Let's Go Hunting Profit!

While the ABS headline data may suggest we will hit a retail growth figure of around the +6% mark this year, there are winners and losers in this “headline” number released by the Government department. And, as we all know only too well, profit is not something that happens by accident – even when top-line growth is relatively strong.

Profit in retail can also be found in many places, some of them not so obvious.

In my consulting business I use a proprietary framework I call The C.O.M.P.A.S.$. System®. It is an anagram made up of Culture, Organisation, Merchandise, Promotion, Access, Store Environment and $Dollars. Using this framework, there are a number of areas all retail businesses should be interrogating to shake out productivity gains and profit – on an ongoing basis.

Retail is a people business. And people aren’t just a cost. They are there for a reason. All retailers should be investing time and effort to ensure that people are deployed where there is a return that best supports the investment and that store staff are supported for success. For every dollar invested in people, a retail operation needs to return at least $3 back to the business at the bottom line. This requires constant trial, measurement and analysis of new ideas and innovations. Ideas which increase conversion rates and lift transaction values, as well as isolating where best to use people on the retail floor to get a better sell through. Question: Could your conversion rate be lifted? How effective is your weakest link – the 3 hour a week casual?

Enablers, support, processes and systems are a never-ending source of cost reduction and profit optimisation. More often than not they are where a great retailer wins and a poor retailer doesn’t even know they are losing. Competency in organization is a critical must have today – right stock, right place, right time is only part of the story here though. Right information is the key and business productivity optimisation is the goal. Question: How good are your information systems at measuring what matters and delivering you insight which could optimise business performance?

Even the most well structured merchandise plan has opportunities for profit growth. In conjunction with pricing architecture, smart retailers are working merchandise strategies using traffic generating “headline” product and clever “sell-to” merchandise. Embellished with the right visual merchandising cues, customers buy better product with higher gross profit dollars, as well as additional items which supplement the initial purchase. Questions: How clever is your basic, better, best architecture? Is your range planned to ensure rapid liquidation, high finished margin dollars and maximum items per basket on a continual improvement basis?

Retailers either love or hate promotion. Most misunderstand it. The primary job of promotion in retail is not to sell product – it is to entice the customer to the store as often as possible and to attitudinally and behaviourally condition them. Done correctly, it delivers a customer flow to the store in a manner that the store can exploit to extract ever-increasing profits from each and every customer they interact with. In the first instance it means attracting the right customer, as this allows the highest productivity. Secondly, the right customer must also be correctly prepared for how the store environment and the merchandise plan will conspire to sell to them. And thirdly, they must be able to rationalise why they feel compelled to come back. Question: Is your promotion targeted to the right people and does it deliver them to the store in the right frame of mind as frequently as it can?

The access game is increasingly about “productive reach”. That is, across all the channels, territories and time horizons your retail business spans, you need to develop strategies and executions which increasingly maximise the return on investment. Part of a continuous improvement program, access focus examines catchment area penetration and customer share parameters for avenues to achieve a lot more for a little bit more…..or better still more for less. Question: Does your retail business have a multi-channel, multi-format access plan that can be executed in a flexible and efficient manner for coverage productivity? Do you track the return on investment of your access plan and make it part of a continuous improvement cycle?

Store Environment
It may sound trite, but for the 3,000 years of organised retail history the main game has always been the merchandise and the selling environment. Yet there are many retailers who forget about the important links between the two. The store environment must be created and maintained to sell the merchandise the way it has been planned. First and foremost a selling environment has functional attributes that must be in play. If not, sales will be lost. The aesthetic overlay to the functional “must haves” is more about promotional connection (see above) than anything else. It helps attract more of the “right customer” more often. The selling environment can be the easiest element of the mix to change…. and it can often be the biggest wasted opportunity. Question: Is the traffic flow, navigation, display space, selling aids and visual merchandising all working in tandem in your selling space to match your merchandise strategy and pricing architecture?

Pricing architecture, financial model and returns are the blood-flow of a retail business. Developing an approach to capital management which underpins the financial model and in turn informs the pricing architecture are sometimes overlooked in businesses which often run to standard “retail ratios”. As Kerry Packer is quoted as saying “Son, you can’t take percentage to the bank.” He also said “Cash is what matters. Profit is a matter of opinion”, but that’s another story. Each category of retail has different financial complications and capital requirements. All need diligence and discipline to engineer the best outcome. Question: Is your pricing architecture (and merchandise plan) derived from your financial model and the targeted EBIT and return on capital you have set?

While the above is not exhaustive, it does give you an indication of how profit can be derived from all the areas of a retail business.

After all, as Gordon Segal Founder/CEO of Crate and Barrel once said, “retail is not rocket science”.

The fundamentals of retail were laid down 3,000 years ago and haven’t changed since. It just takes a lot of time and energy to the cover the detail and the discipline necessary to ensure we drive and nurture the best outcomes. But it’s worth it.