Chapter 1

Finance and Location Strategies for

Retailing
Learning Objectives
„ Working on the ‘Strategic Profit Model’
„ Activity based costing (ABC)
„ Setting objectives for performance by
retailers
„ Factors influencing retailer’s choice of
location
„ Retail location strategies
„ Points to remember
Strategic Profit Model
„ The aim of every retailer is to be
successful financially, which is usually
measured in terms of high return on
assets
„ Return on assets = Net Profit x Net Sales
Net Sales Total Assets
= Net Profit
Total assets
Utility of the Strategic Profit
Model
„ Profit margin in management and asset
management
„ Return on assets
„ Evaluate financial implications of new
strategic decisions before they are
implemented
Profit Path
„ Net Sales = Gross amount of sales –
customer returns –customer allowances
„ Total expenses = Total expenses/ Net
Sales ration
„ Net profit = Gross Margin- Expenses
„ Net profit margin = Net profit/Net
Sales
Turnover Path
„ Current assets
„ Accounts receivables
„ Inventory turnover
„ Cash
„ Fixed assets
„ Asset turnover
„ Current liabilities
„
Turnover Path
„ Long term liabilities
„ Owner’s equity
„ Other current assets
Fig 1.1. The Strategic Profit
Model
Activity Based Costing
„ Activity based costing is a financial
management tool which is being used by
retailers worldwide.
„ Within a const centre all major activities are
identified and the cost of performing each are
worked out
„ The resulting costs are then identified into
costs objects such as stores, product lines
Advantages - Activity Based
Costing
„ It uses the general ledge data and then
assigns all expenses-sales, marketing,
administrative, financing and operating
costs.
„ In other methods elaborate
identification of various costs usually is
not looked into
Activity Based Costing- 5
Steps
1. Summarize the resources
2. Define key activities
3. Define the resource drivers
4. Specify the cost objects
5. Identify the activity drivers
Setting Objectives for
Performance by Retailers
„ The performance desired, including a
numerical goal which is to be achieved
„ The time period within which the goal is
to be achieved
„ The resources required to achieve the
objectives
Three types of retailers;
performance measures
„ Input measures
„ i.e. amount of money or resources used by
the retailer to generate sales and profit
„ Output measures
„ i.e. sales revenue
„ Productivity Measure
„ Ratio of input to output
Factors Influencing Retailer’s
Choice Of Location
„ Consumers’ choice
„ To gain competitive advantage
„ Understanding of the structural and
social changes
„ Long term financial implications
„ Government formalities
New Markets – Up country
„ Better connectivity via a network of
national highways
„ Attraction and migration of job seekers
into such up country towns from
villages
Types of Location Site and
Retail
„ Solitary site
„ The unplanned shopping area site
„ The Planed shopping area site
„ Merchandise kiosks
Retail Location Strategies
„ Department Stores
„ Specialty Apparel stores
„ Category specialists
„ Grocery stores
„ Food stores
Summary
„ The strategic profit model combines two
decision making areas- profit margin
management and asset management
„ ABC provides a means of improving the
retailer's financial analysis
„ While setting performance e objectives
retailers have to consider performance
goal expressed in numerical terms
Summary
„ The retail while taking decisions
regarding the location of a store has to
keep in mind consumer preference
„ Usually retailer make a choice of
location site from solitary site,
unplanned shopping area site and
planned shopping area site
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