TE TE

Retail Productivity
SI SI
Y Y
AN AN

ERMB2C
IN IN
D AD
OA O
U PL UPL
OR OR
E RE
H AR HA
TS TS
NO NO
DO DO
SE SE
EA EA
PL PL

2
1

THE RETAIL PRODUCTIVITY LOOP STRATEGIC RESOURCES IN RETAILING

Invest/Reinvest
• What are they?
SITE SI
TE
Y Y
AN AN
IN IN
D AD
OA O
U PL UPL
Increase OR OR
E
AR Reduce OE HA
RE
Net Sales TS
H
TS
NO NO
DO DO
SE SE
EA EA
PL PL

Reduce Prices(& Margins )

3 4
STRATEGIC RESOURCES IN RETAILING SIGNIFICANCE OF RESOURCES
PEOPLE INVENTORY SPACE
• People SI
TE EXPENSE • TYPICALLY 30 – 40% • HOLDING SI
TECOST • COSTS 5-10%
Y STREAM OF OE HIGHANY OF SALES
AN
• Inventory OA
D
IN • NO “SHELF – LIFE”
OA
D
IN
• HOLDING THE • TOUGH TO
PL UP “WRONG” KIND GET IN & OUT
L
U
OR OR
• Space TS
HA
RE INVESTMENT
STREAM
• EXTREMELY COSTLY
TO GET & RETAIN T SH
AR
E • 60-80% OF
WORKING
• 25-50% OF ALL
ASSETS
NO • RIGHT SKILL NO &
SET CAPITAL • COSTS
DO DO
S E ATTITUDESS E • 40-60% OF ALL INCURRED TO
EA EA
PL PL ASSETS BUILD A FOOT

5 6

RETAILERS’ OBJECTIVES STRATEGIC PROFIT MODEL

Ø Net profit margin = Net Profit/ Net Sales
• Alignment of Financial objectives with retail
E
strategy. Ø Asset turnover =Net sales/Total Assets
IT TE
S SI
Y
AN Ø Return on Asset = Net profit X Asset T/O ANY
• Factors affecting financial performance
AD of a firm. IN
= Net Profit/ Total assets
D
IN
LO OA L
UP UP
OR Net P OR Asset T/O ROA
• Net profit margin HA
RE
HA
RE
TS
Retailer A – 1%
TS
10 times 10 %
NO Bakery/Fast food NO
• Asset turnover DO DO
SE SE
PL
EA Retailer B – Jewelry/
PL
EA 10% 1 time 10 %
Consumer Durables
• Return on assets

o The strategic profit model Ø How did A & B with different models end up with same ROA ?

7 8
 PROFIT MARGIN MANAGEMENT PATH INCOME STATEMENT
Income Statement Retailer A Retailer B
To analyze this, one needs to analyze the income
ITE
statement. Rs in Cr (Fashion) (lLow cost hypermkt)
TE
Y
S
Y
SI• B has thrice the sales of
AN Net sales 15,630 48,107 AN A but both have similar RGM.
IN IN
A D D
LO COGS 9,297 42,093 LOA
UP U P
OR
Gross Margin 6,333 6,014
OR • A has very high Opex,
E GM% 40.5% E
HA
R
H AR 12.5% higher than B.
TS Op Ex 4933 TS 4629
NO NO
DO Op Ex % to sale 31.6% DO 9.6%
SE Interest exp/income 284 EAS
E
-15
• Net profit in % terms
EA
PL Total expenses 5217P
L
4614 higher for A.
Net profit (pre tax) 1116 1400
in % (PBIT%) 7.1% 2.9% • Net profit – key measure
Taxes 427 518 at store level.
Net profit (post tax) 689 882
in % (PAT%) 4.4% 1.8%
9 10

Income Statement Retailer A Retailer B Asset information Retailer A Retailer B

DIFFERENCES IN STRATEGY BETWEEN A AND B

Rs in Cr (Fashion) (hypermarket) Rs in Cr (Fashion) (hypermarket)

Net sales 15630 48,107 Accounts receivable 3418 335

Merchandise Retailer A (Fashion) Retailer B
COGS 9297 42093 Inventory 3120 3644
TE TE(low
cost hypermarket)
Gross Margin 6333 6014 Cash in hand SI 868 2823 SI
Y Y
AN AN
GM% 40.5% 12.5% IN assets
Other current 104 467 IN
AD
Margin High D Low as focus is on high
Op Ex 4933 4629 TotalOCurrent Assets 7510 7269 OA
Op Ex % to sale 31.6% 9.6% L
UP Assets
Fixed 7375 7824 UP
L turnover and low prices
Interest OR OR
exp/income 284 -15 RE Total Assets 14885 15093 RE
HA Assortment Wide HA Narrow
TS Inventory turnover TS
Total expenses 5217 4614 NO (COGS/Inventory) 3.0 11.6 Service High NO Low
DO Asset turnover DO
SE
A1400 3.2 Customers A SE price
Not sensitive Highly price sensitive
Net profit (pre tax) 1116 L E (sale/tot assets) 1.1 L E
P ROA (Net profit P
margin%*Asset Op Ex High Low
in % 7.1% 2.9% turnover) 4.63% 5.84%
(NET PROFIT/ TOT Inventory investment High – slow turn around Low – quick turn around
Taxes 427 518 ASSETS) (current asset)
Net profit (post
tax) 689 882 Fixed Assets High Low
11
in % 4.41% 1.83%
12
 STRATEGIC RESOURCE MANAGEMENT MODEL
Net Sales
HOW TO INCREASE ROA Inventory =
Gross Margin
GMROI
X Inventory
• Net profit margin = Net Profit/ Net Sales X
• Asset turnover =Net sales/Total Assets TE TE
SI Inventory SI
• Return on Asset = Net profit X Asset T/O ANY AN
Y

= Net Profit/ Total assets D

IN Selling Feet IN
OA O AD
n Increase gross margin? How? UP L = UPL
n Price increase? OR Gross Margin OR
RE Net Sales E Gross Margin
A X AR
n Lower costs? H Net Sales SH = GMROF
TS Selling FeetT Selling Feet
n Lesser stocks? NO O N
D O DO
E E X
n Availability? EOOS?
AS AS
P L PLE
n Supplier issues? Selling Feet
n Lesser fixed costs? FT Employees
n Negotiation? =
n Compromise? Net Sales Gross Margin
X = GMROL
n Better and ingenious solutions? FT Employees FT Employees 14

13

GMROI GMROI
• GMROI Gross margin
◈ 60% of a retailers assets are in inventory.
TE
Average Inventory TE
SI SI
NY AN
Y
◈ It is the most important profitability metrics
AD
IN in retail.
A
AD
IN

U PL
O • Average Inventory UPL
O

OR R
Inventory every month(beg RE )+ Closing Inventory
O
◈ It measures how effectively inventory
E
SH is turned into profit.
AR
S HA
NO
T No. of NMonths
OT +1
DO DO
SE SE
◈ Higher the GMROI Pbetter the investment turns.
LE
A
PLE
A

• Indicates how much gross margin you get back for every dollar
invested in inventory.

15 16
 GMROI GMROI
Average Inventory
Store- Sales GM% Av Inventory GMROI
1st Jan 50000 )
S ITE A 315400 46 102400SITE 1.39
1st Feb 50000 ) 250000 Y Y
AN AN
1st Mar 70000 ) IN 4 IN
AD B 220100 41 A53000
D 1.70
31st Mar 80000 ) LO LO
UP UP
OR C 210500 48 OR 86100 1.17
RE RE
HA HA
Store Sales TS GM% Av Inventory OT
S
NO D 186500 N 42 33700 2.32
DO DO
A 315400 SE 46 102400 AS
E
EA LE
PL
• GMROI can bePlow –
B 220100 41 53000

C 210500 48 86100 • If paid up stock holding is high.

• High discounting.
D 186500 42 33700
18
17

STOCK HOLDING GMROI

• Is there an ideal stock holding? • To Improve GMROI –

TE TE
SI SI
• Stocking is based on IN
AN
Y
• Increase Sale IN
AN
Y

D AD
OA O
PL PL
• Sales History OR
U • Increase GM OR
U
E RE
AR HA
SH
• Supply frequency NO
T • Reduce Stock NO
TS
DO DO
SE SE
EA EA
• Supply efficiency
PL PL

• Special occasions

19 20
 GMROF GMROF
• Gross Margin return on Footage/Floor Space. • What can impact GMROF
ITE SI
TE
• One of the major expense is Rent. AN
Y
S • Stock Outs
AN
Y
IN IN
D D
• Getting the best productivity of Revery
OA
inch of space is critical.
PL
• Non moving / slow moving stocks
PL
OA
U U
O OR
AR
E • Increasing sale artificiallyARE
• It helps improve GMROI.OT SH TS
H

DO
N • DO
NO
Helps identify productive categories
E E
• It helps remove/clearAS non productive products /categories. AS
LE
P • E
Helps distribution
PL of space

21 22

GMROL GMROL
• Gross Margin Return in Labour • Helps increase customer conversion.
ITE ITE
• A major expense every month. AN
Y
S
• Helps work out productivity incentives.ANY S
IN IN
D AD
• Low staff performance can impact
PL
OA this measure.
• Identifies excess and under staffing. PL
O
U U
O R R O
• Too many staff can also impact
HA
RE this measure. AR
E

TS • Helps identify training needs for effective customer service.

TS
H

• Helps identify stressed

DO
staff. NO O
DO
N
E E
EAS E AS
PL PL

23 24
 Some KPIs
HOW WOULD WE LOOK AT EACH OF THESE
Retailer A CTS
Stk Stk Annual

• GMROI? When we keep maximizing?

Major Sales ( Rs GM in Stock (Rs Cvr=Stk/sale* Turn=sale/ ST=12*Stk GMROI=GM
Categories Cr)/month COGS Rs=RGM GM % Cat Contr% Cr) 30) stk turn /STK
CAT 1 32.1 26.9 5.17 16.1 20.0 37.5 41.8 0.7 8.6 0.1
CAT 2 30.6 25.4 5.16 16.9 19.0 30.3 35.7 ITE 0.8 10.1 0.2 ITE
S S
CAT 3
CAT 5
26.7
22.1
23.9
18.8
2.73
3.34
10.2
15.1
16.6
13.7
27.7
49.2
34.7
Y
AN78.6
0.9
0.4
10.4
4.6
0.1
0.1 • GMROF? What happens when this keep Agoing
NY up?
CAT 6 17.8 14.8 3.04 17.1 11.1 8.0 IN 16.3 1.8 22.1 0.4 IN
CAT 7 13.0 11.4 1.58 12.1 8.1 4.5A
D 11.8 2.5 30.4 0.3 AD
O O
CAT 4
CAT 8
12.3
6.3
9.9
4.7
2.41
1.64
19.6
25.9
7.6
3.9 R
L20.7
UP 11.1
63.0
71.0
0.5
0.4
5.7
5.1
0.1
0.1
• GMROL? Should this be maximized?
R
U PL
O O
Total 160.9 135.8 25.08 15.6 E
100.0 189.0 41.8 0.7 8.6 0.1 E
H AR H AR
TS TS
Retailer B NO NO
DO Stk Stk Annual DO
Major Sales ( Rs GMEin Stock (Rs Cvr=Stk/sale* Turn=sale/ ST=12*Stk GMROI=GM E
Categories Cr)/month COGS AS
ERs=RGM GM % Cat Contr% Cr) 30) stk turn /STK E AS
CAT A 230.0 194.3 PL 35.7 15.5 40.4 25.0 3.9 7.8 93.2 1.4 PL
CAT B 154.0 120.0 34.0 22.1 27.0 65.0 16.2 1.8 22.2 0.5
CAT C 132.8 107.8 25.0 18.8 23.3 193.1 53.7 0.6 6.7 0.1
CAT D 26.2 19.6 6.6 25.3 4.6 21.0 32.2 0.9 11.2 0.3
CAT E 21.0 14.0 7.0 33.3 3.7 2.0 4.3 7.0 84.0 3.5
CAT F 5.9 4.2 1.7 29.2 1.0 20.0 142.5 0.2 2.5 0.1
TOTAL 569.9 480.7 89.3 15.7 100.0 326.1 20.4 1.5 17.7 0.3

25 26

AVERAGE DAILY SALES

(ADS)
100
TE TE
SI 15% SI
ANY AN
Y

D
IN 60 IN
OA O AD
U PL UPL
OR OR
E RE
H AR HA
TS TS
NO NO
DO DO
SE SE
EA EA
PL PL

10

A B
50K 57.5K
27 28
 NOB AVERAGE DAILY
TRAFFIC

280 NOB-38%
TE TE
SI 1000 SI
240 Y Y
AN AN
IN IN
200 D AD
OA 800 O
U PL UPL
160 OR OR
E 600 RE
HAR HA
TS TS
120 NO 400 NO
DO DO
SE SE
80 EA EA
PL 200 PL

40
0
A B A B
130 180 TRAFFIC 1000 900
29 CONVERSION(%) 13
30 20

WHAT HAPPENED Transaction Count

1,400

STORE B Vs STORE A
1,200
TE TE
SI SI
- 10% LOWER TRAFFIC ANY AN
Y
IN 1,000 IN
D AD
OA O
+ 53% HIGHER CONVERSION U PL UPL
800
OR OR
E RE
AR HA
- 17% LOWER AVERAGE SALE(ABV)SH
T 600 TS
NO NO
+15% HIGHER SALES DO DO
SE 400 SE
EA EA
PL PL
200

0 T
W T F Sa Su M T W R F Sa Su M T W T F Sa Su M

9/5 9/6 9/7 9/8 9/9 9/10 9/11 9/12 9/13 9/14 9/15 9/16 9/17 9/18 9/19 9/20 9/21 9/22 9/23 9/24 9/25

31 Week #3
Week #1 Week #2
 Traffic Count
Transaction Count
4000

1400 3500
TE TE
SI 2,900 SI
1200 +7% ANY 810 3000 +18% +10% NY
A
IN IN 2,625
D AD
800 OA 2,450 O
1000 -5%
U PL 2500 UPL
760 OR OR
RE RE
HA HA
800 2000
TS TS
600 NO 1500 NO
DO DO
SE SE
400 EA 1000 EA
PL PL
200 500

0 0
W R F S S M T W R F W R F S S M T W R F
S S M T W R F S S M T S S M T W R F S S M T
9/ 9/ 9/ a9/ u9/ 9/10 9/1 9/1 9/13 9/14 a
9/1 u
9/1 9/17 9/1 9/1 9/20 9/21 a
9/2 u
9/2 9/24 9/2
9/ 9/ 9/ a9/ u9/ 9/10 9/1 9/1 9/13 9/14 a
9/1 u9/1 9/17 9/1 9/1 9/20 9/21 a9/2 u9/2 9/24 9/2
5 6 7 8 9 1 2 5 6 33 8 9 2 3 5
5 6 7 8 9 1 2 5 6 34 8 9 2 3 5
Week #1 Week #2 Week #3 Week #1 Week #2 Week #3

Some perspectives!
Traffic Count

4000 1. Promotion was run in week 2.

Conversion Rate%
3500 2. Traffic went up, but conversion rates dropped. Week 2 was 20% lower than
TE TE
SI 55% SI
3000 ANY week 1 and 15% lower compared to week 3. AN
Y
IN IN
D AD
OA
50%
3. Even though traffic went up in week 2, thisLO store did not convert them into
2500 U PL UP
OR buyers. OR
E E
2000
HAR 45%
H AR
TS 4. Reason was stock out of key sku’s.
TS
1500 NO NO
DO 5. Takeaway: what decision would D O
you take if the reverse happened? That is
E 40%
SE
E AS EA
1000
PL L
sales go up over the previous
P week?
35%
500

0 30%
W R F S S M T W R F S S M T W R F S S M T
9/ 9/ 9/ a9/ u9/ 9/10 9/1 9/1 9/13 9/14 a
9/1 u9/1 9/17 9/1 9/1 9/20 9/21 a9/2 u9/2 9/24 9/2
5 6 7 8 9 1 2 5 6 35 8 9 2 3 5 36
Week #1 Week #2 Week #3
 CONVERSION SALES PERFORMANCE

• Relationship between CSAT and Sales performance does not always hold. High

SITE SI
TE
Y Y

“Customers Experience” Scores

AN AN
• Traffic always has an impact on CSAT! D
IN ? IN
OA O AD
U PL UPL
OR Q2 Q1E OR
E
H AR HA
R
• Let us try looking at 2 different stores.
TS Q3NOT Q4
S
NO
DO DO
SE SE
EA EA
PL PL ?

Low

$$$
$
Low High
37 38

SALES PERFORMANCE
TRAFFIC & CONVERSION PROVIDE CRITICAL CONTEXT

High

TE CUSTOMER CUSTOMER
TE
SI SI
Y SATISFACTION SATISFACTION
NY
“Customers Experience” Scores

AN A
IN IN
D D
OA OA
U PL UP
L
OR OR
RE E

TS
HA CUSTOMER
TS
HA EXPERIENCE
R

NO NO
DO DO
E E
E AS E AS
PL PL

Mystery Shop Mystery Shop Mystery Shop

Low
Results Results Results
$$$
$ Sales Performance
Low High
39 40
 TRAFFIC & CONVERSION PROVIDE CRITICAL CONTEXT TRAFFIC & CONVERSION PROVIDE CRITICAL CONTEXT

Customer experience is a continuous process that is in effect every hour of

TE CUSTOMER CUSTOMER
TE
every day the store is open, so it shouldn’t be surprisingSI that infrequent SI
NY SATISFACTION SATISFACTION
NY
sampling of subjective experience (i.e., buyers in A A
IN customer surveys and paid IN
D D
OA
professional shoppers) produces customerPLexperience results that often don’t L OA
U UP
correlate to store sales performance. RE OR CUSTOMER EXPERIENCE(Traffic
AR
E
OR
HA SH
NO
TS
Conversion)
NO
T
DO O D
S E E
EA EAS
PL PL

Mystery Shop Mystery Shop Mystery Shop

Results Results Results

41 42