Bill Brett illustrates how high stock turns are a major pathway to high profitability and how you can improve them.
For most, the principle of retail is simple but the implementation is more integrated and complicated:
Basically you identify a market opportunity, establish customer’s needs and wants, provide the premises and staff, buy product at a wholesale price, add a margin and sell for a retail price. From the gross margin, expenses for wages, operations, etc are paid and if well managed there is a profit left for the owner.
Most retailers focus on two things:
- Maintaining sales
- Maximising gross margin
If sales become static (or fall) a typical reaction is to increase prices and try harder to buy cheaper to increase the gross margin. Only after this strategy fails, does the retailer look to reducing costs.
Historically it has been observed that each of these actions have been taken in isolation usually as a defensive strategy - to maintain a bottom line net profit
Most garden centres put most resources into maximising gross margin. To buy cheaper is difficult for independent garden centres, so raising prices has been a common strategy. This results in a noticeable price differential between mass merchandisers (DIY stores and Discount warehouses) and garden centres, especially on volume lines. The end result being that mass merchandisers have gained market share at the expense of garden centres.
Garden centres have refused to lower prices on the grounds that they wish to be seen as upmarket, quality, with service and knowledge - but also to maintain profitability.
But maximising profit is much more than simply maximising gross margin.
Smart operators aim to maximise profit on the total funds invested.
The smart operators ensure they do not over capitalise on land and buildings.
They also ensure that stock levels are not too high, and that expenses are kept low in order to maximise the bottom line, and the all important return on total investment.
From an operating / management point of view.
The aim is to maximise net profit $'s/£'s/€'s (the bottom line)
When considering profitability, it is important to consider all the factors above in relation to any strategic, marketing, or operational decision. Because invariably any decision made will impact not just on the problem you are trying to rectify, but also on one or more other factors. A seemingly innocent remedy for one problem could have a serious negative impact in other areas. It is this inter-relationship between the areas that KPI monitoring reports can measure.
In other words if you make a strategic, marketing, or operation change, the KPI report will detect the result in terms of the net effect on bottom line net profit.
Obviously the more regularly a full profit KPI report is done the better, as results can be identified sooner. Some operational changes may have a relatively quick response (months) while some strategic changes may take 1 - 2 years to become clear.
Factors affecting stock turn:
- Sales – increasing sales with the same stock increases stock turn
- Product mix – a high % of fast turning product (bedding) will
increase stock turn.
- Price – a high price strategy tends to reduce unit sales and
therefore stock turn.
- Stock holding – high stock level, especially slow turning lines
will reduce stock turn
- Supply chain – buying little and often improves stock turn.
- Merchandising – good merchandising and signage increases
stock turn. Merchandising bedding and colour on the type of modern tiered fixtures seen here, rather than flat benches, can increase sales four-fold.
- Promotion – good in store promotion increases stock turn
Stock turn affects:
- profitability (return on funds invested)
- profit per sq.m (return on space)
- cashflow (ability to pay debtors on time and avoid overdraft charges)
Many garden centres develop a site larger than is necessary in order to appear large and credible. It is then filled with more stock than is necessary to appear large and credible.
The result is slow turning stock. Plants age and deteriorate, dry goods in the showroom gather dust and fade, all of which has a depressing effect on sales.
One garden centre owner made this comment to me – “We don’t have a stock turn problem because we have plenty of space and I keep it full”. But at the same time this garden centre had a stock turn of 1, was 6 months overdue paying debtors, and was paying big interest at the bank for an overdraft. In reality there was an overstock of some €150,000, which would have paid all debtors and eliminated the overdraft.
How to improve stock turn
Identify dead or slow moving stock.
This is easier with an EPOS system, as it identifies and quantifies slow turning stock. Slow turning stock can then be cleared at cost or below if necessary. This frees up cash to pay debt or reduce overdraft, and also frees up space that can be used to better display strong selling categories, or introduce different product.
Without an EPOS system, identifying and quantifying slow moving stock is more difficult but the worst cases can usually be identified.
Manage the supply chain.
Form closer relationships with fewer suppliers, in particular key suppliers and then buy less more often.
Short shelf life plants are self disciplining.
Long shelf life plants (trees & shrubs) – only buy what you can sell in 6-8 weeks
Garden care products – only buy what you can sell in 4 – 6 weeks
Garden décor products – only buy what you can sell in 10 - 12 weeks
Giftware – only buy what you can sell in 10 – 12 weeks
Avoid promotional buys that load you up with stock for 6 months or more (unless you have the spare cash to invest and the extra discount is significantly more than the holding cost.
Do not buy large introductory offers of new products with no proven sales record.
There may be some lines which are only available at one particular time of year and a season’s requirement must be purchased at one time, however there are ways to mitigate this problem.
Follow the principles of good merchandising – maximise visibility and appeal, using the 16 techniques outlined in our Merchandising Manual.
Make a little look a lot. Garden care products can be on narrow shelves only 2 – 3 deep but with 6 –8 facings for big sellers and 2 – 4 facings for small / moderate sellers as seen in
the examples to the right.
Make a few plants look a lot by colour blocking with other plants, cross merchandising with pots or adding props.
Always have a product sign with price, and benefits, use or a reason to buy.
Price at a point which will maximise gross profit $’s//€’s/€’s i.e. the balance between volume and margin.
Monitor for slow moving stock and clear at cost price, sooner rather than later
Most garden centres are reluctant to clear old slow stock at cost, but would be happy to return it to the supplier for a credit. Remember – from a financial point of view, in most cases selling at cost to clear, is the same as returning to the supplier for a credit, and usually less hassle.
The following is a summary of stock turns, from benchmarking carried out by Garden Retail Success in several countries. Stock turn is calculated as Cost of sales divided by cost value of average stock holding through the year.
|Bedding, Perennials & Colour
|Trees & Shrubs
|Christmas / Halloween
Note: These stock turn calculations are based on average stock holding not closing stock.
Read More on Key Performance Indicator Monitoring or Benchmarking: