BASICS OF RETAILING

RETAIL LIFE CYCLE EVALUATION CRITERIA / RATIOS FOR RETAIL EFFORT

RETAIL LIFE CYCLE

Changes or up-gradation of retail formats in the course of their operations are referred as Retail Life Cycle Over the past few decades, retail formats have changed radically worldwide The basic department stores and co-opertives of the early 20th century have transformed into mass
merchandisers (Wal-Mart) hypermarkets (Carrefour) Warehouse Clubs (Sams Club, Makro) Category Killers (Toys R Us) Discounters (Aldi) Convenience Stores (7 Eleven)

Retailing Three Phases

Retailers decide on the category and quality of products and services, differentiating them from other retailers. Retail formats in this phase are typically supermarkets, department stores and specialty stores. During the second phase, retailers carve a niche for themselves based on a product category and price. Competition intensifies because the products and services on offer become virtually standardized and price becomes the main selling point. This phase normally gives way to discount stores. The third phase arrives when competition peaks. This is when hypermarkets begin to evolve. Hypermarkets usually compete on price and a wider product range, but they normally lack product depth and service components.

GLOBAL RETAILING TRENDS

Cross-border Movement: Retailers are expanding their businesses outside their home markets, leading to emergence of global retailers. Geo-political developments, trade pacts etc are making easier to move goods and businesses across borders. Consolidation: Rapid pace of mergers and acquisitions is another emerging trend. Recently Wal-Mart acquired Asda in the UK. Carrefour and Promodes were merged in France.. On the Indian side, Trinetra has been acquired by More and Wipro is planning acquisition of Subiksha as of now. Migration of Formats: Retailers are matching their formats to the respective customer segments. Britains Tesco operates supermarkets, hypermarkets, neighborhood stores, convenience stores, mail order, department stores and even e-stores. Fishing where water is: Sticking to one single format does not make good business sense. This is getting recognized very fast among the retailers. Identify the different customer segments, and targeting the most appropriate format addressing those customers is the order of the day.

FINANCIAL DIMENSIONS
Profit Planning Asset Management Budgeting Resource Allocation

PROFIT PLANNING

Changes between two periods in Profit and Loss Statement The measure of square footage, number of branches and number of weeks be given proper care in comparison P & L A/c components Net Sales, Cost of goods sold, Gross Profit, Operating Expenses, Net Profit before taxes

ASSET MANAGEMENT
Hidden Values of Assets takeovers Current Assets Fixed Assets Current Liabilities Fixed Liabilities

PUTTING ASSETS TO BEST USE Ratios that help

Net Profit Margin= Net Profit / Net Sales Increase GP by opportunistic purchases Selling exclusive product lines Avoid price competition by excellent customer service Minimize discounts and selling a mix of goods with high margins Operating costs reduction (cutting energy costs, refinancing a mortgage for lesser interest etc)

Asset Turnover
Net Sales / Total Assets Generate increased sales from same level of assets Resort to longer business hours Accept orders on Web site Cross-sell additional products Move to a smaller store Simplify fixtures Smaller inventory Negotiate with property owners for part payment of renovation costs

Return on Assets
Net Profit / Total Assets Optimization of assets to increase profitability Rapid receivable cycle Rapid stock turnover

Financial Leverage
Relationship between retailers total assets and net worth Total assets / Net worth High financial leverage indicates substantial debt Ratio 1, means assets are equal to net worth and there is no debt High ratio means stress on cost-cutting to meet interest payment commitments Low ratio means conservative and limits expansion renovation

Strategic Profit Model

SPM reflects performance measure known as net worth Relationship of Profit Margin->Asset Turnover>Financial leverage Raising net profit margin can raise return on net worth, asset turnover or financial leverage
Contd.

Other Key Business Ratios

Quick Ratio:

Ratio >1 means firm is liquid able to cover shortterm liabilities Current Ratio: Ratio <1 means firm is not in a position to pay off its obligations. A ratio 2 to 1 is ideal

Key ratios contd..

Collection Period: Debtors x 365 Sales Measures quality of debtors Indicates speed of debtors collection Shorter the average collection period, the better quality of debtors

Key ratios contd..

Overall Gross Profit: Net Sales cost of goods sold Net Sales Covers both operation costs and net profit