Core elements of successful retailing

Happy summer!

Seems we’ve just skipped from winter directly to summer without a meaningful spring season – tough to plan for, and harder to control.

It’s been said, “People and their businesses do not plan to fail; however, they often fail to plan.”

Whether starting a new business or operating an existing business, the importance of a plan cannot be overstated. Whether operating a retail store, running a restaurant, managing a lumberyard, or operating a medical clinic, the need for a plan is vital. The only difference in a plan for an existing business and a startup is the amount and type of data. The startup will be required to do projections based on industrial averages and information drawn from local sources, while the existing business has a track record that can be examined through tax returns and monthly financial statements.

It is a common occurrence that people forget the reasons why they created their business. What was their overarching goal? This goal can be a lofty mission or simply needing to make a living. There is a financial component to the goal. How much money does the owner wish to be able to take out of the business each year. I often hear people say, “I want to make as much money as I can.” I advise people to set a measurable goal and develop a plan to reach or exceed that goal.

The Financial Plan

Having a plan to reach your goals is critical in establishing and operating a profitable business. In the retail world, the example in the table provided here lays out a plan for someone to take home $75,000 per year (example at bottom of page).

Sales would need to be $400,000 with a 50 percent cost of goods. The gross profit would be $200,000, which would be used to pay for fixed costs, and owner compensation. In this case, it is assumed that the owner secured a $100,000 loan to start the business, so the owner will have interest (part of operating expenses) and principal payments (not deductible as an expense). In addition, as a self-employed business owner, the owner must pay both halves of Social Security, so that the owner needs to pay him/herself $86,475 to cover the taxes. In this example $400,000 in sales translates to the owner taking home $75,000.

Pricing

Many retailers work on the “keystone principle of pricing”, which simply means if they pay $10 for an item, they sell the item for $20. This would yield a 50 percent cost of goods sold. Some retailers will price their products above or below this 50 percent threshold to distinguish themselves in the marketplace. Lower-priced retailers are going for a particular market, while high-priced retailers are going for a different customer. A successful retailer will know where they fit into the competitive landscape and price accordingly. The Small Business Administration has many videos that speak to the philosophy of pricing at the SBA website www.sba.gov

KPI’s

In retail, the two biggest controllable costs are the cost of the goods you sell and the labor it takes to sell the products. To manage a business effectively, the retail shop owner cannot have more than five key performance indicators (KPIs). Anymore more KPIs and each will lose importance and become hard to track.

In retail, an important KPI will be sales mix. Often, a retailer will have items that they sell for less than the keystone amount and have other items that sell for more than the keystone amount. Watching this sales mix and adjusting pricing accordingly is very important to do on a weekly, monthly, or quarterly basis. In addition, controlling inventory shrink and watching for “dead inventory” items is also very important. “Shrinkage” refers to the cost of shoplifting or employee theft, and “dead inventory” refers to items that were purchased however have not been sold. Industry statistics state that the “average” retailer turns their inventory 10 times in a year. If a retailer has an item that has not sold in several weeks or months, the retailer needs to

For more Petrick, see page 9 develop a plan to sell the item through lower prices, giveaway to draw customer to the store or consigning to a discounter if there are many items not selling. Retail inventory control is vital to a successful inventory business.

Another KPI is tracking retail sales per employee. Each retailer can have an employee/customer service philosophy. Some retailers stand out based on the friendly, efficient, knowledgeable staff that have been trained in providing excellent customer service. Other retailers hope that their employees provide the service needed. Using the point-of-sale system to track individual employee sales productivity is vital to the success of the retail business and communicating that information back to employees is an important feedback mechanism.

Summarizing

The keys to successful retailing are:

• Have a sustainable plan

• Know where the retailer “fits” in the marketplace

• Understand the pricing philosophies and customer service levels

• Monitor inventory

• Monitor employee productivity – share that information with employees

Engaging with your business in a methodical, structured manner will help you spot trends and identify opportunities to differentiate your business.

This information was gathered from several sources and provided by Jerry Petrick, senior certified business adviser with the Washington Small Business Development Center (SBDC) serving southwest Washington. The SBDC provides confidential business advisory services at no cost to the business. To schedule an appointment email: jerry.petrick@wsbdc.org

Cowlitz Economic Development Council

Ted Sprague President