Retailing is all about change, because consumers change
and so do their tastes. If you dont change, you dont grow. MARVIN TRAUB, former CEO of Bloomingdales INANCIA! REE"OM# $etting %o&r o'n sched&le# Being %o&r o'n (oss# Ta)e %o&r *ic)# No matter 'hat %o&r collateral reasons for o*ening a retail store, the n&m(ers are o(+io&sl% 'hat dri+e %o&r decision a(o&t 'hether or not to in+est the large and intense amo&nt of time and effort it ta)es to (&ild a (&siness %o& can call %o&r o'n# If %o&re an%thing li)e me, seeing a lot of n&m(ers all at once can (e intimidating# Initiall%, that is# ,o'e+er, as the sa%ing goes, there is -strength in n&m(ers#. In fact, ha+ing a (asic &nderstanding of ho' to inter*ret these n&m(ers ma)es man% decisions that seem gra% at first /&ite (lac) and 'hite# This cha*ter to&ches on the meaning of the (asic n&m(ers %o&ll enco&nter in the retail (&siness# If %o& are coming from another ind&str%, s&ch as man&fact&ring or real estate, the 'a% retailers fig&re their n&m(ers ma% loo) a little strange to %o&# Most other ind&stries deal 'ith mar)&*s, the *rofit as a *ercentage of cost0 retailers deal in margins, *rofit as a *ercentage of retail selling *rice# Retailers t%*icall% )ee* a t'o1col&mn ledger in order to f&ll% &nderstand 'hat is going on 'ith their (&siness# In the left col&mn, the% )ee* a r&nning record of the cost of the merchandise, the landed *rice incl&ding the cost of goods and shi**ing costs# In the right col&mn, the% )ee* a r&nning record of the retail +al&e of the merchandise, the s&m of the retail *rice tic)ets on all the items in the store# This method lets %o& )ee* trac) of the mar)do'ns in the right col&mn so %o& can see at a glance the *rofita(ilit% of an item, de*artment, and store# Also, this a**roach sho's %o& the *rofit or loss in the month it occ&rs, and resets the margin for the ne' month, gi+ing %o& a tr&e month1to1month com*arison# Ma)e s&re that an% acco&ntant %o& in+ol+e 'ith %o&r (&siness f&ll% &nderstands retail acco&nting# If not, %o& co&ld tr&l% (e at a loss# Under the retail methodolog%, the selling *rice of an item is al'a%s 2334# Therefore, (oth cost 5the amo&nt %o& *a% for an item6 and markup 5the amo&nt (% 'hich %o& increase the *rice to co+er %o&r e7*enses and *rofit6 m&st e/&al 2334# or instance, if %o& *aid 83#99 for a s*at&la and sold it for 82#33, %o&r gross *rofit margin 'o&ld (e 83#:9 5:946 and %o&r cost of goods 'o&ld (e 83#99 59946# 5In other ind&stries, the 83#:9 *rofit might (e e7*ressed as a *ercentage of cost, gi+ing %o& a markup of a(o&t ;<4#6 ,ealth of =o&r B&siness To determine ho' 'ell or 5*erish the tho&ght6 ho' (adl% their (&siness is doing, retailers ro&tinel% com*are each month 'ith the same month a %ear *rior# This is (eca&se, gi+en the large seasonal s'ings almost all retailers e7*erience, there is little meaning in com*aring this months sales 'ith last months# $o, if this e(r&ar% %o& did 8223,333 in sales and last e(r&ar% %o& did 8233,333, %o&r (&siness 'o&ld (e 234 ahead of last %ear# And, if this contin&es for a 'hile, %o& can (e ha**% 'ith %o&r trend# Of co&rse, if the n&m(ers 'ere re+ersed and %o& did 8233,333 this %ear and 8223,333 last, %o& 'o&ld (e >4 (ehind, and %o& 'o&ld ha+e to ta)e *rom*t remedial action# In loo)ing at these fig&res, %o& m&st e7cl&de ne' stores or de*artments %o& o*ened# To determine ho' health% %o&r (&siness is, the com*arison (et'een %ears m&st (e a**les to a**les, that is, same store *erformance# Esta(lishing Initial Margin To disc&ss the retail conce*t of margin it is im*ortant to ha+e a fe' definitions &nder o&r (elts first# or starters? @ Cost. Cost of Goods (COG is 'hat %o& *a% the +endor for *rod&cts# @ Retail. !elling "rice of #erchandise is 'hat %o&r c&stomers *a% the store for these goods# @ Initial Margin $. Initial #argin is the difference (et'een retail and cost 5Retail A Cost B IM86, e7*ressed as a *ercentage of retail# $o, if %o& (&% a shirt for 8C and sell it for 8D, %o&r initial margin is 8: or 9>#24# If %o& 5li)e me6 didnt *a% attention in ninth grade alge(ra, let me gi+e %o& a /&ic) &*date# 5If %o&, &nli)e me, 'ere an alge(raic 'hiE )id, *lease s)i* this section#6 In retailing there are three ingredients needed to fig&re o&t 'hat %o&r margin is and 'hat the margin sho&ld (e# If %o& )no' t'o o&t of three, calc&late the third# Then, %o& can decide 'hether or not 'hat %o& ha+e to *a% fits into %o&r (&siness *lan# !ets r&n thro&gh a fe' e7am*les# @ When cost and retail are known (and you want to find out what your margin percentage will be) Retail A Cost B Initial Margin 4 retail $%ample& If %o& (&% a lam* for 8F and it retails for 823, Initial margin 4 is 23 A F B : B :34 23 23 @ When cost and margin percentage are known (and you want to figure out what the retail should be) retail B cost 2334 A margin 4G If %o& )no' %o& 'ant to maintain a margin of 994 on the childrens clothing and a +endor offers %o& girls *ants for 89, the retail *rice %o& need to charge 'o&ld (e 89 B 89 B 822#22 2334 A 994 :94 @ When retail and margin percentage are known and you want to find out what you can afford to pay the !endor" the calculation is Cost B Retail HI52334 A margin 46 or %o&r 'hite sale e+ent, %o& need f&ll sheets to retail for 8F#;; and %o& )no' that %o& 'ant to 'or) on a C>4 margin# Jhat can %o& afford to *a% for each sheetK Cost is 8F#;; HI52334 A C>4 B F246 B 8:#<3 In+entor% T&rn T&rno+er of in+entor%, or turn, is the calc&lation of ho' man% times %o& sell and re*lenish the merchandise in %o&r store o+er the co&rse of a %ear# To fig&re o&t %o&r t&rn, di+ide %o&r ann&al sales (% %o&r a+erage in+en1 G2334 A margin *ercentage is also )no'n as the cost *ercentage or the cost complement (eca&se adding this cost *ercentage to the margin *ercentage sho&ld al'a%s e/&al 2334# tor% 5at retail6# or instance, if %o&r sales are 8:33,333 for the %ear and %o&r a+erage retail is 8233,333, %o&r t&rn is :# The more times %o& can t&rn o+er %o&r in+entor%, the (etter it is (eca&se? @ =o& 'ill ha+e less older merchandise# @ =o& 'ill ha+e more o**ort&nities to (&%, 'hich sho&ld lead to (etter (&%s# @ The in+entor% 'ill (e more &*1to1date# @ !ess mone% 'ill (e tied &* in in+entor%# @ =o&ll ma)e more *rofit on %o&r in+ested ca*ital# 5If %o& need 8233,333 of in+entor%tied &* ca*italto feed 8:33,333 'orth of sales and *rofits, %o&re o(+io&sl% (etter off than if %o& need do&(le that in+entor% for the same res<s#6 $toc) to sales ratio is the monthl% +ie' of t&rno+er# It is the amo&nt of merchandise in the store at the (eginning of a gi+en month di+ided (% the amo&nt of sales of merchandise for the month# It *ro+ides %o& 'ith a /&ic) +ie' on ho' 'ell %o& manage the in+entor%# or instance, if %o& ha+e in+entor% of 82<3,333 and 8C3,333 in sales for the month, then %o&r stoc) to sales ratio is fo&r to one# This means that it 'ill ta)e fo&r months of selling at %o&r c&rrent rate to sell thro&gh the a+erage monthl% in+entor%# Lno'ing that there are t'el+e months in a %ear, this means %o& are t&rning %o&r goods at the rate of three times a %ear 5t'el+e months di+ided (% a fo&r stoc)1to1sales ratio6# ,o'e+er, if %o&r 5realistic6 goal is to achie+e a stoc)1to1sales ratio of three to one, that is a t&rn of fo&r %o& are o+erstoc)ing and need to find 'a%s to o*erate on less in+entor% or to sell moreM =o&r <imate goal sho&ld al'a%s (e to de+elo* the highest le+el of sales from the smallest *ossi(le in+entor%# B&t (e caref&l 'hat %o& 'ish for# If %o& tr% to *&sh %o&r t&rns too high, %o& ma% r&n o&t of merchandise that %o&r c&stomers 'ant, and the% ma% go else'here# The n&m(er of t&rns for 'hich %o& sho&ld aim +aries (% t%*e of retailer# Th&s, (efore %o& set %o&r target, %o& sho&ld find o&t 'hat is the ind&str% norm# Act&all%, this is another reason to (elong to the trade association most related to %o&r t%*e of retail store# $&ch organiEations can gi+e %o& the a+erage g&idelines for t&rn and stoc) to sales ratios for different seasons that sho&ld hel* %o& )ee* the right amo&nt of in+entor% on hand, *artic&larl% thro&gh %o&r first fe' %ears in (&siness# =o& sho&ld re+ie' %o&r t&rno+er ratio e+er% 'ee)# The higher the t&rno+er, the stronger the retail (&siness 'ill (e# Jith a high t&rno+er, %o& ha+e less mone% in+ested in the in+entor% at an% gi+en time and a lo'er ris) of carr%ing *rod&cts %o&r c&stomers do not 'ant to (&%# =o& get higher sales from the same amo&nt of s*ace, ha+e fresher goods in the store, and can al'a%s feat&re ne' items to tem*t %o&r c&stomers# Theres nothing more disa**ointing to a re*eat c&stomer than seeing nothing (&t the same old st&ff# Jhile t&rn rates are innatel% different (et'een different categories of retail, 'ithin each categor% there are t'o (asic, and /&ite different, strategies that %o& m&st decide &*on 'hen setting %o&r t&rno+er o(Necti+es? 2# ,igh margin, high *rice, and lo' t&rno+er <# !o' margin, lo' *rice, and high t&rno+er A lo' t&rno+er item m&st gi+e %o& a high margin in order to *a% the rent for sitting on %o&r shelf for a long time# In contrast, a high t&rno+er item o(+io&sl% has to *a% less rent, and therefore can ma)e a lo'er margin# $trategicall%, %o& can mi7 these t'o t&rno+er conce*ts as long as one dominates the other so %o& are gi+ing a clear message to the c&stomers# or instance, in %o&r to% de*artment, %o& ma% *rice Bar(ie at cost to create a high t&rn, (&t *rice her accessories higher to create more margin, e7*ecting that c&stomers 'ho (&% Bar(ie (eca&se of the *rice 'ill *ic) &* the other items (eca&se no little girl can e7ist 'itho&t at least three ne' o&tfits for her dollM O(+io&sl%, %o& 'ant to t&rn all %o&r merchandise as /&ic)l% as *ossi(le# The tric) is to recogniEe that %o& ma% ha+e to stoc) lo' t&rno+er items as a ser+ice to %o&r c&stomers to ind&ce them to come to %o&r store and (&% the more *o*&lar items# or e7am*le, a 'ell1)no'n cosmetic com*an%s *resident 'as del+ing thro&gh his firms li*stic) sales and disco+ered that, of the ninet%1 si7 shades the% mar)eted, fo&r did ;24 of the (&siness, ten did >:4 of the (&siness, and fifteen did >;4 of the (&siness# ,is first tho&ght 'as to discontin&e all (&t the fast1selling fo&r# ort&natel% for him, 'iser heads *re+ailed and the com*an% )e*t fifteen shades and discontin&ed the rest# -Jell sa+e so m&ch in+entor% (% eliminating eight%1one shades, 'ell increase o&r *rofits e+en if 'e lose the 'hole t'o *ercent of sales that are in the discontin&ed shades,. the *resident e7*lained# -In an% case, most of the 'omen (&%ing those shades 'ill *ro(a(l% s'itch to the ones 'ere )ee*ing#. The res<K $ales fell to a(o&t half# A large maNorit% of 'omen 'ere (&%ing the same fifteen shades, (&t the% 'anted to feel the% had a h&ge choice# The% 'ere offended to thin) that the com*an% 'as, in effect, deciding the shade for them# The *resident not onl% reinstated the missing shades, he increased their n&m(er to 2<9# The res<K $ales gre' to a(o&t C34 more than the original le+el(&t 'omen still almost e7cl&si+el% (o&ght the same fifteen shadesM =es, *ro+iding a good selection is often *art of *leasing %o&r c&stomers# B&t it has a cost# #low $urn ca&ses? @ $lo'1mo+ing merchandise to clog %o&r shel+es and ma)e it harder for c&stomers to find the goods the% 'ant @ E7cessi+e acc&m&lation of old st%les, odd siEes, and e7treme colors @ Increased e7*enses @ "ee*er mar)do'ns and the need to r&n them more often The challenge is to (alance the in+entor% le+el against the ser+ice le+el %o& 'ant to *ro+ide %o&r c&stomers# As I said, its a (alancing act# Too high a t&rn 'ill *rod&ce too man% o&t1of1stoc) sit&ations and hence lost sales and disgr&ntled, often non1ret&rning, c&stomers# Too lo' a t&rno+er co&ld *&t %o& o&t of (&siness# "etermining ,o' M&ch Margin to Oo After Remem(er the retailers creed? Al'a%s stri+e to s/&eeEe as m&ch margin as *ossi(le# The more margin %o& can e7tract from one item, the more mone% %o& ha+e to c&t *rices 5and margins6 on the *rod&cts and deals that dri+e traffic thro&gh %o&r store# ,o'e+er, 'hen tr%ing to raise margins, %o& m&st (ear in mind 'hat the cons&mer is 'illing to *a% in your store en'ironment. If %o& are a disco&nt store, %o& cannot e7*ect to ma)e the same margin the de*artment store do'n the street ma)es on the same item# In %o&r store, %o&r c&stomers are onl% in the mood for (argains# In general, margin decisions sho&ld (e (ased on? @ Competitors% retail. If an item is carried thro&gho&t %o&r trading area and its an item %o& cannot do 'itho&t, %o& m&st decide if %o& are going to (e *arit% *riced 'ith e+er%one else or ha+e the lo'est *rice in to'n# ,a+ing the lo'est *rice 'ill h&rt %o&r o+erall margin, (&t it ma% increase t&rn and (&ild c&stomer traffic# @ &ast year%s sales on this item or a similar product. Once %o& ha+e a histor% of an item, %o& can determine ho' *rice1sensiti+e it is and if %o& ha+e room to get more margin# @ 'lanned turno!er of an item. If %o& e7*ect sales to (e limited and %o&re carr%ing the item onl% as a con+enience for the c&stomers, ta)e the e7tra margin# I al'a%s tho&ght the *resident of the cosmetics com*an% I referred to earlier sho&ld ha+e &*1*riced all the colors that hardl% sold and called them -*remi&m shades.M Not onl% 'o&ld he ha+e im*ro+ed his margins, (&t I (et he 'o&ld ha+e sold more of those shades# Cosmetics (&%ers are al'a%s loo)ing for something -e7cl&si+e#. @ Wholesale costs. Be s&re to sho* aro&nd among 'holesalers 5if %o& are not dealing directl% 'ith the man&fact&rer6 to see if %o& can red&ce the *rice %o& are *a%ing# E+en a fe' *ennies sa+ed can acc&m&late into good margin gains at the end of the %ear# Most retailers ma)e a *re1ta7 *rofit of (et'een <4 and ;4 of sales0 onl% in rare cases do their *reta7 *rofits e7ceed 234# !ets ass&me that %o&r *re1ta7 *rofit is 94 of sales# No', if %o& can c&t the cost of %o&r *&rchases so %o&r margin increases (% <4, for e7am*le, (% *a%ing 8F#33 for an item %o& sell for 823#33 instead of *a%ing 8F#<9, that e7tra 83#<9 dro*s to %o&r (ottom line# That means that %o&r *re1ta7 *rofit increases from 83#93 to 83#D9a 'ho**ing 934 increase in %o&r *rofitsM If %o& can ma)e a <#94 im*ro+ement on all the cost of all merchandise %o& sell, and %o&r ann&al sales are 82,333,333, then %o&r *re1ta7 *rofit 'o&ld rise from 893,333 to 8D9,333# Not (adM Certainl% 'orth *&shing %o&r s&**liers to gi+e %o& some *rice (rea)s# Beca&se there are no additional e7*enses, that e7tra 83#<9 dro*s to %o&r (ottom line and %o& ma)e 83#93 for e+er% 823#33 of merchandise %o& sell# @ Manufacturers suggested retail. Altho&gh this is onl% a g&ideline, it gi+es %o& a sense of the 'orth of *rod&cts# If %o& are a disco&nter, this also allo's %o& to *ro+e to %o&r c&stomers ho' m&ch %o& ha+e c&t %o&r *rice# @ (andling and selling costs. Prod&cts can +ar% dramaticall% in 'hat the% cost to sell# $ome *rod&cts 5li)e glass'are6 (rea) easil% so c&stomers or sales *eo*le are li)el% to damage a certain *ercentage of the stoc)# Certain goods ha+e a tendenc% to disa**ear (eca&se of sho*lifting 5electronics6# Others are e7tremel% hea+% or a')'ard to mo+e from the 'areho&se to the selling floor, so the freight and handling costs ma% (e high# $ome ma% (e shi**ed from across the street 'hile others ma% (e coming from across the co&ntr%, so trans*ortation costs need to (e considered# $ome goods ma% come in *re1tic)eted 'hile others re/&ire a lot of handling and tic)eting in the store, adding to %o&r cost# $ome goods tend to ha+e a high ret&rn rate# All these costs need to (e factored into the *rod&cts retail *rice# A (rittle, fadd%, easil% stolen article 'ith a F34 margin ma% act&all% (e less *rofita(le than a solid -e+ergreen. *rod&ct 'ith a :34 margin# @ )ature of the goods. If %o& are dealing in fad1 or fashion1oriented merchandise 5'hich incl&des e+er%thing from fashions themsel+es to cosmetics to to%s to no+elties that come and goremem(er the Pet Roc)K6, )no' 'hat an items li)el% shelf life is# ,o' 'ill the man&fact&rer hel* 'ith mar)do'nsK These, too, are factors %o& need to consider 'hen thin)ing thro&gh ho' to *rice merchandise and ho' m&ch initial margin to achie+e# @ Correlation among departments. or instance, infant clothing sho&ld not (e selling higher than (o%s and girls clothing# @ *emand and supply of goods. If %o& ha+e the e7cl&si+e distri(&tion of a hot item, %o& can &s&all% s/&eeEe o&t additional margin# If there is a high demand (&t short s&**l%, and %o& find there is little *rice resistance for an item, %o& can get additional margin there as 'ell# ,o' to Increase =o&r Margin O(+io&sl%, the /&estion here (ecomes, -,o' do I increase m% marginK. An additional /&estion m&st (e, -,o' do I increase m% margin 'hile still )ee*ing m% c&stomers ha**% and therefore m% sales risingK. Rela7# There are se+eral different tactics %o& can &se to hel* increase %o&r margin 'hile at the same time not changing the c&stomers e7*erience in the store? Im*ort Merchandise It so&nds com*licated at first glance# ,o'e+er, im*orting merchandise can ta)e on se+eral different *hases as %o&r store gro's# =o& ma% 'ant to start off small, dealing 'ith an im*orter &sing his la(el on the *rod&cts# Once %o& reach a certain +ol&me, ho'e+er, %o& ma% (e a(le to (ring in %o&r o'n *ri+ate la(el *rod&cts at considera(l% lo'er cost# In addition to sa+ing mone%, here are some reasons to loo) into im*orting? 2# )o middle man. If %o& are dealing 'ith an im*orter directl% or e+ent&all% im*orting %o&r o'n *rod&cts, %o& ha+e eliminated the 'holesaler or distri(&tor from 'hom %o& 'ere (&%ing the goods# Th&s, %o& ha+e added their margin to %o&r o'n# <# Control. Once %o& esta(lish a *ersonal relationshi* 'ith the o+erseas man&fact&rer, %o& ma% (etter control the /&alit%, /&antit%, and timeliness of the merchandise %o& are (&%ing# C# +,clusi!ity. B% im*orting a *rod&ct feat&ring %o&r name 5and, *ossi(l%, %o&r s*ecifications6, %o& can dis*la% an item that no com*etitor carries# That means %o& can sell it for 'hate+er the mar)et 'ill (ear 'itho&t ha+ing to 'orr% too m&ch a(o&t 'hat %o&r com*etitors are doing# :# Competiti!e Retail. =o& can (ring in a high /&alit%, *ri+ate la(el item to com*ete effecti+el% 'ith a higher1*riced, (randed *rod&ct carried (% %o&r com*etitors# In this 'a%, %o& ma% (e a(le to enhance %o&r lo' *rice re*&tation 'hile still maintaining a comforta(le margin# Cash "isco&nts Vendors are generall% forced to e7tend credit# ,o'e+er, (eca&se cash is )ing to them, the% often enco&rage %o& to *a% (efore the d&e date (% offering %o& a cash disco&nt for earl% *a%ment or a *a%ment in ad+ance of a s*ecific date# Among the more common cash disco&nts are? 2# -./0 +1M. A disco&nt of C4 if the in+oice is *aid 'ithin ten da%s from the end of the month# <# 2./0 )et -0. A disco&nt of <4 if the in+oice is *aid 'ithin ten da%s from the date it is iss&ed# Ten is the n&m(er of da%s the rate is a+aila(le# Thirt% is the n&m(er of da%s 'ithin 'hich the in+oice m&st (e *aid# C# -./0 R13 A disco&nt of C4 if the in+oice is *aid 'ithin ten da%s of recei*t of goods# "eli+er% Terms "eli+er% terms indicate 'hen and 'here the title of the merchandise *asses from the seller to the (&%er# That is the time and *lace at 'hich %o&r ris) of o'nershi* (egins# rom that time and *lace, %o& o'n the goods and %o& *a% for ins&rance and trans*ortation# Therefore, %o& can sa+e mone% (% dela%ing the *oint at 'hich %o& act&all% ta)e *ossession of the merchandise# T'o common deli+er% terms are? 2# 415 4actory. =o&r store o'ns the goods as soon as the carrier *ic)s the shi*ment &* at the factor%# That means %o& *a% the freight from there# <# 415 Warehouse or #tore. In this case, (eca&se the seller o'ns the goods &ntil the% arri+e at %o&r location, the seller *a%s freight, ins&rance, etc# "ating *ating e7tends the time (% 'hich %o& ha+e to *a% for merchandise# As the sa%ing goes, -Time is mone%#. "ating is +al&a(le for t'o reasons# The first reason is the interest %o& sa+e on the mone% that %o& )ee* &nder %o&r control for longer# This +al&e de*ends on the *re+ailing rate at 'hich %o& can (orro' mone%# or instance, if interest rates are 2<4 *er ann&m 5as the% 'ere some %ears ago6, then adding an additional month (efore %o& ha+e to *a% is 'orth 24 of the mone% %o& o'e# If interest rates are F4, that translates into a half *ercent gain each month# Al'a%s as) for additional dating# The second reason, and often the more determinant one, is that %o& are li)el% to find that, li)e most retailers, %o& are chronicall% short of cash# This is not necessaril% &nhealth% 5altho&gh it is &ncomforta(le6 (eca&se there is a good reason for it# If %o&r (&siness is gro'ing 5as %o& ho*e and intend that it 'ill6, %o& need more in+entor%# E+en if %o&r t&rn is a +er% im*ressi+e si7 times a %ear, in the short r&n %o& are still *&tting o&t more cash than %o& are collectingsi7 times a %ear t&rn means %o& ha+e to (&% t'o months of e7tra in+entor% to ser+ice %o&r gro'th# T%*icall%, %o& ha+e to *a% for the e7tra in+entor% in one month# Of co&rse, %o&ll get %o&r mone% (ac) in time, *l&s the *rofit on the e7tra +ol&me, (&t %o&ll (e stra**ed &ntil then# "ating hel*s o+ercome this *ro(lem# ort&natel%, it also hel*s %o&r s&**lier (eca&se %o& can (&%, dis*la%, and sell more of his merchandise# "ating is al'a%s hel*f&l, (&t there are occasion 'hen %o& ha+e a *artic&larl% strong arg&ment to as) for it# T'o s&ch occasions are? 2# 1pening a new store. The goods 'ill (e sitting in a store 'ith no chance of selling or t&rning &ntil the store o*ens, &s&all% for thirt% da%s# <# #hipping to a warehouse instead of a store. The store loses the t&rnaro&nd time it ta)es to get goods o&t of the 'areho&se# Ooods co&ld sit in a 'areho&se for thirt% da%s or more (efore mo+ing to the store# Mar)do'ns As the name im*lies, to mar) something do'n means to red&ce the original retail *rice# Mar)do'ns are ta)en for three rather different sets of reasons? 2# To s*eed the sale of slo' mo+ing *rod&cts0 to clear %o&r in+entor% of odd siEes, colors, and st%les, and to enco&rage the sale of soiled or damaged goods <# To maintain *rice com*etition 'ith other stores C# To create the e7citement of a s*ecial sale 5the -ha**iest. of the three reasons (eca&se, 'hile %o&ll still lo'er %o&r margins, %o&ll (oost %o&r sales6 Other Retail Practices Used to Change Prices $ince the *rice %o& charge %o&r c&stomers 'ill al'a%s affect %o&r (ottom line, %o& can ne+er o+erestimate or &nderestimate the im*ortance of *rice# ,ere are some other retail *ractices sometimes &sed to change *rices? @ 6dditional Mark78p. As the name im*lies, this *ractice changes the *rice &*'ard# It is mostl% &sed in one of the follo'ing occasions? A A s*ecial sale is r&n at a mar)ed do'n *rice, then the *rice is mar)ed &* to its *re+io&s le+el after the sale# A A +endor increases the *rice on the ne7t shi*ment of a certain item# Beca&se the com*etition 'ill (e forced to increase their *rices, those items alread% in %o&r store are mar)ed &*# @ Mark 8p Cancellation. Jhen %o& introd&ce a ne' item into %o&r store, %o& ma% initiall% mar) it &* in order to esta(lish a high *rice# Then, once that +al&e is esta(lished, %o& ma% cancel the additional mar) &* and red&ce the merchandise for a s*ecial sale# To some e7tent, %o& ma% (e a(le to &se the e7tra margin %o& earn 'hen %o& first (ring the item in 5and its still ne' and e7citing eno&gh to attract c&stomers in s*ite of its higher *rice6 to hel* finance the lo'er margin sale %o& r&n s&(se/&entl%# O*en to B&% The *&r*ose of an O*en to B&%, or OTB, s%stem is to tell %o& e7actl% ho' m&ch merchandise %o& m&st *&rchase to satisf% the amo&nt of in+entor% %o& ha+e (&dgeted for a s*ecified *eriod of time, &s&all% one month# The sim*lified 'a% of loo)ing at OTB is? Planned end1of1month 5EOM6 in+entor% for March 8233,333 Pl&s *lanned sales for March Q8:3,333 Pl&s *lanned Mar)do'ns for March Q8 <,333 Min&s merchandise on order and d&e to arri+e in March A829,333 Min&s BOM 5(eginning of month6 in+entor% for March A8>3,333 O*en to B&% 8CD,333 Before %o& e+er commit to (&%ing *rod&ct, %o& m&st ha+e %o&r OTB *lan in front of %o&# That 'a%, %o&ll )no' when %o& need 5and can afford6 to (&% ne' merchandise# =o& ma% not ha+e the mone% to (ring it in d&ring March, (&t 'ith %o&r *lan in front of %o&, %o&ll (e a(le to see that there is room d&ring the first 'ee) of A*ril# Jitho&t %o&r OTB *lan, %o& ma% inad+ertentl% o+ere7tend %o&rself# =o& ma% (e the (est (&%er in the 'orld, (&t if %o& do not ha+e the mone% to *a% for goods, %o& 'ont last long in retailing# The onl% 'a% to sta% on to* of this cr&cial facet of the (&siness is to ha+e a *lan# The first ste* in de+elo*ing this *lan is to *roNect %o&r sales by month for the first %ear# Of co&rse, this is a mo+ing target, so %o& need to re1*roNect them, or ma)e s&re %o&r *rior *roNection is still on target, at the start of e+er% month# The second ste* in %o&r *lanning is to esta(lish the t&rn of %o&r in+entor% so %o& )no' ho' m&ch in+entor% %o& 'ill need at the start of each month to feed %o&r *roNected sales# Once %o& )no' %o&r sales and t&rn, %o& can /&ic)l% calc&late %o&r OTB to see ho' m&ch to *&rchase each month# If, d&ring the %ear, %o& are trending &* or do'n in sales, OTB can easil% (e adN&sted to meet those s*ecific needs# !i)e all of the retail math tools 'ere disc&ssing here, loo) at this OTB as a tool for s&ccess, not something that 'ill get in %o&r 'a%# Retail Method of In+entor%, Or? $to**ing $hrin)age #hortages" also called shrinkage of in'entory or N&st shrinkage, can ca&se a store to go o&t of (&siness# ast# That is 'h% it is im*ortant to ha+e *roced&res in *lace to )ee* trac) of e+er%thing ha**ening in the store, from recei*t of goods to final sale# There are t'o definitions of in+entor%? 2# 'hysical in!entory. This is the co&nting of the stoc) that is act&all% on hand# <# 5ook in!entory. This is the record of 'hat should (e on hand# To deri+e the (oo) in+entor%, (egin 'ith the starting in+entor% 5either from store o*ening or the res<s of last %ears *h%sical in+entor%6# Add all *&rchases, all ret&rns that are in salea(le condition, and an% ma)egoods the +endor ma% ha+e *ro+ided for s&(standard merchandise# $&(tract all sales and the amo&nt of an% mar)do'ns that 'ere (elo' the *rice %o& *aid for the goods# $hrin)age, or o+erage, is the difference (et'een the *h%sical in+entor% and the (oo) in+entor%# The onl% ca&se for an o+erage is a (oo)ing error that sho&ld (e a+oided (% do&(le1chec)ing e+er%thing# $ome shrin)age is ine+ita(le, and %o& need to *lan for it# It re*resents the loss of merchandise for reasons that cannot (e *recisel% s*ecified# Those reasons incl&de? @ Vendor mista)es or fra&d# $ometime, containers dont incl&de the f&ll co&nt of goods# @ Em*lo%ee theft# This incl&des o&tright theft for *rofit 5e#g#, letting a fe' cases -fall off the (ac) of a tr&c).6, *ilfering merchandise for *ersonal &se 5ta)ing home a (o7 of detergent6, and &sing store merchandise for legitimate reasons (&t 'itho&t *a%ing for it 5a store cler) 'ho needs a *encil o*ens a *ac) of a doEen and tosses the rest6# @ E7ternal theft# The most fre/&ent method of e7ternal theft is sho*lifting# More rarel%, theft from %o&r 'areho&ses ma% occ&r# @ Clerical mista)es and (oo))ee*ing errors# @ Unrecorded mar)do'ns and allo'ances# These res< in the /&antit% of *rod&ct sold for the dollar +ol&me recorded act&all% (eing greater than the recorded amo&nt# or e7am*le, if %o& mar) do'n a 823#33 item to 89#33 (&t fail to note the mar)do'n on %o&r (oo)s, selling 8233#33 'orth of that item 'ill sell t'ent% items (&t onl% sho' ten as ha+ing sold# The missing ten items 'ill sho' &* as in+entor% shrin)age# @ Unrecorded (rea)age# ,o' to MinimiEe $hrin)age $ome shrin)age ma% (e &na+oida(le, (&t a maNorit% of the loss is *re1 +enta(le# Jhether the iss&e is slo**% record1)ee*ing or neigh(orhood hooligans ta)ing a -fi+e1finger disco&nt,. ta)e the follo'ing ste*s to minimiEe shortages? @ Record merchandise as soon as it arri+es# @ Pro*erl% mar), *rice, and identif% merchandise (efore mo+ing it to the selling floor# @ Record all *rice changes# @ Record each transaction# @ Change records (efore transferring goods or ret&rning them to the +endor# @ Ta)e *reca&tion against theft, as disc&ssed in the follo'ing sections# $hrin)age from all ca&ses has (ecome a (igger *ro(lem than e+er, *artic&larl% for first1time retail (&siness o'ners for 'hom *a*er'or) can easil% (ecome an o+er'helming chore# In fact, the *ro(lem has (ecome so *re+alent that a <4 loss in shrin)age is a standard of the ind&str% toda%# As disc&ssed earlier, a *ositi+e change in the cost of goods has a h&ge im*act on %o&r (ottom line# Unfort&natel%, shrin)age has e7actl% the same effectin re+erseM In addition to )ee*ing caref&l records, there are se+eral things %o& can do to c&r( shrin)age# Em*lo%ee Theft =o&r em*lo%ees sho&ld (e the last *eo*le to steal from %o&# After all, %o&re the one signing their chec)sM Unfort&natel%, the o**osite is tr&e? most em*lo%ees steal from their em*lo%ers# The incidence of em*lo%ee theft is high in retailing# Em*lo%ees ha+e greater access to a 'ide range of cons&mer goods that the% either desire for themsel+es or )no' the% can resell on the (lac) mar)et# Moreo+er, em*lo%ees often +ie' 'hat the% ta)e as tri+ial and dont consider it stealing# -$o, I ate a m&ffin 'itho&t *a%ing for it0 I 'as h&ngr%#. The office em*lo%ees e/&i+alent is ta)ing home some (all*oint *ens and *ads of *a*er# ,o'e+er, tri+ial or not, these thefts add &*, and their financial im*act goes 'a% (e%ond the items stolen (eca&se it red&ces %o&r stores *rod&cti+it%, lo'ers t&rno+er, inhi(its hiring, and ma)es %o&r store less +ia(le# In addition to cas&al *ilfering, %o& ma% 'ell face *lanned thie+er%, the 'illf&l theft of merchandise, s&**lies, or cash# Cons*irac% 'ith sho*lifters or deli+er% *ersons is also common# $ho*lifting $ho*lifting is a maNor *ro(lem, es*eciall% of smaller, easil% hidden items in general merchandise retailers, and of e7*ensi+e items in larger stores# Jhile most sho*lifters sim*l% tr% to sli* some easil% hidden items into their *oc)ets or (ags, some sho*lifters are more so*histicated# To gi+e %o& some idea of ho' tric)% the% can (e, one of their fa+orite tric)s 'or)s li)e this? The criminal legall% *&rchases an e7*ensi+e article of clothing or an electronic de+ice, ta)es it o&t of the store, remo+es the tags, lea+es the item o&tside, and ret&rns to the store 'ith the tags and the recei*t# Bac) inside, the thief *ic)s o&t an identical item, ta)es it to the dressing room or some /&iet corner of the store, and remo+es the tags# Ne7t, he or she ta)es the item, 'itho&t the tags, to the ret&rn des), hands it and the recei*t and tags from the legitimatel% *&rchased item to the harried cler), and recei+es a ref&nd# Unless a store sec&rit% *erson act&all% catches the thief remo+ing the tags, its hard to *ro+e that the second item is not the first one# E+en if each item is n&m(ered se/&entiall% so the serial n&m(er on the item does not match the recei*t 5something the cler) at the ret&rn des) is &nli)el% to notice6 it is diffic< to &se that as *roof of a scam 'hen the thief can claim that the serial n&m(er 'as incorrectl% recorded on the item# $ome thie+es e+en ha+e the gall to go to another store in the same chain and ret&rn the first item, claiming the% lost the tags# Others sell the items to a fence# $trengthening $tore $ec&rit% A sec&re store is a store that is e7*eriencing less shrin)age than its com*etitors# $ec&rit% ma% (e costl%, (&t so is shrin)age# Often the mere a**earance of sec&rit%, to (oth %o&r c&stomers and %o&r em*lo%ees, is eno&gh to do the tric)# ,ere are some timel% ti*s for strengthening %o&r stores sec&rit%? 2# E/&i* the store 'ith a sec&rit% alarm s%stem hoo)ed &* to a central ser+ice com*an%# Oi+e each em*lo%ee his or her o'n code so %o& can monitor 'ho comes and goes# <# Use loc)ed trash d&m*sters to decrease the ris) of merchandise (eing thro'n into the d&m*ster and retrie+ed later# C# "o not *ermit *ersonnel to *ar) near loading doc)s or e7it doors# A longer 'al) to stash or trans*ort items can (e a real deterrent to em*lo%ee theft# :# $trictl% enforce in+entor% control and trac)ing *roced&res# 9# ollo' &* on all references 'hen hiring an% ne' em*lo%ee# F# Im*lement an anon%mo&s ti* *rogram that moti+ates em*lo%ees to re*ort theft, dr&g a(&se, and other (&siness a(&ses (% (oth co'or)ers and o&tsiders# D# Lee* a close ta( on c&stomers 'ho s*end a lot of time in %o&r store# The closer %o& 'atch, the less li)el% a sho*lifter is to target %o&r store# ;# Place o(ser+ation cameras at strategic locations# As long as the red lights (lin), the% can (e fa)e cameras# One fast1food chain I )no' has three d&mm% cameras that a**ear to (e hidden (&t are easil% o(ser+ed (% em*lo%ees 'hen the% are *eering do'n at the cash register# The% are ine7*ensi+e (eca&se the% dont 'or)M ,o'e+er, the store also has one real camera that is +er% 'ell hidden# Em*lo%ees 'ho decide to raid the cash register nat&rall% t&rn a'a% from the three cameras the% thin) are o(ser+ing them, shielding their misdeeds 'ith their (odies# Jhat the% dont realiEe is that the% ha+e t&rned directl% to face the 'or)ing, 'ell1hidden camera# The% are s&r*rised 'hen, a 'ee) or t'o later, the% are laid off 'itho&t e7*lanation# The com*an% ne+er act&1 all% acc&ses them of stealing0 if it did, it 'o&ld ha+e to re+eal the *resence of the hidden camera, and then the game 'o&ld (e o+er# Parting Jords As 'e ha+e seen thro&gho&t this cha*ter, retail is, indeed, a n&m(ers game# ,ere 'e ha+e *ro+ided %o& 'ith the (asics of retail math# $till, the% are onl% the (asics# Along the 'a%, %o& 'ill enco&nter n&ances of retail n&m(ers that 'ill onl% add to %o&r e7*erience in this com*etiti+e, thri+ing, and <imatel% re'arding field# I ho*e that, li)e the rest of the cha*ters in the (oo), this cha*ter 'as interacti+e# In other 'ords, dont (e a *assi+e readerta)e 'hat Im offering and a**l% it to %o&r o'n sit&ation, either toda% or tomorro'# Or ne7t %ear# Lno'ledge is the )e% to s&ccess# Lno'ing the n&m(ers (efore %o& start %o&r retailing ad+ent&re is +ital to %o&r s&ccess# Certainl% there is a lot to learn, (&t )no' this? Understanding the (asics 'ill hel* %o& fine t&ne the rest and, in the meantime, 'ill )ee* %o& ali+e and 'ell, the latest addition to the thri+ing retail ind&str%# Ret&rn to?