Retail Methodology

Understanding your retail business to manage future challenges.

In today's retail environment it is critical that retailers face the facts and start managing their business into the future with a particular focus on retail financial disciplines.

Retailing is a fast changing industry in which you must be able to quantify important financial information. Both today and in the future this will help you build a sustainable winning product offer for your customer. The result - business growth and the freedom to pursue new directions and innovations as your customers expectations change and as new competitors enter the market.

These disciplines will result in a higher quality in visual offering and when planning the product range, it will force you to think about space management, hot spots, visual merchandising and traffic flows within the store.

“Close enough" is not good enough and “gut feel retailing" will not work effectively for you to maximise the potential of your retail business and the return on your substantial investment. It is therefore important that you have the management “culture" required and have the people who are “bigger" than the job that will take ownership of the planning methodology required in retail financial disciplines.

What are the retail financial management steps that will enable you to manage this challenge?

  1. Embrace category management: All retailers must ensure superb category management principles are present. This enables you to micro manage the business across the categories and allows further “drill down" to sub categories. It will also focus you on category strategies to improve store traffic flow, increase transaction size, and increase gross profit.

  2. Product family trees/ product mix: Retailers must build their product range for their customer. The family tree is a method that allows the scope of the mix to be determined well in advance of the purchasing decision. This is often referred to as “building a buying plan not a spending plan". The facts are that “less is more" in retailing. This means that 80% of sales will come from 20% of the product range- therefore how to plan to ensure that the 20% is constantly on the shelves is an ongoing issue for many retailers.

  3. Implementation of Information Technology: In today's high tech world there is no excuse for not having up to date information on your business performance. Inventory is your biggest asset and not to understand best sellers, worst sellers, inventory values and importantly your future purchase orders will result in reactive management rather than proactive management.

  4. Understanding Key Performance Indicators (KPI's): There are many KPI's in retailing but quantifying your buying margin, sales , inventory levels, markdowns , stock turn, purchase orders, final GP, and shrinkage by category are basic requirements that must be understood by the your management team. To have a culture that talks about selling “heaps, lots and plenty" is not industry best practice.

  5. Merchandise Financial Planning (MFP): This is often referred to as Open to Buy (OTB) and without doubt is the single most important retail financial methodology that retailers must embrace. This involves planning your inventory levels (and therefore range) by category by future months using the retail KPI's. This provides a wonderful understanding of the direction of the business and allows you to go into the market with confidence to purchase to a predetermined budget. It will allow you to see “what if" scenarios well in advance. From this buying plan a “shopping list" of product is developed by month by category.

  6. Range planning - building the offer: on completion of the buying plan retailers must ensure that they build the range plan or “shopping list" of product. The family tree concept is a marvellous tool that will enable buyers to build a story board of product well in advance of the delivery. This will highlight any shortcomings or gaps within the range. The MFP program calculates the spend which is then allocated to the product family tree.

  7. Profit and loss outcomes: Retailers must put in place adequate monthly Profit and Loss controls that allow confirmation of the actual Net Profit of the business. This must include accurate stock on hand information (from the POS) so that confirmation of final GP and expenses are in a format that can be reviewed ongoing. Relying on your accountant's yearly accounts after the financial year closes may not be sufficient to allow you to react to trading trends during the year. The MFP is the methodology that allows the Profit and loss outcomes to be planned well in advance. Business owners need to ensure that the business builds retain earnings to fund growth and allow for possible passive investment activities to take place e.g. purchase of a building, superannuation and / or investment in shares. Putting in place adequate planning and management controls will provide an improved focus on the net assets of the business. This also allows you to quantify your return on the investment in the business.

  8. Cash Flow management: A detailed understanding of your cash flow needs is part of the planning required in retailing. Once a detailed buying plan is in place and you understand the profit outcomes from this plan, a forward cash flow can be prepared to ensure adequate capital is available to fund the plan.

  9. Management of the outcomes:a set of retail management reports needs to be generated to allow ongoing (monthly) review of your business KPI's across categories as they provide a wonderful focus for the management team. Taking a proactive approach in both under and over performance of categories and the business will mean you approach the market with much more information that results in improved decision making. Remember that “knowledge is power".

  10. Negotiation with suppliers: This final step also must be ongoing. It is not good enough to allow your suppliers to dictate range, purchase orders and/or placement of product without your input. You must go to the supplier well briefed on your requirements and therefore build a partnership with the supplier. They must understand your requirements for stock turn, your requirements for margin growth and your requirements for product range.

These 10 steps will allow owners to improve the wellbeing and direction of their business, they will lead to a sustainable winning product offer and will ensure that retailers have control of basic retail principles. Businesses will continue to get into trouble but by having a well thought through plan and monitoring the actual performance to the plan, risks will be minimised and opportunities capitalised on.