Don't do the December Discount Dance

Many retailers use discounting as a substitute for marketing. Discounting is a race to the bottom – and inevitable unprofitability.

Discounting is only appropriate for in the following two scenarios:

  •   strategic retail promotions (e.g. introducing new products)
  •  too fix buying mistakes (bought too much or wrong products) and it is not moving

Q: How do you know when a product is not moving?

A: When the stockturn (or sell-through rate) is below the benchmark for that category – and only then. (Never rely on instinct, use your POS.)

Beware the tipping point. Frequent discounting will lead you to a point where customers perceive you to be a discount store. Unless this is your strategy, make sure you manage discounts prudently.

Is your business a Canary, a Duck, a Horse or a Human?

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.)

Heartbeats and Mass - Like stockturn.PNG

 

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.

In summary:

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?

 

How to harmonise prices between online and offline stores in a multi-channel operation

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.

  1. 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.
  2. 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.

If you want to read some more, the Connected Store offers some interesting content and this presentation on Scribd is worth a look too.

I look forward to comments and additional strategies and ideas. What are YOU doing to address this challenge?

Dennis

Ganador: Architects of High Performance Businesses in the Retail Supply Chain.  

No one cares when your business fails, especially not the landlord

The most popular station in the world is: WIIFM – almost every human being is permanently tuned in to ‘What’s In It for Me’.

 

radio.jpg

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.

 

How much money are you leaving on the shopfloor?

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.

The benefits of the GFC for retail entrepreneurs

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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TOMORROW'S POST:

How the internet transformed the world (VIDEO)

Your Reward

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.

The New Normal

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:

  1. Seeking the best price is not associated with being ‘cheap’ any more – it is smart and responsible.
  2. Getting the best price is possible with modern technologies.
  3. Competitors can price match easily and can physically change prices easily – so they do it.
  4. Getting the best price is easy – no extra effort required, and in fact soon it will almost be automatic.
  5. You can get the best price and the experience – not necessarily in the same place or from the same vendor. (Hello, showrooming…)
  6. Getting the best price is a game that consumers play – because they can.
  7. Consumers feel they can buy more when they pay less – and in a culture of excessive consumption that is the logical thing to pursue.
  8. Consumers have smartened up to most ‘marketing’ tactics – and they recognise when they are being sold to.
  9. 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.)

Dennis

Ganador is a learning and development agency that turns employees into brand ambassadors and suppliers into partners. Email Dennis with questions.

The retail quiz

 

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.

Product 1

  • Sales $200K
  • 50% GM

Product 2

  • Sales $300K
  • 33% GM

A rep is making you an offer to buy additional stock of $5k of Product 1.

Assumptions:

  • 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


Don't cheat....

 

Additional Info

Product 1

 

  • Average Inventory at Cost Price: $20K

 

 

Product 2

 

  • Average Inventory at Cost Price: $15K

 

 

STOP HERE AND FIGURE OUT BEFORE YOU CONTINUE


Don't cheat....

 

The answer:

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)

 

Conclusion:

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.

 

Product 1

 
 

Increase by

$5,000

 

Margin

50%

Margin

 

Current

Future

 

Net Sales

 $       200,000

 $         250,000

 

Gross Profit

 $       100,000

 $         125,000

 $           25,000

Ave Stock @ Cost

 $         20,000

 $            25,000

 

Ave Stock @Retail

 $         40,000

 $            50,000

 

Stockturn

5.00

5.00

 

GMROI

5.00

5.00

 

 

(Sorry about this but I can't fix the layout - just visually line up the the rows with the same row headers.

Product 2

 

Reduce by

$5,000

 

33%

 

Current

Future

 

 $         300,000

 $             200,000

 

 $           99,000

 $               66,000

-$      33,000

 $           15,000

 $               10,000

 

 $           22,388

 $               14,925

 

13.40

13.40

 

6.60

6.60

 

Sometimes simple is stupid, not smart

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.

SIMPLE METRICS

  • 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.

COMPOUND METRICS

  • 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.

COMPLEX METRICS

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

  1. GM%
  2. Stockturn

And if you know this, you can also establish if:

  1. Pricing too high
  2. Pricing too low
  3. Pricing just right
  4. Net sales quantities too high
  5. Net Sales quantities too low
  6. Net sales quantities just right
  7. Cost of Sales too high
  8. Cost of Sales too low
  9. Cost of Sales just right
  10. Average level of inventory too high
  11. Average inventory too low
  12. 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:

  1. Changing your pricing strategy
  2. Have a sale (specific category) or develop a non-price marketing strategy
  3. Negotiate with suppliers for better prices
  4. Review inbound costs
  5. Re-assess your returns policy
  6. Buy less/more stock
  7. 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.

Considering that…

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

Dennis

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.

 

 

If the man comes knocking, can you pay?

Your financial accounts will reveal your history – but not your future.  But since you can’t separate the past from the future, it is the best place to start. There is one magic, simple ratio that will tell you instantly how the decisions you have made in the past have positioned you for the future. 

There are three different types of ratios that are typically considered (by banks and analysts):

Efficiency Ratios – measure the quality of the firm’s receivables and how efficiently it uses and controls its assets and so forth. (E.g. Stock turns)

Profitability Ratios obviously measure how well a company performs based on how profit was earned relative to sales, total assets and net worth. (E.g. Net Profit Margin.)

Solvency Ratios measure the financial soundness of a business and how well the company can satisfy its short- and long-term obligations.

One of the key solvency ratios analysts are fond of is the ‘quick ratio’ - also referred to as the ‘acid test ratio’.

This is an important ratio because it really is the ‘acid test’ for a business’s liquidity. It is similar to the current ratio (which compares current assets and current liabilities) – except that it basically strips out inventory because it is often difficult to liquidate.

The formula is: [Cash + Accounts Receivable] / Current Liabilities

I always look at this ratio as a quick sanity check because even if you don’t have an accurate or up-to-date balance sheet, most SME owners will have a reasonably good idea of cash and receivables – and also of their debt. (Even if your figures are estimates, it is still worthwhile running a quick check.)

A ratio of 1 (or more) is healthy – and this is what a bank will look for before they will add to the liabilities column.

Most people intuitively understand the underlying principle: your ‘liquid assets’ should be equal or greater than your ‘short term debt’.

Put differently: if the man comes knocking on the door, can you pay?

It boggles the mind

You may or may not have heard of Wolfram Alpha.

It is a search engine. But unlike anything you know.

This little widget below gives you a feel for what it does. Enter any two countries to get a comparison of the mobile phone (cell phone) subscriptions.

Just like that.

Fun as that may be - and there are many others - what is worth thinking about is where and how we interact with knowledge, what we need to learn and what we need to access.

What are the possibilities for commerce?

 

It boggles the mind.

Price vs Point of Difference: The numbers are in

If sales are slow, how do you respond?

The favoured ‘marketing’ tactic of all retailers is discounting; and that includes top-end brands. I can say this without fear of contradiction.

Consultants often suggest that this is a short-term ‘strategy’ that does not address the underlying issue, yet retail operators persist.

I found some good research that addresses this question quite definitively. Unlike many studies, this was not a ‘survey of opinion’, but rather based on a modified Du Pont analysis, including all the fancy statistical safeguards on a large sample of retail businesses. (The only question mark may be whether the American market place is comparable to the Australian one, but I will leave that for you to decide.)

Conventional wisdom is that companies can devise successful competitive strategies around either profit margin or asset turnover. That is; you are either a high margin/low volume business or high volume/low margin business.

Cost leadership strategy attempts to achieve organisational goals by delivering a product or service comparable to competitors' at a lower cost to the customer.

A differentiation strategy, attempts to deliver to consumers some characteristic of product or service that will command a premium price.

In this research, a modified Du Pont model of financial ratio analysis was used to evaluate a large sample of retailers using a metric termed RONOA – return on Net Operating Assets.

The results were interesting to say the least.

Differentiation strategy

The RONOA ranged from 13.5% to about 58 % with a mean of about 29 %.

Cost leadership strategy

The RONOA ranged from -46 % to about 24 % with a mean of about 7 %.

What to make of this?

The results of this study suggest that retail firms that pursue a differentiation strategy outperform those retail firms that use a cost leadership strategy. By a long shot.

In fact, the best performing cost leader is still worse off than the ‘average’ differentiator.

But that does not mean that you can’t pursue a low-cost. You COULD be the one with a 24% return. Just recently JB Hi Fi announced their stellar results.

But the key point is that, when it comes to trying to be a cost leader, is that there can only be one leader (winner). And unless you are going to be that leader, it seems like a race to the bottom.

The better alternative (less risky and more rewarding) is to develop your point of difference. I have written previously about developing your proposition. (With extensive supporting templates – search for ‘mojo’ on this website.)

Sure it is harder than knee-jerk discounting. And it may take longer to get right. But eventually you will be the king of the hill, even if you have to build your own hill.



How Retailers and Landlords can resolve ‘critical’ tenancies

There are several proactive solutions going back to sourcing and qualifying the prospective retailer, ongoing support and training, as well as good marketing initiatives. But occasionally, despite these proactive strategies (our preference) some retail tenants underperform and/or fail.

It is this issue that concerns me.

 

And, truth be told; by the time the rescue squad is called in, it is too late because the tenant has exhausted all resources and even goodwill to effect the recommended changes.

 

(I am writing this not to antagonise or criticise retail consultants. I don’t know anyone’s business well enough to do so. I am however proposing a departure from an approach that is very common in the industry, for this particular type of engagement.)

 

It is a catch 22 because until it goes so badly that it is obvious to all, it is too late. Even if there are early warning signs, the requisite investment in consulting services are prohibitive.

 

In essence, I believe landlords have to find a way to get specialist resources involved before the retail business becomes terminal and the only way to do that is to make those resources more accessible.

 

The cost of a tenancy failure can easily run into $100k – with vacancies, make-good, subsequent fitout period, leasing fees and possibly even a fitout contribution – with no guarantee that the replacement tenancy will succeed.

 

Is there a way to (a) add more value and (b) to improve the success of these projects and (c) be more cost-effective. All admirable objectives I am sure you will agree?

 

Whilst our own methodology has been different in the past, I propose that a new approach may make more sense in the current climate. A more equitable outcome is possible if:

  • The consultant is there to help solve the problem, not to make the client dependent on their IP
  • You can eliminate the paperwork (which only gets glanced at anyway)
  • Ensuring commitment from the retailer/tenant before we proceed to the following stage
  •  Adopt a brutal approach: if they won’t cut it or won’t cooperate, we cut our losses and move on…

This is the approach we recommend:

 

 

Stage 1: Diagnosis

This initial assessment can be done ‘on the fly’, without excessive documentation and in a consultative manner between landlord, tenant and consultant.

  • Initial visit and store assessment
  • Immediate feedback on the potential and possibilities of stage 2.

The feedback includes outlines of the expected costs/benefits of two types of strategies:

 

Category A actions:

  • Free or very cheap to implement
  • Immediate impact

Category B Actions:

  • The scope of the long-term actions and strategies

This should be an important decision point.

 

Typically a proper analysis is included in the initial assessment, and this is what I propose to change.

An experienced consultant will ‘know’ with a high level of certainty what the key issues are. Many obfuscate at this stage because all the tools and models and proprietary frameworks make everyone feel comfortable with the structure – and it is a way to pad the bill.

 

These models and frameworks may be necessary, but the point is that they should be applied after the retailer has committed to the probable solutions and understands the costs, the nature of the process and the likelihood of the outcomes.

 

Centre and tenant enters into an agreement about whether stage 2 should be pursued. If the tenant refuses or is unable, an exit strategy for that retailer should be put in place. (Brutal, but necessary.)

 

Stage 2: Strategies


Should the decision about the viability of stage 2 be positive, proceed on the condition of the agreement reached.

 

The consultant conducts a more detailed assessment and this stage would include the feedback which can be structured as:

  • Verbal feedback (keeps the cost down)
  • Written feedback (depending on the complexity of the issues), and
  • Metric analysis (if the data is available – which it often is not if it is a new retailer or one with inadequate systems, or they are simply unwilling.)

By providing the above options, costs can be kept down and the consulting resources can be spread wider – to the retailers who may not yet be critical.

 

Another decision point is reached.

The landlord and tenant negotiate the recommendations and determine if the resources are available, and whether continuation to Stage 3 is viable.

Stage 3: Actions & Implementation

 

Detailed plans and concepts and proposals and quotes are generated detailing HOW the issues are remediated.

 

The consultant commits to the process and in fact should (in my view) charge a success fee. There is an ongoing relationship over several months.

 

During this process, IP is transferred to the centre teams and (often) the retailer. The project should be scoped properly, with a finite involvement from the consultant.

 

What do you think?

 

 

Coupons are discounts, but better for business

Coupons are discounts, but they are better for your business:

> Advertised price-cuts can be forgotten, but your coupon can occupy some real estate in the customer's wallet.

> Coupons can be targeted better than a general discount.

> Coupons may be funded by a supplier.

It is a good idea to always include a coupon in any form of communication that you have with the customer. For instance:

  1. When you notify them of a prize that they had won, include a coupon.

  2. When you send your monthly statement, add a coupon.

  3. When they visit your store and buy above a threshold amount, reward them with a coupon to be redeemed at their next purchase.


Coupons can be personalised, and you can effectively track which ones are more successful than others - which of course means you run them again!

When the local footy club asks for a donation, they are interested in cash. But instead of saying 'no', you can always offer them a series of unique coupons.

It is better than 'no' and it shows some goodwill. This way you can rotate your donations annually and satisfy the endless demands for sponsorship that way. [If you really want to get smart, you can promise them X% of all redeemed coupons as cash sponsorship for next year.]

If you are thinking that coupons/ vouchers are old hat, consider this iPhone App (application) that is revolutionising the business in the UK, and is heading to Aus.


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Three retail strategies to increase profit

Three of the most common strategies to boost profits are:

  1. Price Lining

  2. Leader Pricing

  3. Odd Pricing


Price Lining = A limited number of predetermined price points.

E.g:  $9.99 (good), $19.99 (better), and $29.99 (best).

  • Eliminates confusion of many prices

  • Merchandising task is simplified

  • Gives buyers flexibility

  • Can get customers to “trade up”

  • Simple for customers to understand

  • The psychology of consumer decision making supports this approach (more about that elsewhere/later).


(Loss) Leader Pricing = Certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products

  • Best items:  purchased frequently, primarily by price-sensitive shoppers (KVIs = Kown Value Items)

  • Examples:  bread, eggs, milk, disposable diapers

  • Might attract cherry pickers


Odd Pricing = A price that ends in an odd number (.9)

E.g.: $2.99

Assumptions are that consumers perceive as $2 without noticing the digits and 9 endings signal low prices. Retailers believe the practice increases sales, but probably doesn’t. (The origins of this approach are retailers who wanted to ensure that cashiers were forced to offer customer’s change when offered large notes, rather than some psychological trick.)

It does have implications for your brand (downscale and/or ‘Sale’.)

I can't lay my hands on it for the moment, but research has indicated that 'odd prices' - ending in 43c or 47c for example (Big W is fond of the .88c) are the most effective from a psychological point of view since consumers ostensibly perceive it as the most 'accurate'.

Retail pricing is one of those areas that seem to demand left-brain thinking. But, surprisingly, very often a counter-intuitive strategy (much lower or higher) can inexplicably work - and us consultants often find the 'reason' in hindsight.
Want to learn more about pricing?

There is a free E-Book in the 'File Manager' over at retailsmartresults.com - and much more besides. Registration is required, but it is worth it. 

 



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GMROII- Principles and Calculations

The GMROII concept is easy to understand. It also makes intuitive sense. As a retailer, your product mix is a combination of higher/lower margin products that sell at different rates. Would you rather have:

  • A product with 50% GM that turns over 2x a year, or

  • A product with a30% GM that turns over 4x a year?


GMROI answers that question.

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The actual calculations you may come across may vary, depending on whether it uses Dollars or Percentages.  Most practitioners take a shortcut calculation that may not be strictly text book, but as long as you consistently use the same method for all your decisions, it does not really matter.

There are two parts to it; the “GM”and the “II”.

The calculation is simply a combination of those two KPIs: Gross Margin and Inventory Investment. (I use two’ I’s - Inventory Investment- but you will commonly see the acronym GMROI with one ‘I’ only.)

In essence, you simply multiply the GM% and the Inventory turn rate (stock turn) with each other. This is the abbreviated (practitioner’s) formula, also know as the ‘turn and earn’ formula.

GMROI (via the Turn & Earn formula) is Gross Margin % times the Inventory Turnover Ratio.
Example:

  • Sales of $100,000

  • Cost of goods sold of $80,000

  • Gross margin of $20,000

  • Inventory (at cost) of $16,000


In this example, the item would have a gross margin of 20.0% ($20,000 ÷ $100, 000)
And it would have an inventory turnover of 5.0 x ($80,000 ÷ $16,000)
Combining the two figures produces a GMROI of 100.0% (20% x 5)

Remember: Depending on the formula use, your answer may be (for instance) 2.5 or 250 or 250% - and it is all the same thing!

PS

  1. There is a pretty decent whitepaper by Profit Planning Group uploaded to RetailsmartResultsGroup (registration required) that explores the relative advantages and disadvantages of DPP.

  2. The textbook GMROI definition is:
    ($ Gross Profit /$Sales)  X  ($ Sales/ $ Avg Inventory at cost)        
    The difference between the textbook and the practitioner’s formulae is that the second term of the above formula (the inventory bit) is NOT actually your stockturn factor. (Stockturn is calculated differently.)




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