Basics of Retail Math,

Retailing is all about change, because consumers change

and so do their tastes.
If you dont change, you dont grow.
MARVIN TRAUB, former CEO of Bloomingdales
INANCIA! REE"OM# $etting %o&r o'n sched&le# Being %o&r
o'n (oss# Ta)e %o&r *ic)# No matter 'hat %o&r collateral reasons
for o*ening a retail store, the n&m(ers are o(+io&sl% 'hat dri+e
%o&r decision a(o&t 'hether or not to in+est the large and intense amo&nt
of time and effort it ta)es to (&ild a (&siness %o& can call %o&r o'n#
If %o&re an%thing li)e me, seeing a lot of n&m(ers all at once
can (e intimidating# Initiall%, that is# ,o'e+er, as the sa%ing goes, there
is -strength in n&m(ers#. In fact, ha+ing a (asic &nderstanding of ho'
to inter*ret these n&m(ers ma)es man% decisions that seem gra% at first
/&ite (lac) and 'hite#
This cha*ter to&ches on the meaning of the (asic n&m(ers %o&ll
enco&nter in the retail (&siness# If %o& are coming from another ind&str%,
s&ch as man&fact&ring or real estate, the 'a% retailers fig&re their
n&m(ers ma% loo) a little strange to %o&# Most other ind&stries deal 'ith
mar)&*s, the *rofit as a *ercentage of cost0 retailers deal in margins, *rofit
as a *ercentage of retail selling *rice#
Retailers t%*icall% )ee* a t'o1col&mn ledger in order to f&ll%
&nderstand 'hat is going on 'ith their (&siness# In the left col&mn, the%
)ee* a r&nning record of the cost of the merchandise, the landed *rice
incl&ding the cost of goods and shi**ing costs# In the right col&mn, the%
)ee* a r&nning record of the retail +al&e of the merchandise, the s&m of
the retail *rice tic)ets on all the items in the store#
This method lets %o& )ee* trac) of the mar)do'ns in the right
col&mn so %o& can see at a glance the *rofita(ilit% of an item, de*artment,
and store# Also, this a**roach sho's %o& the *rofit or loss in the
month it occ&rs, and resets the margin for the ne' month, gi+ing %o& a
tr&e month1to1month com*arison# Ma)e s&re that an% acco&ntant %o&
in+ol+e 'ith %o&r (&siness f&ll% &nderstands retail acco&nting# If not,
%o& co&ld tr&l% (e at a loss#
Under the retail methodolog%, the selling *rice of an item is
al'a%s 2334# Therefore, (oth cost 5the amo&nt %o& *a% for an item6 and
markup 5the amo&nt (% 'hich %o& increase the *rice to co+er %o&r
e7*enses and *rofit6 m&st e/&al 2334#
or instance, if %o& *aid 83#99 for a s*at&la and sold it for
82#33, %o&r gross *rofit margin 'o&ld (e 83#:9 5:946 and %o&r cost of
goods 'o&ld (e 83#99 59946# 5In other ind&stries, the 83#:9 *rofit might
(e e7*ressed as a *ercentage of cost, gi+ing %o& a markup of a(o&t ;<4#6
,ealth of =o&r B&siness
To determine ho' 'ell or 5*erish the tho&ght6 ho' (adl% their (&siness
is doing, retailers ro&tinel% com*are each month 'ith the same month a
%ear *rior# This is (eca&se, gi+en the large seasonal s'ings almost all
retailers e7*erience, there is little meaning in com*aring this months
sales 'ith last months# $o, if this e(r&ar% %o& did 8223,333 in sales and
last e(r&ar% %o& did 8233,333, %o&r (&siness 'o&ld (e 234 ahead of
last %ear# And, if this contin&es for a 'hile, %o& can (e ha**% 'ith %o&r
trend# Of co&rse, if the n&m(ers 'ere re+ersed and %o& did 8233,333
this %ear and 8223,333 last, %o& 'o&ld (e >4 (ehind, and %o& 'o&ld
ha+e to ta)e *rom*t remedial action#
In loo)ing at these fig&res, %o& m&st e7cl&de ne' stores or
de*artments %o& o*ened# To determine ho' health% %o&r (&siness is, the
com*arison (et'een %ears m&st (e a**les to a**les, that is, same store
*erformance#
Esta(lishing Initial Margin
To disc&ss the retail conce*t of margin it is im*ortant to ha+e a fe' definitions
&nder o&r (elts first# or starters?
@ Cost. Cost of Goods (COG is 'hat %o& *a% the +endor for *rod&cts#
@ Retail. !elling "rice of #erchandise is 'hat %o&r c&stomers *a% the store
for these goods#
@ Initial Margin $. Initial #argin is the difference (et'een retail and cost
5Retail A Cost B IM86, e7*ressed as a *ercentage of retail#
$o, if %o& (&% a shirt for 8C and sell it for 8D, %o&r initial margin is 8: or
9>#24# If %o& 5li)e me6 didnt *a% attention in ninth grade alge(ra, let me
gi+e %o& a /&ic) &*date# 5If %o&, &nli)e me, 'ere an alge(raic 'hiE )id,
*lease s)i* this section#6
In retailing there are three ingredients needed to fig&re o&t 'hat
%o&r margin is and 'hat the margin sho&ld (e# If %o& )no' t'o o&t of
three, calc&late the third# Then, %o& can decide 'hether or not 'hat %o&
ha+e to *a% fits into %o&r (&siness *lan# !ets r&n thro&gh a fe' e7am*les#
@ When cost and retail are known (and you want to find out what
your margin percentage will be)
Retail A Cost B Initial Margin 4
retail
$%ample& If %o& (&% a lam* for 8F and it retails for 823,
Initial margin 4 is 23 A F B : B :34
23 23
@ When cost and margin percentage are known (and you want to figure
out what the retail should be)
retail B cost
2334 A margin 4G
If %o& )no' %o& 'ant to maintain a margin of 994 on the childrens
clothing and a +endor offers %o& girls *ants for 89, the retail
*rice %o& need to charge 'o&ld (e
89 B 89 B 822#22
2334 A 994 :94
@ When retail and margin percentage are known and you want to
find out what you can afford to pay the !endor" the calculation is
Cost B Retail HI52334 A margin 46
or %o&r 'hite sale e+ent, %o& need f&ll sheets to retail for 8F#;;
and %o& )no' that %o& 'ant to 'or) on a C>4 margin# Jhat can %o&
afford to *a% for each sheetK Cost is
8F#;; HI52334 A C>4 B F246 B 8:#<3
In+entor% T&rn
T&rno+er of in+entor%, or turn, is the calc&lation of ho' man% times %o&
sell and re*lenish the merchandise in %o&r store o+er the co&rse of a %ear#
To fig&re o&t %o&r t&rn, di+ide %o&r ann&al sales (% %o&r a+erage in+en1
G2334 A margin *ercentage is also )no'n as the cost *ercentage or the cost complement
(eca&se adding this cost *ercentage to the margin *ercentage sho&ld al'a%s
e/&al 2334#
tor% 5at retail6# or instance, if %o&r sales are 8:33,333 for the %ear and
%o&r a+erage retail is 8233,333, %o&r t&rn is :# The more times %o& can
t&rn o+er %o&r in+entor%, the (etter it is (eca&se?
@ =o& 'ill ha+e less older merchandise#
@ =o& 'ill ha+e more o**ort&nities to (&%, 'hich sho&ld lead to (etter
(&%s#
@ The in+entor% 'ill (e more &*1to1date#
@ !ess mone% 'ill (e tied &* in in+entor%#
@ =o&ll ma)e more *rofit on %o&r in+ested ca*ital# 5If %o& need
8233,333 of in+entor%tied &* ca*italto feed 8:33,333 'orth of
sales and *rofits, %o&re o(+io&sl% (etter off than if %o& need do&(le
that in+entor% for the same res&lts#6
$toc) to sales ratio is the monthl% +ie' of t&rno+er# It is the amo&nt of
merchandise in the store at the (eginning of a gi+en month di+ided (%
the amo&nt of sales of merchandise for the month# It *ro+ides %o& 'ith
a /&ic) +ie' on ho' 'ell %o& manage the in+entor%# or instance, if %o&
ha+e in+entor% of 82<3,333 and 8C3,333 in sales for the month, then
%o&r stoc) to sales ratio is fo&r to one# This means that it 'ill ta)e fo&r
months of selling at %o&r c&rrent rate to sell thro&gh the a+erage monthl%
in+entor%#
Lno'ing that there are t'el+e months in a %ear, this means %o&
are t&rning %o&r goods at the rate of three times a %ear 5t'el+e months
di+ided (% a fo&r stoc)1to1sales ratio6# ,o'e+er, if %o&r 5realistic6 goal is
to achie+e a stoc)1to1sales ratio of three to one, that is a t&rn of fo&r
%o& are o+erstoc)ing and need to find 'a%s to o*erate on less in+entor%
or to sell moreM
=o&r &ltimate goal sho&ld al'a%s (e to de+elo* the highest le+el
of sales from the smallest *ossi(le in+entor%# B&t (e caref&l 'hat %o&
'ish for# If %o& tr% to *&sh %o&r t&rns too high, %o& ma% r&n o&t of merchandise
that %o&r c&stomers 'ant, and the% ma% go else'here#
The n&m(er of t&rns for 'hich %o& sho&ld aim +aries (% t%*e of
retailer# Th&s, (efore %o& set %o&r target, %o& sho&ld find o&t 'hat is the
ind&str% norm# Act&all%, this is another reason to (elong to the trade
association most related to %o&r t%*e of retail store# $&ch organiEations
can gi+e %o& the a+erage g&idelines for t&rn and stoc) to sales ratios for
different seasons that sho&ld hel* %o& )ee* the right amo&nt of in+entor%
on hand, *artic&larl% thro&gh %o&r first fe' %ears in (&siness#
=o& sho&ld re+ie' %o&r t&rno+er ratio e+er% 'ee)# The higher
the t&rno+er, the stronger the retail (&siness 'ill (e# Jith a high
t&rno+er, %o& ha+e less mone% in+ested in the in+entor% at an% gi+en time
and a lo'er ris) of carr%ing *rod&cts %o&r c&stomers do not 'ant to (&%#
=o& get higher sales from the same amo&nt of s*ace, ha+e fresher goods
in the store, and can al'a%s feat&re ne' items to tem*t %o&r c&stomers#
Theres nothing more disa**ointing to a re*eat c&stomer than seeing
nothing (&t the same old st&ff#
Jhile t&rn rates are innatel% different (et'een different categories
of retail, 'ithin each categor% there are t'o (asic, and /&ite different, strategies
that %o& m&st decide &*on 'hen setting %o&r t&rno+er o(Necti+es?
2# ,igh margin, high *rice, and lo' t&rno+er
<# !o' margin, lo' *rice, and high t&rno+er
A lo' t&rno+er item m&st gi+e %o& a high margin in order to *a% the rent
for sitting on %o&r shelf for a long time# In contrast, a high t&rno+er item
o(+io&sl% has to *a% less rent, and therefore can ma)e a lo'er margin#
$trategicall%, %o& can mi7 these t'o t&rno+er conce*ts as long as one
dominates the other so %o& are gi+ing a clear message to the c&stomers#
or instance, in %o&r to% de*artment, %o& ma% *rice Bar(ie at cost to create
a high t&rn, (&t *rice her accessories higher to create more margin,
e7*ecting that c&stomers 'ho (&% Bar(ie (eca&se of the *rice 'ill *ic)
&* the other items (eca&se no little girl can e7ist 'itho&t at least three
ne' o&tfits for her dollM
O(+io&sl%, %o& 'ant to t&rn all %o&r merchandise as /&ic)l% as
*ossi(le# The tric) is to recogniEe that %o& ma% ha+e to stoc) lo'
t&rno+er items as a ser+ice to %o&r c&stomers to ind&ce them to come to
%o&r store and (&% the more *o*&lar items#
or e7am*le, a 'ell1)no'n cosmetic com*an%s *resident 'as
del+ing thro&gh his firms li*stic) sales and disco+ered that, of the ninet%1
si7 shades the% mar)eted, fo&r did ;24 of the (&siness, ten did >:4
of the (&siness, and fifteen did >;4 of the (&siness# ,is first tho&ght 'as
to discontin&e all (&t the fast1selling fo&r# ort&natel% for him, 'iser
heads *re+ailed and the com*an% )e*t fifteen shades and discontin&ed
the rest# -Jell sa+e so m&ch in+entor% (% eliminating eight%1one shades,
'ell increase o&r *rofits e+en if 'e lose the 'hole t'o *ercent of sales
that are in the discontin&ed shades,. the *resident e7*lained# -In an%
case, most of the 'omen (&%ing those shades 'ill *ro(a(l% s'itch to the
ones 'ere )ee*ing#.
The res&ltK $ales fell to a(o&t half# A large maNorit% of 'omen
'ere (&%ing the same fifteen shades, (&t the% 'anted to feel the% had a
h&ge choice# The% 'ere offended to thin) that the com*an% 'as, in
effect, deciding the shade for them#
The *resident not onl% reinstated the missing shades, he
increased their n&m(er to 2<9# The res&ltK $ales gre' to a(o&t C34 more
than the original le+el(&t 'omen still almost e7cl&si+el% (o&ght the
same fifteen shadesM
=es, *ro+iding a good selection is often *art of *leasing %o&r c&stomers#
B&t it has a cost# #low $urn ca&ses?
@ $lo'1mo+ing merchandise to clog %o&r shel+es and ma)e it harder for
c&stomers to find the goods the% 'ant
@ E7cessi+e acc&m&lation of old st%les, odd siEes, and e7treme colors
@ Increased e7*enses
@ "ee*er mar)do'ns and the need to r&n them more often
The challenge is to (alance the in+entor% le+el against the ser+ice le+el
%o& 'ant to *ro+ide %o&r c&stomers# As I said, its a (alancing act# Too
high a t&rn 'ill *rod&ce too man% o&t1of1stoc) sit&ations and hence lost
sales and disgr&ntled, often non1ret&rning, c&stomers# Too lo' a
t&rno+er co&ld *&t %o& o&t of (&siness#
"etermining ,o' M&ch Margin to Oo After
Remem(er the retailers creed? Al'a%s stri+e to s/&eeEe as m&ch margin
as *ossi(le# The more margin %o& can e7tract from one item, the more
mone% %o& ha+e to c&t *rices 5and margins6 on the *rod&cts and deals
that dri+e traffic thro&gh %o&r store# ,o'e+er, 'hen tr%ing to raise margins,
%o& m&st (ear in mind 'hat the cons&mer is 'illing to *a% in your
store en'ironment. If %o& are a disco&nt store, %o& cannot e7*ect to ma)e
the same margin the de*artment store do'n the street ma)es on the same
item# In %o&r store, %o&r c&stomers are onl% in the mood for (argains#
In general, margin decisions sho&ld (e (ased on?
@ Competitors% retail. If an item is carried thro&gho&t %o&r trading area
and its an item %o& cannot do 'itho&t, %o& m&st decide if %o& are
going to (e *arit% *riced 'ith e+er%one else or ha+e the lo'est *rice in
to'n# ,a+ing the lo'est *rice 'ill h&rt %o&r o+erall margin, (&t it ma%
increase t&rn and (&ild c&stomer traffic#
@ &ast year%s sales on this item or a similar product. Once %o& ha+e a
histor% of an item, %o& can determine ho' *rice1sensiti+e it is and if
%o& ha+e room to get more margin#
@ 'lanned turno!er of an item. If %o& e7*ect sales to (e limited and
%o&re carr%ing the item onl% as a con+enience for the c&stomers, ta)e
the e7tra margin# I al'a%s tho&ght the *resident of the cosmetics com*an%
I referred to earlier sho&ld ha+e &*1*riced all the colors that hardl%
sold and called them -*remi&m shades.M Not onl% 'o&ld he ha+e
im*ro+ed his margins, (&t I (et he 'o&ld ha+e sold more of those
shades# Cosmetics (&%ers are al'a%s loo)ing for something -e7cl&si+e#.
@ Wholesale costs. Be s&re to sho* aro&nd among 'holesalers 5if %o&
are not dealing directl% 'ith the man&fact&rer6 to see if %o& can red&ce
the *rice %o& are *a%ing# E+en a fe' *ennies sa+ed can acc&m&late into
good margin gains at the end of the %ear# Most retailers ma)e a *re1ta7
*rofit of (et'een <4 and ;4 of sales0 onl% in rare cases do their *reta7
*rofits e7ceed 234#
!ets ass&me that %o&r *re1ta7 *rofit is 94 of sales# No', if %o&
can c&t the cost of %o&r *&rchases so %o&r margin increases (% <4, for
e7am*le, (% *a%ing 8F#33 for an item %o& sell for 823#33 instead of
*a%ing 8F#<9, that e7tra 83#<9 dro*s to %o&r (ottom line# That means
that %o&r *re1ta7 *rofit increases from 83#93 to 83#D9a 'ho**ing
934 increase in %o&r *rofitsM
If %o& can ma)e a <#94 im*ro+ement on all the cost of all merchandise
%o& sell, and %o&r ann&al sales are 82,333,333, then %o&r
*re1ta7 *rofit 'o&ld rise from 893,333 to 8D9,333# Not (adM Certainl%
'orth *&shing %o&r s&**liers to gi+e %o& some *rice (rea)s# Beca&se
there are no additional e7*enses, that e7tra 83#<9 dro*s to %o&r (ottom
line and %o& ma)e 83#93 for e+er% 823#33 of merchandise %o& sell#
@ Manufacturers suggested retail. Altho&gh this is onl% a g&ideline, it
gi+es %o& a sense of the 'orth of *rod&cts# If %o& are a disco&nter, this
also allo's %o& to *ro+e to %o&r c&stomers ho' m&ch %o& ha+e c&t
%o&r *rice#
@ (andling and selling costs. Prod&cts can +ar% dramaticall% in 'hat
the% cost to sell# $ome *rod&cts 5li)e glass'are6 (rea) easil% so c&stomers
or sales *eo*le are li)el% to damage a certain *ercentage of the
stoc)# Certain goods ha+e a tendenc% to disa**ear (eca&se of sho*lifting
5electronics6# Others are e7tremel% hea+% or a')'ard to mo+e from
the 'areho&se to the selling floor, so the freight and handling costs ma%
(e high# $ome ma% (e shi**ed from across the street 'hile others ma%
(e coming from across the co&ntr%, so trans*ortation costs need to (e
considered# $ome goods ma% come in *re1tic)eted 'hile others re/&ire
a lot of handling and tic)eting in the store, adding to %o&r cost# $ome
goods tend to ha+e a high ret&rn rate# All these costs need to (e factored
into the *rod&cts retail *rice# A (rittle, fadd%, easil% stolen article
'ith a F34 margin ma% act&all% (e less *rofita(le than a solid -e+ergreen.
*rod&ct 'ith a :34 margin#
@ )ature of the goods. If %o& are dealing in fad1 or fashion1oriented
merchandise 5'hich incl&des e+er%thing from fashions themsel+es to
cosmetics to to%s to no+elties that come and goremem(er the Pet
Roc)K6, )no' 'hat an items li)el% shelf life is# ,o' 'ill the man&fact&rer
hel* 'ith mar)do'nsK These, too, are factors %o& need to consider
'hen thin)ing thro&gh ho' to *rice merchandise and ho' m&ch
initial margin to achie+e#
@ Correlation among departments. or instance, infant clothing sho&ld
not (e selling higher than (o%s and girls clothing#
@ *emand and supply of goods. If %o& ha+e the e7cl&si+e distri(&tion
of a hot item, %o& can &s&all% s/&eeEe o&t additional margin# If there is
a high demand (&t short s&**l%, and %o& find there is little *rice resistance
for an item, %o& can get additional margin there as 'ell#
,o' to Increase =o&r Margin
O(+io&sl%, the /&estion here (ecomes, -,o' do I increase m% marginK.
An additional /&estion m&st (e, -,o' do I increase m% margin 'hile still
)ee*ing m% c&stomers ha**% and therefore m% sales risingK. Rela7# There
are se+eral different tactics %o& can &se to hel* increase %o&r margin 'hile
at the same time not changing the c&stomers e7*erience in the store?
Im*ort Merchandise
It so&nds com*licated at first glance# ,o'e+er, im*orting merchandise
can ta)e on se+eral different *hases as %o&r store gro's# =o& ma% 'ant to
start off small, dealing 'ith an im*orter &sing his la(el on the *rod&cts#
Once %o& reach a certain +ol&me, ho'e+er, %o& ma% (e a(le to (ring in
%o&r o'n *ri+ate la(el *rod&cts at considera(l% lo'er cost# In addition
to sa+ing mone%, here are some reasons to loo) into im*orting?
2# )o middle man. If %o& are dealing 'ith an im*orter directl% or e+ent&all%
im*orting %o&r o'n *rod&cts, %o& ha+e eliminated the 'holesaler
or distri(&tor from 'hom %o& 'ere (&%ing the goods# Th&s, %o&
ha+e added their margin to %o&r o'n#
<# Control. Once %o& esta(lish a *ersonal relationshi* 'ith the o+erseas
man&fact&rer, %o& ma% (etter control the /&alit%, /&antit%, and timeliness
of the merchandise %o& are (&%ing#
C# +,clusi!ity. B% im*orting a *rod&ct feat&ring %o&r name 5and, *ossi(l%,
%o&r s*ecifications6, %o& can dis*la% an item that no com*etitor
carries# That means %o& can sell it for 'hate+er the mar)et 'ill (ear
'itho&t ha+ing to 'orr% too m&ch a(o&t 'hat %o&r com*etitors are
doing#
:# Competiti!e Retail. =o& can (ring in a high /&alit%, *ri+ate la(el item
to com*ete effecti+el% 'ith a higher1*riced, (randed *rod&ct carried
(% %o&r com*etitors# In this 'a%, %o& ma% (e a(le to enhance %o&r lo'
*rice re*&tation 'hile still maintaining a comforta(le margin#
Cash "isco&nts
Vendors are generall% forced to e7tend credit# ,o'e+er, (eca&se cash is
)ing to them, the% often enco&rage %o& to *a% (efore the d&e date (%
offering %o& a cash disco&nt for earl% *a%ment or a *a%ment in ad+ance
of a s*ecific date# Among the more common cash disco&nts are?
2# -./0 +1M. A disco&nt of C4 if the in+oice is *aid 'ithin ten da%s
from the end of the month#
<# 2./0 )et -0. A disco&nt of <4 if the in+oice is *aid 'ithin ten da%s
from the date it is iss&ed# Ten is the n&m(er of da%s the rate is a+aila(le#
Thirt% is the n&m(er of da%s 'ithin 'hich the in+oice m&st (e
*aid#
C# -./0 R13 A disco&nt of C4 if the in+oice is *aid 'ithin ten da%s of
recei*t of goods#
"eli+er% Terms
"eli+er% terms indicate 'hen and 'here the title of the merchandise
*asses from the seller to the (&%er# That is the time and *lace at 'hich
%o&r ris) of o'nershi* (egins# rom that time and *lace, %o& o'n the
goods and %o& *a% for ins&rance and trans*ortation# Therefore, %o& can
sa+e mone% (% dela%ing the *oint at 'hich %o& act&all% ta)e *ossession
of the merchandise# T'o common deli+er% terms are?
2# 415 4actory. =o&r store o'ns the goods as soon as the carrier *ic)s
the shi*ment &* at the factor%# That means %o& *a% the freight from
there#
<# 415 Warehouse or #tore. In this case, (eca&se the seller o'ns the
goods &ntil the% arri+e at %o&r location, the seller *a%s freight, ins&rance,
etc#
"ating
*ating e7tends the time (% 'hich %o& ha+e to *a% for merchandise# As
the sa%ing goes, -Time is mone%#. "ating is +al&a(le for t'o reasons# The
first reason is the interest %o& sa+e on the mone% that %o& )ee* &nder
%o&r control for longer# This +al&e de*ends on the *re+ailing rate at
'hich %o& can (orro' mone%# or instance, if interest rates are 2<4 *er
ann&m 5as the% 'ere some %ears ago6, then adding an additional month
(efore %o& ha+e to *a% is 'orth 24 of the mone% %o& o'e# If interest
rates are F4, that translates into a half *ercent gain each month# Al'a%s
as) for additional dating#
The second reason, and often the more determinant one, is that
%o& are li)el% to find that, li)e most retailers, %o& are chronicall% short of
cash# This is not necessaril% &nhealth% 5altho&gh it is &ncomforta(le6
(eca&se there is a good reason for it#
If %o&r (&siness is gro'ing 5as %o& ho*e and intend that it 'ill6,
%o& need more in+entor%# E+en if %o&r t&rn is a +er% im*ressi+e si7 times
a %ear, in the short r&n %o& are still *&tting o&t more cash than %o& are
collectingsi7 times a %ear t&rn means %o& ha+e to (&% t'o months of
e7tra in+entor% to ser+ice %o&r gro'th# T%*icall%, %o& ha+e to *a% for the
e7tra in+entor% in one month# Of co&rse, %o&ll get %o&r mone% (ac) in
time, *l&s the *rofit on the e7tra +ol&me, (&t %o&ll (e stra**ed &ntil
then# "ating hel*s o+ercome this *ro(lem# ort&natel%, it also hel*s %o&r
s&**lier (eca&se %o& can (&%, dis*la%, and sell more of his merchandise#
"ating is al'a%s hel*f&l, (&t there are occasion 'hen %o& ha+e
a *artic&larl% strong arg&ment to as) for it# T'o s&ch occasions are?
2# 1pening a new store. The goods 'ill (e sitting in a store 'ith no
chance of selling or t&rning &ntil the store o*ens, &s&all% for thirt%
da%s#
<# #hipping to a warehouse instead of a store. The store loses the t&rnaro&nd
time it ta)es to get goods o&t of the 'areho&se# Ooods co&ld
sit in a 'areho&se for thirt% da%s or more (efore mo+ing to the store#
Mar)do'ns
As the name im*lies, to mar) something do'n means to red&ce the original
retail *rice# Mar)do'ns are ta)en for three rather different sets of
reasons?
2# To s*eed the sale of slo' mo+ing *rod&cts0 to clear %o&r in+entor% of
odd siEes, colors, and st%les, and to enco&rage the sale of soiled or
damaged goods
<# To maintain *rice com*etition 'ith other stores
C# To create the e7citement of a s*ecial sale 5the -ha**iest. of the three
reasons (eca&se, 'hile %o&ll still lo'er %o&r margins, %o&ll (oost
%o&r sales6
Other Retail Practices Used to Change Prices
$ince the *rice %o& charge %o&r c&stomers 'ill al'a%s affect %o&r (ottom
line, %o& can ne+er o+erestimate or &nderestimate the im*ortance of *rice#
,ere are some other retail *ractices sometimes &sed to change *rices?
@ 6dditional Mark78p. As the name im*lies, this *ractice changes the
*rice &*'ard# It is mostl% &sed in one of the follo'ing occasions?
A A s*ecial sale is r&n at a mar)ed do'n *rice, then the *rice is mar)ed
&* to its *re+io&s le+el after the sale#
A A +endor increases the *rice on the ne7t shi*ment of a certain item#
Beca&se the com*etition 'ill (e forced to increase their *rices, those
items alread% in %o&r store are mar)ed &*#
@ Mark 8p Cancellation. Jhen %o& introd&ce a ne' item into %o&r
store, %o& ma% initiall% mar) it &* in order to esta(lish a high *rice#
Then, once that +al&e is esta(lished, %o& ma% cancel the additional
mar) &* and red&ce the merchandise for a s*ecial sale# To some e7tent,
%o& ma% (e a(le to &se the e7tra margin %o& earn 'hen %o& first (ring
the item in 5and its still ne' and e7citing eno&gh to attract c&stomers
in s*ite of its higher *rice6 to hel* finance the lo'er margin sale %o&
r&n s&(se/&entl%#
O*en to B&%
The *&r*ose of an O*en to B&%, or OTB, s%stem is to tell %o& e7actl% ho'
m&ch merchandise %o& m&st *&rchase to satisf% the amo&nt of in+entor%
%o& ha+e (&dgeted for a s*ecified *eriod of time, &s&all% one month#
The sim*lified 'a% of loo)ing at OTB is?
Planned end1of1month 5EOM6 in+entor% for March 8233,333
Pl&s *lanned sales for March Q8:3,333
Pl&s *lanned Mar)do'ns for March Q8 <,333
Min&s merchandise on order and d&e to arri+e in March A829,333
Min&s BOM 5(eginning of month6 in+entor% for March A8>3,333
O*en to B&% 8CD,333
Before %o& e+er commit to (&%ing *rod&ct, %o& m&st ha+e %o&r OTB
*lan in front of %o&# That 'a%, %o&ll )no' when %o& need 5and can
afford6 to (&% ne' merchandise# =o& ma% not ha+e the mone% to (ring it
in d&ring March, (&t 'ith %o&r *lan in front of %o&, %o&ll (e a(le to see
that there is room d&ring the first 'ee) of A*ril# Jitho&t %o&r OTB *lan,
%o& ma% inad+ertentl% o+ere7tend %o&rself# =o& ma% (e the (est (&%er in
the 'orld, (&t if %o& do not ha+e the mone% to *a% for goods, %o& 'ont
last long in retailing#
The onl% 'a% to sta% on to* of this cr&cial facet of the (&siness
is to ha+e a *lan# The first ste* in de+elo*ing this *lan is to *roNect %o&r
sales by month for the first %ear# Of co&rse, this is a mo+ing target, so %o&
need to re1*roNect them, or ma)e s&re %o&r *rior *roNection is still on target,
at the start of e+er% month#
The second ste* in %o&r *lanning is to esta(lish the t&rn of %o&r
in+entor% so %o& )no' ho' m&ch in+entor% %o& 'ill need at the start of
each month to feed %o&r *roNected sales# Once %o& )no' %o&r sales and
t&rn, %o& can /&ic)l% calc&late %o&r OTB to see ho' m&ch to *&rchase
each month# If, d&ring the %ear, %o& are trending &* or do'n in sales,
OTB can easil% (e adN&sted to meet those s*ecific needs# !i)e all of the
retail math tools 'ere disc&ssing here, loo) at this OTB as a tool for s&ccess,
not something that 'ill get in %o&r 'a%#
Retail Method of In+entor%, Or?
$to**ing $hrin)age
#hortages" also called shrinkage of in'entory or N&st shrinkage, can ca&se a
store to go o&t of (&siness# ast# That is 'h% it is im*ortant to ha+e *roced&res
in *lace to )ee* trac) of e+er%thing ha**ening in the store, from
recei*t of goods to final sale# There are t'o definitions of in+entor%?
2# 'hysical in!entory. This is the co&nting of the stoc) that is act&all%
on hand#
<# 5ook in!entory. This is the record of 'hat should (e on hand# To
deri+e the (oo) in+entor%, (egin 'ith the starting in+entor% 5either
from store o*ening or the res&lts of last %ears *h%sical in+entor%6# Add
all *&rchases, all ret&rns that are in salea(le condition, and an% ma)egoods
the +endor ma% ha+e *ro+ided for s&(standard merchandise#
$&(tract all sales and the amo&nt of an% mar)do'ns that 'ere (elo'
the *rice %o& *aid for the goods#
$hrin)age, or o+erage, is the difference (et'een the *h%sical in+entor%
and the (oo) in+entor%# The onl% ca&se for an o+erage is a (oo)ing error
that sho&ld (e a+oided (% do&(le1chec)ing e+er%thing# $ome shrin)age is
ine+ita(le, and %o& need to *lan for it# It re*resents the loss of merchandise
for reasons that cannot (e *recisel% s*ecified# Those reasons incl&de?
@ Vendor mista)es or fra&d# $ometime, containers dont incl&de the f&ll
co&nt of goods#
@ Em*lo%ee theft# This incl&des o&tright theft for *rofit 5e#g#, letting a fe'
cases -fall off the (ac) of a tr&c).6, *ilfering merchandise for *ersonal
&se 5ta)ing home a (o7 of detergent6, and &sing store merchandise for
legitimate reasons (&t 'itho&t *a%ing for it 5a store cler) 'ho needs a
*encil o*ens a *ac) of a doEen and tosses the rest6#
@ E7ternal theft# The most fre/&ent method of e7ternal theft is sho*lifting#
More rarel%, theft from %o&r 'areho&ses ma% occ&r#
@ Clerical mista)es and (oo))ee*ing errors#
@ Unrecorded mar)do'ns and allo'ances# These res&lt in the /&antit% of
*rod&ct sold for the dollar +ol&me recorded act&all% (eing greater than
the recorded amo&nt# or e7am*le, if %o& mar) do'n a 823#33 item to
89#33 (&t fail to note the mar)do'n on %o&r (oo)s, selling 8233#33
'orth of that item 'ill sell t'ent% items (&t onl% sho' ten as ha+ing
sold# The missing ten items 'ill sho' &* as in+entor% shrin)age#
@ Unrecorded (rea)age#
,o' to MinimiEe $hrin)age
$ome shrin)age ma% (e &na+oida(le, (&t a maNorit% of the loss is *re1
+enta(le# Jhether the iss&e is slo**% record1)ee*ing or neigh(orhood
hooligans ta)ing a -fi+e1finger disco&nt,. ta)e the follo'ing ste*s to minimiEe
shortages?
@ Record merchandise as soon as it arri+es#
@ Pro*erl% mar), *rice, and identif% merchandise (efore mo+ing it to the
selling floor#
@ Record all *rice changes#
@ Record each transaction#
@ Change records (efore transferring goods or ret&rning them to the +endor#
@ Ta)e *reca&tion against theft, as disc&ssed in the follo'ing sections#
$hrin)age from all ca&ses has (ecome a (igger *ro(lem than e+er, *artic&larl%
for first1time retail (&siness o'ners for 'hom *a*er'or) can easil%
(ecome an o+er'helming chore# In fact, the *ro(lem has (ecome so
*re+alent that a <4 loss in shrin)age is a standard of the ind&str% toda%#
As disc&ssed earlier, a *ositi+e change in the cost of goods has a h&ge
im*act on %o&r (ottom line# Unfort&natel%, shrin)age has e7actl% the
same effectin re+erseM In addition to )ee*ing caref&l records, there are
se+eral things %o& can do to c&r( shrin)age#
Em*lo%ee Theft
=o&r em*lo%ees sho&ld (e the last *eo*le to steal from %o&# After all,
%o&re the one signing their chec)sM Unfort&natel%, the o**osite is tr&e?
most em*lo%ees steal from their em*lo%ers#
The incidence of em*lo%ee theft is high in retailing# Em*lo%ees
ha+e greater access to a 'ide range of cons&mer goods that the% either
desire for themsel+es or )no' the% can resell on the (lac) mar)et#
Moreo+er, em*lo%ees often +ie' 'hat the% ta)e as tri+ial and dont consider
it stealing# -$o, I ate a m&ffin 'itho&t *a%ing for it0 I 'as h&ngr%#.
The office em*lo%ees e/&i+alent is ta)ing home some (all*oint *ens and
*ads of *a*er# ,o'e+er, tri+ial or not, these thefts add &*, and their
financial im*act goes 'a% (e%ond the items stolen (eca&se it red&ces
%o&r stores *rod&cti+it%, lo'ers t&rno+er, inhi(its hiring, and ma)es %o&r
store less +ia(le#
In addition to cas&al *ilfering, %o& ma% 'ell face *lanned thie+er%,
the 'illf&l theft of merchandise, s&**lies, or cash# Cons*irac% 'ith
sho*lifters or deli+er% *ersons is also common#
$ho*lifting
$ho*lifting is a maNor *ro(lem, es*eciall% of smaller, easil% hidden items
in general merchandise retailers, and of e7*ensi+e items in larger stores#
Jhile most sho*lifters sim*l% tr% to sli* some easil% hidden items into
their *oc)ets or (ags, some sho*lifters are more so*histicated#
To gi+e %o& some idea of ho' tric)% the% can (e, one of their
fa+orite tric)s 'or)s li)e this? The criminal legall% *&rchases an e7*ensi+e
article of clothing or an electronic de+ice, ta)es it o&t of the store,
remo+es the tags, lea+es the item o&tside, and ret&rns to the store 'ith
the tags and the recei*t# Bac) inside, the thief *ic)s o&t an identical item,
ta)es it to the dressing room or some /&iet corner of the store, and
remo+es the tags# Ne7t, he or she ta)es the item, 'itho&t the tags, to the
ret&rn des), hands it and the recei*t and tags from the legitimatel% *&rchased
item to the harried cler), and recei+es a ref&nd# Unless a store
sec&rit% *erson act&all% catches the thief remo+ing the tags, its hard to
*ro+e that the second item is not the first one# E+en if each item is n&m(ered
se/&entiall% so the serial n&m(er on the item does not match the
recei*t 5something the cler) at the ret&rn des) is &nli)el% to notice6 it is
diffic&lt to &se that as *roof of a scam 'hen the thief can claim that the
serial n&m(er 'as incorrectl% recorded on the item# $ome thie+es e+en
ha+e the gall to go to another store in the same chain and ret&rn the first
item, claiming the% lost the tags# Others sell the items to a fence#
$trengthening $tore $ec&rit%
A sec&re store is a store that is e7*eriencing less shrin)age than its com*etitors#
$ec&rit% ma% (e costl%, (&t so is shrin)age# Often the mere
a**earance of sec&rit%, to (oth %o&r c&stomers and %o&r em*lo%ees, is
eno&gh to do the tric)# ,ere are some timel% ti*s for strengthening %o&r
stores sec&rit%?
2# E/&i* the store 'ith a sec&rit% alarm s%stem hoo)ed &* to a central
ser+ice com*an%# Oi+e each em*lo%ee his or her o'n code so %o& can
monitor 'ho comes and goes#
<# Use loc)ed trash d&m*sters to decrease the ris) of merchandise (eing
thro'n into the d&m*ster and retrie+ed later#
C# "o not *ermit *ersonnel to *ar) near loading doc)s or e7it doors# A
longer 'al) to stash or trans*ort items can (e a real deterrent to
em*lo%ee theft#
:# $trictl% enforce in+entor% control and trac)ing *roced&res#
9# ollo' &* on all references 'hen hiring an% ne' em*lo%ee#
F# Im*lement an anon%mo&s ti* *rogram that moti+ates em*lo%ees to
re*ort theft, dr&g a(&se, and other (&siness a(&ses (% (oth co'or)ers
and o&tsiders#
D# Lee* a close ta( on c&stomers 'ho s*end a lot of time in %o&r store#
The closer %o& 'atch, the less li)el% a sho*lifter is to target %o&r store#
;# Place o(ser+ation cameras at strategic locations# As long as the red
lights (lin), the% can (e fa)e cameras# One fast1food chain I )no' has
three d&mm% cameras that a**ear to (e hidden (&t are easil% o(ser+ed
(% em*lo%ees 'hen the% are *eering do'n at the cash register# The%
are ine7*ensi+e (eca&se the% dont 'or)M ,o'e+er, the store also has
one real camera that is +er% 'ell hidden# Em*lo%ees 'ho decide to
raid the cash register nat&rall% t&rn a'a% from the three cameras the%
thin) are o(ser+ing them, shielding their misdeeds 'ith their (odies#
Jhat the% dont realiEe is that the% ha+e t&rned directl% to face the
'or)ing, 'ell1hidden camera# The% are s&r*rised 'hen, a 'ee) or t'o
later, the% are laid off 'itho&t e7*lanation# The com*an% ne+er act&1
all% acc&ses them of stealing0 if it did, it 'o&ld ha+e to re+eal the *resence
of the hidden camera, and then the game 'o&ld (e o+er#
Parting Jords
As 'e ha+e seen thro&gho&t this cha*ter, retail is, indeed, a n&m(ers
game# ,ere 'e ha+e *ro+ided %o& 'ith the (asics of retail math# $till,
the% are onl% the (asics# Along the 'a%, %o& 'ill enco&nter n&ances of
retail n&m(ers that 'ill onl% add to %o&r e7*erience in this com*etiti+e,
thri+ing, and &ltimatel% re'arding field# I ho*e that, li)e the rest of the
cha*ters in the (oo), this cha*ter 'as interacti+e# In other 'ords, dont
(e a *assi+e readerta)e 'hat Im offering and a**l% it to %o&r o'n sit&ation,
either toda% or tomorro'# Or ne7t %ear#
Lno'ledge is the )e% to s&ccess# Lno'ing the n&m(ers (efore
%o& start %o&r retailing ad+ent&re is +ital to %o&r s&ccess# Certainl% there
is a lot to learn, (&t )no' this? Understanding the (asics 'ill hel* %o&
fine t&ne the rest and, in the meantime, 'ill )ee* %o& ali+e and 'ell, the
latest addition to the thri+ing retail ind&str%#
Ret&rn to?