A version of this article ran in the April issue of Bicycle Retailer & Industry News. (Not receiving our magazine? Sign up here.)
Inventory is essential as it is used to produce sales. In the typical bike shop, inventory drives up to 85% or more of the gross sales, while service typically provides about 10% or more of the sales volume. Inventory is a crucial asset, but it can also be an albatross. When businesses start to feel financial stress, one of the first tactics is to move inventory more aggressively, which typically entails discounting, lowering margins, and throwing cash flow off balance. When a dollar bill goes in the money drawer, most shops will have paid about 60% or more of that dollar towards the cost of the product, another 20% for staffing, and hopefully, at most, 7 or 8% on occupancy expenses. It becomes easy to see why running a successful bike shop is a complex game of percentages. Buy products with low margins, buy too much, discount, blow the payroll budget, or rent too extravagant a location and the math says you'll suffer.
The correct amount of inventory to carry is among the least understood and, if understood, most difficult-to-apply concepts, all while providing the most potential to affect a bike shop negatively. Having spoken with hundreds of hard-working retailers in one-on-one conversations, many need help understanding the basics. The basis for this article is to help those who struggle with the concept, and the hope is to establish a general understanding of the what and how of inventory management. I applaud you if this is laughably basic, but many retail owners and buyers need this help and they are the target audience.
You should understand that within reason, the more often you turn an item, the more profitable you will be. You will also be holding more cash at any given time. Bicycle retailers have historically averaged around two turns. The ideal number is closer to four. Gross margin return on investment, or GMROI, clearly shows how the math works. Research GMROI if you are unfamiliar with it, as it can take a few minutes to absorb, but it will be eye-opening. In a spreadsheet, GMROI's equation usually is: (gross margin $$)/(average inventory cost $$). The too long; didn't read version? You should turn your inventory more.
Inventory is a crucial asset, but it can also be an albatross.
Get your inventory levels right, and cash flow and profitability will increase while stress decreases.
So, how do you do it? First, look at how much you sold at wholesale in the prior 12 months, then divide that by your current inventory at wholesale to get an idea of your turns. You should also project 12 months of wholesale inventory needs based on your crystal ball and divide by your current inventory. If you realize two turns of inventory or less, imagine having half your current inventory dollars back in your checking account instead of your sales floor. While your turns using this formula will fluctuate through the year, it is helpful to get a baseline for the correct amount of inventory.
The next step is to drill down further into categories while analyzing for margin and profitability. This is where you may find that your overall inventory investment is in a healthy range, but you have categories that are either over or underbought relative to their sales performance. Reliable data is essential, so data hygiene — a fancy term for spot-on inventory accuracy — is critical. Good data is so fundamental to success that I cannot state any more clearly that having unreliable data will limit the most well-intended desire to become a better bike shop.
I prefer to concentrate on turns, even in the face of volume discounts.
The increased workload, sometimes cited as a deterrent to higher turn rates due to ordering more often, can be offset by keeping accurate reorder points in your POS. I typically see stores skip keeping reorder points altogether or failing to adjust them. Reorder points are an every-order/every-time maintenance item rather than a set-and-forget item.
Now, let's move on to the mental game buyers must master. The biggest mistake I see buyers make is thinking they can outperform math by buying larger quantities for better pricing. I prefer to concentrate on turns, even in the face of volume discounts, unless the purchase meets the appropriate inventory needs. Staying within the budget of what your shop needs to have invested in inventory will serve you well.
The other part of the mental game is that nothing is shinier to a buyer who loves bike stuff than a new model, component group, category, or colorway. It is hard to turn off emotion and honestly evaluate your stores and staff's ability to sell a new product, category, or price point into your local market. This is where data and raw honesty with yourself are so important.
There are many benefits to having the right amount of inventory. These include better cash flow, increased profitability, pivoting more easily with market changes, and taking advantage of lower prices; perhaps none is better than reduced stress due to holding cash versus having too much inventory! Remember that the right amount of inventory is paramount to your success — caution and restraint are your friends when purchasing.
To summarize, turn your inventory 3-4 times, which, to be possible, requires the right amount in the correct categories. That level of analysis will require clean POS data and rigorous self-control while buying. View buying analytically and then sell with passion. Last, I'd like to say that the past four years have been an incredible roller coaster. I'd like to encourage everyone in our industry to go easy on each other as we make our way through the maze of issues that we have to navigate and return to the fundamentals that create operationally sound and efficient businesses. The bicycle industry has challenges, yet it is a beautiful place to be and worth the effort needed to succeed.
David De Keyser spent 28 years taking out the cardboard while owning and operating bicycle retail stores. Since 2019, he has focused on helping bicycle retailers improve their businesses, open new stores, or consider selling them. He can be reached at bikezest@gmail.com.
