Sweating your assets

My personal view is that the most effective measure of retail productivity is the measurement of stockturns.

The number of times you turn over stock is a direct measurement of the extent to which you are sweating your assets. Stock is the single biggest expense in virtually every retail business (non-services of course) and about 50%-70% it makes sense to manage such a big expense actively.

Typical stockturns are:

  • Dairies 95 x

  • Butchers 60 x

  • Newsagents 9 x

  • Chemists 7 x

  • Fashion 6 x

  • Hardware 4 x

  • Jewellery 2 x

As usual in the retail industry, reliable statistics are hard to come by, so expect some variation.

Stockturns are calculated by dividing Net Sales by Average Inventory at Retail; or by dividing Cost of Sales by Average Inventory at Cost.

Knowing stockturn allows you to work backwards from your sales budget to determine your OTB (Open-to-buy: Inventory Budget).

If you know how much you want to/ need to sell and you also know the performance of the merchandise category (stockturn benchmark) then it is a simple matter of dividing your sales target (budget) by your stockturn rate to determine the average inventory required.

It is interesting to note that the stockturn of the same merchandise category is radically different depending on the retail format. For instance; in a department store, fashion will turn about 3x and in a specialty store (as above) it will turn at a rate of double that. This means department stores can't even turn their fashion once per season. It is no wonder they always have to have these massive clearance sales to try and move stock.

My advice to retailers is that they should only discount their stock if the stockturn rate drops below the benchmark - or is anticipated to do so. Marking down merchandise is the road to ruin unless you are doing so to rectify mistakes and your aim is to recover your $ investment. Markdowns/ sales rarrely lead to the acquisition of permanent, good quality customers and it is therefore rarely a great acquisition tool.

Also remember that for 'mixed businesses' like for instance newsagents, it is silly to look at average stockturns at the store level. It should be managed at the individual category level.