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[dropcap cap=T]he deal looked like such a good one when he finally agreed. “You are the best, most promising store in the market. We want you to take our line. We understand that you are tightening up and not buying right now. We are willing to give you an entire “A” assortment on memo — yours to keep for up to two years with no stock order commitment. All you have to do is replace the pieces as you sell them, and convert the whole collection to asset inventory after the two-year period, once you’re established with the brand. You know the line is one of the hottest in the country. You can’t make a mistake…”[/dropcap]

Now, two years later, Jim Jacobs is sitting at his desk, looking at the $240,000 in outstanding invoices in front of him, the depressing balance in his checking account, and his maxed credit line, wondering how he could possibly have let things get this far. Why did he fail to see the problems associated with the brand’s memo plan? Was he like many of his friends — so blinded by the “hot” selling memo product that he never saw the hundreds of thousands in owned inventory that was aging by the day while his salespeople “drank the Kool Aid” and showed the memo product to every customer? Worse, why hadn’t he paid closer attention to his escalating expenses? His inventory level (and accounts payable balance) took a large jump when his top watch brand demanded that he expand the line or risk their opening to a nearby competitor. He had been content with his $4.5 million sales volume remaining flat, knowing that in his market, many other stores were struggling through double-digit drops — but there wasn’t much he could do about contracted rent increases, out of control health insurance, gas and utility costs and annual cost of living raises for his staff, was there?

He certainly wasn’t thinking about declining sales last year when he finally decided to take the advice of his research group and give the store a “face lift.” During their last visit, they made a strong case for creating a “sitting area” and for making better use of his space and layout. They all agreed that the return on investment would come as he would be able to add more product, compete with the newly renovated store up the street and create a more comfortable, exciting experience for his customers. What started out as new carpet, a couple of new cases, a soft chair and a coat of paint turned into an actual remodel that went way over budget and caused Jim to take out a longer term capital improvement loan. That was just before the auto industry hit the skids and the local plant cut a large number of jobs, turning the town’s economy on its ear. Who could have predicted that his beautiful new store would open to a significantly smaller active client base?

It seemed that the more pressure he put on his sales staff, the more difficult things got. They insisted that if he wanted to increase sales, he would have to spend more on advertising to bring people in — maybe even have a huge sale — and he’d also have to allow them more latitude to discount regularly so they could compete on a more level platform with the bigger stores. Jim recognized that lowering his already thin margins was not a good plan, but he couldn’t seem to offer any reasonable alternative to his staff. Of the 10 of them, six had been with Jacobs for over 10 years, and they had been remarkably loyal. They relied on the store’s success for their livelihood — income, healthcare, life insurance. He had to trust that they would act in the store’s best interest, didn’t he?

Jim had always had a great relationship with his banker, as had his father before him. From the time Richard Jacobs started the business 40 years earlier, he had been firmly committed to the idea of keeping his working relationships local. He was proud of the bond he’d formed with First City, the locally owned bank, and worked closely with the bank manager to ensure a smooth transition when Jim took over seven years back. At his father’s advice, Jim took great care to safeguard his relationship with First City, keeping his credit line flexible and his payments current — at least up till about 6 months ago, when his cash flow disappeared! Coincidentally, six months ago was also when First City was bought by a large national bank. Since the transition, Jim has been late with three payments, and missed the last one entirely — prompting the bank to call in his line of credit.

[h4]BIG QUESTIONS: As Jim sits at his desk now, in the midst of a disappointing holiday season, he knows that his next act must be drastic and swift if he is to save his business — but he has no idea what to do first. How can he make the right decisions to put his business back on track? Is there a way to generate revenue that he hasn’t already tried? The numbers show that despite a much smaller average ticket, the number of sales is the store has remained fairly constant. Can he afford to cut staff at the risk of compromising service? Is the damage to team morale worth the $7,000 monthly savings he would realize by cutting out health insurance benefits? Can this business be saved?[/h4]

Editor’s Note: Real Deal Scenarios are inspired by true stories, but are changed to sharpen the dilemmas involved. The characters should not be confused with real people.

[span class=note]This story is from the February 2009 edition of INSTORE[/span]

[span class=alert]To be eligible for publication in INSTORE, responses must include your name, store name, and the city and state in which your store is located. [/span]