Financial consultant Brett Stevenson kicks off a series on how small retailers can learn from the triumphs and failures of their larger counterparts.
PART ONE: The first three essentials
There was much ‘doom and gloom’ talk this year regarding retail in general and the ragtrade in particular. The GFC and the politicisation of economic trends has not helped. I suggest a more sanguine approach is in order if we take a more strategic look.
Apparel and footwear’s share of the consumers’ wallet steadily declined in the 20th century from around 15 per cent in 1900 to 4 per cent in 2000 however the 21st century has seen a slight reversal with an increase to around 5 per cent in 2011.
But the business fundamentals remain the same. How do I attract the consumer to spend their dollar in my business? I would like to highlight some of the lessons (both positive and negative) we can learn from the big ‘players’ in this industry
1. Watch your costs below the gross profit line.
Any savings made here go straight to your bottom line - this is the obvious first item of attack for the CEOs of the larger corporates. Technology has provided significant cost effective opportunities for the smaller operators in this regard.
Communications and stock management costs are the clear front-runners to review. A helpful way to start this process is to group all your costs together by activity (e.g. customer service, stock control, merchandising, marketing etc) or by major resources (e.g. space, staff etc) rather than the normal alphabetical order common in many reports.
Express these as a percentage of your revenue dollar, and then try to put some priority/importance rankings on them for action. You will be surprised at the benefits this will provide. The general attitude is that you need to keep your fixed costs (which would be most of these below the GP line costs) as low as possible. Above all it requires you to think innovatively.
2. Improve your gross profit margin.
Obvious I know but it’s worth considering what the larger players are doing in this regard. They are flattening the supply chain (shorthand for less middle men) by directly sourcing from the manufacturer (for example Witchery is aiming for 65 per cent direct), increasing their use of own brands (at Myer these comprise 17 per cent of sales, and growing).
Others, such as Billabong, are developing a ‘direct to consumer’ strategy by increasing the number of company owned stores (now account for 40 per cent of sales) and moving into online trading (only 3 per cent of sales but growing dramatically). The common denominator with all these strategies is an improvement in gross margins of 12 per cent to 20 per cent.
What this means for you practically can vary from seriously looking at your business model to fine-tuning your purchasing and merchandising, but it does require serious consideration.
It is well worth keeping in mind that a slight improvement by the large players in their gross margin (for example Myer increased from 39.18 per cent in 2008 to 39.63 per cent in 2009) requires great effort on their part. Smaller businesses can achieve much more significant increases for the effort.
3. Lift your product category and department management.
This should be an area of strength for any ragtrade business but too often it is neglected such that the big players are the torchbearers. Myer, for example, are increasingly allocating space in their stores to departments where the sales, foot traffic and most likely profit are greatest (womenswear, shoes, cosmetics).
Staff are being specifically trained and rostered to maximise this space. Could I suggest a couple of handy tips – firstly monitor your departmental sales, and sales staff and consider allocating your staff and the space accordingly, and secondly utilize the fitting room area as a key decision point for customers by training your staff to actively assist them (encourage to try on, have alternative sizes available etc).
The maxim is increase the frequency and profitability of sales, so make sure you know what is selling and adjust your business practices accordingly.
Stay tuned for points 4, 5, 6 and 7.
Brett Stevenson is Director of Excellere Pty Ltd, a company that specialises in workshops covering financial management, strategic planning, business ethics and personal development for business. www.excellere.com.au