If you are trying to get your product into retail distribution, than you will have to work with retail buyers, wholesalers and distributors and you will have to understand key performance indicators (KPIs), terminology, the retail accounting terms and overall math so as to speak so that you can enter the negotiations with proper awareness.
Sooner or later, you need to not only understand but also track these key performance indicators regardless of whether you are a independent retail store owner, manager, retail buyer or even a vendor or supplier of products and services to retail stores.
There is a lot of retail analytics metrics and nomenclature you will find online, however, in my experience the ones listed below are the most essential and you can bolster these by advanced metrics as your business expands.
Case pack: Products are shipped in full cases (for example, 12, 24, or 36 units). These types of products cannot be broken down into smaller quantities.
Product Categorization taxonomy: Divisions -> Departments -> Categories -> Subcategories -> Baselines ->Color -> Size. These are all part of the merchandise hierarchy.
Drop shipping: Prepacking merchandise so that a pallet or large case can be dropped at a store without sorting.
EAN: European article number. This is a European version of the UPC (described below).
General merchandise: nonfood types of merchandise.
Gross margin: The difference between cost and selling price (revenue minus cost of goods sold).
JIT: Just-in-time shipment.
Logistics: The routes many trucks take to deliver goods from a central warehouse to a store.
Markdown: How much a product will be reduced in price from the listed price.
Mark-on: A term interchangeable with markup, indicating the profitability of a product.
Pack quantities: Package quantities designate how many items will be packed in a single bundle.
POS: Point of sale cash registers.
Price type: Regular, markdown, event, rain check, BOGO (buy one, get one free), or clearance.
Season code: A number designating the seasonal nature of a product.
SKU: Stock-keeping unit. This is the basic term for a piece of merchandise.
UCC: Universal Code Council. This council sets the standards for all UPCs.
UPC: Universal product code. This is a bar code that is assigned to a single piece of merchandise.
An open-to-buy plan is a purchasing budget for future inventory orders that a retailer creates for a specific period. An OTB plan helps a retailer stock the right amount of the right products at the right time by showing the difference between how much inventory is needed and how much is available.
Distinguishing between selling price, mark-up and gross margin
Mark-up is a percentage added to the cost price to get the selling price. Margin is that proportion of the final selling price that represents profIt.
It is recommended that you work with margins with retail buyers because this enables them to know a percentage of the total income is profit. Obviously, these are gross profits, and from these are deducted the overall retail expenses, wages, taxes, operational costs such as rent, electricity, and phone bills, stationery, bags, warehousing, and to establish the net profIts.
Hence, if the gross margin in selling your product is not high enough, the retailer will infact make a net loss after adding all the costs. Typically you work with experienced retail buyers so they will rightly walk away from any product pitch where the gross margins are insufficient for them to make a net profit.
Having a 50% margin means that half the selling price is profit. In mark-up terms, this would be a 100% mark-up.
The formula for calculating a gross margin percentage is : Gross Margin % = (Selling Price - Cost) x 1 00/Selling Price
For many products, price is often a function of the cost of the product and a desired level of m ark-up. When price is determined by the level of m ark-up desired, this is often referred to as cost-plus pricing
The formula for determining a product’s selling price using a desired percentage mark-up is:
Selling Price = Total Cost x ( 1 + Percentage Mark-up)
cost-plus pricing, mark-up pricing or full-cost prIcmg. There are several schools of thought related to mark-up pricing. For example, some retailers may expect to price items at anywhere between 15% to 100% above their cost. There is, however, a fine line between the desired mark-up, the cost of the product and the price that the market will accept.
Discounts on list price
Many suppliers prefer to quote list prices less a discount. This is because that gives them and the retail buyer a base line to work from.
buyer typically will like to know how these discounts are going to affect the end selling price and if these discounts are attractive enough for, say, a promotion or a sale. In many cases, the supplier will link the discounts to the quantity of merchandise ordered.
“Factor” for ballparking margins
A factor is an another way o f expressing a margin . A factor o f 2.5 (suggested industry best practice) indicates that the buyer operates with a margin of 60% and a mark-up of 150%.Very often, a supplier will ask the buyer what her factor is. This enables the supplier to estimate what margins the buyer operates on, and figure out if his cost to retail will be comparable with this type o f margin .
A supplier should notwant the merchandise to be priced too high (and thus run the risk o f selling fewer units), or too low ( and thus run the risk of cheapening the brand in the consumers’ eyes).
Vendors should have an ideal price point in mind . By asking the buyer for their factor, the vendor can then calculate if the buyer’s retail price fits his ideal price for the merchandise to be sold.
Mark-downs are used on goods that are slow to move and in hope that the new price will attract customers. Slow inventory ties up precious OTB dollars that could otherwise be used to buy productive lines.
The degree to which prices are marked down will depend on how much has been sold at the regular price or, in other words, on the initial interest.
The balance, the sizes and the time left in the season have some bearing on the estimated discount required to clear the goods.
In general, a vendor or manufacturer of a product should view any markdowns happening in retail as a negative news since it means that their items are slow to sell at the very least, and they should try and find out why is that happening. Maybe a new competitor is on the horizon? Markdowns can also foretell future loss of retail space to a competitor.
In industry terms, markdowns are different from sales and promotions that retailer might run at frequent intervals to stimulate demand. Both result in your merchandise being sold at the lower cost, but one is done to stimulate overall demand whereas other one is simly a way to get rid of your product.
Weeks of stock on hand
As a vendor, you should always ask a retailer about weeks of stock on hand. It can be calculated by taking average stocks on hand, divide the retail value of the inventory by the average weekly sales for a specified period of time.
The average rate of weekly sales will give you an indication of the flow o f goods required. If sales fluctuate during certain periods, recourse must be made to the records and modify the p re-planned projections. A successful promotion may have had some spillover, generating unusual increases in the rate of sale of a particular basic item.
You should be very careful in extrapolating this to any overall long term demand growth and conservatively view it as a one time demand bump until you have evidence for a sustained growth.
Estimate delivery schedules conservatively, from the time of ordering to the time the order hits retailer’s shelves. This should take account o f the time it takes to place the order and the time the vendor takes to process it.
Metrics important to measure store performance
Lots of retail stores are publicly listed companies and hence not only do they have to make their annual financial results public, but they will also give out forecasts and management commentary for the upcoming year via analyst calls, press releases or just interviews to business networks such as CNBC.
If you are a vendor selling products or services to a retailer than it will help you plan for your future better if you know whether your retailer is doing well or not.
Let us give an overview of some of the metrics retail management commonly refer to and measure their financial performance.
The top line - sales when compared to previous year (YoY)
Its extremely common to expect a year-on-year (YoY) sales growth and this is a robust indicator of how customer acquisition and retention is going against the previous year. These forecasts will normally take into account market trends, political stability, commodity price hikes, changes in taxes or any foreseeable trends that may affect consumer spending.
If the sales are not growing than it generally means that merchandise selection is a problem, and if you happen to be a vendor of such a retailer than you should assume some changes in ordering pattern in future since the retailer will be fix the problem and you may be the one affected by it even though your product line is doing comparatively well.
The bottom line - gross profit margin when compared to previous year (YoY)
Achieving the planned gross profit margins has an even greater importance than over- achieving planned sales. This is because all budgeted expenses are in line with the profIts expected.
Growing the top line is fine but, at the end of the d ay, it’s the profIts that pay the bills.
Accumulated sales and gross profit for year to date for each retail buyer
These are the markers r the global overview of the business being generated by the buyer.
Though each month’s performance is probed individually, if the accumulated sales and gross profits are behind plan, management will want to explore the cause of these discrepancies and assist the buyer in closing the gap.
Sales per square foot
A sales-per-square-foot figure allows management to assess if a product line or a brand is generating sufficient business on a given sales area. In a cosmetics department, for example, sales per square foot will always be better than in a fashion department, simply due to the nature of the products sold.
Thus, each segment of the business will have specifIc requirements in this regard based on whether the management judges the products or brands to be performing up to expectation.
Their respective locations on the selling floor will also be taken into account.
Gross profit margin per square foot
While the cosmetics department in our example above enjoys greater sales per square foot, against this productivity measure, the fashion department will have the advantage.
While cosmetics usually offer between 25 - 30% margins, fashion should command 40% and above.
Actual stocks against planned stocks
A stock holding against plan reflects the effIciency of the products bought.
If a buyer is over plan, it could indicate that goods are not selling as well as anticipated, more goods were bought than were planned for, or goods were brought in early to prepare for a big sales event.
The last of these is acceptable, as long as management is informed and there are good reasons to justify the early deliveries.
More critical is when goods are selling below expectations, or if a buyer has over-bought. Such circumstances usually lead to markdowns and loss of profits.
A stock turn is a ratio of sales to average stocks. The stock turn measures the efficiency of the inventory, the retailer’s main source of operating profits.
It determines the effectiveness of the merchandise planning and controls in place. The higher the stock turn of the inventory, the more profitable the operation will be.
A stock turn below plan is costly. In retail, we estimate that an excessive inventory can cost the company as much as 5% per month as result of increased expenses in storage, interest, insurance, internal transfers, and, ultimately, devaluation of the merchandise with mark-downs.
Conversion rate takes into account the number of customers walking into the store vis-a-vis the number of transactions being processed. It provides another tool for measuring the effIciency of store locations, merchandise categories, and the staffs selling skills in turning potential shoppers into actual customers.
Gross margin return on inventory (GMROI)
The GMROI assists management in evaluating whether a suffIcient gross margin is being earned on the products purchased in relation to the investment in inventory required to generate it. This can be worked out by calculating the gross profIt margins of the average inventory at cost and dividing this by the average cost of inventory. The result is a ratio that indicates the number of times gross margin is earned from the inventory investment.
Average selling price against the plan
The average selling price (ASP) is the price at which a particular class of merchandise is typically sold . This varies according t o the type of product and its expected lifecycle. Products such as silverware, crystal ware, watches and jewelry tend to h ave a higher ASP than garments and fashion accessories. In the latter p art of its lifecycle, a product becomes less attractive as the novelty wears off and is replaced by newer styles, o r, m o re likely, is saturated with competitors, thus driving the ASP down. I f a n average selling price goes below plan, it is usually caused by the buyer underselling products before the end of their lifecycle, or by introducing high er-than-planned levels of l o w-priced items. Having aggressive price promotions or i l l -managed discounts is a sure way of lowering the perceived value of a given product, and therefo re driving down the ASP.
Monthly mark-downs, accumulative mark-downs and markdowns against budget or previous year.
Mark-downs are planned for by month, and typically involve a standard set of mark-down percentages implemented on a standard schedule, across all departments or stores. These plans, however, do not take into account store-specific consumer demand, inventory on hand, and sales velocity. They are allocations as a percentage to sales for clearing oddments and limited levels of slow-selling merchandise during the season. Whether correcting a bad buy or clearing merchandise at the end of a product’s lifecycle, buyers are expected to control and manage their m ark-down allocations. Excessive use of m ark-downs always equates to l oss of profits. Astute buyers can often negotiate cooperation or compensation from vendors on mark-downs as part of their purchasing deal.
Stock obsolescence (OBSL)-year to date
Stock obsolescence reserves are financial tools based on historical mark-down data that enable retailers to factor into their calculations a certain percentage of mark- downs against sales to clear aged, or problematic stock holdings at the end of each season. The reserves can typically be a reduction of 40% on an inventory that is older than seven months, and 80-90% off for inventories th at are older than a year. The percentage allocated will normally be higher for fashion departments than for homeware, which has a much longer lifecycle.
The OBSL reserves are made accessible after the stocktake result is known. These mark-downs are then utilized to clear any o l d stocks during t h e store’s season-end sales. As a result, t h e newer the buyer’s inventories are, the more management saves.
Shrinkage (due to theft or spoilage)
Many retailers plan shrinkage arising fro m theft or spoilage as a percentage of sales. Though minimizing shrink is an operational duty, any help rendered by the buyers to reduce these losses is greatly appreciated by management.
Return on investment (ROI)
In retail , the ROI will calculate the profit returns generated by the inventory invested and is usually expressed as a percentage. For instance, a $ 1 ,000 investment that earns $ 50 in interest obviously generates more cash than a $ 100 investment that earn s $ 20 in interest, but the $ 100 investment earns a higher return on investment.
ROI enables retail store management to evaluate the relative efficiency of the profits generated by the merchandise bought.
ROI is also important to you as manufacturer or vendor of a product especially if you have external funding and investors.
If your product line is not giving enough ROI you can expect to get significant pushback from your investors and other shareholders about making modifications to your product, or even discontinuing some product lines to improve ROI and decrease tying up your operating capital in slow moving inventory.