Page 82 - DMGT553_RETAIL_STORE_MANAGEMENT

Unit 5: Retail Arithmetic

Notes
Example: A well-known cosmetic company’s president was delving through his firm’s
lipstick sales and discovered that, of the ninety six shades they marketed, four did 81% of the
business, ten did 94% of the business, and fifteen did 98% of the business. His first thought was
to discontinue all but the fast-selling four. Fortunately for him, wiser heads prevailed and the
company kept fifteen shades and discontinued the rest. “We’ll save inventory by eliminating
eighty-one shades, we’ll increase our profits even if we lose the whole two percent of sales that
are in the discontinued shades,” the president explained. “In any case, most of the women
buying those shades will probably switch to the ones we’re keeping.”
The result? Sales fell to about half. A large majority of women were buying the same fifteen
shades, but they wanted to feel they had a huge choice. They were offended to think that the
company was, ineffective in deciding the shade for them. Providing a good selection is often
part of pleasing your customers. But it has a cost.

Slow Turn causes:
Slow-moving merchandise to clog your shelves and make it harder for customers to find
the goods they want

Excessive accumulation of old styles, odd sizes, and extreme colours
Increased expenses
Deeper markdowns and the need to run them more often

The challenge is to balance the inventory level against the service level you want to provide
your customers. As I said, it’s a balancing act. Too high a turn will produce too many out-of-
stock situations and hence lost sales and disgruntled, often non-returning, customers. Too low a
turnover could put you out of business.
Determining How Much Margin to Go After Realising the retailer’s creed: Always strive to
squeeze as much margin as possible. The more margins you can extract from one item, the more
money you have to cut prices (and margins) on the products and deals that drive traffic through
your store. However, when trying to raise margins, you must bear in mind what the consumer
is willing to pay in your store environment. If you are a discount store, you cannot expect to
make the same margin the department store down the street makes on the same item. In your
store, your customers are only in the mood for bargains.

In general, margin decisions should be based on:
Competitors’ retail. If an item is carried throughout your trading area and it’s an item you
cannot do without, you must decide if you are going to be parity priced with everyone
else or have the lowest price in town. Having the lowest price will hurt your overall
margin, but it may increase turn and build customer traffic.

Last year’s sales on this item or a similar product. Once you have a history of an item, you
can determine how price-sensitive it is and if you have room to get more margin.
Planned turnover of an item. If you expect sales to be limited and you’re carrying the item
only as a convenience for the customers, take the extra margin. I always thought the
president of the cosmetics company I referred to earlier should have up-priced all the
colours that hardly sold and called them “premium shades”! Not only would he have
improved his margins, but I bet he would have sold more of those shades. Cosmetics
buyers are always looking for something “exclusive.”
Wholesale costs. Be sure to shop around among wholesalers (if you are not dealing directly
with the manufacturer) to see if you can reduce the price you are paying. Even a few
pennies saved can accumulate into good margin gains at the end of the year. Most retailers

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