Control Parameters for Retail Business

Retail business is based largely on Mathematics. One can identify excellent location for the store, build a beautiful store, stocks it with wonderful products, staff it with great sales associates.

But if you do not run a profitable business , then it will go bankrupt & lose everything . The secret to run a profitable retail business lies in controlling the store operation.

Retailers identify procedure to periodically understand & evaluate the business. It helps control & improve productivity!!!

• Stock to Sale Ratio

  • Works on the concept of a) High Margin, high price & low turnover b) Low Margin, low price & high turnover. It is a good measure to know the store inventory level & if it matches the store sale. For eg, if a retailer want to turn inventory 12 times a year, the stock to sales ratio will be one. Each month you would have in stock just the amount of inventory that you were going to sell in the month. Stock to sale ratio=Beginning of month inventory at selling price/Total sale for the month Stock to sale ratio = 800/200 = 4/1 Performance check   Good stock to sale 4/1 Better stock to sale 3/1 Best stock to sale 2/1

• Gross Margin Return on Inventory Investment (GMROII)

  • Need to think as Investment Banker, Instead of making Retail investment, amount could be invested in Saving bonds, MF, Fixed deposits... “It tells you how much you are getting back for every dollar you have invested in inventory”. GMROII is the only financial ratios that yield a value answer instead of a % ,it is never expressed as percentage. GMROII=Gross margin in value/Average inventory at cost GMROII = 140000/37500 = 3.73 Performance check   Good stock to sale 3 Better stock to sale 5 Best stock to sale +8

• Sales per Sq.ft or Per sq.ft per day (PSFPD)

  • Important tool to measure productivity & efficiency as retailer. Space cost money (not only rent), also account for money spent on A/C, Electricity, insurance, & cleaning. With all these costs, you have to ensure that every sq.ft of selling space is paying for its own. Sales per sq.ft=Net sale (for period)/Total selling area in sq.ft/per day Sales per sq.ft=350,000/1000 sq.ft/30 day = Rs 11.67/- Performance check   Good stock to sale Better stock to sale Best stock to sale

• Selling Cost

  • Important tool to measure the productivity of staff working at store. Retail outlet establishes a payroll budget at the store. This ensures they are productive in terms of sale. Selling Cost=Wages & Benefits / Sales Selling Cost=30,000 / 250,000 = 12% E.g, a retailer want to achieve a selling cost of 12% in business, which means he pays Rs 12/- for every Rs 100 wages & benefits. Performance check   Good stock to sale 12% Better stock to sale 10% Best stock to sale 8%

• Conversion Rate

  • Important measure to know the productivity at store. This is nos of transactions done in a day, week, month, divided by the number of customers who enter the store during that period. It tells how well are shopper converted into buyer & is an important measure of how well a customers expectations are met. Conversion rate at typical Convenience store approaches 100% & conversion rate at Specialty store is much lower. Conversion Rate=No of transaction / No of customers Conversion Rate = 168/600 = 28% E.g a retailer want to achieve a selling cost of 12% in business, which means he pays Rs 12/- for every Rs 100 wages & benefits. Store A B Weekly traffic 600 600 Conversion Rate 25% 28% Transaction 150 168 Average Sale 45 45 Total Sale 6,750 7,560

• Average Transaction or Average ticket value (ATV)

  • Fastest & most efficient way for sales increase is to increase the Average transaction. It is a powerful measure of productivity for individual employee & store as a whole ,because it indicates how well the merchandise are sold. Average transaction=Sale for the week / Transaction for the week Average transaction=9240 / 168 = Rs 55 E.g , a retailer want to increase the store performance by the same walk- inn to the store. If for every transaction value is increased by Rs 10/- against a purchase of Rs 45/- will add to additional 1680/- from the same customer walk inns. Store A B Weekly traffic 600 600 Conversion Rate 28% 28% Transaction 168 168 Average Sale 45 45+10=55 Total Sale 7,560 9,240 Can be improvised with better trained staff. Will ensure customers associate with shopping gaps which have been missed. Additional business with the same set of customer walk inns!!!