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Checklist: "Where is the Chain Profit Hiding?" Part 1.
Profit is the main milestone for any trading chain. It is the basic and most rational source of development and expansion of retail.
It should be reminded that profit growth is the result of the interaction of many factors and processes. Therefore, if the profit does not reach the desired size, you should analyze the forming factors and their interaction. This will find "gaps" or unused reserves.
Where is the Retail Profit "Hidden"?
In the beginning, we recall that the profit of a trading chain is the difference between the received income and the incurred expenses.
Therefore, you should look for the reasons for the profit "shortage" among these components. In other words, it is necessary to increase revenues and reduce expenses at the same time.
To increase revenue, we propose to evaluate the factor's interaction in the context of the following blocks:
- Inventory Management;
- Sales Management;
- Pricing.
You can minimize retail costs if you go through the checklist in detail for the following blocks:
- Sales Cost Management;
- Personnel and Payroll Management;
- Expenses for Marketing Activities;
- Retail Space Maintenance Costs.
How to Increase Chain Revenue?
Retail revenue is mainly received money from the sale of goods. Therefore, let's figure out where you can find reserves to increase it.
- Inventory Management:
# 1. Do you analyze the dynamics of the cost and quantity of the chain's inventory?
Retail inventory is not only a major asset, but also a type of investment. Therefore, the current state of inventory stocks and the effectiveness of investment in them should be assessed.
✅Yes - Great! The next step is to analyze the inventory stocks with different details: for individual products, brands, suppliers, and category managers.
❌ No - These analytical actions allow you to determine how the store is provided with a product, category, or brand at the moment and in comparison with previous periods. Here you should study the availability of stocks in natural units. This indicator will show you how many days the store is supplied with goods for normal operation.
# 2. Do you study the structure of stocks?
You need to keep tracking how much money is invested in:
- goods for sale;
- product items for layout (insurance stocks);
- overstocks.
Ideal ratios are 70/25/5%. Subsequently, you should minimize overstock inventory.
✅ Yes - Excellent! This is a really important step for optimizing the assortment and speeding up the turnover ratio. When identifying overstock, it is necessary to form a competent strategy for working with them: 1) return to suppliers; 2) organization and conduction of promotions; 3) internal movement between stores.
❌No - Such data will allow you to understand where your money is concentrated and, if necessary, help you improve the assortment matrix, which will provide more sales and profits in the future.
# 3. Do you analyze the share of products that should be removed from the assortment matrix?
Changing customer demand requires constant revision of the assortment. On average, the normal share of products that should be removed from the assortment is from 5% to 15%. At the same time, such actions allow you to increase sales and minimize the cost of their storage.
✅ Yes- This is a very good practice that TOP retailers use.
❌ No - Correct management of goods for deletion from assortment contributes to the release of funds from circulation and provides the chain with more popular product items.
# 4. Are you doing ABC analysis in sufficient detail?
ABC analysis allows you to study the structure of inventory stocks according to their significance for retail.
This approach of analysis can be conducted with different indicators:
- Profit;
- Turnover;
- Sales Qty;
- Checks Qty;
- Stocks Qty and stocks cost, etc.
Such information indicates which group each product item falls into and allows you to develop the most competent management strategy for each product group.
✅ Yes - Excellent. This technique is the key to success in inventory management, which will increase chain profitability. Afterward, you should clearly define the activities for each stock group and check if the product items have moved from one group to another.
❌ No - The implementation of ABC analysis allows the chain to optimize the assortment, which will be aimed at maximizing sales and profits.
Sales Management:
# 5. Do you analyze the dynamics and implementation of sales plans (turnover, sales qty)?
Comparison of actual values of sales indicators with planned values or values for previous periods allows you to:
- establish changes in customer demand and predict it for the future;
- identify seasonal fluctuations in sales;
- evaluate the effectiveness of promotions and the assortment matrix.
✅ Yes - Brilliant. You have the opportunity to timely identify changes in demand and adapt the assortment matrix to them. It will lead to a sales and profit increase in the chain.
❌ No - For a deeper understanding of the turnover formation pattern, you should analyze the dynamics and % of the completion of the sales plan for each product, brand, supplier, and category manager. It is important to analyze using the Like-for-like method, excluding stores (products, brands) that did not have sales in one of the analyzing periods.
# 6. Do you study the goods turnover ratio?
The turnover ratio is the harmonization of inventory stocks and sales. Understanding how quickly goods are sold allows you to correctly and timely form orders to suppliers, avoid lost sales, and detect non-selling positions.
✅ Yes - Perfect. In the future, the calculation of turnover ratio should be supplemented by an assessment of their dynamics and the count of the amount of "frozen" or released funds from inventory stocks.
❌No - A turnover ratio analysis methodology should be introduced, which will allow you to competently manage sales and assortment and bring a higher level of profits.
#7. Do you analyze lost sales?
Lost sales are the most obvious reserve for increasing the chain's profits. The reasons for lost sales may be zero stock of good-selling products, incorrect layout on the shelves, damaged items, etc.
✅ Yes - Understanding which products and which stores lost sales allows you to fix such "gaps". To do this, you should avoid zero goods stocks, arrange timely orders from suppliers, check the availability of goods on the shelves, etc.
❌ No - Estimates of lost sales in each store should be provided. At the same time, it is important to conduct such an analysis by goods, categories, suppliers, and category managers. This will allow you both to identify losses in sales and establish responsible for them.
# 8. Do you analyze the effectiveness of promotions?
Promotion is one of the most effective ways to increase goods sales and the interest of real and potential customers. A promotion results analysis shows how successful or unsuccessful they were. Such information allows you to adjust the future chain marketing strategy.
✅ Yes - Excellent. You should also answer the following questions: 1) What is the extent of achieved goals for each promotion? 2) Do customers react differently to typical promotions at various intervals?
❌ No - When implementing the analysis of promotions, you should pre-set goals (plans) for different indicators for each promotion. This will allow you to better evaluate their effectiveness. It is useful to track sales metrics for promotional goods in the pre-promotional, promotional, and post-promotional periods. This helps you to better form marketing offers and increase the store profit.
Pricing:
# 9. Do you analyze product margin?
Margin is the profit included in the sales price. For each retailer, it is desired that the margins of the goods should increase. But this should not affect the reduction in customers' demand.
✅ Yes - Great! This will help you adjust your prices and ensure getting the desired profit.
❌ No - Margin analysis should be implemented for each product, brand, and category manager. Such an analytical direction should be supplemented by the calculation of the % of the completion of the plan of the margin.
# 10. Do you track the relationship between price changes and sales metrics?
The main task of the retailer in the pricing process is to ensure the optimal ratio between the price and customer demand.
✅ Yes - Good! It is an effective practice that most leading retailers use. To achieve more accurate results (calculation of the optimal price), we recommend using the "Recommended prices" report on the BI. Datawiz platform, which is based on Machine Learningalgorithms.
❌No - Finding the optimal ratio between the selling price and the sales metrics allows you to maximize profits and improve the chain's reputation.
An equally important component of profit is expenses. The checklist for blocks that are responsible for reducing costs will be discussed in the next article Retailer's Checklist: "Where is the Profit Hiding?" Part 2. Don't miss it, it will be very helpful.
Conclusion
All the described analytical approaches are necessary to find ways to profit increasing. And if you want to perform them quickly and accurately, we recommend using reports of BI.Datawiz platform for retailers. Unique algorithms with clear and informative visualizations allow you to get insights from the data, reduce the time for analysis and quickly make effective business decisions.
