4 benchmarking lessons for the retail sector
By Marie-Claude Frigon, CPA, CA and Phil Lichtsztral, CPA auditor, CA
Retail is a challenging business. From adapting to new fashion trends to deploying your omni-channel retailing strategy, you must always stay ahead of the game to experience success. But how can you know for sure if you are among the frontrunners, or trailing them? The answer is simple: benchmarking.
Are you up to the challenge?
Although all retailers are different, comparing your results with your competitors’ allows you to see how you measure. Benchmarking store performance is a powerful tool if you choose your criteria carefully. Location (i.e., mall based or off-mall based), type of goods being sold and store size all have a major impact on costs and sales figures. If you fail to take all relevant factors into account, your assessment may be wrong, leading to decisions that are poorly suited to your business reality.
The following are the income statement highlights for retailers. These tables present guidelines for benchmarking activities for mall-based and off-mall based stores, as well as for head office. Keep in mind that true retail leaders achieve a level of performance that is well beyond excellence.
Benchmarking means more than just collecting data: it is about interpreting it and transforming it into actionable insights. Our experts Marie-Claude Frigon and Phil Lichtsztral present four lessons taken from recent benchmarking data.
Lesson #1: Inventory management is key
The importance of an effective Open-to-Buy system cannot be stressed enough. 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, more importantly, to take prompt action based on this information.
The performance of hard goods (i.e., everything other than textiles or shoes) is a testimony to the effectiveness of Open-to-Buy systems. This sector saw fair growth in 2015 and, in fact, has almost caught up with the soft goods market. Why? Its productivity has increased more quickly than that of other sectors. The resulting increase in profitability is partly due to an emphasis on inventory management, which generated higher profit margins
Lesson #2: Go online or go home
E-commerce is growing, year after year, and should soon account for close to 10% to 15% of sales. This increase means that website is already the most important store for many retail chains.
It is worth noting that, in spite of initial concerns, very few businesses that have made the shift toward online retail have seen any sales cannibalization. In fact, retailers that have embraced e-commerce and whose online sales now exceed the 10% threshold have also seen their in-store sales increase. On the other hand, retailers that have failed to invest in this new platform have seen either zero growth or a decline in same store sales.
Investing in e-commerce is generally quite profitable. It costs much less to build an online infrastructure than it does to set up a physical store, which means the return on investment may be quite significant. However, the Open-to-Buy system must be adapted in order to deal with the specific challenges of managing inventory for e-commerce.
Lesson #3: Operating costs are on the rise
An analysis of store performance shows that costs are increasing in a number of areas. The increase in the minimum wage and corresponding adjustment for salary scales is resulting in higher payroll expenses. Head office operating costs have risen to between 9% and 10% of sales. With eroding profit margins and higher costs, earnings before interest, taxes and depreciation and amortization (EBITDA), i.e. cash flows from operations, are on the decline. You should therefore pay particular attention to your operating costs and contemplate the possibility of outsourcing some functions, like your warehousing activities, to reduce your overall costs.
Lesson #4: Income of 6% to 10% has to be generated
To remain competitive in today’s business environment, you need to generate operating income (before tax) of between 6% and 10% of sales. Although this target may seem high, it is achieved by successful retailers.
To reach this objective, your gross margin for stores must be 60% or more. Moreover, the cash contribution of each location must correspond to approximately 15% of sales, perhaps even 20%. On the other hand, any store with a cash contribution of less than 10% should be examined carefully. Can it operate more efficiently? How can this be achieved.
All individual stores should generally undergo a serious review to determine possible improvements that can be made in each case. It is important to take a clear look at the situation, acknowledging the fact that not all stores will be able to substantially increase their sales, and then make the appropriate decisions.
Get your hands on good data
The Canadian retail sector is bound to experience more uncertainty due to the increased presence of foreign retailers and strong currency fluctuations. The only way to fight this uncertainty is to base your decisions on good, reliable data.
Each week, Richter publishes a comparative store sales survey of Canadian retailers. By signing up as a participant, you will receive the most-up-to date and critical information for your business.
About Richter : Founded in Montreal in 1926, Richter is a licensed public accounting firm that provides assurance, tax and wealth management services, as well as financial advisory services in the areas of organizational restructuring and insolvency, business valuation, corporate finance, litigation support, and forensic accounting. Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory and consulting firms in the country. Richter has offices in both Toronto and Montreal. Follow us on LinkedIn, Facebook, and Twitter.