BASIC RETAIL PRINCIPLES

Prepared for :

PMA Members

Category Management
The principles outlined in the category management section are based on many years experience in retailing and proven fundamentals. They are presented in a format to encourage you the retailer to work on these principles within your business. By the very nature of retailing, markets and customers will change over time. Retailers must understand and mange this information through category management. Due to the limited amount of time available in the review, the principles will be limited in there scope to generic retail principles. Managing your retail business through category management improves your knowledge and ability to react quicker to the customers wants and needs. As a retail owner you need to have at least 15 categories based on product groupings within your store. You can also break down each category into sub categories for further analysis. The categories that you establish will be the basis of ongoing management across key performance indicators (KPIs) that you want to manage within your business. The categories you chose should be based on product types or groupings. If you are in food for example your categories would be your menu offer for example: sandwiches, cold drinks, coffee, cakes, salads, donuts. If you are in home wares categories like: gadgets, dinnerware, saucepans, kitchen ware, and glass ware are some examples. How good is your collection of data? To collect information on categories you need to ensure that you have a suitable cash register or point of sale program that will show the various indicators of the business. By defining your categories you are laying the foundations on which to build your retail business. These principles reflect my own views and does not necessarily reflect the views of any other entity or company. The principles provided in this document may not produce positive results. Therefore you must make your own assessment of the principles. Any commercial decision by you to implement the principles is at your risk and not any other entity or company. Ken Tickle Astanda Pty Ltd ktickle@pacific.net.au www.mfp.net.au Mobile 0419 419 634

The 10 Basic Principles

Embrace category management Build product family trees/ product mix Implement sound Information Technology Understand Key Performance Indicators

Develop forward Open To Buy budgeting each month

Quantify your Profit and loss outcomes Set a cash flow budget Build the business equity Manage the outcomes monthly Build a partnership with your suppliers
KEN TICKLE

Who is Your Customer?

The Principle:
Understanding who your customers are is critical in getting your product offer right in your store. Successful retailers will agree that they fully understand their target customers wants and needs. A retailer must identify the top five customer attributes and type of customers that visit the store. Profiling the customer in your store needs to be ongoing. Steps to Complete; 1. Market research on customer buying behavior and profiling. 2.Identify your target customer. 3.Develop the relationship with your customer through customer service and selling skills. Attached are some ways of getting information on your customer: EXIT POLLS: as per questionnaire attached. POINT OF SALE INFORMATION: Captures information at time of purchase e.g. post codes, average purchase, number of units and other relevant information.

YOUR CUSTOMERS:
AGE OF PRIMARY CUSTOMER: Female Male TYPE OF CUSTOMER: TYPE 1 TYPE 2: TYPE 3 SPENDING PROFILE: low AVERAGE SPEND: medium $ high % % % % %

SHOPPING PATTERNS WEEK DAYS: 10am-12pm 12pm-2pm 2pm-4pm 4pm-close SHOPPING PATTERNS ON WEEKENDS: Comments: % % % %

CONVERSION RATE: the % of customers who enter the store and purchase.

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

Exit Poll a sample for you to use in your business

Questions
Where our staff friendly? Did they know about our products? What do you think about our product range? How do our prices compare? How do you rate the cleanliness of our shop? Was it easy to move around in our shop? How convenient are our shopping hours? What is your overall opinion of our shop?

Very Good

Good

Poor

Will you shop with us again?

YES

NO

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

POINT OF SALE
Post code Male/ Female Age Under 25 Age Under 35

a sample for you to use in your business

Age Under 45 Age Under 55 Age Under 65 Senior Citizen Product Category Average Spend $

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

YOUR CATEGORIES:

What are your Sales categories?

The Principle:
Category management is an important tool required in your retail business to maximise the sales and profit margins of a category or group of categories. A category is an assortment of SKUs (stock keeping units that the customer sees as reasonable substitutes for each other. An analysis of categories through POS systems or manual cash registers is a fundamental requirement for the retail manager . Identifying growth categories, declining categories and stable categories is part of this analysis.

Category

Sales %

Growth, Stable, Declining

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

A basic form to collect sales by category

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

How does this link to your stock and floor space?

Category Sales per year % Stock level at retail % Floor space %

Notes:

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

What is your promotional plan?

The Principle:
Promotions need to be designed to bring more customers into your store and to keep them coming back to see your new products or offer. Some promotions do not work therefore it is important to plan and measure the results of all promotions to learn for the future. The promotion needs to be focused on core customers. In general you should run promotions for no longer than 2 weeks. They can educate customers about your products, market new items and provide a means to market your business within your retail precinct . It is a good principle to have a promotions calendar to identify your major events. Your point of difference to other retailers should be part of the promotion e.g. service, range, warranty.

YOUR PROMOTIONAL PLAN:

Event
New Lines

Examples

Point of Difference

Loyalty

Major Events

All Year

Mega Sales

Special events

Trends

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

PROMOTIONAL CALENDAR
NO: MONTH
EVENT/T ITLE THEME SERVICE OR PRODUCT FOCUS SUBCATEGORY EMPHASIS METHODS/MEDIUM DISPLAY/POS/TIC KETING TOTAL PRODUCTION COST PLANNED ACTUAL STAFF ADVISED REMARKS ON PROMOTION

START

FINISH

START

FINISH

START

FINISH

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

What are your Key Performance Indicators?

The Principle:
Key Performance Indicators (KPIs) enable you as a retailer to understand what is happening within your categories and business each day. It is very important to have information collected and summarized across a range of KPIs by category. This can be done through your POS or cash register. These KPIs are detailed on the right and are the most important for successful retail management. There are many other KPIs that you will also need to monitor. Your accountant can help you in quantifying all of these within your business. It is important to work with your accountant to maintain good financial controls in your business. If you have a POS system, talk to your software provider to ensure reports are available from the system that can deliver KPIs by category.

YOUR KPIs:
First Margin Markdowns Shrinkage Final Achieved GP Stock Turn Average Breakeven Sales Orders Committed Conversion Rate $ % $ % % % %

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

BUYING MARGIN
(The First Margin / Prime Margin )
Recommend Retail Price RRP =Cost+MUP$ $120 $125 $133 $140 $150 $175 $200 $225 $250 $300 Potential $ Profit $20 $25 $33 $40 $50 $75 $100 $125 $150 $200 Cost Base Mark up % On Cost Base 20% 25% 33% 40% 50% 75% 100% 125% 150% 200% Buying Margin Profit/RRP % 16.6% 20.0% 24.8% 28.6% 33.3% 42.9% 50.0% 55.5% 60.0% 66.7%

$100 $100 $100 $100 $100 $100 $100 $100 $100 $100

Mark on Cost to achieve Buying Margin Profit divided by Cost $50 / $100 = 100% KEN
TICKLE

Potential Buying Margin Profit divided by RRP $50 / $150 = 33.3%

What is your buying plan?

The Principle:
All retailers must go into the market with a shopping list to buy for their customers. The shopping list must be planned in advance to ensure that the product offer is well thought through. This is important in making sure that you are never out of wanted products for your customer. In the supermarket industry it has been quantified that about 3% of total turnover is lost to out of stocks. The retailer should develop efficient means by which they can manage the replenishment process. PRODUCT RANGE PLAN: The attached product range plan is a model used to identify core products within each category. It focuses the retailer on buying for the target customers. Retailers need to develop a range plan in each category of the business.

Your Best Sellers

CATEGORY CORE ITEMS

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

What is Merchandise Financial Planning?

A buying plan is a living and breathing plan put in place by retailers to manage inventory levels at category level by using key KPIs from the information base. The MFP uses retail inventory (retail prices) rather than cost. This means all KPIs are planned at retail. Improvement in inventory management impacts on profitability, cash flow product mix , visual presentation and customer relationship.
KEN TICKLE

YOUR PRODUCT RANGE PLAN

CATEGORY:
1ST PRODUCT FEATURE 2ND PRODUCT FEATURE 3RD PRODUCT FEATURE

CUSTOMER PROFILE:
GENDER: AGE:

% % % % %

SPENDING PATTERN:

Category %
PRODUCT FEATURES AND BENEFITS:

%
%

%
% %

The retail principles should be read in conjunction with the attached consultants report.

Ken Tickle

6: 1: 5 Principle
Actual Sales $925,000 $980,500 GP $ $277,500 $304,500 UP 6% UP 1%
to 31%

less Rent 462 psm less Wages & on Costs less Depreciation $50,000 / 5 Years less Interest 8.0% $145,000 less Other total Expenses

$ 46,250 $ 92,500 $ 10,000 $ 11,600 $ 29,650 $190,000 $180,500 $ 87,500 $124,000

- 5%
UP 42%

equals EBT (Earnings before tax)

KEN TICKLE

Building the net worth of the retail business

Retail Inventory Management
Reporting controls Sales Planning Buying Margin

Product & Range Planning

Customer profiles Sales Categories Category action plans

Merchandise Financial Planning - Open to BuySetting retail goals across categories

Stock turn
Cash flow implications Profitability outcomes

Markdowns
Shrinkage

Promotional Plans
Product family tree

Gross Profit
BUILDING A STRONG PROFIT MARGIN KEN
TICKLE

BUILDING A STRONG PRODUCT OFFER

BUILDING A STRONG BALANCE SHEET

ACTION PLAN category management

IDENTIFY ISSUE ACTION TO COMPLETE PERSON IN CHARGE DUE DATE COMMENTS

Disclaimer- Astanda Pty Ltd

This disclaimer has been provided on the following basis: A person who relies upon the category management information contained in this document does so at their own risk. In accordance with our normal practice, we emphasise that the recommendations contained in this document are based on industry sources. However, as no independent verification is possible, neither the firm nor any employee of the firm takes responsibility for any errors that may occur, however caused. The accuracy of those assumptions cannot be and is not, guaranteed. As the document involves recommendations which can be influenced by a number of unforeseen events or by the management decisions affecting the project or implementation, no warranty can be given that the recommendations contained will achieve the desired outcome. No officer, employee or agent of Astanda Pty Ltd has the authority to waive or modify this Disclaimer In any respect in any way whatsoever. Astanda Pty Ltd des not represent or warrant that the figures will necessarily apply with respect to the operation of individual operators. This report may not be reproduced or used in part or in whole , without prior consent of Astanda Pty Ltd. All images in this document are positional only and require image rights approval prior to marketing and use.

RETAILFINANCIALDISCIPLINES
Understandingyourretailbusinesstomanagefuturechallenges. Intodaysretailenvironmentitiscriticalthatretailersfacethefactsandstartmanagingtheirbusinessintothe futurewithaparticularfocusonretailfinancialdisciplines. Retailingisafastchangingindustryinwhichyoumustbeabletoquantifyimportantfinancialinformation.Both todayandinthefuturethiswillhelpyoubuildasustainablewinningproductofferforyourcustomer.Theresult businessgrowthandthefreedomtopursuenewdirectionsandinnovationsasyourcustomersexpectationschange andasnewcompetitorsenterthemarket. Thesedisciplineswillalsoresultinahigherqualityvisualoffering.Asretailers,whenforcedtoplantheproduct range,willthinkaboutspacemanagement,hotspots,visualmerchandisingandtrafficflowswithinthestore. Closeenoughisnotgoodenoughandgutfeelretailingwillnotworkeffectivelyforyoutomaximisethe potentialoftheretailbusinessandthereturnonyoursubstantialinvestment.Itisthereforeimportantthatyouhave themanagementculturerequiredandhavepeoplebiggerthanthejobthatwilltakeownershipoftheplanning methodologyrequiredinretailfinancialdisciplines. Whataretheretailfinancialmanagementstepsthatwillenableyoutomanagethischallenge? 1. Embracecategorymanagement:Allretailersmustensuresuperbcategorymanagementprinciplesare present.Thisenablesyoutomicromanagethebusinessacrossthecategoriesandallowsfurtherdrill downtosubcategories.Itwillalsofocusyouoncategorystrategiestoimprovestoretrafficflow,increase transactionsize,andincreasegrossprofit. 2. Productfamilytrees/productmix:Retailersmustbuildtheirproductrangefortheircustomer.Thefamily treeisamethodthatallowsthescopeofthemixtobedeterminedwellinadvanceofthepurchasing decision.Thisisoftenreferredtoasbuildingabuyingplannotaspendingplan.Thefactsarethatlessis moreinretailing.Thismeansthat80%ofsaleswillcomefrom20%oftheproductrangethereforehowto plantoensurethatthe20%isconstantlyontheshelvesisanongoingissueformanyretailers. 3. ImplementationofInformationTechnology:Intodayshightechworldthereisnoexcusefornothavingup todateinformationonyourbusinessperformance.Inventoryisyourbiggestassetandnottounderstand bestsellers,worstsellers,inventoryvaluesandimportantlyyourfuturepurchaseorderswillresultin reactivemanagementratherthanproactivemanagement. 4. UnderstandingKeyPerformanceIndicators(KPIs):TherearemanyKPIsinretailingbutquantifyingyour buyingmargin,sales,inventorylevels,markdowns,stockturn,purchaseorders,finalGP,andshrinkageby categoryarebasicrequirementsthatmustbeunderstoodbytheyourmanagementteam.Tohaveaculture thattalksaboutsellingheaps,lotsandplentyisnotindustrybestpractice. 5. MerchandiseFinancialPlanning(MFP):ThisisoftenreferredtoasOpentoBuy(OTB)andwithoutdoubtis thesinglemostimportantretailfinancialmethodologythatretailersmustembrace.Thisinvolvesplanning yourinventorylevels(andthereforerange)bycategorybyfuturemonthsusingtheretailKPIs.Thisprovides awonderfulunderstandingofthedirectionofthebusinessandallowsyoutogointothemarketwith confidencetopurchasetoapredeterminebudget.Itwillallowyoutoseewhatifscenarioswellin advance.Fromthisbuyingplanashoppinglistofproductisdevelopedbymonthbycategory. 1

6. Profitandlossoutcomes:RetailersmustputinplaceadequatemonthlyProfitandLosscontrolsthatallow confirmationoftheactualNetProfitofthebusiness.Thismustincludeaccuratestockonhandinformation (fromthePOS)sothatconfirmationoffinalGPandexpensesareinaformatthatcanbereviewedongoing. Relyingonyouraccountantsyearlyaccountsafterthefinancialyearclosesmaynotbesufficienttoallow youtoreacttotradingtrendsduringtheyear.TheMFPisthemethodologythatallowstheProfitandloss outcomestobeplannedwellinadvance. 7. CashFlowmanagement:Adetailedunderstandingofyourcashflowneedsispartoftheplanningrequired inretailing.Onceadetailedbuyingplanisinplaceandyouunderstandtheprofitoutcomesfromthisplan,a forwardcashflowcanbepreparedtoensureadequatecapitalisavailabletofundtheplan. 8. Businessequity:Businessownersneedtoensurethatthebusinessbuildsretainearningstofundgrowth andallowforpossiblepassiveinvestmentactivitiestotakeplacee.g.purchaseofabuilding,superannuation and/orinvestmentinshares.Puttinginplaceadequateplanningandmanagementcontrolswillprovidean improvedfocusonthenetassetsofthebusiness.Thisalsoallowsyoutoquantifyyourreturnonthe investmentinthebusiness. 9. Managementoftheoutcomes:Ongoing(monthly)reviewofyourbusinessKPIsacrosscategoriesprovides awonderfulfocusforthemanagementteam.Takingaproactiveapproachinbothunderandover performanceofcategoriesandthebusinesswillmeanyouapproachthemarketwithmuchmore informationthatresultsinimproveddecisionmaking.Rememberthatknowledgeispower. 10. Negotiationwithsuppliers:Thisfinalstepalsomustbeongoing.Itisnotgoodenoughtoallowyour supplierstodictaterange,purchaseordersand/orplacementofproductwithoutyourinput.Youmustgoto thesupplierwellbriefedonyourrequirementsandthereforebuildapartnershipwiththesupplier.They mustunderstandyourrequirementsforstockturn,yourrequirementsformargingrowthandyour requirementsforproductrange. These10stepswillallowownerstoimprovethewellbeinganddirectionoftheirbusiness,willleadtoasustainable winningproductofferandwillensurethatretailershavecontrolofbasicretailprinciples.Businesseswillcontinueto getintotroublebutbyhavingawellthoughtthroughplanriskswillbeminimisedandopportunitiescapitalisedon. Preparedby: KenTickleBComm,FCPA ktickle@pacific.net.au