Pretty cool - must watch
What is the
most important metric in retail? And the answer is NOT that ‘it depends’.
Whilst I like GMROI as being most useful and revealing, it has one drawback in that there aren’t many benchmarks available to be used. Its ugly sister metric, stockturn, is simpler but still extremely useful – AND importantly it goes to the heart of retailing. (Breaking bulk to tailor product/quantity to the needs of the consumer.)
Understanding the stockturn of a product/category is extremely useful, yet so few small retailers actually do the homework necessary to have access to this metric. (Services and hospitality would have equivalent metrics that go by different labels, but the same principle applies.)
Your stockturn will reveal that:
(1) Your inventory levels are wrong, or that
(2) Your sales rate is wrong.
But there is one feature or principle of stockturn that even very experienced retailers don’t know and don’t appreciate. The ideal/optimum stockturn for a category is (for practical purposes and in most cases) fixed. That is the optimum stockturn for any given category is a given.
With metrics like sales or profit, there is never a case of ‘having too much’. But with stockturn there is an optimum range. Consider these examples.
The stockturn for a daily newspaper is 365 times per annum. Any more than that would indicate inefficient double handling and any less would mean you probably overstock.
Fashion has a stockturn of 4 times per year – for the obvious reason that the purchase cycle is driven by the seasons. The Christmas Tree Farm sells its stock once a year.
The same applies for every category or product. This rate is determined by (a) the retailers’ business models and (b) by how consumers purchase certain products.
Good planning and good systems will allow efficient retailers to make mid-season corrections on their stock and instead of turning their stock once per season, they may be able to do a mid-season clearance of the duds and stock up on the best sellers. They may turn their stock 1.5 x per season, resulting in a turn of 6x per annum. Inefficient retailers (like Department Stores) who also sell fashion traditionally achieve stockturns of less than 4x per season in their fashion category.
The vast majority of (specialty) fashion retailers will sit in that 3.5 – 6.5 range. But there are ‘fast fashion’ retailers who have a different business model. For instance, Zara is vertically integrated and goes from runway to store in a few weeks. They achieve stockturns of 17x per annum (my estimate.) But then, they are not really in the Fashion business, they are in the disposable clothing business.
What people don’t appreciate is that there is an optimum level for this metric. Just like your heartbeat can’t be in the 1-25 bpm range, nor can it sustain 200+bpm. To work best it needs to be in the 65-75 range.
That is just for a human being. Canaries’ hearts flutter at 1000 bpm, a duck at 190 and a horse at 38. (Yes, there is an apparent mass/ rate inversion – just like the boutique and the department store.)
Which brings us to the title of this post: Do you sell canaries, ducks or horses? And of course, whether your canary’s heart beats like a canary or is acting like a duck or a horse?
You should know the rate of turn and you must compare it to the benchmark:
Again, since the relationship between your sales and your inventory is (relatively) fixed, the amount of stock determines the level of sales you can achieve. (READ THAT AGAIN.)
How to interpret and use stockturn metric:
If the canary is a canary = just right
Assume you sell a product that has an optimum stockturn of 8 – and your average inventory is valued at $200K at retail. The BEST you can hope for is $$1.6m in sales. No matter how much marketing you do, or how much you improve your service, your sales destiny is determined by the amount of stock you carry.
The worst thing you can do if you are turning your stock in the optimum range, is to discount your stock. Your rate of turn will spike slightly but won’t go up over an extended period (the whole year) because discounting will bring tomorrow’s sales forward to today – and on average the turn will stay the same. In fact the net effect is you will make less GP over the term because your discount is the margin you give away.
You should evaluate whether $1.6m is sufficient turnover for your business. None of the traditional, retail tactics like sales/service/display etc is going to change the business fundamentally. The only way to grow a business that is already tuned for an optimal stockturn, is to make strategic structural changes that will increase your market share. E.g. buying out a competitor or implementing strategies that are directly aimed at taking business from someone else
If the canary acts like a horse = too slow
If you are over-stocked, with a sub-optimum stockturn, you should discount the product to recycle the cash into new product that will sell. That is, if people aren’t buying canaries, then you should sell ducks. Or horses. But remember that different products/categories are different yet again.
A low stockturn indicates that you have made a mistake: you bought too much or you bought stuff that doesn’t sell. Discounting is only an appropriate tactic to rectify these mistakes – and should not be used in any other way.
If your horse is a canary = too fast
You are probably under-capitalised and paying the price of ordering small quantities (with no volume discounts) and double handling. The only way to slow down your turn is to increase your stock levels.
Keep increasing it UNTIL you hit benchmark and you will see your sales rise.
If you don’t know your stockturn, you are not practising retail. This number reveals whether you should buy more or less or different stock. It reveals when you should discount and when not. Knowing your stockturn eliminates certain strategies and opens up others as the logical options. Buying stock accounts for 70%-40% of your total expenses of running the business – it is vital to get that right.
Do you really know the stockturn of every major category in your store?
After last week’s post on DIY Consulting, I received an email and a phone call. The issue raised was similar, and I promised the caller I would take up the challenge of this particular topic since, as the caller put it, none of the ‘commentators seemed to address the issue’.
I am not sure that I am a fan of being called a ‘commentator’ – but here goes:
1. There is NO magic bullet answer that makes the problem go away, but there are several things you can do to make it better – maybe even make it good enough.
The following strategies should be seen as the sliders on a graphic equaliser, and as such are used in conjunction with each other and any/all of the strategies will achieve harmonisation to a greater or lesser extent.
2. I have stated previously (repeatedly) that for many small business operators, multi-channel is not the answer. An online retail business is very different business with a different business model with different metrics and different strategies, requiring different skills and different tools. There is nothing wrong with wanting to have another business, but adding an ecommerce site is not the same as adding another store to your network. In particular, if you are a small business operator that relies on an unsophisticated and out-of-date database and POS, you do NOT have the wherewithal to run a successful eCommerce business. (I am assuming the brick-and-mortar store came before the online store.)
But assuming you do adopt a multi-channel strategy, and assuming you are technically and technologically competent to handle the two businesses, then one of the potential issues you must solve will be the harmonisation of prices across channels.
There are two reasons why you may NOT need price synchronisation.
- It may not matter. You may be selling different brands online or you may be selling to different audiences- and either way price discrepancies are not an issue.
- You may operate under a different brand (different URL) and it is therefore effectively a different business. There is no problem because you can’t compare (or at least the customers can’t argue about) the different prices. You may be cheaper or you may be dearer, but that is normal for different businesses to charge different prices.
If you do want to operate the online and offline businesses under the same banner, you will want prices to be comparable and harmonised.
Strategy #1> Make it harder for the customer to compare prices
Offer your product in bundles/ combinations that are not the same online and offline. (E.g. create gift packs or offer different sizes etc.)
Add value differently online and offline. (E.g. include ‘freebies’ or bonuses that are not quite the same.)
Strategy #2> Make the difference matter less
- Reduce your offline expenses to minimise the impact of the los of margin. Bigger retailers are negotiating rents, but everyone can get better at expense management and increase profits relatively easily.
- Negotiate with your suppliers. There are at least 20 things you can negotiate that is not price, but will have financial benefits.
- Increase your online prices (as much as possible) – even marginally
- Reduce your offline prices (as much as possible) – even marginally. At the very least get rid of price point proliferation and reconsider your price-point endings.
- Increase the online sales volume to make up for the loss of margin%. Presumably your online sales does not only cannibalise your existing customer base, but you are reaching new customers in new geographies. You need SEM and SEO skills to achieve this. (I am assuming your traditional offline store is already marketing effectively.)
- Increase the average sale (online and offline) to earn the GM$ to make up for the loss of GM%.
- Vertical integration (ala Zara) gives you control over the supply chain and hence control over costs and prices and the brand.
As mentioned earlier, there is no simple one-trick answer that will allow two different business models to operate in complete harmony. This reality emphasises the fact that online retail and offline retail are different businesses. That should not prevent one from working to wards the best possible outcome.
I look forward to comments and additional strategies and ideas. What are YOU doing to address this challenge?
Ganador: Architects of High Performance Businesses in the Retail Supply Chain.
The most popular station in the world is: WIIFM – almost every human being is permanently tuned in to ‘What’s In It for Me’.
By extension, companies and brands are comprised of people – so they too are tuned to that very same station. (Even charities and the volunteers who work there to some extent do so because it makes people feel good about themselves for doing good.)
This is not a bad thing; quite the opposite. It makes things predictable and we all know where we stand with each other. (Even if we say otherwise.)
When it comes to running a retail business in a shopping centre, the ‘tenant’ often approaches the landlord for a rental abatement.
The times when an abatement is appropriate is rare – and only if the alternative is a vacancy. But simply because a retailer cannot afford the rent is not a good reason to award a rental abatement.
Obviously the leasing cycle (say five years for specialties) and the general economic cycle cannot be completely in sync and on average will lag 2.5 years. This means that specialty tenants will suffer for that period of the economic downturn.
When the lease is renewed or negotiated in a down cycle– currently market reports are 5% to 10% below previous rents – then the retailer will enjoy 2.5 years of advantage whilst the landlord experiences below average returns.
In addition to reducing rents, retailers are also closing stores, shrinking formats and adopting eCommerce solutions. ALL of these are to the disadvantage of the landlord.
Sometimes you win and sometimes you lose.
When a retailer approaches a landlord for an abatement, they are typically poorly prepared and lack a realistic business case. What they EXPECT is for the landlord to wear some of their business risk. Times are tough = Rent is too high; that is the extent of their argument.
They will never come to the landlord and say Times are Good = Here is some extra rent. (Landlords know that of course, hence ‘turnover rent’.)
And good on the retailer for NOT doing it. When it is your turn to win and benefit from unexpected gain, you should profit. But when the opposite applies, you should also (be prepared to) wear the pain.
The retailers and the landlord should each wear their own business risks. Abatements are viable options when both parties will benefit. Retailers should understand that simply offering less rent is of no benefit to the landlord. Retailers should understand that landlords are tuned in to WIIFM – and prepare accordingly when things do turn sour.
I suspect retailers who are scanning this may think I am insensitive or worse, ‘don’t understand’ the challenges they face. I encourage you read the article again – slowly: I am not suggesting that you don’t or can’t approach your landlord. (In my personal experience, most of the major landlords will give you a fair hearing.)
I am suggesting though that retailers must appreciate that simply passing on their business risk to the landlord (who has their own risks) is not a smart thing to do and won’t get you the result you need.
To complete the headline:
No one care when your business fails, especially not the landlord – if all you do is wanting pass on your business risk to them with no benefit to them.
Do yo know your Space Allocation Index?
One simple thing to do in a multi-category store (and it is even somewhat relevant when you have several sub-classes in a single category) is to balance your store in terms of merchandise allocation.
The core idea is that percentage contribution that a category/class makes to your overall gross margin should be proportionate to percentage of floor space that the product category occupies.
If product A contributes 10% of your GM$ then it should occupy 10% of your floor space.
You calculate the index as follows:
%Category Contribution to Margin
%Category Allocation of Floor Space (sqm)
The idea is that if the resulting index < 1 then the category occupies more space than it should and if it scores > 1 then you have category that over-performs.
In theory you will increase the space allocation (and stock) when a category is productive and vice versa for low-scoring categories.
But the exceptions to this rule are many and varied of course:
- Some products will have a physical advantage of simply requiring less space than other products by virtue of what it is (e.g. accessories/jewelry)
- Some products will not increase its sales if you increase stock/allocate more space because you are already selling as much of it as possible.
- Some products won’t require more space even if you increase the stock holding (e.g. you can simply stack it higher in the existing space like newspapers bundles)
- Some product categories will be new/ experimental and have not reached their full sales potential yet.
- Some categories will be stocked to manage competitive threats
But the key point remains valid:
You don’t want to be under or over represented in a merchandise category, and calculating your SAI is an excellent starting point. Once you have done the calculations, you can then make some rational decisions about whether the misalignment has nay merits – and if not take action.
In my experience, for example, a typical newsagent can increase sales by 15% by getting this right.
How much money are you leaving on the floor?
PS: Happy to discuss simple ways to calculate the floor space allocation for a category - because in practice that can prove to a lot harder than you may think at first.
Imagine you are tasked with finding out how to make
something better. (Aren’t we all?). As part of this process you have figure out
whether a particular piece of steel is good for the product.
You apply pressure to it and discover that the beam remains intact (i.e. it successfully performs) at tension level 8. You learn from success.
You repeat the exercise. This time you discover it breaks at level 8.1. You learn from failure.
Which piece of information is more useful?
Obviously it is more useful to appreciate what makes something fail rather than what makes it succeed.
And when we have learned that, we tend to seek more of that.
But this is the difference between real, sustainable success and terminal failure: Your real challenge is to seek the solution that will benefit under pressure.
Taleb has coined a term for this: Antifragile.
Something that breaks under stress is fragile - drop a glass vase on the ground.
Something that does not break easily under some stress is robust - drop a plastic vase.
Robustness is not the opposite of fragility. Robust is simply less fragile.
But what if there is something that actually benefits (grows stronger) from stress?
When you get a flu shot, you get a dose of germs that will make you stronger.
When you exercise, you stress your muscles but it makes you stronger.
When a child eats dirt, it strengthens their immune system.
When your father throws you against the fence for not hitting the tennis ball properly, you learn to play shots under pressure.
It is counter-intuitive to seek out stressors to get stronger in our business, but we seem happy accept that Botox is a good thing. (It works on the same principle.)
Some time ago the concept of a ‘burning platform’ was popular in management literature. (Here is a post by Harvard Business Review on the topic.)
This idea has been bundled into obscurity by sexier, more current jargon; and few practitioners actively use it.
Knowing what succeeds is not as useful as knowing what fails. But knowing what fails is not nearly as useful as knowing what improves under stress. And the only way to find out is to put your business under stress – inject some botox or set fire to the rig.
Then again; the environment will provide enough shocks to our economic system to foster the antifragility needed to prosper. (GFC anyone?)
What matters is whether you use this as an opportunity to become antifragile. As hard as that may be…
PS: I wrote a post in April 2009 predicting that we will regret our response to the GFC. I still stand by that view.
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THANKS & APOLOGIES.
How the internet transformed the world (VIDEO)
Apologies once again for the numerous re-posts. I have been on the receiving end of those before and now I know why: Feedburner going nuts.
Your reward is 20 minutes with Neil Gaiman. I promise it is worth it.
Everybody will tell you that customers don’t buy on price, they buy on value. I have said that. I have trained that. There are still some ways around the price barrier – but it is certainly getting tougher.
Consider this graphic carefully. I am predicting the trend of price movements. The only unspecified variable is the length of time it will take for prices to find the new equilibrium. That is because I don’t know and secondly because it will different for ever merchandise/ service category.
Price is increasing in importance, and it is getting harder to differentiate on non-price factors. For instance; once you may have had exclusive distribution to a product, but with more manufacturers entering the market online, or access via overseas online operators offering free shipping, that advantage is all but unattainable.
Convenience, accessibility, exclusivity and scarcity won’t cut it any more.
There are a number of reasons why price parity will be the new normal in many merchandise categories as more customers demand a good deal and as customers who previously weren’t price sensitive become price sensitive:
- Seeking the best price is not associated with being ‘cheap’ any more – it is smart and responsible.
- Getting the best price is possible with modern technologies.
- Competitors can price match easily and can physically change prices easily – so they do it.
- Getting the best price is easy – no extra effort required, and in fact soon it will almost be automatic.
- You can get the best price and the experience – not necessarily in the same place or from the same vendor. (Hello, showrooming…)
- Getting the best price is a game that consumers play – because they can.
- Consumers feel they can buy more when they pay less – and in a culture of excessive consumption that is the logical thing to pursue.
- Consumers have smartened up to most ‘marketing’ tactics – and they recognise when they are being sold to.
- Price convergence is happening in every category where the internet is a viable channel. (E.g. not so much in Fast Food etc.)
At some stage in the future, there will only be two dominant price points:
There will be ‘the market price’ which always will be under downward pressure. Short-term fluctuations may occur as new entrants come into the market, but in essence most everyday products will be come commoditised.
Secondly, there will be a premium version of everything simply because there will always be people who want to prove to themselves that they can pay more and have a psychological need to be different and has the wherewithal to do so. This will be a specialised market for certain product categories only.
In the medium term, there will be increasing price convergence. I don’t know what the level is for any individual product, but it is probably not much more than we are paying online now.
Online prices will (eventually) rise somewhat towards offline prices – it won’t be a one-way slide:
- As online sales become a bigger portion of sales for brands and manufacturers, they will need to increase prices to retain sufficient gross margin
- Categories will mature and there will be less pressure from new entrants driving the price down
- Globally second and third world countries will enter the market (more money into the market) and with that the ability to charge a little more. (If everyone plays the same game.)
Of course other pressures will push prices down (competition etc.) but on balance prices will be close to existing online prices.
The ONLY way to be able to charge more than a competitor is to make the purchase an emotional one. It is easier for some products than others, but in essence it is about the customer experience.
Can you deliver a customer experience that makes price irrelevant? That is the only thing that remains between you and commodity status.
In order to answer this question, you need to really understand the difference between customer service (which is cost of entry for any retail business) and customer experience. There is a difference, and it is important. (Presentation here if you have 30 minutes.)
What do you think?
I ran this post as a decision-making challenge at Inside Retailing.
I do it basically to lillustrate the benefits fo belonging to a MasterMind group.
We are building a Smart Community: HERE
The intention is not to embarrass anyone with a trick question – but your comment can be anonymous anyway.
- Sales $200K
- 50% GM
- Sales $300K
- 33% GM
A rep is making you an offer to buy additional stock of $5k of Product 1.
- You don’t have sufficient free cash, and can only do it by reducing stock of Product 2 to the same amount.
- All other things are equal. (E.g. The additional stock will sell as well as the existing stock, the decision you make is instantaneous and simultaneously effective, etc.)
- BUT DO NOTE: these products are different (A & B) - the 'equality' refers to extraneous/trick variables
What are you going to do next?
STOP HERE AND FIGURE OUT BEFORE YOU CONTINUE
- Average Inventory at Cost Price: $20K
- Average Inventory at Cost Price: $15K
STOP HERE AND FIGURE OUT BEFORE YOU CONTINUE
You should want to calculate your GMROI.
Read more about GMROI here.
These table show that whilst the higher margin product appears to be attractive, the higher stockturn of Product B has a bigger final impact (gross margin return on inventory investment)
Whilst the higher margin product appears to be attractive, the higher stockturn of Product 2 has a bigger total impact (gross margin return on inventory investment) on the GP.
You could simply calculate GMROI very easily
OR you can tediously work through comparative statements to calculate the GM impact to discover that:
- Increasing Product 1 increases your Gross Margin Dollars (+$25,000)
- Decreasing Product 2 decreases your Gross Margin Dollars (-$33,00)
If you take the GMROI shortcut, you will know that:
- GMROI of $5 means GMD impact is ($5 x $5000 = $25k)
- GMROI of $6.60 means GMD impact is ($6.60 x $5000 = $33k)
Of course the key to remember is that as you ADD stock to your inventory, the stockturn will likely start to decrease, but that is what we mean by ‘all things being equal’ as an assumption
OR you can tediously work through comparative statements as below.
Ave Stock @ Cost
Ave Stock @Retail
(Sorry about this but I can't fix the layout - just visually line up the the rows with the same row headers.
No doubt you have been told before that it is best to Keep it Simple Stupid (KISS). No doubt it is sexy advice. But what people may not appreciate is that sometimes simplicity comes at the price of effectiveness.
The real world is complex – and sometimes the response to a challenge is complicated.
When it comes to retail metrics, the same thing applies. We know we NEED to know what is happening in a business – and often we lean on very simple metrics to tell us what is happening.
- Daily takings.
- Or net profit for the month.
It’s nice to know. And it is simple, but it is not particularly useful. These metrics don’t pass the dennis price ‘so what’ test.
So what if your sales were $5k yesterday? So what if you knew that it was $4k the day before?
What can you DO about that?
Nothing much, because simple metrics simply don’t provide enough information.
Yet, every retailer I know will ALWAYS be able to tell me what yesterday’s takings were.
You could say it indicates that you should increase your daily takings, and I would argue that you don’t need a metric to know that since you must be doing it anyway.
You can also consider compound metrics, which typically measure productivity in retail.
- Sales per employee.
- The average sale.
This is better, much better. Compound metrics introduce two variables and if it is a measure of productivity then one variable is an output of the business (sales, profit) expressed relative to the input (time, space, people).
By using these metrics you can drill down better and are able to make more relevant comparisons.
These are good metrics because you can actually take specific actions like firing an employee or increasing the space allocation – and then continue to monitor the metric to assess the impact.
The most useful metric is a complex metric; like GMROII.
If you knew that for one category of merchandise in your store you are achieving GMROII of 200% instead of 300%, what does that mean and what can you do about it?
(Read THIS to understand the calculation if you are interested.)
One metric like this reveals a lot
And if you know this, you can also establish if:
- Pricing too high
- Pricing too low
- Pricing just right
- Net sales quantities too high
- Net Sales quantities too low
- Net sales quantities just right
- Cost of Sales too high
- Cost of Sales too low
- Cost of Sales just right
- Average level of inventory too high
- Average inventory too low
- Average inventory just right
And of course, any of combination of the above is possible.
One metric like this suggests a range of different actions you can/ should take, for instance:
- Changing your pricing strategy
- Have a sale (specific category) or develop a non-price marketing strategy
- Negotiate with suppliers for better prices
- Review inbound costs
- Re-assess your returns policy
- Buy less/more stock
- Business as usual
Of course these options exist anyway, and you may contemplate them from time to time anyway. BUT, the beauty of it all is that IF you monitored the specific metric, you will KNOW which the right strategy is – and you will be able to track definitively what the impact is.
All the retailers who struggle are the ones with non-existent systems (as I revealed here last week).
A decent POS (not a ‘till’) will cost about 2% of your annual sales to get a good system implemented across your business.
it pays off over many years to follow and that the ongoing cost is a fraction of the setup cost, and
it can reveal real actionable insights with direct financial benefits,
why would you NOT have a good system with accurate data?
A ‘system’ will not improve your business. Taking action on the insights will. Whilst a metric (like GMROII) is a complex metric, it is not difficult to calculate and any decent POS will do it for you. All it takes is 5 minutes to understand what it means.
Data that is turned into intelligent actions will save time and money and make time and money for you.
Everyone I know can do with more of both.
Making more money is not always simple. Sexy advice is not always good advice.
Have fun – be Retail$martTM
Dr Dennis Price helps retailers and their retail supply chain to (re-)capture their entrepreneurial mojo with the right skills, strategies and systems to improve business performance.