Poor Management In Retailing
( Originally Published 1939 )
Our system of free competition insures the right of anyone to enter business whether he is qualified or not. A relatively small amount of capital is required to start a retail business. As a result thousands of store owners poorly equipped by background, training and financial resources have been brought into the field. Be-cause of these fundamental deficiencies and because of the small amount of business available for the vast majority of newcomers, the death rate of small stores is enormous.
The average life of American business concerns, inclusive of manufacturers and wholesalers, is only five years. Although separate and comprehensive data are not available for retailing alone it is safe to conclude that the life expectancy of retailers is certainly no longer-and probably shorter-than the average for business in general.
A number of detailed studies" of retailer mortality have been made over the last twenty-five years. All of them show the seriousness of the problem. In Pittsburgh, for example, between 1925 and 1934, an average of 20 per cent of the grocery stores studied by Professor Boer went out of business every year. In other words one out of every five stores in business at the beginning of a year passed out of existence before the end. Of course new entrants came into the field, so that the total number at the end of the year was about the same as at the beginning. The annual mortality rates in the shoe, hardware and drug trades were respectively 16.3 per cent, 10.1 per cent, and 9.4 per cent.
In a comprehensive study made in Buffalo for the period from 1918 to 1928 the ranking of these four trades was the same, but the percentages of mortality were higher than those in the Pittsburgh study. The mortality of grocery stores was 35.9 per cent; shoes, 21.8 per cent; hardware, 16.2 per cent; and drugs, 12.6 per cent. These were sample studies, however, and the difference in the figures may be the result of somewhat different methods of research.
The first year in business, of course, is the hardest. Of the grocery stores studied in Pittsburgh, nearly 47 per cent were unable to complete one year of life. Nearly 40 per cent of the newly-opened shoe stores went out of business before the end of one year, while the "infant mortality" of drugstores was 31 per cent, and of hard-ware stores, 28 per cent. In three out of the four trades in Buffalo it was somewhat higher.
These figures show withdrawals from business, not necessarily failures. Business may be discontinued for many other reasons than failure, such as death, ill health or retirement of proprietors, loss by fire or changes to other lines of business. But Professor Nystrom estimates that only about 25 per cent of the withdrawals are due to these miscellaneous causes. Most, or all, of the remaining 75 per cent must be due to failure.
He also states that the rate of failures according to the various causes were about the same over a forty-one year period. Direct competition with other stores, popularly thought to be a common cause of failure, accounted for a little less than 3 per cent of all the failures reaching the bankruptcy courts in 1931. Furthermore, failures due to competition do not seem to change much irrespective of prosperity or depression. He concludes that a very large part of all business failures are due to poor management, even though ascribed to undue competition, changes in business conditions, lack of capital, or other reasons. In most cases these are only symptoms of the more deep-seated difficulty of weak or poor management. Parenthetically it may be said that such terms as "competition" and "poor management" are relative and not subject to strict definition. It would be very difficult to determine the causes and degree to which each is responsible for a failure.
Retailer mortality entails a heavy loss for the economic system. Not only is the capital of proprietors wiped out but losses are also often sustained by creditors. In addition to direct money losses are many other undesirable effects. For example, stable competitors are injured by the fact that failing proprietors cut prices in an effort to stave off the evil day; and then, when the business is closed out, the inventory is often sold at sacrifice prices.
Concrete evidences of poor management in retailing are almost too numerous to mention. Among the more apparent are poor location of stores, bad layout, display and lighting, improper selection of merchandise, slow turnover of stock and inadequate inventory control, excessive credit losses, losses from returned goods and costly services, poorly trained personnel, inefficient advertising and promotion, improper pricing policies, and last, but most general of all, inadequate knowledge of costs.
Studies by the Department of Commerce and other agencies re-veal many instances of these sources of high costs and show the savings which have come from intelligent efforts to reduce them. The Louisville Grocery Survey, conducted by the Department of Commerce in cooperation with the grocery trade, developed various improved merchandising methods which have been of great help to the grocers there and elsewhere. It was found, for example, that many stores were clogged with slow-moving goods. This retarded business, tied up capital, and increased expense. To quote from a summary of results from improving merchandising methods in this respect alone:
A direct result of inventory improvement reported in one store was to jump sales from $80,000 to $96,000. Another increased its volume 20 per cent. A third store maintained business at the former level but handled it with reduced expense. A fourth, though suffering a drop in sales due to general conditions, has been able to ring up profits at the normal rate. One store which lost money during the survey has since, by improved operation of its meat department, become able to meet all competition and turn a net profit.
In discussing the work of this survey in general and its results for local storekeepers, the Louisville Board of Trade made the following comment some time after the completion of the survey:
A recent check-up showed wholesale and retail grocers in this territory are profiting greatly by putting into practice fundamental marketing principles developed by it. Many grocers have changed the outside appearance of their stores, have installed proper lighting and shelving fixtures within and have learned to make acceptable goods accessible. They are now taking inventory and keeping up-to-date records, which they had not done previously; they have learned how to analyze the cost of handling individual commodities and customers' orders to the end that they maintain smaller inventories, turn them over more frequently and are gradually eliminating unprofitable items and customers. Credit practices are being improved markedly. In fact the Louisville Grocery Survey has made known to hundreds of our tradesmen the essentials of successful merchandising and has brought to them inestimable benefits.
It is significant that during 1929 fifteen groceries were forced into bankruptcy while in this first full year following the Survey only four suffered a similar fate, in spite of the most severe financial depression Louisville has experienced in a generation. We believe that this remarkable improvement during these very trying times to be a direct result of the Survey.
A survey conducted in Alabama by the Department of Commerce in cooperation with the University of Alabama showed a close relationship between efficiency and profits on the one hand, and proper store arrangement and display of goods, adequate record systems and modern merchandising systems, on the other. This study covered various kinds of retail business. The report of the survey makes the following among many interesting comments:
As examples of extremely poor business methods encountered, it might well be pointed out at this time that eight merchants were found who had never taken a physical inventory of their merchandise, or else had not done so for several years. From information obtained, it was indicated that all of these merchants were losing money. It was also found that eight merchants had never prepared a financial statement of their business. Seven of these were losing money and the other was just breaking even. The fact that practically none of these merchants was making money is direct evidence that unintelligent business methods go hand in hand with poor business.
It is not surprising that 83 per cent of the profitably operated stores kept well up-to-date accounts, and that 88 per cent of the proprietors were able to locate without delay the detailed information required by the questions asked by the reporter.
The examples cited above can hardly be regarded as typical of conditions prevailing throughout the retail business but they undoubtedly reflect factors responsible for widespread inefficiency and failure among retailers. Students of distribution as well as the leaders in retail merchandising agree that one of the prime causes of waste and loss in retailing is the lack of training and incompetence of the individual merchant.