Retail: Five questions to grow your profits in 2016

Canadian retailers did not have it easy in 2015. Total sales were irregular throughout the entire year and, overall, rose by a rather modest 4%. The arrival of major U.S. retailers such as Nordstrom and Saks, in addition to the increased presence of foreign retailers in Canada is creating upheaval in the Canadian retail landscape. With such fierce competition, Canadian businesses have no choice but to take a hard look at themselves to find ways to improve and be able to compete with these foreign giants.

The start of a new year is always a good time to take a critical look at your operations and ask some crucial questions for the future. What are your projections and objectives for 2016? What is your strategy for achieving them? Do you have an expansion or a downsizing plan? How should you deal with e-commerce challenges? What changes will you introduce to ensure that your company remains competitive?

The following are five questions that retailers must absolutely ask themselves if they hope to see solid profitable growth.

1. What factors influence sales?

In today’s retail environment, it is important to understand the factors that have an impact on sales. Your overall strategy must therefore include considerations that affect many facets of your operations.

A good brand strategy can have a major impact on business growth. A recognized and respected brand has a positive impact on prices; in fact, private label brands have a clear advantage in this respect. Moreover, today’s consumer is looking for an in-store experience as much as a product. You must therefore have a better understanding of consumer behaviour so as to truly meet people’s needs. This means offering people what they want—and eliminating products that they do not—while giving consumers a positive experience. Build on the strengths of your brand and of your products.

Your strategy should also take the physical side of your operations into account. What is your optimal store size? Has this clearly been established? Do you want to focus on mall locations, outlets, e-commerce or a combination? Do you have a good inventory management and open-to-buy system?

Many retailers are slow to embrace digital technology and, therefore, lose a large number of potential customers. What is your strategy for undergoing a digital transformation in your sector? Do you have a plan to put in place omni-channel retailing, which includes both an in-store as well as digital experience to strengthen your customer relationships?

There is no point in having a strategy without the ability to implement it. Once your strategy has been established, you must make sure that it can be supported financially, logistically, technologically and from an operations standpoint.

2. What are your store employees doing?

If you reduce the amount of time worked by store employees by one hour per week, how would this impact your business? You would save on salaries, but would sales be affected? This seemingly trivial question would be a good starting point to think about what store employees are doing.

In order for your business to grow, you must ensure that you get the most out of your employees. To do so, you will need flexible and effective work scheduling tools. Particular attention should also be paid to staffing, both in terms of recruiting the best people available and supervising them with the right managers. New employee and ongoing training must support people in carrying out their duties and should allow them to develop their knowledge and skills with the objective of increasing sales.

Compensation and sales incentives have a major impact on employee performance and a store’s culture. Some incentives encourage individual performance while others highlight results achieved by the entire sales team. It is also possible to opt for a combination of the two, a formula which rewards individual efforts while encouraging cooperation among employees.

The duties of store employees depend in large part on the support that they receive from the logistics and operations team. How much of their work is not related to sales? When goods are received, are they floor-ready for sale or do they require a fair amount of handling before being put on display?

All of these questions must be answered and the related problems must be taken into account in establishing your growth strategy.

3. Is a mall location your best bet?

A store’s location has a major impact on the business’s sales and profit margin. To make an informed decision, you must understand consumer behaviour and determine which location will be the most profitable for you.

This does not just mean knowing whether it is better to operate a store in a mall or not. When opting for a mall location, choosing the right mall is also important. Situations change quickly in the retail sector. For example, three of the best shopping complexes in the Toronto area saw their sales drop in recent years, with business shifting to other malls on the outskirts of the city.

The turbulence in Canada’s retail sector did not leave mall owners unscathed. Owners are becoming increasingly open to support tenants. Regardless whether you are operating a store in a shopping mall, as soon as you deal with property owners, it is strongly recommended that you use the services of a third party specializing in commercial retail real estate to advise and support you in negotiations with your real estate partners.

4. Where do the responsibilities of the procurement function end?

The procurement function plays a key role in the success of your business. However, in order for this function to contribute fully to sales growth, an effective open-to-buy system must be in place. This type of system allows you to keep track of store sales in real time, to determine which products are popular—and which are not—and, especially, to take prompt action based on this information. Too many retailers still do not have such systems in place, meaning that they are unable to benefit from the flexibility that can be provided for procurement as well as the additional revenues that can be generated when adjustments are made in real time. If you do not have an open-to-buy system, this should be your top priority for 2016.

Since the procurement function plays a key role in ensuring that your business is running smoothly, you must develop incentive pay and key performance indicators that will allow you to achieve your objectives. The goal is not merely to provide the largest possible gross margin percentage, other equally important factors must be taken into consideration, such as unsold inventory. You therefore need to see the big picture for the procurement and selling functions and have an appropriate strategy for optimizing gross margin dollars.

One of the best ways to realize the potential of the procurement function is to ensure that buyers visit points of sale more often. They must be a regular presence so as to speak with customers and employees and help to determine how and where merchandise should be presented. Buyers’ responsibilities should extend to include regular store visits.

5. Is your warehouse at the service of your stores?

The warehouse and the merchandise distribution function must be at the service of your stores. How do these facets of your activities fit together? What are the risks specific to warehouse and distribution activities? What internal control factors are in place to mitigate them? These are important questions in assessing the logistical structure for storage and distribution activities.

As is the case with procurement, an open-to-buy system is a must nowadays to measure productivity and properly manage inventory. It can also help you to plan for peak periods and, therefore, anticipate your staffing needs at these times of year.

There currently is a growing trend in the retail sector to outsource this function completely. In the past, warehouse operating and distribution costs accounted for between 2% and 4% of sales. These expenditures have increased substantially, notably due to higher labour costs and lower sales, and now represent between 5% and 6% of gross revenue. Many retailers consider that this justifies outsourcing storage and distribution to specialized businesses, such as Exel or the Metro supply chain group. No matter what you decide, you must analyze your productivity for warehouse and distribution operations.

A strategy for 2016 and beyond...

Reviewing the performance of your stores, your operations and your head office for 2015 should provide the basis for your growth strategy for 2016. This strategy should allow you to bring about the changes needed to remain competitive, in particular where open-to-buy systems and e-commerce are concerned. It must reconcile short-term changes and long-term growth. This way, you will prepare your business to face the challenges that lie ahead in 2016, but also in 2017 and beyond.

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