Retailing Strategy Retail Market Strategy Chapter 5 Financial Strategy Chapter 6 Retail Locations Chapters 7,8 Human Resource Management Chapter 9 Information and Distribution Systems Chapter 10 Customer Relationship Management Chapter 11
Retailer Objectives Financial – not necessarily profits, but return on investment (ROI) – primary focus Societal – helping to improve the world around us Personal – self-gratification, status, respect
Financial Tradeoff Made by Retailers to Increase ROI Asset Turnover Net Profit Margin
The Strategic Profit Model: An Overview Profit Margin x Asset turnover = Return on assets Net profit x Net sales (crossed out) = Net profit Net sales (crossed out) Total assets Total assets
The Strategic Profit Model: Profit Management Net Profit Margin Sales Net Profit Gross Margin Total Expenses Sales Cost of Goods Sold 15% 15 40 100 60 100 25 - -
The Strategic Profit Model: Asset Management Asset Turnover Total Assets Sales Current Assets Fixed Assets Inventory Accounts Receivable 2.5 100 10 5 4 40 30 + + + Other Current Assets 1
The Strategic Profit Model: Return on Assets Net Profit Margin Sales Net Profit Gross Mar Total Exp. Sales Cost Goods Sold 15% 15 40 100 60 100 25 - - Asset Turnover Total Assets Sales Current Assets Fixed Assets Inventory A/R 2.5 100 10 5 4 40 30 + + + Other Cur Assets 1 Return on Assets 37.5% Times Net Profit Net Profit Net Sales Total Assets = Net Sales x Total Assets Net Sales Total Assets ( ) Net Profit Net Sales ( ) Net Profit Total Assets ( )
Financial Implications of Strategies Used By a Bakery and Jewelry Store Net Profit X Asset = Return on Assets Margin Turnover La Madeline Bakery 1% X 10 times = 10% Kalame Jewelry 10% X 1 time = 10%
Income Statements for Federated Department Stores and Costco
Profit Management Path for Federated and Costco
Components of Gross Margin Net Sales Gross Margin Gross Margin Gross Sales Less Returns Less customer allowances COGS
Gross Margin for Federated and Costco Gross Margin = Gross Margin % Net Sales Federated: $ 6,333 = 40.5% $15,630 Costco: $ 6,014 = 12.5% $48,107 Why does Federated have higher margins than Costco? Does the higher margins mean the Federated’s is more profitable?
Asset Turnover Net Sales = Asset Turnover Total Assets Stores: $700,000 = 1.84 $380,000 GiftstoGo.com: $440,000 = 2.09 $211,000
Return on Assets Net Profit Margin x Asset Turnover = Return on Assets Stores: 8.54 x 1.84 = 15.7% Giststgo.com 10.3 x 2.09 = 21.3%
Profit Management Asset Management The Strategic Profit Model Net Sales Cost of goods sold Variable expenses Fixed expenses Gross margin Total expenses Net profit Net Sales Net profit margin Asset turnover Return on assets - - + Inventory Accounts receivable Other current assets Total current assets Fixed assets Net sales Total assets + + + x
Productivity Measures Input Measures – assess the amount of resources or money used by the retailer to achieve outputs such as sales Output measures – asses the results of a retailer’s investment decisions Productivity measure – determines how effectively retailers use their resource – what return they get on their investments
Retailers will be better able to gauge performance if it has specific objectives in mind to compare performance.
numerical index of performance desired
time frame for performance
necessary resources to achieve objectives
Setting Objectives in Large Retail Organizations Top Down Planning Corporate Developmental Strategy Category, Departments and sales associates implement strategy
Setting Objectives in Large Retail Organizations Bottom Up Planning Buyers and Store managers estimate what they can achieve Corporate Operation managers must be involved in objective setting process
Performance Objectives and Measures Used by Retailers
Examples of Performance Measures Used by Retailers Level of Output Input Productivity Organization (Output/Input) Corporate Net sales Square feet of Return on assets (measures of store space entire corporation) Net profits Number of Asset turnover employees Growth in sales, Inventory Sales per employee profits Advertising Sales per square expenditures foot
Examples of Performance Measures Used by Retailers Level of Output Input Productivity Organization (Output/Input) Merchandise Net sales Inventory level Gross Margin management Return on (measures for a Investment (GMROI) merchandise category) Gross margin Markdowns Inventory turnover Growth in sales Advertising Advertising as a expenses percentage of sales * Cost of Markdown as a merchandise percentage of sales* * These productivity measures are commonly expressed as an input/output.
Examples of Performance Measures Used by Retailers Level of Output Input Productivity Organization (Output/Input) Store operations Net sales Square feet of Net sales per (measures for a selling areas square foot store or department Gross margin Expenses for Net sales per within a store) utilities sales associate or per selling hour Growth in sales Number of sales Utility expenses as associates a percentage of sales * * These productivity measures are commonly expressed as an input/output.
Illustrative Productivity Measures Used by Retailing Organizations Level of Output Input Productivity Organization (Output/Input) Corporate Net profit Owners’ equity Net profit / (chief executive owners’ equity = officer) return on owners’ equity Merchandising Gross margin Inventory * Gross margin / (merchandise inventory* = manager and GMROI buyer) Store operations Net sales Square foot Net sales / (director of stores, square foot store manager) *Inventory = Average inventory at cost