by Bill Gilmour
As 1990 progressed the scene on British High Streets and retail parks became increasingly gloomy. The combination of constrained consumer spending, rising overheads and high costs of financing was bad enough, but a record-breaking summer (in terms of the weather) served to keep consumers at home basking on their patios rather than spending in the shops.
Lower spending and the general downturn in the economy led to a slowing down in the retail property market, as reflected in Healey & Baker’s survey of rental values for prime units in 267 representative locations across Britain, except the North West. As Healey & Baker pointed out in their Summer Review, the rapid slowdown in the retail property market, in the main, “has been caused by high levels of interest rates, combined with a decrease in consumer expenditure and the arrival of the Uniform Business Rate”.
In a tight retail market-place, the only way to ensure survival is to steal market share from competitors while maintaining close control over the cost base.
With property being a significant part of the retailer’s cost base it is vital to maximise the productivity of existing and new accommodation. In a market showing static or slow growth, how can retailers achieve the sales levels necessary to cover costs and make some profit as well? The answer lies in focusing on five key areas:
- Strategy
- Store traffic
- Customer activity
- Margin management
- Cost control
An effective strategy with regard to target customers, trading proposition and retail format is a prerequisite for staying alive in an increasingly competitive retail sector. Paying lip service to customer requirements while offering something else is no longer a recipe for success.
During the 1980s retailers used design as a major factor for improving the attractiveness of their stores and thus increasing customer traffic.
As the decade evolved, the effectiveness of store design in generating significant sales growth declined as the proportion of retailers with modern state-of-the-art stores increased.
Today retailers need to look at different ways of broadening the appeal of their stores – such as improving their merchandise ranges, more closely tailoring their offers to local consumers through the adoption of micro-marketing techniques or even such basics as extending trading hours.
Increasing the shopping frequency of existing customers is a key way of raising the throughput. Advertising and special promotional programmes are obvious ways of seeking to step up customer traffic. Advertising is very often one of the first costs to be trimmed in a recession, but it can be argued that this is a false economy.
Other ways to improve the percentage of customer shopping include increasing the proportion of high-frequency purchase lines (such as fresh foods) or introducing new ranges more often. Wave merchandising is a technique being adopted by an increasing number of retailers to improve customer throughput.
For many retailers, two of the larger opportunities to increase sales are in converting a higher proportion of visitors into purchasers and in encouraging existing purchasers to spend more.
For example, in a speciality fashion store it is not unusual for only 15% of visitors to be converted into purchasers, ie for every 100 visitors, 85 walk out without buying. Reducing the walk-out proportion to 83 in 100 and assuming maintained average spend levels, sales increase by 13%. Increasing average customer spend levels show similar direct benefits.
The opportunities to improve conversion rates and average spend levels are wide ranging, but certain initiatives can be implemented fairly quickly without significant cost — for example, improving merchandise disciplines and presentation, emphasising co-ordinating and complementary lines, ensuring full availability of merchandise lines, and deploying in-store price competitiveness of key lines. A further opportunity exists in improving the level of personal service and the quality of salesmanship.
Higher sales are obviously critical, but the main focus must be on profit generation — avoiding the risk of achieving higher sales at the expense of gross margin and no positive benefit to profit. Too many retailers focus on last week’s sales rather than last week’s profit in relation to previous years’ performance.
Generating increases in gross margin generally requires improvements in buying and merchandising skills.
Many retailers have recognised that if they buy closer to the selling time they reduce the risk factor in terms of the merchandise being inappropriate and also have better ideas of their requirements in terms of volume.
However, once it is apparent that a merchandise line is not going to sell quickly it is important that early action is taken to mark down the selling price and move the item out of the store.
Taking markdown early may avoid the need to take larger markdowns at the end of the season and also creates space in the store for potential fast-selling lines. Improvements in gross margin can also be generated by better negotiation of buying terms, an area in which many buyers still depend on flair and gut feel rather than proven techniques and attention to detail.
In today’s trading environment, while it is essential that sales and gross margins are optimised this will not be effective unless costs are very effectively controlled. Our experience of working with a range of retailers has shown that there are often significant opportunities to improve cost control or to improve the effectiveness of expense budgets.
Stepping up marketing and merchandising efforts alone will not necessarily convert sales into bottom line profitability. Larger retailers particularly must develop the business infrastructure to support the product offer. In today’s information age it is essential that the appropriate systems are in place in stores, distribution centres and head office to provide control over stock both in the stores and in the supply chain and, of course, over the cost base.
In the current climate, the retailers who optimise sales and gross profits will be those who are most responsive to the market-place. In the short term this is best achieved by improving the needs of current customers, capitalising on best selling lines, efficiently eliminating poor sellers and minimising out-of-stock situations. In the long term it requires careful tracking of consumer spending, a response to demographic and lifestyle shifts and a change in the stores and merchandise offers to meet the new demands of target customers, all provided at a cost which the business can sustain.
