By Nima Ghodratpour
Every day, retail managers are inundated with numbers: sales, margin, conversion, operational expenses and profitability. The confusion is not helped when the corporate raison d’etre from the higher ups keeps changing from ‘increasing revenue’ to ‘reducing costs’ or ‘increasing brand equity’. In a climate where it’s hard to understand what the actual objective is many retail managers are left scratching their heads as to how to make sound managerial decisions that will guide their stores to success.
Even with the ever-changing goals and action plans, it is encouraging to know that the main objective of most retail businesses is pretty much set in stone. What actually changes is how that objective is achieved. That main objective is creating a healthy Return on Investment, or simply, making a profit.
There are many figures that retail managers monitor on daily, monthly and yearly bases. We’ve all heard the terms, units per invoice, average invoice, and sell through. These metrics are excellent at gauging how a specific aspect of the business is performing. However, what are the main drivers that managers can directly influence that will ultimately increase the profitability of a store? There are two main managerial issues and four key performance indicators (KPIs) that can directly influence and monitor to ensure increased profitability.
The first main managerial issue is all about Asset Management. Are your assets working hard for you? The entire purpose of a business investing in assets is to generate sales. When money is invested in stock, fixtures, computers or buildings, the purpose is to help the store create revenue. The two greatest assets that a company invests in that requires constant attention is the physical store and the inventory. In accounting terms it’s all about better Space and Stock management.
SPACE MANAGEMENT - A retail manager must constantly be asking themselves what is being done to improve the store’s selling potential. The KPI to look for here is the store’s Return per square foot. Managers should always be monitoring the store’s actual sales versus square footage, against, budgeted sales versus square footage looking for opportunities to increase sales for every square foot of the store. Since so much money is tied up in retail real estate, it becomes crucial that a store is ‘earning its rent’.
STOCK MANAGEMENT – The second biggest asset and subsequently where most of the stores cash is tied up in, is the inventory. When looking at inventory, what we’re really interested in is how effectively they are being used to generate sales. The most important KPI that measures effective stock management is a store’s Stock Turn. This tells us how many times a store’s stock is turned over in a year. So when your manager says, “I want to no more than 3 months of stock cover” what he is really saying is that he wants the store to maintain a yearly stock turn of four, more simply, he wants the inventory to be turned over every three months. The higher the stock turn, the more revenue is being achieved in a year compared to the amount of cash being tied up in stock. If a store strives to achieve the same amount of sales, with less forward cover, while replenishing more often with a lower volume of stock, a store’s profitability will increase exponentially, as the same sales have been achieved with less funds being tied up in stock.
A retailer has now committed to making sure that they are using their assets, namely their Space and Stock, to their full potential to generate sales by diligently monitoring the stores, Sales per square foot and Stock turn. Better asset management to generate sales is only half what is needed to ensure an increased profit. Remembering that Profit=Sales-Costs and that we now have increased our sales through proactive asset management, we must start looking at smart ways to decrease costs. Once again in accounting jargon it’s all about Cost Management and the two management issues to think about here is better Sales and Operational Cost Management.
SALES MANAGEMENT – Though we have ensured that our assets are working hard to generate sales by rigorously checking our Return per square footage and Stock turn, we can’t pat ourselves on the back yet. The mantra being choired by retail execs seems constantly to be ‘we must maintain a healthy margin’. That translates to making sure stock is sold at full price, thereby achieving maximum margin, leading to a ‘healthy’ gross profit. The KPI here is your store’s percentage of gross profit against sales. Margin really means how much contribution your are receiving per sale of an item. So if you have a shirt which retails for $100 and costs $60 your gross profit will be $40 or 40%. This means that 40% of the sale will be contributed to the operational costs and profit of your store. In that same scenario let’s say that shirt is on 15% discount, meaning it now retails for $85 the cost remains the same at $60 but the contribution per sale towards your operational costs and profit is now $25 or 25%. Small decreases in prices often require much larger increases in sales to compensate for the lower profit/contribution per sale. Therefore, as astute managers we must constantly be pushing to achieve full margin sales, by looking at our markdowns as a percentage of sales, versus, our markdowns as a percentage of budget, ensuring minimum deviation.
OPERATIONAL COST MANAGEMENT – We have now made sure that each item is contributing the maximum amount towards operational costs and profit. The next step is effectively managing our operational costs. So what is one of the biggest operational costs a retail manager must worry about? Easy, your staff! Personnel usually account for a significant portion of your operational expenses and in my opinion also constitutes the most important element in any store. The KPI to metric here is the percentage of payroll expenses versus sales, compared to percentage of payroll expenses versus budget. The key here is to ensure that each and every single member of your team is operating at 100%. A knowledgeable, involved and motivated sales associate apart of a driven sales team translates into a store being able to achieve more sales with equal or less amount of staff. Closely performance managing your team, while persistently looking to root out loss in productivity (according to statistics Canada the average Canadian worker is absent 9.3 days a year, multiple that by your average daily individual sales and you will get a pretty alarming figure of potential sales lost per employee per year) requires a great deal of follow through but will yield tremendous dividends in both the short and long run. Ensuring maximum productivity per sales associate means less money in the budget being allocated to operational expenses therefore, increasing the profitability of the store.
Its store audit day and you’re doing a floor walk with your senior manager and he or she complements you on the presentation of the product, staff and store. He or she then turns to you, with a smirk and ominously asks you, “what are some of the ways we can improve store profitably?” Without skipping a beat you answer, that you have come up with plans to improve the store’s, Space, Stock, Sales and Cost situation by measuring progress against your four KPIs namely, Sales per square foot, Stock turn, Percentage Gross Profit on Sales and Percentage of Payroll Expenses on Sales. Aside from your boss being flabbergasted, what essentially has been achieved is a structured approach to managing a profitable store. Asking yourself how to improve the Stock, Space, Sales and Cost of the store on a regular basis will accentuate when and where management action is required.
Nima Ghodratpour is an MBA candidate at Queen's University with over 11 years of Canadian and International Luxury retail experience, working for Clinique, Bloomingdale's and Boutique 1. Nima can be contacted at linkedin.com/in/nimaghodratpour.