Black Belt In Retail

WINNING FORMULAS IN RETAIL

.....................................................................

PRAKASH MENON ANDREW CAVANAGH&

108 Retail Formulas for Retail Mastery

........................................................................................................................

TABLE OF CONTENTS

PRICE AND MARGIN FORMULAS .....................................................................9

1. Calculation of Percentages .............................................................................. 10

2. Percentage Change on Previous Period or Budget Figures....................... 11

3. Remove Tax component from Retail Price.................................................... 12

4. The Cost Complement....................................................................................... 13

5. Target Cost Price using Cost Complement................................................... 14

6. Buyer Retail Price Using Cost Complement....................................................15

7. Mark Up % ..............................................................................................................16

8. First Margin %........................................................................................................17

9. Converting Mark Up % and First Margin %......................................................18

10. Final Margin........................................................................................................ 19

11. Discount %............................................................................................................ 20

12. Markdown %........................................................................................................ 21

13. Shrinkage %......................................................................................................... 22

14. Markdown % Estimate Based on Projected Sales Performance.............. 23

15. Conversion of Discount % to Markdown ...................................................... 24

16. Calculation of First Margin Given Final Margin and Markdown

Targets.................................................................................................................. 25

17. Calculation of impact on Final Margin to Changes in First Margin or

Reductions........................................................................................................... 26

18. Increase in Unit Sales Required to Maintain Final Margins when

Discounting........................................................................................................ 27

WHOLE BUSINESS FORMULAS ...................................................................... 29

19. Average Margin Using the Contribution to Margin (CTM) Method.............30

20. Initial Open to Buy (OTB).....................................................................................32

21. Available OTB.........................................................................................................34

22. Business Break Even............................................................................................35

23. Proft Calculation Using Break Even Figures....................................................36

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24. Calculating the Impact of Additional Expenses to the Business.............. 37

25. Business Gross Proft......................................................................................... 38

26. Pareto Analysis....................................................................................................38

27. Net Proft After Tax ............................................................................................ 40

28. Return on Sales....................................................................................................41

29. Asset Management Measure #1 – Asset Turnover.....................................42

30. Asset Management Measure #2 – Return on Assets ................................43

31. Earnings Before Interest, Tax, Depreciation and Amortisation

(EBITDA).................................................................................................................44

32. Earnings Before Interest and Tax (EBIT)........................................................45

33. Stock Type %’s.................................................................................................... 46

34. Stock Newness %............................................................................................... 47

35. Slow Moving and Obsolete (SLOB) Stock %................................................. 48

36. Aged Inventory %.................................................................................................49

PRODUCTIVITY FORMULAS ....................................................................... 51

37. Average Stock on Hand.....................................................................................52

38. Stockturn..............................................................................................................54

39. Sales to Stock Ratio...........................................................................................55

40. Stock Intensity.....................................................................................................56

41. Gross Margin Return on Inventory (GMROI).................................................57

42. Historical Weeks Cover......................................................................................58

43. Forward Weeks Cover........................................................................................59

44. Sell Through Rate................................................................................................60

45. % Sold at Full or Planned Price.........................................................................62

46. Sales per M2 or Ft2.............................................................................................63

47. Gross Margin Return on Floor-space (GMROF)............................................64

48. Promotional Productivity Measure #1 – Return on

Promotion (ROP).................................................................................................65

49. Promotional Productivity Measure #2 – Gross Margin Return on

Promotion (GMROP)...........................................................................................66

50. Return on Marketing Investment (ROMI).......................................................67

51. Incremental Sales Increase ............................................................................68

52. Return per Linear Metre or Foot of Shelf Space..........................................69

53. Transaction Analysis.........................................................................................70

54. Product Life Cycle (PLC) %...............................................................................71

FINANCIAL FORMULAS ............................................................................. 73

55. Working Capital Ratio........................................................................................74

56. Operating Expense Ratio..................................................................................75

57. Capital Expense Ratio.......................................................................................76

58. Return on Investment (ROI) ............................................................................77

59. Return on Capital Employed (ROCE) .............................................................78

60. Current Ratio.......................................................................................................79

61. Quick Ratio...........................................................................................................80

62. Inventory to Trade A/C Payable Ratio............................................................81

63. Sales to A/C Receivable Ratio..........................................................................82

64. Sales to Fixed Assets Ratio..............................................................................83

65. Share of Sales.....................................................................................................84

66. Inventory Days....................................................................................................85

67. Market Share %...................................................................................................86

68. Net Worth or Owner’s Equity............................................................................87

69. Gearing or Leverage Ratio................................................................................88

70. Debt to Equity Ratio (D/E Ratio)......................................................................89

71. Return on Net Worth (Return on Equity, ROE)..............................................90

72. The Strategic Proft Model................................................................................ 91

SUPPLY CHAIN AND LOGISTICS FORMULAS ................................................ 95 73. Delivery In Full On Time (DIFOT)...................................................................... 96

74. Capacity Utilisation Rate.................................................................................. 97

75. Order Fulflment Time....................................................................................... 98

76. Product Lead Time............................................................................................ 99

77. Initial Order Quantifcation................................................................................100

78. Replenishment Order Quantifcation...............................................................101

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79. Supply Chain Cost %..........................................................................................102

80. Distribution Centre Cost %...............................................................................103

81. Distribution Centre Units Processed per Hour.............................................104

82. Distribution Centre Cost per Unit....................................................................105

83. Order Accuracy %...............................................................................................106

84. Out of Stock %.....................................................................................................107

85. Cost of Goods Sold............................................................................................108

86. Cost of Doing Business.....................................................................................109

87. Cost to Serve...................................................................................................... 110

88. Product Breakeven Pricing...............................................................................111

89. Allocation Calculations – Ongoing Items.................................................... 112

90. Allocation Calculations – Indent lines.......................................................... 113

STORE OPERATIONS FORMULAE ................................................................ 115

91. Conversion Rate (Traffc to Sales)................................................................ 116

92. Units Per Transaction (UPT)........................................................................... 117

93. Average Unit Value............................................................................................ 118

94. Average Basket Size......................................................................................... 119

95. Customer Retention Rate............................................................................... 120

96. Customer Lifetime Value................................................................................ 121

97. Staff Turnover Rate......................................................................................... 122

98. Sales Per Hour.................................................................................................. 123

99. Full Time Equivalent Employee calculation................................................ 124

100. Sales per FTEE.................................................................................................125

101. Service Intensity...............................................................................................126

102. Gross Margin Return on Labour (GMROL).................................................127

103. Selling Salaries %.............................................................................................128

104. Store Assets Calculation................................................................................129

105. Store Contribution Calculation......................................................................130

106. Return on Store Assets (ROSA)....................................................................131

107. Occupancy Cost % ..........................................................................................132

108. Loyalty Program % .........................................................................................133

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PRICEAND MARGINFORMULAS

+

......................................................

No. 1+........................................................................................................................

CALCULATION OF PERCENTAGES

Retail businesses express many of their measures and performance results as

percentages. The word ‘percentage’ literally means ‘Part of 100’. Using

percentages allows us to compare aspects of our business performance against a

common base figure.

For retail that base is nearly always our sales figures. So expenses will be

expressed as a percentage of sales, margins likewise. Profit will also be shown not

only in $ figures but as a percentage. The base may be a number of other elements,

such as price, for example.

FORMULAS

element % = element $ ÷ base (or sales) $This basic formula can also be reconfgured to calculate the individual elements

element $ = base $ x element %, and

base (or sales) $ = element $÷ element %

WORKED EXAMPLES

A retailer has sales turnover of $1,200,000. Their selling salaries are $144,000. What is their

selling salaries %?

The retailer also has a franchise fee of 3.75% that they have to pay.

How much will that amount to?

An item costs $15.00 and the cost price represents 48% of the total price.

How much is the total price?

$144,000 ÷ $1,200,000 = 12.0%

$1,200,000 x 3.75% = $45,000

$15.00 ÷ 48% = $31.25

10 11PRICE AND MARGIN FORMULAS PRICE AND MARGIN FORMULAS

No. 2+........................................................................................................................

PERCENTAGE CHANGE ON PREVIOUS PERIOD OR BUDGET FIGURES

One of the most common retail comparisons that are made is to compare current

performance against a previous period or against a budget, forecast or target

figure. This allows the retailer to monitor how they are performing against last year,

last month or the budget.

This figure is then expressed as a percentage.

FORMULAS

(Current Period $ - Comparison Amount $)

÷ (Comparison Amount $)

expressed as a percentage.

SHORTCUT FORMULAS

(Current Period $ ÷ Comparison Amount $) – 1,

WORKED EXAMPLES

A retailer has had sales of $450,630 against last year sales for the same period of $415,687 and

a budget figure of $460,500.

What were the percentage variations against last year and the budget?

($450,630 - $415,687) ÷ $415,687 = $34,943 ÷ $415,687

($450,630 - $460,500) ÷ $460,500 = $9,870 ÷ $460,500

% change on Last Year = = + 8.41 %

% change on Budget = = - 2.14 %

USING THE SHORTCUT

% Change on Last Year = = 8.41 %

% Change on Budget = = -2.14 %

($450,630 ÷ $415,687) -1 = 1.0840608 -1 = 0.0840608

($450,630 ÷ $460,500) – 1 = 0.978567 – 1 = - 0.021433

No. 3+........................................................................................................................

REMOVE TAX COMPONENT FROM RETAIL PRICE

This formula is used to take the tax amount (Goods and Services Tax, Value Added

Tax etc.) out of a retail price. It allows the retailer to calculate the amount of the

sale they get to keep in order to pay for the product and pay expenses and is an

essential step in calculating margins. It is sometimes called the 'Buyer Retail Price'

as it is the amount of the retail price with which the Buyers get to work..

FORMULAS

WORKED EXAMPLES

12 13PRICE AND MARGIN FORMULAS PRICE AND MARGIN FORMULAS

No. 4+........................................................................................................................

THE COST COMPLEMENT

The cost complement is that part of the retail price less GST or VAT (if applicable)

minus the First Margin amount. It is usually expressed as a % amount and is very

useful when calculating anticipated Buyer Retail prices, and hence final Retail Sell

Prices. It is the % of the Buyer Retail amount that the cost represents; hence it is

the cost % that complements the First Margin %. It is sometimes referred to as

either the reciprocal or inverse of the margin, although mathematically neither of

these terms is correct.

First Margin is defined as the Margin achieved on the initial retail pricing of an item.

This will be examined later in this book.

The Cost Complement calculation flows from the basic formula:

(This formula applies to both currency amounts and % amounts)

Cost + First Margin = Buyer Retail Price

Retail Price ÷ (1 + Tax %)For example, if the GST is 7.5%, the formula would be:

Retail Price ÷ 1.075If it is 12.5%, it would be:

Retail Price ÷ 1.125

A T-Shirt retails at $20.00, and the VAT was 20%, the net amount for

the retailer would be:

A tennis racquet sells for $99.95 and the GST is 10%, the net amount

would be:

To add the GST or VAT amount to a Buyer Retail figure, the formula is:

So in the above example:

$20 ÷ 1.2 = $16.67

$99.95 ÷ 1.1 = $90.86

Buyer Retail Price x (1 + Tax %) = Retail Sell Price

$90.86 x 1.10 = $99.95

FORMULAS

Cost + First Margin = Buyer Retail Price

WORKED EXAMPLES

A jewellery retailer has a margin of 75%.

The cost complement would be:

so the cost represents 25% of the Buyer Retail price.

An electrical goods retailer has a margin of 12%.

The cost complement would be:

so the cost represents 88% of the Buyer Retail price.

100% - 75% = 25%,

100% - 12% = 88%,

For example, if the margin% is 65%, then the cost complement is:

100% - 65% = 35%

131

Return on Store Assets, or ROSA, is the relationship between Store Contribution

and Average Store Assets. This highlights how much return retailers are getting on

the money that is tied up in the store. For store management, it highlights the

need to monitor sales, expenses, average investment in inventory and debtors and

average investment in fixed assets.

No. 106+

FORMULA

WORKED EXAMPLES

RETURN ON STORE ASSETS (ROSA)

No. 105+........................................................................................................................

STORE CONTRIBUTION CALCULATION

FORMULAS

WORKED EXAMPLES

130

Store Contribution = (Total Gross Profit $ + Sundry Income $) – Total Store Expenses $

........................................................................................................................

Store Contribution is the amount of wealth created by the store. In a large, multi-

store operation, it is vital to keep track of how much each store is contributing to

the overall improvement in value of the business and address any stores that are

making unsatisfactory contributions.

ROSA = Store Contribution ÷ Average Store Assets

A store has the following Profit and Loss Statement for the year

- Markdowns and Shrinkage @ cost

Sales

- Cost of Goods Sold

$ 9,565,425

Gross Profit

Store Income

- Total Store Costs

Store Contribution

+ Sundry Income

$ 4,974,020

$ 565,545

$ 4,025,860

$ 125,850

$ 4,151,710

$ 3,386,475

$ 765,235

Taking the figures from our previous two formulas, we can see that Store Contribution was

$765,235 and Average Store Assets were $3,805,785.

ROSA = $765, 235 ÷ $3,805,785 = 20.1%

STORE OPERATIONS FORMULASSTORE OPERATIONS FORMULAS

133

Many retailers now have a Loyalty Program of some sort. The major benefits of

having such a program are:

a. To reward regular customers, thus engendering a greater sense of loyalty,

b. Greater transparency of the transactions of Loyalty Program customers,

increasing your ability to target marketing more specifically, and

c. Better use of limited marketing spending through more targeted marketing.

It is imperative that retailers are aware of how important their Loyalty

Program customers are to their business. One of the easiest ways to do

this is to calculate the percentage of your total sales that are attributed to

these customers.

No. 108+

FORMULA

WORKED EXAMPLES

LOYALTY PROGRAM %

No. 107+........................................................................................................................

OCCUPANCY COST %

FORMULAS

WORKED EXAMPLES

132

Occupancy Cost % = Total Occupancy Costs ÷ Total Sales

........................................................................................................................

The three largest categories of expenditure for any retailer are related to people,

inventory and space. Occupancy Cost % looks at all the space related costs and

expresses them as a percentage of total sales.

Occupancy costs include (but are not be limited to) rent, heating/cooling, lighting,

gas, water, cleaning and security.

Loyalty Program % = Sales $ from Loyalty Program Members ÷ Total Sales

A retailer has achieved total sales of $9,565,425. The total Occupancy Costs for the year were

$2,135,790.

Occupancy Cost % = $2,135,790 ÷ $9,565,425 = 22.3%

Our example retailer has sales of $9,565,425. Of those sales, $6,868,425 worth was made to

Loyalty Program members.

Loyalty Program % = $6,868,425 ÷ $9,565,425 = 71.8%

STORE OPERATIONS FORMULASSTORE OPERATIONS FORMULAS

PRAKASH ‘PK’ MENON

ANDREW CAVANAGH

AUTHOR BIOGRAPHIES

Prakash ‘PK’ Menon is a globally renowned Retail,

Supply Chain & Logistics & Leadership authority. A

regular contributor to several UAE and international

retail publications, PK is also the author of three other

books - Driven - accelerate your career with smart

transitioning; Supply Chain is Sexy - Harnessing the

Retail Revolution; and Fail Smart - The Undeniable

Link Between Failure and Success. As Executive

Director of Thought Leaders Middle East, PK’s passion

and expertise is to help retailers transform their

organisations into global powerhouses and add

signifcant dollars to their proft lines.

Andrew Cavanagh brings more than 20 year’s retail

buying, merchandise planning and IT experience with

Myer and Coles Myer and more than 6 year’s national

and international teaching experience at the

Australian Centre for Retail Studies to the table. Today

he focuses on his true passion, which is to develop the

skills and competencies of Buyers and Planners

around the world as an international facilitator.

MORE BOOKS IN THE RETAIL MASTERY SERIES:

OTHER BOOKS BY PK MENON:

Fail Smart (TM)

PK's book on Failure

Intelligence. About the

undeniable link between

Failure and Success.

Supply Chain is Sexy

Transform your supply

chain fromweak link to

core strength with PK

Menon

Driven...whatever it takes!

A memoir highlighting PK

Menon's journey - an

inspiring combination of

humble beginnings to an

even more humble yet

awe-inspiring present.

PUMP UP YOUR ROI

From Good to Great Buying in Retail

A guide to managing your retail business by measuring what matters.

GOOD BUYER GREAT NEGOTIATOR

Fact-Based Negotiation in Retail

A guide to the art and skills of negotiating for retailers.

ROCKETING RETAIL PROFITS

With Excellence in Merchandise Planning

A guide to optimising inventory and retail profits.

POWER UP YOUR RETAIL

Powerful Financial Excellence for Retail Store Managers

A guide to driving outstanding retail store profits in the 21st century.

CHECKMATE IN RETAIL

Dynamic Strategy for Retailers in a Volatile Retail Environment

A retail buyer's guide to driving outstanding profitability using effective

merchandise strategy.

Black Belt In Retail

Retail

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