The key measure of SUCCESS for any system is PRODUCTIVITY. This is a much used – and very misunderstood term. In this program we will study the concept of (retail) productivity in great detail, because it is important to manage the performance of any system.
Productivity measures relative performance, which is almost always the most useful way to measure performance. If I told you that I came 1st in a race this morning, you may or may not be impressed. But if I told you that it was a race against toddlers, you will definitely not be impressed. (The context of the race is used to measure the relative importance of my performance claim.) But if I you told that I covered the 100 meters in less than 10 seconds, you would be impressed again – because a new measure of relativity was introduced.
The objective of retailing is, for instance, maximum sales from minimum resources. The retail store manager must therefore achieve the optimum balance between sales and investment in merchandise and space and people in the shortest possible time. In order to know if these objectives are achieved, the manager can use a number of measures of productivity. Just like a doctor checks heartbeat per minute or cholesterol levels, a retail manager must make certain such checks from time to time.
The most important activity that happens in a retail store is the sales transaction. It is also important to measure the effectiveness of that process.
By far the most powerful and the most effective measure of the productivity of the sales system is the average sale. Even a business with unsophisticated technology can very easily measure the average sale, but surprisingly they don’t. It is measured by dividing the total sales value ($) by the number of transactions.
In most stores it is actually quite difficult to give individual sales people targets to achieve, and such targets can often be counter-productive and cause animosity amongst staff. The average sale, however, is a measure that can be used equally by everyone in every transaction as a ‘target’.
In any retail business, the three biggest expenses are:
- Stock (Cost of sales)
- Space (Rent)
- Staff (Salaries and wages)
The following measures of activity are commonly used because they are the most relevant – as they measure the biggest expense items relative to sales, as well as the efficacy of the most important process.
Cost of sales can typically represent 50% – 80% of a retail business’ cost. It is absolutely imperative that merchandise management strategies are effectively employed to manage this cost. (This is discussed in detail in the appropriate section.)
Some strategies require you to (increase sales or) reduce your stock. Such a reduction can be achieved by:
- Cutting slow moving stock items out completely.
- Reduce variety (range) by emphasizing popular items only.
- Reduce assortment by minimising price, colour, style, fabric and size choices.
This measure is crucially important, but the reality is that it is very difficult to change the key input (space rented) once there is a lease in place. Rent (and outgoings) constitutes between 10% – 25% of the cost base of most specialty stores. Because the rent itself is difficult to reduce, the focus for the store team is on how we use that space. Space allocation is also addressed in much greater detail in the relevant section.
Staff costs are usually the 3rd largest expense. Just like floor space must be ‘productive’, staff must be productive. Staff productivity is measured as Sales/ Employee, or as Sales/ Hours worked. The business owner looks at sales dollar value generated per employee (including non-sales staff). This gives the owner an indicator of how many people can be employed whilst remaining profitable.