March 16, 2023

What Harms You Today Harms You Tomorrow

We learned yesterday that the Class Of 3/10/2021 was too small, and didn't generate enough sales, costing this business five million dollars in the year ending 3/10/2021.

Did you notice that the business never recovers from this problem?

New items recover quickly. Somebody noticed that the merchants nuked the business, and as a consequence new items perform at \$9.5 million the following year ... recovering by about \$5.5 million dollars. However, the total business does not recover ... sales increase by a paltry \$0.4 million.

How can that be?

Two things are happening here.

First ... new items today become existing items tomorrow. Read across the year ending 3/10/2021 row. \$3.9 million in year one becomes just \$2.6 million in year two. In the class of 3/10/2020, \$8.0 million in year one becomes \$5.7 million in year two. In other words, this brand loses \$5.7 million - \$2.6 million = \$3.1 million in sales in the second year because the merchants failed the year prior.

Each merchandise class has a "life" ... and if you don't have enough new items one year you won't have enough existing items the following year.

That's the first issue.

The second issue? This is a completely different issue. Look at the top row. These are older items, items that have been around for more than four years. Look at how sales drop off year-over-year. These items gave up \$6.6 million in the year ending 3/10/2020, they gave up \$6.8 million in the year ending 3/10/2021, they gave up \$5.6 million in the year ending 3/10/2022, and they gave up \$3.0 million in the year ending 3/10/2023.

In other words, items at this company have a moderate life cycle (in terms of length), and each year you need to come up with enough new items to cover the losses you experience from long-term existing items. If you don't generate enough new items, you hurt your new item performance AND you fail to compensate for items that are aging.

You can use this analysis technique to measure how many new items you "might" need next year to protect the future of your business. When you know the decay rate of existing items you can back into how many new items you likely need to keep your business moving forward.