Understanding Retail Metrics

As most of you have come to realize, running a successful retail business involves more than buying merchandise, marking it up and selling it. When you first got started, you probably had a good idea of what your store would look like, how your staff would present itself, how the merchandise would be displayed…and where you’d be opening up your next store! Like most CEOs, you were and probably still are the visionary. But as you later found out, even great visionaries need a little pragmatism to realize their dreams.The good news is that you don’t have to be a statistician, mathematician or even a rocket scientist to manage your business in both a visionary and more scientific manner.

These days, using specially designed retail software products like Retail Pro and CounterPoint SQL, you can run a few reports on a weekly basis and get an excellent understanding of exactly what is going on with your business.

The information you get enables you to analyze your operation, identify problem areas, and take immediate corrective action before it costs you a bundle. These reports contain the Key Performance Indicators (KPI) for your business.How important are Key Performance Indicators? Think of yourself as the pilot of an airplane. You decide to take a trip and create a flight plan – when you’re leaving and where you plan to go. You take off with your flight plan in hand. It’s a beautiful day, with no clouds in sight.

But how do you know if you’re flying in the direction you want to go, flying level, high enough not to run into any mountains, have enough fuel and flying fast enough to get to your final destination on time?

Well, a pilot uses instruments to systematically get to his/her final destination safely. A retailer is no different, and must have and use the equivalent instruments in order to fly his or her business on a daily basis in a profitable manner. Those “instruments” are closely monitored by KPI.So start reading those KPI reports! And don’t forget to set objectives for the merchandise you are buying. 

Why is this important? When you run your KPI report you will know if the item is performing according to your expectations. If not, then you can take quick decisive actions to sell off that item before you get stuck with it and have to lose money on a mark down. Now, let’s take a closer look at how analyzing your inventory performance on a regular basis can keep your business on track.A retailer has five decisions to make on any given item in stock:

1. Mark up2. Mark down3. Buy more4. Buy less5. Don’t do anythingHow does a retailer know what to do and when to do it? Well the answer to that million dollar question lies in KPI’s. Let’s take a look at what I consider to be the five most important retail KPI’s that should be easily generated from your software program:Days of SupplyDefinition: Days of Supply is a key statistic which tells you how long it will take you to sell out of your present stock, assuming that sales continue at the same rate as recent past sales.Days of Supply analyzes the last period of sales, and based upon that rate, gives you the amount of days of supply left on that style. It is based upon the numbers of days of selling that you tell your system to examine. For non-seasonal merchandise which sells at a relatively steady rate, you could use a longer basis period, such as 30 or 60 days. For seasonal merchandise, the rate of sale changes rapidly, and you would want to use a shorter period.Merchandising Goal: To reduce your days of supply to match lead times, without losing sales.TurnDefinition: Turn is a measure of how many times your inventory turns over in the course of a year.Example: If you have an average inventory of 100 jackets in a year and you sell 100 jackets every 4 months, your inventory "turns over" or is totally replaced, 3 times per year. Therefore, your turn is 3.Turn is often increased by reducing selling price. However, this obviously reduces profit. A balance needs to be reached between the proper turn, and the proper profit margin.The formula for turn used by Retail Pro is: Annual Sales divided by Average InventoryMerchandising Goal: Increase your turn as much as possible, without having to take markdowns.Stock to Sales RatioDefinition: The ratio of the inventory available for sale to the quantity sold. For every unit I sold, how many units did I have on hand? Stock to Sales Ratio is the exact inverse of Sell Thru Percentage.Stock to Sales Ratio is a key statistic for measuring whether or not you are overstocked. If your Stock to Sales Ratio rises, and there is not an accompanying rise in sales, then you are adding more stock without increasing sales, which will reduce your profitability. If your Stock to Sales Ratio decreases, and your sales do not decrease, then you will have increased profitability.The formula used for Stock to Sales Ratio is: Averaged Units of Inventory Available divided by Units SoldMerchandising Goal: To reduce your Stock to Sales Ratio as low as possible, without losing sales.Sell Thru PercentageDefinition: The percentage of stock you had available for sale which was sold.Sell Thru Percentage is the exact inverse of Stock to Sales Ratio.Sell Thru Percentage is especially important for seasonal merchandise, since the goal is to be out of stock of seasonal merchandise by the end of the season. Therefore, you can look at your year-to-date sales of seasonal merchandise, and be sure that you were out of stock by the end of the season.The formula used to calculate Sell Thru Percentage is: Average Units Sold divided by Averaged Units of Inventory AvailableMerchandising Goal: On seasonal merchandise, plan out the percentages to be sold out of by month, so that you can ensure being out of stock by season end.Gross Margin Return on InvestmentDefinition: For every dollar invested in this style, how many dollars did I get back? (Abbrev. GMROI).Gross Margin Return on Investment calculates that return based on the gross margin from sales. For example, if you purchase $2000 of inventory, and sold it all in the same year for $6000, your profit would be $4000. The return on your investment of $2000 was $4000. The GMROI in this example is $4000/$2000 = 2.GMROI is closely related to turn. If your turn increases, your average inventory cost will be lower (relative to your profit), and thus the greater the return on your investment.The formula for GMROI is: Sales Margin Dollars divided by Months Passed X 12Your merchandising goal is to increase the GMROI as high as you can, by keeping turn high, at high margins.As an additional note, always remember to set objectives for the merchandise you are buying. For example, when buying a new style of jeans, set a target for how many pairs should be sold by some reasonable time frame like, sell 12 pairs in the first week.

This is important so when you run your KPI report you will know if the item is performing according to your expectations. If not, then you can take quick decisive actions to sell off that item before you get stuck with it and have to mark it down in an unprofitable fashion.