Page 100 - DMGT550_RETAIL_MANAGEMENT

Unit 6: Financial Strategy and Retail Locations

Marketing not only influences net profits but also can affect investment levels too. New plants Notes
and equipment, inventories, and accounts receivable are three of the main categories of
investments that can be affected by marketing decisions. Thus, the retailer aims to achieve a
high return on investment.

Note In retail, the customer lies at the centre of any organisation's marketing efforts,
determining the overall success of the product or services.

6.2 Strategic Profit Model

The Strategic Profit Model is a crucial part of understanding how different retail strategies can
be used to pursue similar financial goals. There are different financial tools retailers use to
measure and evaluate their performances. Thus, stores operate with different margins depending
on their strategies.

A standard measure of financial success is Return on Equity (ROE). It is a simple calculating
method using the simple formula of net income divided by owner’s equity. Achieving a
high Return on Assets (net profit + total assets) is one of the important financial goals. It is
divided into two different paths which are the profit and the turnover. Here, asset turnover is
used to measure the productivity of a firm’s investment in assets.

Figure 6.1: Income and Investment Stream of Strategic Profit Model

Above is the income and investment stream of the strategic profit model. It shows that it could
be determined whether the ROE can be improved or not through the income stream or the
investment stream. It is basically showing how ROE is doing compared to ROA and suggests
two different ways to improve performances.

Overall, retailers aim for high turnover to successfully run their business and one way to do it
is to decrease the average inventory. This could be done promotions to speed up the turns, by
lowering gross margin and by electronic replenishment.

LOVELY PROFESSIONAL UNIVERSITY 95