Black Belt In Retail

PRAKASH MENON ANDREW CAVANAGH&

PUMP UPYOUR ROI...............................................From Good to Great Buying in Retail

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

TABLE OF CONTENTS

1.What is a ratio? ..................................................................................................3

2. Calculating a ratio ............................................................................................4

3. Exercises .........................................................................................................5

4. The Impact of Volume ....................................................................................13

5. Business Break-even .......................................................................................14

6. Exercise ..............................................................................................................17

7.'Tactical' Pricing .................................................................................................22

8. Setting Pricing Strategies ...............................................................................23

9. Pricing Considerations ....................................................................................24

10. Exercise ............................................................................................................25

11. The Basics .......................................................................................................29

12. First Margin Percentage ...............................................................................30

13. Exercise ............................................................................................................31

14. Retail Arithmetic in Practice: Shortcuts ....................................................32

15. Exercises ..........................................................................................................34

16. Margin Mix .......................................................................................................35

17. Average Margin ..............................................................................................35

18. Using the Contribution to Margin or CTM Method .................................38

19. Exercises .........................................................................................................40

RETAIL METRICS.....................................................................................iv

CHAPTER 1: WORKING WITH RATIOS .....................................................2

CHAPTER 2: THE RETAIL BUSINESS MODEL .............................8

CHAPTER 3: RETAIL PRICING STRATEGY .................................19

CHAPTER 4: MARGIN MANAGEMENT .......................................28

TABLE OF CONTENTS

................................................................................................................................................................................................................................................TABLE OF CONTENTS

TABLE OF CONTENTS

44. Margin Management-The Profit and Loss Statement .......................91

. Let's now take a look at the terms used on a Profit and Loss .

statement and explain what each term means.

45. Profit and Loss Statement Definitions ...............................................92

46. Asset Management-The Balance Sheet .............................................94

47. Stock Valuation ...................................................................................96

48. Determination of Gross Profit (Simplified) ........................................97

49. EBIT ......................................................................................................99

50. EBITDA .................................................................................................100

51. The Strategic Profit Model .................................................................101

52. Composition of Return on Net Worth ................................................103

53. What is Strategic About the Model? ..................................................104

Chapter 1: Working With Ratios................................................................107

Chapter 2: The Retail Business Model .....................................................109

Chapter 3: Retail Pricing Strategy ............................................................112

Chapter 4: Margin Management ...............................................................113

Chapter 5: Markdowns and their effect on margins ................................118

Chapter 6: Managing Inventory Productivity ...........................................123

Exercise Solutions ..................................................................106

Chapter 5: Markdowns and Their Effect on Margins ...................42

Chapter 6: Managing Inventory Productivity .............................58

Chapter 7: The Need to Measure Business Performance ............82

20.Markdowns ...........................................................................................43

21. Setting First Margin .............................................................................44

22.Sell-through Rate and Markdown Percentage ....................................45

23.Calculating Markdown using sell-through rates .................................46

24. Calculating Final Margin Using First Margin and Markdowns .........48

25. Maintaining Dollar Margin ...................................................................49

26. Margin/Discount Unit Increase Ready Reckoner ..............................51

27. Exercises.............................................................................................. 53

28. The Importance of Stock Management .............................................60

29. The Need for Balanced Stock .............................................................61

30. Measuring Inventory Performance .....................................................63

31. Stockturn ..............................................................................................63

32. Determining the Optimum Stockturn .................................................65

33. Ways to Improve Stockturn ................................................................66

34. Stockturn and Intake Phasing ............................................................67

35. Exercise ................................................................................................68

36. Gross Margin Return on Inventory .....................................................69

37. Calculation of GMROI ..........................................................................70

38. Planning GMROI ..................................................................................72

39. Benefits and drawbacks of GMROI ....................................................73

40. Ways to Improve GMROI Performance ..............................................75

41. Exercises ..............................................................................................78

42. Cash Flow Control ...............................................................................85

43. Cash Flow Benefits of Merchandise Planning .................................. 88

+ ......................................................

The current ultra-competitive retail environment imposes

great pressure on retail profitability. Customers are

demanding better value for money and a low inflation

economy has removed opportunities for upward

revaluations of inventory. It is therefore essential that all

functional managers in a retail enterprise understand the

consequences of reductions in margins, increases in

expenses and the linkages between sales, margins,

markdowns and ultimately, return on investment.

Many buyers and planners find themselves having control

over hundreds of thousands of dollars worth of sales and

inventory despite having a relatively basic understanding of

the 'numbers' with in the business. Computer reports

provide information on margins, market share, growth rates

and productivity ratios. So much is calculated for retail

buyers that many have lost the basic skills necessary to

perform the calculations themselves. Some are even

unaware of the bases of the calculations they need to

perform. While most of us are exposed to percentages in

the early years of schooling, most of us also happily move

on to a more exciting curriculum as soon as we can.

Entrepreneurial and analytical skills are generally more

highly prized and rewarded in the retail sector than

numerical skills. An attitude of leaving the numbers to the

'bean-counters'often prevails (and even the use of such a

pejorative term demonstrates how poorly numerical skills

are valued). Unfortunately this attitude is no longer viable.

Retail managers from all functional areas, including store

management, merchandise management and distribution,

must understand the impact of pricing, sales and asset

RETAIL METRICSmanagement if they are to make a full contribution to the

bottom line.

This book provides you with a deeper understanding of the

numerical side of retailing. This doesn't mean you need to

have an accountant's insight into the numbers. As a retailer

you should view the world from a different perspective.

Retail is about taking risks and seizing opportunities.

Focusing too much on risk and risk mitigation will simply

slow your ability to respond quickly to changing market

demands. The arithmetic of pricing is covered in depth

within this book to enable you to calculate the impact of

discounts and markdowns.

Our goal in writing this book is that its contents will not only

add to your numerical skills, but will also enable you to take

initiatives that will raise your own performance and the

company's profitability.

WORKING WITH RATIOS

+

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

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

WHAT IS A RATIO?

3 WORKING WITH RATIOS 4WORKING WITH RATIOS

A ratio is calculated by dividing one element by the other. If we need to know how

many sales are generated for each square metre of space, we divide sales by

square metres.

In the example above, sales of $1,500,000 were generated from 150 square

metres.

So for every square metre of space, $10,000 of sales is generated. When

expressed as a ratio the relationship would be expressed as 10,000:1

Sales per Square Metre = Sales

Square Metres

Sales per Square Metre = $1,500,000 = $10,000

150

A ratio is the numerical relationship between two variables. When mixing concrete,

we may use two measures of sand to one measure of cement. This is a ratio of

2:1. Ratios are often expressed in that simple form. However, in retailing, we

usually add a description to make the relationship between the two variables

clear.

Typical of the relationships used in retail are measurements of financial, stock and

staff productivity.

Asset turnover: the relationship between net sales and total assets

Inventory turnover: the relationship between net sales and average inventory

levels

Gearing leverage: the relationship between total assets and net worth

Stock turn: the relationship between sales and average stock

Gross Margin Return on Inventory (GMROI): the relationship between average

stock at cost and final margin dollars

Sales per FTE: Sales generated for each full time equivalent employee

Sales/Profit per sales hour: sales or profit for each paid hour of employee time

Sales per square metre/foot (for the purpose of simplicity and ease of

understanding, we use the metric system – metres - in this book)

Gross Margin Return on Floor Space (GMROF), sometimes referred to asGMROS

Gross Margin Return on Linear Footage (GMROLF)

FINANCIAL RATIOS

STOCK PRODUCTIVITY RATIOS

STAFF PRODUCTIVITY RATIOS

SPACE PRODUCTIVITY RATIOS

No. 2+

CALCULATING A RATIO

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

RATIOS

Sales $64,133,300

Total Assets $17,320,100

Inventory $ 9,347,800

Calculate the sales per full time equivalent at 38 hours per week.

Branch 'A' of a retail organisation is generating $1.5 million in sales from 500

square metres of floor space, whilst branch 'B' is generating sales of $2.2 million

from 800 square metres of floor space.

What are the respective sales/space ratios?

Which store is more productive, Branch A or Branch B?

Hobnobs Boutiques has released the following information in its annual report.

Calculate Sales to Asset ratio (Asset Turnover)

Sales to Inventory ratio (Inventory Turnover)

The company employs 12 full-time staff and 24 part time staff working an average

of 12 hours a week each. Presuming that each full time staff member works 36

hours per week, Calculate sales per full time equivalent employee.

Store A generates $28 million per annum from 3000sq m while Store B generates

$8.6 million pa from 800 sq m.

What are the respective sales/space ratios?

Which store is more productive?

Essential Directions' employs 7 full timers and 7 part timers (3 working 20 hours

per week and 4 working 16 hours per week). Sales per week currently stand

at$220,000.

No. 3+

EXERCISES

5 WORKING WITH RATIOS

124123

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

MANAGING INVENTORY PRODUCTIVITY

CHAPTER 6+

EXERCISES

Calculate the Average Stock and Stockturn for each scenario.

Average Stock = (Opening SOH + (All Closing SOH)) ÷ 13

Scenario 1 = (3,800 + 104,000) ÷ 13= 8,292.31

Scenario 2 = (3,800 + 59,000) ÷ 13= 4,830.77

Stockturn = Sales ÷ Average Stock

Scenario 1 = 16,000 ÷ 8,292.31= 1.93

Scenario 2 = 16,000 ÷ 4,830.77= 3.31

Avg Stock

Stockturn

Scenario 1 Scenario 2

SOH SOHIntake IntakeSales SalesSOH SOH

Total 16,000 16,000

11 3,800 1,300 1,3002,500 2,5003,800

10 5,200 1,400 1,4003,800 3,8005,200

9 6,700 1,500 1,5005,200 5,2006,700

8 8,200 1,500 1,5006,700 6,7008,200

6 10,600 1,200 1,2009,400 3,9005,100

5 12,000 1,400 1,40010,600 5,1006,500

3 14,700 1,200 1,20013,500 5,200 4,000

2 16,100 1,400 1,40014,700 5,2006,600

Period 1 3,800 13,500 1,200 1,20016,100 3,800 6,6004,000

4 13,500 1,500 1,50012,000 6,5004,000 4,000

7 9,400 1,200 1,2008,200 8,2003,900 5,500

12 2,500 1,200 1,2001,300 2,500 1,300

EXERCISES

(a) Calculate the sales and GMROI for each department

Sales @ Cost = Average Inventory @ Cost x Stock Turn

Sales = Sales @ Cost ÷ (100 % - Gross Margin %)

Sales @ Cost = $100,000 x 12 = $1,200,000

Sales = $1,200,000 ÷ 90 %= $1,333,333

GMROI = Gross Margin $ ÷ Average Inventory @ Cost

Gross Margin $ = Sales x Gross Margin %

Gross Margin $ = 1,333,333 x 10 % = 133,333

GMROI = 133,333 ÷ 100,000= 1.33

PROBLEM 1

Dept

A

B

C

D

E

Sales

1,333,333

625,000

285,714

2,222,222

1,500,000

Avg. Inventory

at cost

100,000

100,000

100,000

200,000

200,000

Gross

Margin %

10%

20%

30%

10%

20%

Stockturn

12

5

2

10

6

GMROI

1.33

1.25

0.86

1.11

1.50

EXERCISE SOLUTIONS EXERCISE SOLUTIONS

MANAGING INVENTORY PRODUCTIVITY

126125

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

(b) Assuming Department B dropped the margin to 18% but increased inventory

turnover to 6 whilst maintaining the average inventory, how would GMROI be

impacted?

Step 1 – Calculate Sales @ Cost

$100,000 x 6 = $600,000

Step 2 – Calculate Sales

$600,000 ÷ (100 % - 18 %) = $600,000 ÷ 0.82

= $731,707

Step 3 – Calculate Gross Margin $

$731,707 x 18% = $131,707

Step 4 – Calculate GMROI

$131,707 ÷ $100,000 = 1.317

This change would see the GMROI increase from 1.25 to 1.317

You have been approached by four different suppliers of a range of dog food.

However your range plan shows that you can only stock one of the lines and you

now have to decide which one.

Your assessment of the potential of each range indicates the following:

PROBLEM 2

(I) Calculate the gross profit for each line in $ and %'s.

$ = Sales – COGS e.g. 15,000 – 11,000 = 4,000

% = FM$ ÷ Sales e.g. 4,000 ÷ 15,000 = 0.2667 or 26.67%

(ii) Calculate the GMROI for each.

GMROI = GP$ ÷ Ave Stock @ Cost

= 4,000/6,122

= 0.6534 or 65.34%

(iii) Which line will you purchase giving reasons for your choice?

This requires you to first answer part iv.

(iv) Why would you need to know the financial priorities of the company before

making the choice?

If Cash flow/ sales, choose A;

If Profit, choose B;

If OTB, choose C;

If GMROI, choose D;

Product

A

B

C

D

Sales

15,000

14,000

9,000

10,000

Cost

11,000

9,500

6,000

7,000

Stockturn

1.8

2.0

1.7

2.5

Dept

A

B

C

D

Gross Profit $ Gross Profit %Avg. Stock

@ CostGMROI %

4,000

4,500

3,000

3,000

26.67

32.14

33.33

30.00

6,122

4,746

3,529

2,801

65.34

94.82

85.00

107.10

EXERCISE SOLUTIONS EXERCISE SOLUTIONS

MANAGING INVENTORY PRODUCTIVITYMANAGING INVENTORY PRODUCTIVITY

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.

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.

WINNING FORMULAS IN RETAIL

108 Retail Formulas for Retail Mastery

108 formulae that every Retail Manager needs to know.

Black Belt In Retail

Retail

Transcript of Black Belt In Retail