Retail Operations: Never Miss an In-Store Sale

Retailers face a constant challenge: balancing between overstock and stock-outs. They make predictions months in advance about what customers will want, from colors to sizes. But these predictions can be unpredictable. Big retailers like Nordstrom can pull inventory from other stores or distribution centers when a specific item is not available at a location. So what about small to medium-sized retailers?

They face two options when an item is out of stock: 1. Apologize and risk losing the sale, or 2. Promise a reorder and hope the customer will return to purchase - which often doesn’t happen. This situation underlines a key challenge for smaller retailers: missing sales opportunities due to limited stock, cash flow, and space constraints. So what is the solution? Tune into this week’s episode to hear more from Michelle on finding a solution for these smaller retailers.

This conversation has been edited and condensed for clarity.

Stefanie: Today, I'm chatting with Michelle, the CEO and founder of ShopDot, and Vim & Vigr, which we'll talk about, and we're going to talk about retail and how it's evolving. Let's dive in. Michelle to start. You've been in retail now for 10 years. You've seen it evolve, like what's going on in retail.

Michelle: Retail is a dynamic industry. I've spent a decade in it and have witnessed significant shifts, particularly in e-commerce. Over the past 20 years, we've seen a transition from physical stores to online shopping, notably from 2011-2019. Brands that traditionally sold through retailers began developing direct-to-consumer e-commerce sites.

The rise of platforms like Shopify, Bigcommerce, and WooCommerce made it easier for businesses of all sizes to enter and grow in the e-commerce world. Coupled with the power of Facebook and Google ads, these changes created a perfect storm, accelerating e-commerce growth and the emergence of many direct-to-consumer brands.

E-commerce saw steady year-on-year growth of around 1%. Then COVID-19 struck, and with brick-and-mortar stores closed, consumers turned to e-commerce for everything from groceries to clothing. Pre-COVID, e-commerce made up 9-10% of all retail, but during the pandemic, this figure soared to 20-24%. Now, it's settled at around 12-15%.

Interestingly, despite the emphasis on e-commerce, it still only represents 15% of all retail. This fact was eye-opening during the fundraising process for Shop DOT, my new platform focusing on the brick-and-mortar experience. Initially, investors questioned the relevance of physical stores. Yet now, many direct-to-consumer brands, finding it hard to rely solely on e-commerce, are moving into physical retail. The future, it seems, lies in an omni-channel shopping experience.

Stefanie: It's fascinating to reflect on our backgrounds. I often forget that my roots are in retail too, and it all comes rushing back when I think about it. I recall when we were launching our companies - your compression sock business and my venture, Mile 22 Bags. At that time, we didn't label them as direct-to-consumer brands, did we? Did you have a website from the get-go? I remember your products being popular in hospital gift shops.

Michelle: My first company, Vim & Vigr, a stylish compression sock brand, was launched around 2014. We initiated with a Shopify store, but most of our business came from wholesale, selling to stores that ultimately sold to the end customers. This approach allowed us to focus on product education and customer acquisition via retailers.

Over time, many brands have shifted towards a direct-to-consumer model due to better margins. When selling directly to consumers, you sell at retail price, whereas selling to wholesalers or retailers often requires a discount of about 50%. However, these higher gross margins in direct-to-consumer sales can sometimes be offset by increased customer acquisition costs.

In fact, over the past five years, customer acquisition costs have risen, and the number of platforms needed to run a direct-to-consumer business has also grown. As a result, some brands find their net profit margin is sometimes higher when selling to a retailer, even at a discounted price, due to these rising costs.

This has led many direct-to-consumer brands to diversify their channels and consider selling to brick-and-mortar stores for a more balanced approach.

Stefanie: It's interesting and valid to point out that the common belief has always been that selling directly to customers yields higher profits. There was indeed a period when this seemed true. For instance, I never sold into retail or brick-and-mortar stores; instead, I bought expo booths at marathons and compared the sales from these expos to those on my website.

As direct-to-consumer sales grew in popularity, the process may have become overcomplicated. What used to be a simple operation of storing products in our basements and shipping them out has now evolved into a complex system requiring multiple software applications. The cost of these applications is another factor to consider when comparing sales channels.

The dynamics of retailing are continually changing, and it's crucial to keep reassessing strategies to stay ahead.

Michelle: Yeah, the democratization of online business creation and direct-to-consumer sales has been a game-changer. Now, any business can register, sell on platforms like Facebook or Google, and invest in ads. This is generally seen as a positive development.

However, it also means that the market is now flooded, making it more competitive and complex. Businesses need to identify their unique selling points and invest in various channels, such as email marketing, Google ads, and even SMS marketing. The bar keeps getting raised as competition in the space intensifies, a trend we've observed over the past decade.

Stefanie: That's an interesting point. Let's discuss the traditional retailers, not just the direct-to-consumer brands that are opening their own brick-and-mortar stores - a trend we're seeing quite frequently now with brands like Cotopaxi and Vuori.

I'm referring to small business owners, individuals who are passionate about owning a business and choose to open retail shops in their local communities. They usually curate a collection of various brands in their stores.

As someone unfamiliar with this process, I wonder, how do these store owners acquire the brands they sell? Do they approach each brand individually or is there another method? Understanding this process could provide valuable insight.

Michelle: Let's talk about independent retailers or multi-brand retailers. Unlike brands like Cotopaxi's, who have their own stores and primarily sell their products, most retailers stock a variety of other brands.

Historically, these retailers would attend trade shows in cities like Las Vegas, Atlanta, San Francisco, and Los Angeles. These industry-specific events allowed them to curate a diverse range of products for their stores, which is often what they love doing - selecting unique items for their local communities.

However, the trend has been shifting towards online sourcing. Retailers are now using online marketplaces and virtual trade shows to find and source products. This method can be challenging as it eliminates the opportunity to physically interact with the products.

Another sourcing avenue is through sales representatives. Many brands hire independent sales reps who cover specific geographies. These representatives visit stores to showcase their brand's products to the retailer or business owner. So, there are a few ways to source products, including online marketplaces, virtual and physical trade shows, and through direct contact with sales representatives.

Stefanie: Oh my gosh, that sounds so fun. It's almost worth having a retail shop for. Not that I should do that, but it actually sounds enjoyable to go to these things. So small business owner, retail shop owner. They open, they go to a trade show, and they stock their store. How are they managing all their inventory today?

Michelle: Retailers often face a tough balancing act between running out of stock and having excessive inventory. They usually place orders in January and February for products they expect to sell in the fall, making predictions about what their customers will want in terms of colors, sizes, and styles.

I recently spoke with a retailer who has been in business for over 20 years and specializes in denim. She typically orders a particular range of sizes, but she noticed an unusual trend over the past two years. She's been left with an abundance of smaller sizes, which is a new development for her. This change has forced her to adjust her size range. It illustrates how factors that worked in previous years may not necessarily apply in the following year.

Another challenge for retailers is managing physical inventory. Once they purchase stock from a brand, they own it, and it becomes an asset on their balance sheet. This means their cash is tied up in products sitting on their shop floor, waiting to be bought by customers. Realizing a return on this investment can be a complex process for retailers.

Stefanie: Oh, that's so interesting. On that, too, you do talk to a lot of retailers. What are some of the concerns you're seeing, or what are the things on retailers' minds right now that keep coming up?

Michelle: 

Michelle: At present, I'm hearing concerns about a potential decline in consumer shopping behavior due to economic factors. During the COVID-19 pandemic, consumers were eager to shop once restrictions eased, leading to a significant increase in retail activity. Every retailer I've spoken with has said that 2021 was their most successful year, even those who have been in business for 20 or 30 years.

However, there are already indications of a slowdown as we move into 2023. These fluctuations are part of the retail cycle we're currently experiencing, and it's causing concern among retailers. Many have already committed to purchasing products from brands months in advance. When forecasting, they must balance historical data with future predictions.

Some retailers I've spoken with have asked their brands to delay shipping products for an additional month before they take on more inventory. These are some of the current challenges and concerns in the retail industry.

Stefanie: Okay, yes, which are real challenges, huge risks. I totally get that. Okay, I want to get onto the topic of when a retailer doesn't have a product, which will lead to what you are doing and trying just to understand that problem. So today, I go shopping downtown wherever I find a pair of jeans, and they don't have my size because I'm with everyone else and needed two sizes up the same size as everyone else. What happens? Like, right now, I just don't buy those jeans. I would just want to understand this problem. Like, what are people doing right now? Why is this a problem?

Michelle: Larger stores, like Nordstrom, have the ability to check inventory across multiple storefronts and distribution centers. If a customer wants an item that isn't available in the store they're in, staff can locate it elsewhere and arrange for it to be sent over.

However, this isn't the case for small to medium-sized independent retailers. If a customer requests an item that isn't in stock, the retailer has two options. The first is to apologize for not having the item in stock, which often leads to the customer leaving without making any purchase. The second option is to tell the customer they'll reorder the item and contact them when it's available again. However, the chances of the customer returning to buy the item at a later date are relatively low.

Unfortunately, retailers often miss opportunities to make sales because they're limited by what they physically have in stock, cash flow, and space constraints. This is a frequent occurrence in retail, where a customer enters the store intending to buy something, but the exact item they want isn't available.

Stefanie: Interesting. Yeah, which is a huge problem. I've heard you tell this to me in the past, so I want to come back to it because I can't remember the numbers right now. Tell me again, what are the industry numbers around brick-and-mortar versus e-commerce? I'm trying to think about the potential impact here.

Michelle: Despite e-commerce being a trillion-dollar industry, it only accounts for 15% of all retail sales. The remaining 85% still occur in brick-and-mortar stores, which often surprises people when they hear this statistic.

The past few years have seen significant changes in how these physical stores operate to meet the needs of the next generation of shoppers. Traditional large-format stores like Bed, Bath and Beyond, and Macy's are closing many locations, indicating a shift away from the old-school mall-based retail model.

On the other hand, smaller retailers that effectively curate their products are thriving. Consumers seem to be experiencing 'endless aisle fatigue,' overwhelmed by the vast array of products available online. Even on platforms like Amazon, where purchasing intent is high, the sheer volume of options can be daunting.

Brick-and-mortar retailers, especially independent ones, offer a curated shopping experience, selecting what they believe are the best products for their customers. This curation builds a trusted relationship between the retailer and the customer, contributing to the ongoing success of independent brick-and-mortar stores, while traditional department stores struggle.

Stefanie: That's fascinating, and I've started noticing these trends during my regular outings. Although I'm not as deeply involved in the retail space as you are, your insights certainly resonate with what I've observed.

Let's shift our focus to ShopDot, but I'd like to circle back to your background later. You began your journey in the direct-to-consumer sector, selling fashionable compression socks to retailers, which gained notable recognition, particularly in Montana.

However, during the pandemic, you identified a problem faced by brick-and-mortar stores and launched ShopDot. Could you tell us more about ShopDot? How did you come up with the idea, and what are your plans for it?

Michelle: With my other company, Vim & Vigr, we often received calls from retailers during COVID-19 - and even before - requesting us to ship specific products directly to their customers. This usually happened when they had run out of stock or didn't carry a particular style that a customer had seen on our Instagram. Retailers are always keen to satisfy their customers, so it was frustrating for them to turn customers away because they didn't have the desired item in stock, especially when we had it in our warehouse.

This situation sparked an idea: what if we could bridge the gap between the inventory sitting in my warehouse and the retailer who has successfully attracted and engaged a customer? Traditionally, retailers buy products from a brand, own the inventory, and then sell it. This model has been in place for a very long time. But what if we could create a new model where the retailer could access my inventory and sell products directly to their customers without taking on inventory risks? This would enable them to offer more of my products without the risk of overstocking.

That's how ShopDot was born. It's a platform designed to ensure brick-and-mortar retailers never lose a sale by providing them with direct access to their favorite brands' inventories. If a retailer is out of stock on an item, they can use ShopDot to fulfill the order.

Another exciting use case for ShopDot is facilitating a showroom model. Retailers can display one of every size in their physical store for customers to try on and then use ShopDot to have the chosen product shipped directly to the customer from the brand.

We have several other use cases that many brands and retailers are excited about. However, our main challenge is changing the traditional retail model to one where the brand and retailer work together to serve the end customer better.

Stefanie: That's awesome, and so to my understanding, both direct-to-consumer brands and independently owned retail shops can come to your website, sign up for your platform and start working together. Is that how it works, or is it something else?

Michelle: Many traditional direct-to-consumer brands primarily focus on online sales and don't currently have many brick-and-mortar retailers. While we've spoken to several of these online-focused brands who are interested in reaching physical retail stores, our primary focus since launching a month ago has been on brands that already sell to retailers.

Many of the brands we're working with, including Vim & Vigr, already sell to between 1,000 and 2,000 retailers nationwide. They're excited about ShopDot because they frequently receive requests from their retailers to ship products directly to the retailers' customers. This is a common occurrence, and our platform allows these brands to offer their inventory and product options to their retailers in ways they haven't been able to before.

So, for now, our main focus is on brand suppliers that already have relationships with independent brick-and-mortar retailers.

Stefanie: That's so cool, and congratulations! That's such an exciting time. All of us listening as business owners understand what you're going through, so we're excited for you. Michelle, thank you so much for being here. We learned so much from you. I hope you found this episode informative and helpful to your business journey. Don't forget to subscribe and follow us on social media to get other great content. If you are a small business owner looking for funding, check out our Capital Marketplace for flexible and affordable financing options.