Chapter 83

Sales per Square Foot

Measurement NeedRetail space is an expensive solution, whether owned or leased, so retailers need to maximize the sales per square foot of themain customer selling space.

SolutionSales per square foot (SPSF) measures how productive a retailer is with the use of retail space for merchandising products thatgenerate revenue. It is important to note that selling area refers to the actual selling space, as opposed to window displays (towhich consumers have no access), dressing rooms (where no merchandise is displayed for sale), and similar nonselling floorspace. Also, vacant space costs money (much like an empty airline seat costs money), so the productive use of existing space iscritical to successful sales.

where

SPSF = sales per square foot

S = total sales

Sa = selling area in square feet

Suppose that a sporting goods retailer has total sales of $20 million and a total selling area across all stores of 100,000square feet. The sales per square foot is $200, calculated as follows:

$20.000,000~

lOO.OOO

= $200

Impact on Decision MakingA retailer's selling space is a key productive asset since its business model depends on its effectiveness at utilizing this spaceto generate profitable sales. Retail space is a form of marketing, and marketers pay close attention to the use of each store'sselling space so that it is appealing and even inspiring to customers (assuming the retailer is customer-focused)-hopefullyleading to improved sales. Store layout, merchandise mix, and general ambience all influence consumer purchase decisions atthe store level, and each of these are important to marketers who want to create a positive shopping experience for consumersand develop the proper image for the company. As sales per square foot varies, marketers can and should review the changesto determine the factors that may be influencing sales. Furthermore, any advertising and promotions marketers run to increasecustomer traffic and sales will have a direct and measurable impact on sales per square foot. Of course, the challenge isdetermining which specific marketing programs yield financial changes.

Large retail chains will use sales per square foot to assess performance across all stores, looking for those that either under-or overperform against the chain average. In an effort to maximize buying power from suppliers and develop consistentexpectations from the market, large chains often focus on designing selling space with identical layouts and merchandise

mixes. However, this assumes that customer expectations and needs are the same everywhere, which is rarely true. In theUnited States, for example, there is a wide variety of cultures, regional interests, and economic patterns that can penalizeretailers who do not pay attention to the unique needs of customers in, for example, Southern California versus those inMinnesota. The same logic applies when expanding internationally since cultural differences, language barriers, and historicaltraditions can directly affect merchandise mixes and product acceptance. Retailers ignore these differences at their own peril.The same is true for small retailers as well, albeit on a smaller scale.

Of course, too much variety can undermine efforts to develop a consistent image in the marketplace just as much as roterepetition. Retailers must clearly understand their overall strategic objectives and determine how individual store executionsupports company efforts.

Marketers will want to compare sales per square foot for the same period in prior years to understand how their programsaffect buying patterns. Promotions, such as yearly sales (discounts), can drive temporary revenue increases and even highermonetary margins on an absolute basis, although they will likely be lower on a percentage basis. Correspondingly, monthswith low or no marketing promotions may result in lower overall financial performance. The challenge is determining theproper use of aggressive marketing programs since, done too frequently, they can train consumers to wait for promotionsbefore shopping, harming the business pattern during non-promotion periods. Marketers will also want to understand how theirperformance compares to that of their competitors

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and/or the industry in which they compete.

Most retailers generate daily sales reports that are consolidated into weekly and monthly financial summaries. Informationon each store'

s square footage should be available in the detailed notes of the company'

s tangible assets. Marketers merelyneed to match each store'

s revenues with its square footage to ensure the correct SPSF total is calculated at the store level.This is usually aggregated to the company level to arrive at an overall average sales per square foot figure.

Sales/Profits per Employee

Measurement NeedProductivity is important in every business. Retailers have high fixed costs in property, plant, and equipment, plus additionalinvestments in inventory and marketing. Retail stores with slow or no business must still pay employees to keep the businessrunning during operating hours. Therefore, evaluating the financial contribution (i.e., sales!) generated by each employee-using a sales/profits per employee (SPPE) metric-is an important productivity measure.

SolutionThis is a measure of financial performance on an individual employee basis.

SPPE -E

where

SPPE = sales/profit per employee

S = total sales

P = total profits

E = total number of full-time employees

Let's assume a marketer's product line has $40 million in sales and $4 million in profits and that there are 400 full-timeemployees working in this particular business. The sales per employee is therefore $100,000 calculated as follows:

!4o,(mooo

SPPE =

= $100,000

Its profits per employee are:

$1000,000SPPE =

m

110,000

Impact on Decision MakingSales/profits per employee is an important measure of productivity. It helps a retailer gauge, in effect, the amount generated(either revenues or profits) per employee. A lower figure is an indication that either the company is overstaffed orunderproductive with its employees and, therefore, must find ways to improve. Training might prove to be a worthwhileinvestment, for example. Or in some cases the addition of new point-of-sale technology can make operations and consumertracking more efficient while allowing employees to take better care of customers. Retail management may also includeoperations staff when measuring productivity since their wages are effectively paid by the sales revenues generated. Of course,this can distort the performance of employees on the selling floor.

A company's sales are likely to be somewhat cyclical during the course of the year, with certain times being stronger (froma revenue standpoint) than others. This will affect the SPPE figure differently at each change in the business cycle. Forexample, the Christmas holiday season in the United States is the busiest time of the year for consumers. A sizable percentageof a retailer's annual revenue is gained in November and December. This is particularly true in the toy industry. Retailers mayfind that their SPPE numbers are quite strong during this time (relative to the full-time employees), which can distort theoverall productivity picture for a company.

SPPE may also be misleading if industry averages are used as performance benchmarks since competitors, while offeringsimilar products, may have very different business models and cost structures. Therefore, marketers and company managersneed to consider SPPE in the context of their capabilities and asset utilization first, before comparing it to the competition.However, if your company's SPPE is dramatically different from industry norms, and you are supplying similar products, thenit would be prudent to examine the reasons behind the differences more closely. It may turn out that you have longer-termchallenges to correct to remain competitive.

The sales and profit data comes from the company's financial statements; specifically, from the income statement. Theemployee information is most likely in the human resource files. This example refers only to full-time employees.

Retailer's Margin Percentage

Measurement NeedRetailing is a high-cost business yielding low margins. High capital investment in equipment, plus facilities costs, whetherleased or owned, put pressure on the retailer to generate profitable sales. Additional costs include labor and inventory. Each ofthese costs reduces the retailer's profits, so it is imperative that retail management has a clear understanding of their marginobjectives.

SolutionThe retailer's margin percentage is the profit margin that retailers realize after purchasing from the wholesaler and then sellingto the consumer. It is a measure of how much money the retailer makes. The following formula summarizes the calculation:

Spwhere

RMP = retailer's margin in percentage terms

Sp

= selling price to consumers

Pp

= purchase price from wholesalers

Suppose a retailer is selling a consumer product at a retail price of $5 and the price they paid from the wholesaler was$2.50. The retailer margin percentage is 50 percent.

(*5 - (2.50)RMP -

«5

= 50%

Impact on Decision MakingA retailer's margin percentage objectives have an important impact on product and category profitability, positioning, andeven image. It reflects the retailer

'

s strategy in attracting the target audience and it is also influenced by the manufacturer'

s

own recommendations. If a retailer selects a premium price position, it is most likely trying to achieve higher margins.However, higher margins are usually not associated with high volume. Conversely, lower margins may signal a moreaggressive position to grow demand through volume sales, but then low-price retailers can often face negative returns,especially during slower selling cycles.

The retailer's margin percentage will also influence the retailer's merchandise mix between store brands and national orglobal brands. Store brands may allow a retailer to increase its margins-even accounting for in-house production andmanufacturing costs-over nonstore national brands, thereby improving the retailer

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s margin percentage. For nonmarketers,store brands are a retailer's own product, typically developed and marketed by them. Store brands are usually lower priced(and sometimes lower quality) versions of better-known branded products. However, many store brands have improved theirquality in recent years. Either way, a store brand reduces costs for the retailer since the retailer is not paying the premium

prices for the better-known brands. Part of the higher pricing for better-known brands is to offset the higher advertising costs,although the higher prices also reflect the fact that the better-known brands are trusted, allowing the manufacturers to chargehigher prices. For companies like Wal-Mart, store brands can be a very effective component of their merchandise mix andoverall profitability, especially if they do not get the margin concessions they expect from large international brands. Asmaller, less well-known retailer may depend on nonstore brands simply because it does not have the financial wherewithal todevelop its own product line.

Retailers set prices based on several factors including their own per-store expenses, store positioning, product type, andcustomer type. Manufacturers influence retail price expectations by providing guidelines to their retail accounts, depending ontheir own positioning and margin objectives. In the United States, laws and regulations prevent manufacturers from dictating aretail selling price. However, they provide a manufacturer

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s suggested retail price, which can be a very persuasive guide,depending on the strength (in terms of brand or overall market size and clout) of the company. Manufacturers, such as Nike,want to encourage retailers to properly represent their products and price is one of the key tools in this effort.

The final retail price is also affected by slotting fees (payments a manufacturer makes to a retailer to place the products onstore shelves), co-op marketing (a shared advertising or promotional arrangement between manufacturers and retailers toencourage product sales), promotional allowances (additional discounts offered to retailers for performing promotionalactivities in support of the manufacturer

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s products), and other similar marketing programs. For manufacturers and retailers,these fees are usually set at the corporate level and are often negotiated. Retailers will have their own set of pricing and profitguidelines for each product they sell, often down to the individual store level (since goals may vary slightly from market tomarket, even if the store is part of a chain). In some cases, the corporate strategy may include a tacit understanding that eachstore manager has limited freedom to adjust corporate requirements based on the prevailing market situation in a given area.

The wholesale selling price is usually found on shipping or customer invoices, purchase orders, and/or accounting reports.The retail selling price to consumers is influenced by several factors including manufacturers, marketing programs, and, ofcourse, consumer response. Ultimately, the retailer will have this information contained in their end-of-day sales summaries atthe store level, by item.

Percent Utilization of Discounts

Measurement NeedWhen retailers buy products from a supplier, the supplier offers discounts for certain volume purchase levels, or as anincentive for the retailer to purchase specific products the supplier is particularly keen on selling. At the end of each businessreporting cycle, retailers review the financial results of the time period being measured. This includes measuring the discountsactually taken from suppliers when purchasing their merchandise, to determine if the various discount opportunities offeredwere utilized. Each discount represents the potential for the retailer to improve their margin, hence the importance ofunderstanding the metric.

SolutionPercent utilization of discounts (PUD) measures the total value of discounts taken compared to the total purchases from thesupplier:

PUD = - x 100Pi

where

PUD = percent utilization of discounts

Vd = dollar value of discounts taken

Pt = total purchases (in dollars)

A retailer's buyer or buying team (in the case of large, multidepartment retailers such as warehouse stores and departmentstores) purchases merchandise from a network of suppliers. The suppliers induce product sales often through buyer discounts,used primarily to increase the placement of new products and/or for volume purchases. If a supplier offers 20 percent discountsfor purchases over $100,000, then a retailer who buys $200,000 of merchandise will pay $160,000:

140,000PUD = --: x 100

$200,000

= 20%

Impact on Decision MakingPUD is a simple, yet highly useful measure enabling retailers to see what percentage of their total purchases received adiscount. Retailers want to maximize the use of supplier discounts since they can lead to improved retail margins. When thelevel of supplier discounts is low, then the retailer can review purchases with their buyers to see where and what discountswere missed. The information would also demonstrate to the buyer the bottom-line impact of missed supplier discountopportunities.

Shrinkage to Net Sales

Measurement NeedShrinkage is a retail term used to describe the difference between inventory purchased and officially received at the time ofdelivery, and the actual value of that same inventory in the stores, warehouses, or other locations in the retailer's distributionchannel. Shrinkage results from customer or employee theft, misplaced or careless inventory storage, or administrative errors.Retail management needs to determine the percentage of inventory lost to shrinkage. This can be done by finding the ratio ofshrinkage to net sales (SNS).

Solution

SNS=AI_

Elxia}

where

SNS = shrinkage to net sales

AI= actual inventory in dollars (measured at the retailer's cost)

BI= book inventory in dollars (measured at the retailer's cost)

Snt = net sales in dollars in time period f

Retailers regularly confront unaccounted inventory shrinkage. Let's assume a local hardware store that sells tools does aweekly inventory and its most recent results reveal that the actual inventory for its most recent week ending was valued at$55,000. The managers compare that number to the book inventory (determined by calculating inventory purchases minussales for the same week), which indicates a value of $62,000. Total net sales for that week were $71,000 (measured at fullretail price). The calculation is as follows:

= 35,000 162,000 X1(X)671,000

= -9.9%

Therefore, this retailer has shrinkage to net sales of 9.9 percent. With low net margins common in retail businesses, a nearly10 percent shrinkage has a substantial impact on the bottom line.

Impact on Decision MakingSNS helps retailers understand the direct financial impact of shrinkage, although it does not suggest a cause. Retailmanagement should review its security procedures and inventory tracking systems, compare purchase orders to productsshipped, and review the signatures that approved inventory for shipping. Management should also review any records thatcontain daily inventory levels and identify the times of day when products were shipped to determine any patterns that mayexist. Perhaps the same employee is on the job each time actual versus book inventory levels differ and is improperlyrecording shipments, in which case more training is needed. It is conceivable that when the inventory was first received it wascounted incorrectly. Of course, the worst-case scenario is theft. The most important action management should take is to

reduce shrinkage through a diligent review of every touch point the inventory crossed from its arrival to its shipment (or whenit went missing).