MK 322 Retailing and ECommerce

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Retailing Key Performance Metrics (How to Make
Money)
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Retail Financial Strategy

• Whats is all about?
• Evaluating performance, at many levels
• Department / Store / System
• Performance Metrics
• Return on Assets (ROA)
• Gross Profit Margin (Gross Margin)
• Net Profit Margin (Net Margin)
• Asset Turnover (Inventory Turnover / Inventory
  Turn / Stock Turn)

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The Strategic Profit Model Margin Management
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Gross Margin for Wal-Mart and Tiffany
Gross Margin Gross Margin Net
Sales Wal-Mart 30,483
21.90 139,208 Tiffany 658
56.10 1,173
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Gross Margin , Inventory Turnover, GMROI for
Selected Retailers
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Retailing Pricing
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Objectives

• Learn about typical Retail pricing strategies
• Focus on EDLP
• Learn how to avoid Illegal Pricing Tactics
• Re-learn how to do Markups/Breakevens, etc.

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Everyday Low Price versus High/Low Pricing
Strategies

• Everyday Low Prices (EDLP)
• Set between regular non-sale price and deep
  discount sale prices.
• Similar to Everyday Stable Prices.
• High/Low Pricing
• Low prices are lower than EDLP competitors, but
  average price higher - frequent promotions.

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EDLPSupermarketCase(get into groups of 4 or 5)
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EDLP Case Information
MKT 322 - Spring 2006

• You are the manager for all 16 Ourstores a
  typical full-service Stop-and-Shop kind of
  grocery chain.
• Recently, a smaller rival called Feisty has
  embarked upon an EDLP pricing strategy.
• Given the following information, what
  recommendations will you make regarding
  Ourstores prices? Some realistic options are
• Do nothing / Match Feistys prices / Drop prices
  a little
• Pick an overall pricing strategy and explain why
  you are doing it.
• Other potentially useful information
• Only 25 of Anytowns consumers actively compare
  competitive stores prices (by shopping around
  and reading advertising).
• Most Anytown consumers shop one grocery store all
  the time.
• You are under no pressure from the home office
  either to follow or not follow the new price
  competition.

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(No Transcript)
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EDLP VS. HIGH-LOW PRICING

• In EDLP pricing, a retailer charges a constant,
  low price with no
• temporary discounts.
• Notable practitioners Wal-Mart, Sams Club and
  Price/Costco,
• Southwest Airlines, and Saturn.
• In high-low pricing, a retailer charges higher
  prices but then
• runs frequent promotions in which prices are
  temporarily
• lowered.
• How well does EDLP work in supermarkets?
• For EDLP to work, prices must be dropped, which
  leads to lower gross margins.
• Lower margins means that volume must increase
  substantially.
• To get increased volume, the strategy must create
  a low-price image in consumers minds.

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MORE ON EDLP IN SUPERMARKETS

• What does it take to make EDLP work?
• Gross margins in the typical supermarket average
  25.
• Given an original margin of 25, unit sales have
  to
• increase over 39 to make the same dollar
  profit after
• a 7 reduction in prices.

• When and how should EDLP be employed?
• For EDLP to work, it probably has to be
  chainwide so as to
• benefit from an overall price image.
• Advertising is critical to build the low-price
  image.

• With any pricing strategy, firms must consider
  the likely effect
• on two customer sections
• Current users.
• Nonusers who represent potential for growth.

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Return on Assets
Return on assets Net profit margins X
Asset
turnover
Net profit X Net sales
Net sales Total assets
Net profit Total assets
Wal-Mart 4,430 8.86 49,996 Tiffany
90 8.51 1,057
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Merchandising

• Item / Location

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What else is important?

• Gross Margin is everything. . .
• So is Inventory Turnover

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Inventory Turnover

• Inventory turnover Net Sales
  Average
  inventory at retail
• Inventory turnover Cost of goods sold
  Average
  inventory at cost
• Average inventory Month1 Month2 Month
  3
  Number of months

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Advantages of Rapid Turnover?

• Increased sales volume
• Less risk of obsolescence and markdowns
• Money for market opportunities
• Decreased operating expenses
• Increased asset turnover

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Inventory
Why is Wal-Mart so much higher than Tiffanys?
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Increasing Inventory Turnover

• Turnover Net Sales / Average Inventory (per
  year)
• What do we want Higher or lower turnover?
• Usually Higher
• How can we make turnover higher?
• Michaels Example

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What else is important?

• Gross Margin is everything
• So is Inventory Turnover
• Now we can make some merchandising decisions. . .
  
• GMROI Exercise (gmroiexc.doc)

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GMROI
Gross Margin
Net Sales
X
Net Sales
Avg. Inventory
This is the performance measure that allows you
To compare profitability across items and across
categories VERY USEFUL!
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Gross Margin , Inventory Turnover, GMROI for
Selected Retailers
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The Bookstore Problem(Which book do you stock?)
VS.
Retail 17.00
Retail 7.00
Cost 12.75
Cost 4.00
Gross Margin 25
Gross Margin 45
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The Bookstore Problem(Which book do you stock?)
VS.
Retail 17.00
Retail 7.00
Cost 12.75
Cost 4.00
Gross Margin 25
Gross Margin 45
Compare the GMROIs
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GMROI
Gross Margin
Net Sales
X
Net Sales
Avg. Inventory
Calculate GMROIs on board for 1 book
Retail 17.00 Cost 12.75 Gross Margin 4.25
Retail 7.00 Cost 4.00 Gross Margin 3.00
Keep all units in
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So they shouldnt stock my Dads book...

• Or should they?
• What would have to happen for my Dads book to be
  stockable by book retailers?

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High-Tech. Invades Shelf-Space Management

• Obviously, cant make careful personal decisions
  on 30,000 SKUs
• Computerize/Automate the process
• Supermarket scanners read UPC bar codes
• Feed data into real-time database
• Measure many variables
• Some we havent even covered...

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Evaluating Space Productivity

• Productivity ratios are output/input
• Sales per square foot
• Sales per linear foot
• Gross or contribution margin per square foot

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Apollo SpaceManagement Program

• View Clips
• Summary
• Retailing is all about