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.)
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?