Some profitability metrics of the retail world

As a layman, what do we think about the profitability & the success of a retail store?

Is our favorite product available in the store? Does it have enough quantities of it? Does the store give me the option of trying out a new product (the visibility)?

Well, we are true to an extent. All of these measures of success are from the customer’s view. But retail success is not measured by how the customer sees the store, but how the retailers & the company sees the store.

For that to happen, the world has identified certain metrics which are essential to measure the success of the retail stores. So, here we are going to list out various metrics which are very important when it comes to retail.

Gross Margin Return on Investment

One of the three most important performance indicators of a retail store, this is an inventory ratio, which measures how much profit are we able to extract from the inventory which we are holding.

Now inventory holding costs can be a lot, if it goes unnoticed, or unmanaged. On top of it, if that inventory goes unsold, it creates a bit of a problem. GMROI lets us know how financially strong our retail business is; are we getting some profit on the inventories we hold? Why is a certain set of inventories not selling, and what can be done to sell it? GMROI measures the profitability of your inventory investment.

It is the “relationship between gross margin & the costs of holding the inventory”

GMROI = Gross Margin/ Average Inventory Costs

Another simple explanation can be:

‘For every one rupee invested in the inventory, how much profit are you earning” is the Gross Margin Return on Investment.

If the GMROI of a retail company comes out to be $2, then it means that for every $1 spent to bring the inventory to the store, the company earns $2 in profit for that inventory.

The average GMROI for a store depends upon the industry, category & the vertical which they operate in – because the variable costs (transportation, labour, logistics etc) of holding the inventory are different for each of them.

Gross Margin Return on Labour (GMROL)

Another one of the three important retail metrics, this measures how much profit an employee is generating, with respect to the inventory. Or, the return you have got from your employee at the store. This may be measured by – has the employee been able to sell the inventory allotted to him; how much time has the employee taken to do so etc.

In other words, out of the total profits earned, how much profits are you getting per employee. This helps in determining the performance of the staff, are they performing their role to a good extent or failing to do so and so on.

It is the “relationship between the gross margin & the labour employed.”

Gross Margin Return on Floor Space (GMRFS)

Now in a retail store, allocating space to inventory in a proper way, & ensuring that the maximum returns are gained from the smallest of areas in the store is as important as measuring the productivity of your inventory.

If you see that there are some products which are not getting sold, then that space is being used up, which you can allot to some other category & increase your profit for that space. This is what is measured by GMRFS.

It is the “relationship between the gross margin & the area (or floor space) allocated to the inventory (per square foot area)”

For a retailer, this helps in identifying which are the most profitable & important areas in the store where stocks can be placed, & that area can be utilized profitably. It also helps them in merchandise display to increase footfalls, sales, revenues & profits.

GMROF = Gross Margin% * (Sales/Area in square foot) * Sales for corresponding area & time.

This shows how much profit per square foot area is bringing in for the retailer, helping in comparing different product categories, shelf designs, & layouts.

Cash to Cash Cycle

Also known as Cash Conversion Cycle, it is the time in which retail stores convert all of their cash invested (from payment made to suppliers) to actual sales (payment received from customers). The time here is mostly measured in days. The number of days the store takes to bring back the cash into its system via receivables from customers, which was sent out via the payments to suppliers.

This also includes the inventory days, which is the time when the inventory is lying on the shelves on the way to be sold. It is very important for a retail outlet to keep a track of its cash flows, as this also gives an idea about how robust is your supply chain, and how faster does your inventory turnarounds & gets replenished.

There are certain elements of a cash-to-cash cycle:

  • Inventory Days (ID): The number of days it takes to sell the inventory which you have.
  • Receivable Days (RD): The number of days to receive payments from customers (including the credit cycle)
  • Payable Days (PD): The number of days it takes to pay your suppliers.

Keeping these elements in mind, lets come up with a formula for calculating the cash-to-cash cycle.

CTC = Inventory Days (ID) + Receivable Days (RD) – Payable Days (PD)

Example:

If More Supermarket sells its existing inventory in 60 days, it further takes 20 days to collect cash (payments or receivables) from its customers. Along with this, More pays its suppliers in 75 days.

Then its CTC would be = 60 + 20 – 75: 5 days

This means that More supermarket is able to rotate all of its cash invested and getting payments from customers in a mere 5 days, showing a good sign for the business.

“A low CTC is a good sign for your business.”

If More shows a CTC of 5 days, & Star Hypermarket shows a CTC of 20 days, then it means that More is better in managing its financials as it is able to rotate its cash much sooner.

Sales per Square Foot

Another metric which can be useful in determining which area inside the store is more productive, apart from GMRFS. This is the store’s average revenue per square foot of the sales space, which also includes inventory stock rooms, fitting rooms and more.

Sales per square foot = Sales/Total Square feet of sales space

Sales per Point of Distribution (SPPD)

This signifies how fast is the product moving when it is sold in the market, from a point of distribution (this can be shelves & racks in a retail store, etc.).

A measure of the speed in which the stock is sold & emptied from one distribution point. SPPD helps in determining the demand of the product in the market.

Other important retail metrics also include stock turn or inventory turnover, which shows the time it takes to sell all the stocks present in the store.

For a retail store, it is more important to see the time in which it is able to rotate the cash (measured by a cash-to-cash cycle). That is how we actually gauge which retail store is better, than by any other metric. But, at the same time, keeping a track of the other metrics mentioned above will also help the retail outlet in ways more than one.

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