keep growing.

Don't Forget Fixtures. We quickly ran out of room with this big stock up. I knew I potentially had physical room for twice my inventory, but I was unclear on what fixtures we needed for expansion. With COVID protocols, it also meant items were more spread out. We ended up with a very cluttered store, often with items on folding tables. The first step was some cheaper fixtures, my first foray into Ikea shelving for the store. Then as we stabilized, we put in orders for more permanent fixtures. After moving the retail space to install new carpet, we damaged enough fixtures to put in yet another order for shelving. It should look great in another month, but the store has looked pretty full throughout all this. I'm happy to drop $5K on D&D books, but I'm far more reluctant to spend $5K on store fixtures, which is what we did.

Mistakes? A lot of stuff bought early in the pandemic had no traction and was dumped around the time things got back to normal. This was not my deep stock however, but new items in reasonable quantities. Likewise, I haven't had to dump any of my "depth of stock" items. Those have remained strong. I go through our "dusty"inventory weekly and put items in our new online store, and thankfully it hasn't been entire product lines, or deep stock mistakes. 

That's how I increased my inventory by 50%, resulting in a 54% sales increase over 2020 and an 11% increase over a more normal 2019. We're having our best year yet and it's modest compared to my peers who had depth to begin with, strong online sales channels, or were better at divining demand. We know our success is partly due to increased inventory and partly due to outsized demand. We'll never know how much is which. Profits are stratospheric. Now we begin worrying about paying taxes.