Retail: Going beyond survival

If you thought the nineties were fast-paced and full of change, welcome to the new millennium where the mantra is globalisation, consolidation and diversification. JAYESH DESAI on productivity measures to increase sales and profits

Globalisation is the buzzword in today’s retail market. This is evidenced by the fact that a few large retailers control global markets. Wal-Mart, the largest retailer in the world, now has operations in 11 countries, with multiple formats, and is growing rapidly. Increasingly, the world of retailing is becoming Wal-Mart’s world.

Consolidation

Consolidation and retrenchment are inevitable as department-store market shares continue to decline. Department stores are caught between escalating competition from mass-channel, lifestyle-focused specialty retailers and category-killer superstores. Supermarkets are expanding their one-stop shopping appeal with the addition of fuel pumps, more non-food items and mealtime options (often in partnership with other retailers) in order to become the new convenience store, or at least a more convenient store. In essence, the lines between the different formats are fast disappearing and the emphasis is now on consolidation.

Diversification

Consumer ecosystems are the emerging trend. These ecosystems address the inter-related requirements of consumers for speed and efficiency; they also provide retailers with the opportunity for growth. Retailers are using their negative working capital scenario (on account of cash sales and deferred supplier payments) to get into finance, banking and insurance services.

In effect, what we are witnessing is Darwinism in the retail industry; this is a concern for all players, large and small. Large retailers like Wal-Mart are putting smaller retailers out of business through multiple formats, a larger range of merchandise, lower prices, and consistent enhancement of the customer’s overall retail experience. Driving prices down is the key to Wal-Mart’s success. They achieve this through a passion for cutting down costs in all aspects of the business. This is referred to as the EST model for growth and overall dominance of the retail industry, the CPG manufacturers and various suppliers. Let’s take a closer look at this model.

The EST model

In order to ensure that their businesses and market shares are not sucked into a black hole, retailers need to chalk out their strategies and adopt the EST model most closely aligned to their core competencies. This model takes a number of factors into account, as detailed below.

CheapEST: Low price

This is the adoption of the pricing strategy as a clear differentiator with regards to the competition. It is easier said than done, and requires clear visibility and control over cost components in the supply chain, merchandising operations and store operations. Some retailers who have adopted this model are Wal-Mart, Carrefour and PriceLine.

BiggEST: Selection, variety

Home Depot and Amazon are examples of retailers who offer this value proposition to customers. They both offer a deep range and have clearly distinguished themselves from the competition as the ones having the largest selection and variety in the categories they deal in.

HottEST: Fashion

Apparel retailer ZARA has clearly established itself as having an eye for the trendiest and hottest in the fashion world. This, coupled with its pricing strategy, sets it apart from the rest of the players.

QuickEST: speed and service

“If your wait in the queue exceeds five minutes, then your order is free”—this promise by McDonalds to its customers helped it become the largest fast-food chain in the world.

Adoption of the EST has to be complemented by stringent productivity measures, and controls in internal and external processes.

Processes

Internal processes refer to processes within the four walls of the retailer in terms of operations management, merchandising strategy, cost reductions, pricing discipline, human resources and financials.

External processes are focused towards integrating operations between manufacturers, suppliers and retailers to bring about cost reductions and better visibility throughout the retail supply chain through inter-firm collaboration.

Before we explore some of the productivity measures that can help retailers survive and grow, let us understand productivity and why it needs to be measured.

What is productivity?

Simply put, productivity means quantifiable output derived from the application of a quantifiable resource or input for a unit of time. To increase productivity one has to increase the output derived from the same input or get the same output with decreased input. More for less—that is what retailing is all about now. Consumers want more variety, more payment options, more convenience and more service—but at reduced prices.

Higher productivity and its consistent increase not only ensures survival but also creates opportunities for growth.

Why measure productivity?

In this era of more for less, the only way to really survive is to increase productivity, and to increase productivity you have to measure it. To elaborate, what gets measured gets changed. In order to bring about any change, it is necessary to know what the current metrics are, and then compare them with the past. Having a map and not knowing your current position on it will not really help.

What gets rewarded gets done. If you do not measure it, you cannot change it, and if you do not reward change, it will not happen. Also, if the rate of change outside exceeds the rate of change inside your company, disaster is imminent.

What should be measured?

There are quite a few things that retailers need to continually measure, monitor, report and improve on. Some of them are

• Average transaction value and spend range analysis.
• Items per receipt.
• Conversion rate.
• GMROII.

The average transaction value, items per receipt and conversion rate, if monitored, tracked and rewarded, can bring about an increase in sales and profits of at least 15 percent.

Average transaction value

The average transaction value is calculated by dividing the total revenues of a store by the total number of receipts. It gives retailers an understanding of how much the average customer spends in their stores. It is a critical indicator, and gives an idea of how retailers could sell more to customers they already have. Promotions and pricing strategies need to be aligned with these average numbers to increase the average basket-spend in the store. An example of how average transaction value and spend range analysis can be used profitably is as follows.

The table above lists the daily spend analysis of three stores of a sample retailer. Assuming that the range, pricing policy and customer demographics of all three are the same, there is a clear opportunity to improve the average spends in both store 1 and store 3.

Store 1

A possible way to increase the average spend in store 1 would be to introduce a raffle draw (worth $100 in purchases) for receipts over $50. This would encourage customers in the 0-50 range to make an incremental purchase of $11 (based on the average transaction value) to qualify for the raffle. If this works for even 70 percent of the customers in the 0-50 range for store 1, it will increase total sales by $3,850 (11x0.7x500), which translates into a 5 percent increase in total sales. The average value per receipt would also rise to $87.80.

Store 2

In the case of store 2, there is an opportunity to increase the average spend of customers in the range of $51-100 since a significant percentage of receipts are in that range. A raffle draw (worth $200 in purchases) for receipts over $100 would encourage the 51-100 range of customers to make incremental purchases worth $40 (based on the average transaction value). If this works for 50 percent of the customers ($51-100 range), it will increase total sales by $8,000 (40x0.5x400), which translates to a 5.3 percent increase. The average value per receipt would also rise to $198.3.

Items per receipt

Items per receipt is a measure obtained by dividing the total number of items sold by the total number of receipts. This gives an indication of how many items the average customer purchases. It is highly co-related to the performance of suggestion and add-on selling.

Suggestions or add-on selling are definitely easier to do during the holiday season. It is possibly the best time of the year to maximise every sale. Retailers need to make their shop floor and customer service assistants aware that they have an advantage; the shoppers walking into the store are not ‘just looking’—they are ‘looking to buy.’ What they don’t know is how much they will buy.

Adding on doesn’t take much time. If a customer has selected a sweater for his sister, it takes virtually no additional time for a sales person to suggest a perfectly coordinated scarf or a really wild pair of earrings to enhance the look of the sweater. And no one should be allowed to sell a pair of shoes without suggesting that the customer buy a tin of shoe polish or a matching pair of socks.

As busy as it may get, retailers should never miss the opportunity to make the most of every sale by adding on. These add-on sales must be measured, tracked and rewarded by store, sales person and/or cashier.

Conversion rate

The conversion rate, also known as the conversion ratio, basically represents the number of customers that make a purchase out of every 100 that walk into the store. Whilst footfall represents the retailer’s ability to draw potential customers into the store, the conversion ratio measures how well he converts shoppers to buyers. Higher conversion ratios translate into higher sales. While footfall can be attributed to various marketing activities, the actual conversion ratios depend on various factors like merchandise range, pricing, promotions, display, store layout, suggestive selling, service and product availability. This key measure, if monitored, tracked, analysed and acted upon, has the potential to deliver significant growth in sales and profits. An example follows.

The table on this page gives the weekly sales figures for a store.

Case A

The conversion rate is 35 percent at an average sale value of $45.

Case B

The conversion rate is increased by 5 percent with the same average transaction value bringing about a 14.28 percent sales increase.

Case C

Retaining the added conversion rate, the average spend is increased by $5 resulting in a sales increase of 27 percent over that of Case A.

There are a lot of parameters that go into effecting an increase in the conversion rate and average transaction value. Tracking and monitoring these parameters, and constantly working to improving them, provides retailers with the opportunity to realise growth in their sales and profits.

GMROII

GMROII (Gross Margin Return On Inventory Investment) measures how effectively the money allocated for inventories is invested. It is the only return on investment (RoI) formula to show returns as a currency value and not as a percentage, so its importance to retailers cannot be overstressed. GMROII is often used to compare the performance of different categories for a retailer. The buyers are allocated money for purchasing stock, and the money spent is measured against the returns they have achieved on this investment. It effectively translates into identifying the returns on every dollar invested in inventories. GMROII can be computed by dividing the gross margin value by the average inventory value (stock on hand) at cost. It is very sensitive to inventory turns and the gross margin. It helps in

• Identifying profitable categories.
• Identifying problem categories.
• Making comparisons between categories.
• The allocation and management of open-to-buy budgets.

GMROII figures, when compared across stores of a retailer, also give valuable insights into potential areas of improvement in store operations, staffing and employee productivity.

So while Darwinism is really at play on the global scene, there are still opportunities for retailers to not only survive but actually grow. They need to constantly improve in key areas by constant monitoring and measurement. They have to set realistic targets, measure productivity, and provide the right systems to bring about improvements in the same.

The author is practice head, Retail, at Zensar Technologies. He has extensive experience planning and executing domain-led technology solutions for large and medium-size companies in the retail, pharmaceutical and CPG industries.