Managing the Cash Intensity of the Shoe Business
By Alan Miklofsky, 10/13/24
One of the most misunderstood challenges in the retail shoe industry is the sheer amount of cash required to keep a store properly stocked. Unlike many other retail sectors, the shoe business demands significant up-front investment—not just in product variety but also in sizes, widths, and colors.
As Maurice Breton, a longtime industry expert, insightfully explains:
“The Shoe Business is a very CASH INTENSE business. For example, you have one shoe on display, but you need to stock 5 pairs to 18 pairs in the back room or in a warehouse (to fill the store); more if the SKU comes in extended widths. It’s like opening a lemonade stand, but you have 1000 gallons of lemonade outside of the refrigerator for back-up stock. And another 5000 gallons in the fridge. All that lemonade just to sell that one glass of lemonade.”
Breton's metaphor captures the complexity of managing inventory in the shoe business. Below, we explore how this cash intensity impacts operations, and what strategies shoe store operators can implement to stay ahead.
1. The Inventory Challenge: Stocking Depth and Width
Shoes aren't like other retail products—carrying one of each style isn’t enough. Customers expect size options, and without them, sales opportunities are lost. If your store sells athletic shoes in ten full and half sizes, from men’s size 8 to 12 and 13 (or alternatively women’s in sizes 6 to 10, 11), and if you carry it in both a regular and wide widths, stocking a single SKU means you need 20 individual units of stock for each color. Multiply that across hundreds of SKUs, and it's easy to see how cash gets tied up quickly.
Solution: Open-to-Buy (OTB) Planning
Effective open-to-buy planning can help balance the need to stock deeply with available cash. Allocating purchasing budgets by category and season allows you to adjust orders based on trends and avoid overstocking.
2. Seasonal Inventory: Timing Cash Flow
The cash intensity also extends to seasonal products. Boots must arrive in the fall, sandals need to hit the shelves by early spring, and running shoes need to be available year-round. Managing these seasonal shifts requires careful cash flow planning.
Solution: Vendor Collaboration and Pre-Season Orders
Working closely with vendors allows you to secure terms such as delayed billing or markdown allowances, helping smooth out cash flow challenges. Pre-season orders also ensure timely delivery, keeping you ahead of customer demand without overstocking too early.
3. Warehouse Management: Holding Costs Add Up
As Breton pointed out, maintaining back stock—both on-site and in external storage—adds another layer of complexity. Every pair stored in a warehouse represents tied-up cash, plus additional costs for storage and logistics.
Solution: Drop Shipping and Just-in-Time Replenishment
Some retailers are turning to drop shipping and just-in-time inventory systems to reduce the need for massive stockpiles. With drop shipping, suppliers ship products directly to the customer, reducing the store’s inventory burden. Just-in-time replenishment allows for smaller, more frequent deliveries, keeping cash available for other operational needs.
4. Managing Markdowns to Avoid Cash Erosion
Markdowns are inevitable in footwear retail, but they can eat away at profits if not managed correctly. When sizes sell unevenly (as they often do), stores are left with excess inventory that must be discounted, further tying up cash.
Solution: Strategic Markdown Policies
It’s critical to plan markdowns strategically, using data to decide which items to discount and when. For example, shifting slow-moving styles to an online platform or holding clearance events can help free up both inventory and cash. (See more tips in the Markdown Strategies section of my website.)
5. Omnichannel Integration: Optimizing Inventory Across Locations
With the rise of omnichannel retail, shoe store operators can better manage the cash intensity by using inventory across multiple locations more efficiently. Linking your online store, warehouses, and brick-and-mortar stores allows you to minimize overstock while ensuring customers have access to the sizes they need.
Solution: Centralized Inventory Systems
Using centralized inventory management software helps track stock levels across all channels, ensuring better allocation of cash. When a product is available in multiple locations, you can fulfill online orders from the nearest store or warehouse, reducing inventory buildup.
Conclusion
The shoe business is undeniably cash-intense, as Maurice Breton's lemonade stand metaphor so aptly illustrates. Every glass of lemonade sold requires thousands of gallons to be held in reserve, just as every pair of shoes sold requires multiple sizes and widths in back stock. Managing these complexities demands strategic planning, careful budgeting, and leveraging technology to optimize inventory and cash flow.
By understanding and addressing the realities of this cash-heavy business model, independent shoe retailers can stay competitive and profitable. Success comes not just from selling shoes but from effectively managing the processes behind the scenes—ensuring that every dollar invested in inventory drives customer satisfaction and long-term growth.
With thoughtful execution, the challenge of cash intensity transforms from a burden into an opportunity to build a thriving, well-stocked shoe business that stands the test of time.