Checklist: "Where is the chain's hidden profit?" Part 2.
It is well known that profit in retail is an indicator that is formed as a result of the interaction of revenue and expenses. Therefore, to increase it, the chain owner needs to look for two options:
- to raise income;
- to reduce cost.
In the previous article, we reviewed the checklist for blocks aimed at identifying unused reserves for income growth.
The purpose of this article is to form a checklist for blocks related to the expense part of retail work:
- managing the cost of sales;
- employee salary management;
- costs of marketing;
- lease costs and maintaining retail space costs.
Expenses as a concealed source of chain profit increase
Modern retailers are almost deprived of the opportunity to compete by reducing prices and giving up their margins. Therefore, a significant emphasis should be placed on reducing costs.
Reducing costs even with constant revenues will provide the chain with more profit. Therefore, by reducing costs, retailers can:
- offer customers goods with lower prices without sacrificing their margin;
- increase the popularity of the chain and the number of customers due to favorable prices;
- improve competitive position in the market;
- increase profits and business dynamics.
How can you reduce costs in retail?
Trade chain expenses are the amount of money spent on maintaining the normal operation of stores (cost of goods, lease costs, staff salaries, packaging, advertising costs, etc.).
Let's figure out where you can find reserves for their reduction.
Managing the cost of sales:
# 1. Do you analyze the dynamics of purchase prices?
The cost of goods is the most significant expense component in retail. Therefore, it is very important to analyze what prices are paid when you buy goods, and how they change.
Expert recommendation! The cost of purchasing goods should not exceed 40-50% and less of the turnover. I.e., the selling goods price should be twice the purchase price. To achieve this, you need to carefully plan the assortment to reach an average margin of 100%.
# 2. Do you estimate the shipping costs?
Shipping costs increase the cost of your goods. As the experience of global companies shows, transportation costs should not exceed 1% of the purchase price.
# 3. Do you assess the reliability of your suppliers?
Timely delivery in agreed quantities and prices is an important step to reducing costs. To analyze the reliability of supply, it is reasonable to study the indicator "Security of supply".
# 4. Do you control the quality of the supplied goods?
Quality of goods is an important characteristic that can significantly affect the chain's costs. An indicator of low-quality goods is the number of returns of purchased goods. Therefore, for this area of analysis, it is useful to count indicators:
- Quantity and cost of written-off goods;
- % of write-offs in the total value of goods;
- Cost and number of returns by customers;
- % of customer returns in total turnover.
- Cost and number of returns to suppliers;
- % of returns to suppliers in the total value of goods.
Employee salary management :
# 5. Do you analyze the productivity of your staff?
The productivity of employees is proof of the expediency of expenses on their salary. Therefore, it is important to set KPI for each group of employees and evaluate their achievements.
# 6. Do you analyze the number of employees per sq. ft. of retail space?
Labor costs are directly related to the number of employees.
The number of employees depends on the specifics of the business and is calculated per sq. ft. or per number of visitors.
Expert recommendation! The optimal is 1 worker per 85 sq. ft. or 1 worker per 50 visitors per day. But you should take into account the features of the chain.
# 7. Do you analyze the structure and dynamics of labor costs?
Labor costs include salary, bonuses, additional payments, and compensation. Understanding how these costs are formed will make it possible to find irrationally spent money and reduce their amount.
Expert recommendation! Leading trading companies try to keep the payroll within 10% of turnover.
# 8. Do you track the dependence between changes in staff productivity and labor costs?
Ideally, staff productivity should grow faster than salary. It is reasonable to conduct a comparative analysis of these indicators, to predict the payroll with possible changes in staff productivity.
Costs of marketing:
# 9. Do you analyze the structure and dynamics of advertising costs?
Advertising and related marketing costs are a necessary component of every chain's retail activity. But you must understand exactly how much money is spent on advertising, how marketing costs change over time, and what their share is in turnover.
Expert recommendation! Advertising costs should be about 5% of turnover. If the company does not have the opportunity to invest 5% in marketing campaigns, then the minimum amount of such investments should be at least 1.5%.
# 10. Do you evaluate the effectiveness of advertising costs?
Advertising costs should bring the desired benefit - increased profits. It is necessary to constantly analyze the effectiveness of such costs, and calculate special coefficients, such as ROI.
Lease costs and maintaining retail space costs:
# 11. Do you analyze the dynamics of the lease costs?
Lease costs - rent, utilities, etc. Evaluating these costs and tracking their changes will allow you to understand how acceptable they are for your business.
Expert recommendation! Utility bills should not exceed 1.5% of the store's turnover.
# 12. Do you evaluate the effectiveness of the lease costs?
Lease cost should be efficient. I.e, they should be covered by the desired amount of profit.
Expert recommendation! Each sq. ft. must bring at least $1,500 annually. Only in this case, the costs of rent and utilities can be reimbursed.
The proposed checklist will allow you to identify "weaknesses" and find possible options for reducing costs, and, as a result, increasing profits.
If you want to conduct the described analytical actions quickly and without mistakes, we recommend using the reports of the BI.Datawiz platform for retailers. Algorithms AI allow you to generate accurate indicators, process a huge amount of data, and reveal the results of calculations in an understandable format. So you get insights from your data, reduce the time for analysis and make effective business decisions quickly.