‘Numbers’ is a people game
There are a few reasons why retailers fail. At the top of the list is a confused/poorly conceived retail proposition. Second is the absence of a good merchandise plan - which is an important part of how you execute your proposition.
The easiest, most obvious way to make more money without doing any extra work is to keep an eye on the numbers of your business and KNOW what they mean. The following examples are simple things designed to simply frame the impact of the numbers you already know in a different perspective. (And they are rounded for simplicity.)
1. In a store with a 40% margin and a 4% shrinkage factor, you can accommodate a 5% loss in sales if you got your shrinkage down to 2% and still make the same profit.
2. If you maintain 95% in-stock (merchandise) availability and assuming the average customer buys 4 items, they are likely to be able to buy only three items because the fourth will be out-of-stock. (95% x 95% x 95% x 95% = 77%).
3. If a supply chain has four members plus the retailer and each member has a 20% margin requirement and the retailer has a 50% requirement, the product costing $100 will retail for over $400. (What will the retail price be if you cut one member from the chain?)
4. If you typically carry twelve weeks supply and your typical weekly sales are $20K, and you can reduce your weeks’ supply to ten weeks, you will have an extra $40K available.
5. If you should achieve a stockturn of 5x and you only achieve 4x and you typically carry $200K worth of stock, you will be carrying $40K more than necessary.
6. If the three dimensions of stock planning are variety, breadth and depth and you typically carry 3 items for each dimension (including 3 in quantity) but decide to increase this quantity to 4, you will increase your number of SKUs by 25%. (Do you have the physical space for that?)
7. If you typically have a margin of 40% and you decide to discount the product by 20%, then you will have to sell 2x more of the product to make the same amount of gross profit. (That is why discounts are there to fix your mistakes – very rarely will 20% discount double your volume – only to gain very little.)
8. If a supplier offers you 3%/ 10, N30, (receive three percent discount if you pay within 10 days instead of full payment in 30 days) your bank would have to charge you 56% interest to make the offer unattractive. Additionally, you just took an item that cost you 50.00 and made it 48.50. Depending on volume sold, you can easily add thousands to your bank account – without any extra work.
Why do I tell you this?
This post is not about demonstrating my knowledge. (I don’t consider myself to be an expert in merchandise planning; our focus is marketing +sales +service = people & consumers.)
This post is not to make you feel inadequate.
This post is not to entertain you with a brain teaser.
This post is about what you must do to eventually get in the position to work ON your business.
The absence of an up-to-date, modern POS that provides the data you need to make smart decisions is an indicator of a retailer who will never make that transition. (Readers who work for chains may find it hard to believe but at least half the independents have nothing more than a cash register.)
Once you have access to regular, reliable data you are able to systematically process that data to optimise your decision-making.
True entrepreneurs (as opposed to small business people) build businesses and that means creating a ‘system’ of business. This ‘system’ allows things to happen without the direct input of the owner. It allows delegation whilst retaining control – and that is the holy grail because it frees you up to grow the business, buy another or even just go on holiday.
Getting your merchandise plan right is the science of retail. The art of retail involves taking risks, innovating and trialling new products. But you need a sold foundation from which to work. For example:
You need ART to create a great display. You need SCIENCE to tell you whether it was effective.
I want to challenge retailers (and suppliers to the retail industry) who are struggling in these tough times to invest in expertise. Last week I wrote that you should not trust a vegan butcher.
There is right way to engage expertise. Beware of the consultant who owns a hammer and thinks every problem is a nail. (If you want to talk to someone about making more money by getting your merchandise planning straightened out, I will point you in the right direction because that is a nail we don’t want to hit J.)
How do you build a business?
Knowing your own strengths and limitations and then supplementing it with the appropriate expertise is the basic recipe. It all comes down to people: they are the ones that will have the ideas and will do the work.
Your challenge for 2013 is to compare your daily activities (buy and sell merchandise?) against your real job description: building the network of people who will make it happen.
… and have fun doing it.