retail overview oracle retail sales training july, 2004

Retail OverviewOracle Retail Sales TrainingJuly, 2004

2© Accenture 2004. All Rights Reserved.

Agenda

• Introduce Accenture Retail Practice and Capabilities

• Conduct a Retail Overview

– Retail Definition

– Retail Value Chain

– Major Segments of Retail

– Retail Organization

– Retail Math and Terms

• Retail Industry Trends

• Accenture’s View of High Performance Retailing

• Accenture’s Retail Offerings Driving High Performance

• Case Studies

• Joint Opportunities


Retail involves the sale and logistical processes that bring goods and services to consumers.

Retailing includes all business activities that involve the sale of goods and services to consumers for personal, family, or household use.

Sources: Accenture Analysis; Standard & Poors Industry Surveys – Retail (General and Specialty); About.com Retail Industry Profile, U.S. Census Bureau

Key Retail Facts

Definition

• $3.8T high volume/low margin industry comprising 33% of U.S. GDP

• Employs 15MM people in U.S. or 11.7% of work force

• Single-store businesses account for over 95 percent of all U.S. retailers, but generate less than 50 percent of all retail store sales

– Top 10 Retailers account for 52% of Top 100 Retailer sales in U.S.

Key Retail Statistics

• Break-bulk

• Provide assortment

• Convenience of location/distribution breadth

• Promotion

• Value-added services

Key Purposes of Retailers in Value Chain


The U.S. retail industry is comprised of four major segments.

• Store Based General Merchandisers: Retail stores selling general, non-food merchandise (e.g., Wal-Mart, Sears, The Gap, and Best Buy) Typically categorized by the following:

– Variety of product categories offered

– Assortment or depth of products offered

– Level of service offered

– Price range

• Food Retailers: Retail stores selling food products, typically categorized as convenience stores, supermarkets, and “big box” or superstores (e.g., Kroger, Albertson’s)

• Drug Retailers: Retail stores that are a form of specialty stores concentrating on health related merchandise (e.g., Walgreen)

• Non-Store Retailers: Retailers selling through non-traditional methods including catalog and direct mail retailing, e-Commerce, TV home shopping, and direct selling (e.g., Spiegel and Amazon.com)

Major Retail Segments

Sources: Accenture Analysis; U.S. Department of Commerce


Retail Value Chain

• Within all major retail segments, key processes must take place to get the product to the customer

– How these processes are executed varies widely across different companies

• These operational processes within an organization make up the value chain- the actual steps a company must go through to get the right product at the right time to the customer

• We will review the value chain from the merchant’s perspective to understand each step as it relates to a Retail organization

Retail Value Chain


Plan Merchandise

Plan Merchandise

Source Product

Create Market Demand

Deliver Product

Sell Merchandise

Manage In- Season

Planning provides a structured process for the deployment of a merchant’s two biggest assets: inventory and space, as well as a process for operationalizing the merchandise strategy.

Retail Value Chain


Source Product

Plan Merchandise

Source Product


Deliver Product

Sell Merchandise

Manage In- Season

The Source Product phase, when properly executed, affords the retailer increased profit margin and sales, by having the right product, right quality and right retail price to satisfy the consumer.

Retail Value Chain



Plan Merchandise

Source Product


Deliver Product

Sell Merchandise

Manage In- Season

Creating market demand lies in the effectiveness of the marketing strategy. Retailers can have the best product at the best price, but if the customer is unaware or ill-informed, sales and profits will be suboptimal.

Retail Value Chain


Deliver Product

Plan Merchandise

Source Product


Deliver Product

Sell Merchandise

Manage In- Season

The most successful retailers carefully manage their inbound and outbound transportation. The best retailers choose vendors that have a mutual interest in developing a strategic partnership, who not only manufacture products that customers perceive to be of good value, but also provide them with a high level of logistics service.

Retail Value Chain


Sell Merchandise

Plan Merchandise

Source Product


Deliver Product

Sell Merchandise

Manage In- Season

At its core, retail is a “relationship” or “people” business and the interactions that customers have with associates can leave lasting impressions with customers, both positive and negative. This difficulty of providing consistent high quality service provides an opportunity for a retailer to develop a sustainable competitive advantage.

Retail Value Chain


Manage In-Season

Plan Merchandise

Source Product


Deliver Product

Sell Merchandise

Manage In- Season

This is truly where the customer “votes” for what they like or don’t like. Based on customer response, this is where the “business of retailing” comes into play; placing re-orders, canceling back-up orders on slow sellers, re-assorting the offering based on color or style trends, monitoring open to buy (OTB) and accelerating markdowns. This process relies heavily on strong merchandising systems and reports that give the buyer the right information to make quick, fact-based decisions.

Retail Value Chain


Product Types

BASIC SEASONAL/ PROMOTIONAL PERISHABLE

Very predictable selling cadence

Long lifecycles

Not subject to volatility

Examples include light bulbs, white athletic socks, canned soup, some types of candy, etc.

Short lifecycle

An "in and out business," which means there are certain demand periods that must be managed aggressively

Examples include holiday decorations, swimsuits, suntan lotion, snow shovels, skis, patio furniture, etc.

Shortest lifecycles

In essence, become obsolete in days

Examples include fruit, meat, dairy products, etc.

FASHION

Longer lifecycle than seasonal and is very trend driven

Interpretation of a fashion product varies from retailer to retailer based on where it fits on the "trend" curve

Examples include low rise jeans, capri pants, three-quarter sleeve tops, high-tech electronics, etc.

Merchants execute the key processes of the value chain differently depending on the type of product they are managing

Retail Value Chain


Critical Buyer Touchpoints

• "Plan Merchandise" and "Manage in Season" warrant most of the buyer's attention

• The actions taken in these two processes determine the overall success or failure of the business: poor planning and execution results in poor business performance results

Retail Value Chain


Challenges for the Merchant

Six months from today:

STRATEGIC

Three months from today:

TACTICAL

Today:

REACTIVE

• Decisions that take time to implement, but will result in a competitive advantage

• Key questions include:

– What businesses should I grow, shrink or maintain?

– What product categories should I grow, shrink or maintain?

– Is the customer responding to the product offering? What adjustments need to be made to increase market share?

• Prioritized set of action steps that need to be implemented in order to:

–Improve or exploit the business opportunities

–identify the adjustments needed to improve results

• “Taking action now" as a response to business events or conditions

• The buyer's focus is to manage all three timeframes together

• This results in the need to perform the following tasks everyday:

–Manage the mix and local market optimization

–Track and control profitability and productivity

–Manage inventory

–Monitor performance

Retail Value Chain


Industry Segments Overview

Store Based General Merchandisers • Discounters/Department Stores: Companies engaged in the retail sale of a diverse

mix of merchandise emphasizing fashion apparel and accessories, home furnishings, electronics, and cosmetics. For example, JC Penney, Target, Wal-Mart.

• Hardlines: Companies engaged in the selling of sporting goods, toy, jewelry, music, consumer electronics, and office products retailers. For example, Best Buy, Staples.

• Apparel (Softlines): Companies engaged in the retail sale of men's, women's, and/or children's clothing, shoes, and accessories. For example, Nordstrom, The Gap.

• Do-It Yourself (Home Improvement): Companies primarily engaged in the selling of lumber, paint, glass, wallpaper, hardware, lawnmowers, outdoor furniture, and floor tile. For example, Home Depot, Lowes.

Food Retailers

• Grocery: Companies engaged in the retail sale of groceries, including dry goods, meat, produce, frozen foods, dairy products, seafood, deli/bakery, and nonfood items. For example, Albertson’s, Kroger, Safeway.

• Convenience: Companies engaged in selling such items as beverages, tobacco products, and in some cases gasoline. For example, Seven Eleven.


Drug Retailers• Drugstores: Companies engaged in the retail sale of prescription drugs and patent

medicines, as well as a number of related lines such as cosmetics, toiletries, and novelty merchandise. For example, Walgreens, CVS.

Non-store Retailers

• Internet/Catalog/Mail Order: Companies engaged in the sale of products by television, catalog, and mail order. For example, Amazon.com, LL Bean.

Industry Segments Overview


Store based general merchandisers’ offerings span a wide spectrum of variety, assortment, and service; however, the basic product flow is relatively constant.

Type Variety Assortment Service Location Top U.S. Players

Department Stores Broad Deep to Average Average to High Regional Malls Downtown

Areas

Federated J.C. Penney Saks

Specialty Stores Narrow Deep High Regional Malls Main Street

The Gap Abercrombie & Fitch

General Merchandise Discount Stores

Broad Average to Shallow Low Stand Alone Strip Malls

Wal-Mart Sears Holding Co. Target

Category Killers Narrow Very Deep Low Stand Alone Strip Malls

Circuit City Best Buy Staples

Off-Price Retailers Average Deep But Varying Low Stand Alone Outlet Malls

• Dollar General• Dollar Tree

Sources: Accenture Analysis; Standard & Poors Industry Surveys – Retail (General and Specialty)

Store Based General Merchandisers

VendorDC

RetailDC

Store

Direct Store Delivery (DSD)

Cosmetics

Accessories

Apparel

Soft Home Furnishings

Typical General Merchandiser Forward Product Flow


Segment Overview:

Top 5 US Chains:

Dominated by a few national and international retailers: Department store space has seen heavy consolidation in recent years

Discounters usually have higher metrics such as sales per square foot, inventory turnover and ROIC when compared with Department Stores

Department Stores tend to have higher margins as a function of carrying more upscale product lines

Discounters/Department stores often operate more than one store format

Ones to watch:

• Target (TGT)

• JC Penney (JCP)

Trends:• Discounters are steadily expanding scope to

steal share in Groceries, Electronics & Housewares

• Discounters and Department stores are focusing on developing and expanding private label assortments to increase margins

• Discounters and Department stores are also licensing designers and labels to provide exclusive products & increase customer loyalty

Store Based General Merchandisers Sub-Segment Cheat Sheet: Discount/Department

Chain (Ticker) Sales USD Store Count

Wal*Mart (WMT) 228.6B 3,710

Target Corp (TGT) 45.68B 1,308

Sears Holding Co (SHLD)* 44.6B 2,650

Costco (COST) 39.0B 324

J.C. Penney (JCP) 19.5B 1,039

US

D B

illio

ns

109 122139

157174

194216

239263

26 29 33 3741

46 51 55 6035 36 35 30 22 19 18 17 18

$100

$200

$300

1999 2000 2001 2002 2003 2004 2005E 2006E 2007E

Wal-Mart Target Kmart

Total Big 3 Discounter Sales 1999- 2007E


Large national players are increasingly dominant, stealing share and driving more regional chains into extinction

Hardlines sub-segments, such as CE and Office Superstores, are near saturation; opportunities for US store footprint expansion are limited

Short product life cycles and downward price pressure

Retailers are rapidly building private label brands and/or increasing the percentage of private label merchandise in the overall assortment

Hardlines retailers are sourcing more product from Asia; industry leaders are rapidly building direct sourcing capabilities, especially in regards to private label brands

Competitors are increasingly offering services (installation, repair, delivery) as a means to drive top line sales

Digital technologies are driving topline growth, especially in the Consumer Electronics space

Segment Overview:

Top 5 US Chains:

Ones to watch:


Best Buy (BBY) 24.6B 694

Staples (SPLS) 10.8 1184

Office Depot (ODP) 10.4 936

Circuit City (CC) 10.0B 617

Bed, Bath & Beyond (BBBY) 5.5B 721

• Best Buy (BBY)

CE Household Penetration Rates: Jan 2005 Est.

Trends:

Store Based General Merchandisers Sub-Segment Cheat Sheet: Hardlines


Segment Overview:

Top 5 US Chains:

Ones to watch:


The Gap (GPS) 13.5B 2,561

TJX Companies (TJX) 12.5B 1,852

The Limited (LTD) 9.5B 3,779

Nordstroms (JWN) 7.13B 148

Footlocker (FL) 5.3B 3,845

Trends:

Slow growth within the segment; downward pricing pressure

Sales are driven by ‘hitting the trend’: ever more fickle fashion trends award short product development cycles and brand equity

Product life cycles are typically 2-6 months, low frequency of store replenishment

Variety of value chain ownership models across competitors

Consumer channel preference tends to change with age

• Abercrombie & Fitch (ANF)• Urban Outfitters (URBN)• Chico’s (CHS)

• Successful apparel retailers are selling a ‘lifestyle’: integrating unique brand promises into all facets of their customer presentation (product, atmosphere, store employees)

• Consumers have shown an increasing preference for ‘luxury’ and are willing to pay a premium price. Retailer have responded by creating upscale brands to complement traditional private labels

US APPAREL SALES, 2000-2007e (billions)*

$240 $239 $244 $249$258

$268$279

$290

$155$148$142$136$130$125$121$120

$0

$50

$100

$150

$200

$250

$300

$350

2000 2001 2002 2003 2004 2005e 2006e 2007e

TOTAL SALES - ALL RETAIL FORMATS TOTAL SALES - SPECIALITY APPAREL RETAILERS

Store Based General Merchandisers Sub-Segment Cheat Sheet: Apparel (Softlines)


Segment Overview:

Top 5 US Chains:

Ones to watch: • Home Depot (HD)• Lowes (LOW)

Trends:

Intense competition dominated by two major players

Home Depot & Lowes fight to come up with new ideas to drive same-store sales growth and explore new, yet-to-be penetrated markets for expansion such as inner cities and more rural markets

Downward pricing pressure

Cannibalization - some markets may be over-saturated for the price of market dominance

• More direct-sourcing opportunities from overseas to wring out more margin dollars

• Product breadth extensions to grow business and trends

• Customer service initiatives

• Tailoring of stores to be more female-friendly

• Direct correlation to housing sales

• Home Depot eyeing international expansion

18.822.1

26.530.8

36.542.5

48.655.2

42.849.8

54.259.7

66.172.2

79.787.3

0

10

20

30

40

50

60

70

80

90

100

2000 2001 2002 2003 2004 2005E 2006E 2007E

Lowe's Home Depot

00-04 CAGR

04-07E CAGR

Lowe's 18.0% 14.8%Home Depot 11.5% 9.7%

DIY Chain US Retail Sales: ’99-’07E


Home Depot (HD) 66.1 1,720

Lowes (LOW) 36.5 1,087

Menards 5.6 195

84 Lumber Company 2.6 450

Payless Cashways (PCSH) 1.5 128

Store Based General Merchandisers Sub-Segment Cheat Sheet: Do-It-Yourself


Food retailers must build superior supply chain capabilities to deal with “high velocity” products.

Type Variety Assortment Service Top U.S. Players

Convenience Stores Narrow Shallow Average 7-Eleven

Convenience Supermarkets

Average Average Average Kroger Ahold

Superstores, Combination Stores, Supercenters

Broad Deep Low Albertson's Safeway

Warehouse Supermarkets, Wholesale Clubs

Broad Shallow Low Costco Sam’s Club


Typical Food Retailer Forward Product Flow

Vendor Direct Store Delivery

Vendor RetailDC

Store

Meat

Produce

Wholesale DC

Beverage

Dry Goods

Frozen Food

Tobacco

Beauty

Frozen Food

SubstitutesWholesale Direct Store Delivery

Consolidator DC

Food Retailers


Segment Overview:

Top 5 US Chains:

Ones to watch: • Whole Foods (WFMI)

Trends:

Grocery Chain US Retail Sales: ’00-’08E

• Ultra thin Operating Margins

• Highly Regional

• Fragmented but consolidating- large conglomerates operating under several regional ‘banners’

• Supercenter expansion poses a direct threat to the traditional grocers that currently serve the market


Kroger (KR) 55B 3,764

Albertsons (ABS) 40B 2,492

Safeway (SWY) 31B 1,583

AHold USA 27B 1,507

Publix (Push.OB) 18B 850

• Retailers are expanding Preferred shopper & Loyalty card programs, with the best in class utilizing the data gleaned from programs to make merchandising and promotion decisions

• Diversification of product offerings by adding organic, ethnic, and ready-to-eat selections to their assortments

• Increasing investments in pricing and promotional optimization technologies

• Consumers are making fewer shopping trips and spending more per trip

US

D B

illio

ns

Food Retailers Sub-Segment Cheat Sheet: Grocers


Segment Overview:

Top 5 US Chains (Non Petrol Cos.):

Convenience Store US Retail Sales: ’01-03E


7-Eleven (SE) 11.7B 5,788

The Pantry, Inc (PTRY) 3.8B 1,361

Casey General Stores (CASY)

2B 1,290

Kroger (KR) 1.6B 795

Trends:

• Overall sales in 2003 reached $335.3 billion for the industry, an increase of 13.9%.

• Motor fuel sales, which account for 65% of the total, drove the C-store sector’s sales increase, jumping by 19.6% to $218.8 billion for 2003.

• The remaining 35% of sales came from in-store categories, including merchandise and foodservice; these sales increased by 4.6% to $116.5 billion.

• In 2003 the total number of convenience stores decreased by 1.3%, ending the year with 130,659 units in operation.

• Motor-fuels sales continue to dominate overall revenues

• Foodservice sales lead in-store sales growth. Foodservice jumped up 13.3 percent to reach a record $15.2 billion, making it the number-two in-store category.

• Credit Card fees continue to rise. As a percent of gross profit, fees jumped 20.8 percent in 2003, and now equal 5.8 percent of gross profit.

Total Convenience Store Sales

113.5 111.3 116.5173.7 182.9

218.8

287.3 294.3335.3

0

100

200

300

400

2001 2002 2003

In-Store Sales Motor Fuel Sales Total Sales

Food Retailers Sub-Segment Cheat Sheet: Convenience


Drug retailers are being faced with a number of competitive challenges from major general merchandisers (e.g., Wal-Mart) who also sell pharmaceuticals.


Typical Drug Store Forward Product Flow

Vendor RetailDC

Store

Vendor DSD

Beverage

Pharmacy

Wholesale DC

Beauty

Dry Goods

Tobacco

Wholesale DSD

Consolidator DC

Type Variety Assortment Service Top U.S. Players

Drug Stores Average Shallow to Average

Average Walgreen’s CVS Rite-Aid Corporation

Drug Retailers


Segment Overview:

Top 5 US Chains:

Ones to watch:


Walgreens (WAG) 36.4 B 4,579

CVS (CVS) 32.2B 5,375

Rite-Aid (RAD) 16.9B 3,385

Jean Couteau 9.9B 1,878

Albertsons (ABS) 7.4B 2,492

• Walgreens (WAG)• CVS (CVS)

Trends:

Sales and foot traffic are driven by the ‘back end’ (Pharmacy), which account for 60-70% of total chain sales. Stores look to drive profit with add-on purchases of higher margin ‘front end’ (Consumer Goods) items

High regional density and high store counts (largest chains have ~5,000 stores). No single chain has a true nationwide presence YET.

Supply Chain Complexity: Front end carries a wide assortment of product, most of which is ‘slow-turn’ product

• Aging of the Baby Boomers and innovation in disease treatment are fueling long term revenue and traffic growth

• Pharmaceutical market share is increasingly under pressure from discounters and Pharmacy Benefit Mangers (mail order pharmacies)

• Walgreens and CVS continue to aggressively open stores as the become increasingly ‘national’ chains

17.2

0.9

19.4

20.5

14.5

1.0

21.4 23

.8

15.2

1.3

23.1

27.7

15.8

1.8

25.4

31.5

16.6

1.8

36.4

16.9

9.9

34.0

17.5

10.6

36.7

48.9

18.1

11.5

40.0

56.2

18.7

12.4

13.4

17.6

32.2

42.4

0

10

20

30

40

50

60

CVS Walgreens Rite Aid Jean Coutu

1999 2000 2001 2002 2003 2004E 2005E 2006E 2007E

Chain Drug US Retail Sales: ’99-’07E

CAGR '99-'04E CAGR '04E-'07E

CVS 5.8% 5.3%

Walgreens 10.3% 11.0%

Rite Aid 1.1% 0.1%

Jean Coutu 54.7% 4.5%

Drug RetailersSub-Segment Cheat Sheet: Drugstores


Non-store retailers are growing and leveraging multiple channels successfully while store-based merchandisers actively sell through this channel as well.


Typical Non-Store Retailer Forward Product Flow

Type Medium for messaging

Medium for ordering

Amount of information available about merchandise

Degree of information availability “on demand”

Degree to which information is tailored to customer

Top U.S. Players

Catalog / Direct Mail

Print MailTelephone

Low High Low LL Bean

TV Home Shopping

TV Telephone Low Low Low Home Shopping Network

QVC

Direct Selling Interpersonal Interpersonal High Medium High Avon Amway

Corporation

Internet (Pure-play)

Interactive / electronic through computer or cable television

Interactive / electronic through computer or cable television

High High High Amazon.com, Inc. Travelocity.com

DCVendor ConsumerAssorted Products

Non-Store Retailers


Segment Overview:

Top 5 US E-Retailers (non-store):

Ones to watch:

Company (Ticker) Sales USD Store Count

Amazon (AMZN) 6.9B N/A

Dell (DELL) 3.2B N/A

Hewlett Packard (HPQ) 2.7B N/A

SonyStyle.com (Sony- SNE) 1.6B N/A

CDW (CDWC) 1.5B N/A

• Overstock.com (OSTK)

Trends:

Online Retail Spending: 2000-2007

Non-Store RetailersSub-Segment Cheat Sheet: Internet/Catalog/Mail Order

• Industry shakeout: only the strong survive after the dot-com bust

• Top Net retailers operate ‘best in-class’ fulfillment systems

• Wider Consumer acceptance: Online spending in 2004 for non-travel retail rose almost 26% to $70.2B from $56.0B in 2003

• With U.S. Internet retailing sales historically growing at an average 20% to 25% annually, the industry is on track to achieve total sales of at least $106 billion in 2005.

• Retailers are increasingly leveraging their banner’s brand equity to build their own e-commerce channels. Many retailers offer an expanded assortment online and offer home or in-store pick-up

• Multichannel consumers are spending more (They spent 53% more during the 2003 holiday shopping season)

• Fulfillment costs per order rose to $9.80 in 2003

• Marketing costs per order have fallen, partially due to the trend towards keyword search advertising


Most retailers today are organized based on the four major types of tasks critical to their organization’s success

Typical Retail Organizational Structure

StrategicManagement

MerchandiseManagement

StoreManagement

AdministrativeManagement


Key Functions

• Develop a Retail Strategy

• Identify the Target Market

• Determine the Retail Format

• Design Organizational Structure

• Select Locations

• Merchandise Management

• Store Management

• Administrative Management (operations)

Typical Job Titles

CEOPresidentCOOHead of Corporate Strategy

StrategicManagemen

t


StoreManagement



Top Of Mind

Increase Competitive/Strategic Positioning

Grow Top Line Sales

Improve Operating Profit

Improve Capital Productivity

Reduce Costs


Key Functions

• Buy Merchandise

– Locate, evaluate and negotiate with vendors, Place orders

• Control merchandise inventory

– Develop merchandise budget plans

– Allocate merchandise to stores

– Review open-to-buy and stock position

• Price Merchandise

– Set initial price, Adjust prices

Typical Job Titles

VP Merchandising

VP Store Design and Visual Merchandising

General Merchandise Manager

Divisional Merchandise Manager

Senior Buyer, Buyer, Assistant Buyer

Replenish (Inventory) Manager

Replenish (Inventory) Analyst

StrategicManagemen

t


StoreManagement



Top Of Mind

Grow Top Line Sales

Improve Margin

Increase Inventory Turnover

Improve In-Stock Position

Increase Advertising Productivity


Key Functions

• Recruit, hire, train store personnel

• Plan work schedules

• Evaluate performance of store personnel

• Maintain store facilities

• Locate and display merchandise

• Sell merchandise to customers

• Repair and alter merchandise

• Provide services such as gift wrapping and delivery

• Handle customer complaints

• Take physical inventory

• Prevent inventory shrinkage

Typical Job Titles

Director of stores

Store manager

Assistant store manager - operations

Assistant store manager - human resources

Assistant store manager - selling and merchandise

Sales personnel

StrategicManagemen

t


StoreManagement



Top Of Mind

Improve Labor Productivity

Improve Return on In-Store Space

Reduce Inventory Shrink


Typical Job TitlesVP Marketing

VP Human Resources

VP Distribution

VP Finance

VP Information Systems

Key Functions• Promote the firm, its merchandise, and services

- Plan communication programs

- Develop communication budget

- Select media

- Plan special promotions

• Manage Human Resources

- Develop policies for managing store personnel

- Recruit, hire, train managers

- Plan career paths

• Distribute Merchandise

- Locate warehouses

- Receive merchandise

- Mark and label merchandise

• Establish Financial Control

- Provide timely information on financial performance

- Forecast sales, cash flow, profits

- Raise capital from vendors

StrategicManagemen

t


StoreManagement



Top Of MindIncrease Brand Strength

Increase Marketing ROI (Sale, Margin, Units)

Drive Operational Excellence

– Efficient supply chain

– Low cost of goods sold

– High employee productivity

Maintain Capital Discipline

– Inventory reduction

– Capital productivity


Retail Math

*Represented in millions

1995 1996 1997 1998 1999 Average Annual Growth Trend

(Base Year 1995)

Net Sales Revenue $10,395 $11,778 $13,363 $15,306 $17,838 14.3% , Steady Upwardly Trend

Cost of Goods Sold (COGS) 7,482 8,514 9,68 11,139 12,978 14.7%, Slight increase

Gross Margin (GM) 2,912 3,263 3,681 4,167 4,860 13.4% Increasing

SG&A Expense 2,392 2,659 2,972 3,332 3,844 12.1%

Operating Profit (EBIT) 523 606 712 877 1,027 19.2% Trending Positively

Interest Expense 1.0 2.0 1.6 1.1 0.4 -12.0%

Profit Before Taxes 522 604 710 876 1,026 19.3%

Taxes on Profit 202 235 276 339 403 19.7%

Net Profit 320 371 436 510 624 18.9%

Example Income Statement


*Refer to handout for complete list of Retail math calculations.

Working Capital Ratios

• Inventory Turnover

• Weeks of Supply

• Days Receivable

• Days Payable

Retail Math

Cost of Goods Sold (COGS)

Cost vs. Retail Accounting

Shareholder Value Analysis (SVA)

Asset Ratios

• Gross Margin Return on Inventory (GMROI)

• Gross Margin Return on Space (GMROS)

• Sales Per Square Foot

Select Retailer Metrics*


Cost of Goods Sold (COGS)

• COGS is the cost directly related to selling a product during an operating period

• COGS is calculated by adding total product cost (after cash discounts), transportation charges, and merchandise preparation costs

• When COGS is subtracted from the sales revenue, you get Gross Profit Margin (GM). – Do not confuse cost with price, which is what the company charges its customers

for products or services

• Since COGS has a direct impact on sales and gross margin, it is important to understand if the cost of goods is trending up or down

• Many items impact COGS and can be examined to understand if value can be created– Vendor terms and discounts, rebates, rush orders, drop shipments and shrinkage

are a few examples of items that can impact cost

Retail Math: Cost of Goods Sold (COGS)


Inventory turnover (or "turnover" or "turn") is the number of times, within a given period, that the average inventory is sold and replaced

• Inventory turnover is very important to retailers

• Turnover shows whether customers are buying items while they are still desirable

• Inventory turnover can help you diagnose the overall health of a product or business and point you in the direction of other business drivers.

Retail Math: Working Capital Ratios


Weeks of supply is the average number of weeks' worth of inventory that is on hand at a given time

• Understanding weeks of supply helps you to understand if purchasing is in line with sales

• Generally, it is desirable for a company to carry fewer weeks of supply



Days receivable is a measure of the average time a company's customers take to pay for purchases

• Understanding days receivable and what is influencing it can help the client improve its cash position

• A lower ratio indicates that a company is receiving payment for goods soon after they are purchased.



Days payable is a measure of the average time a company takes to pay suppliers

• A higher days payable ratio means that a company has more time to pay for goods/services that they have purchased from others

• The days payable number depends on a company’s contract with its suppliers



Gross margin return on inventory (GMROI) is a statistic indicating the amount of gross margin dollars returned for every dollar invested in merchandise inventory

• Looking at GMROI will provide you with some insights into whether the client is carrying a profitable assortment

• The higher the GMROI, the better. An increasing GMROI trend means that gross margin is increasing at a rate higher than average inventory.



Sales per square foot is represented by net sales divided by square feet of selling space

• Sales per square foot can help a client make strategic decisions regarding store layout, overall assortment, as well as resources allocated to specific departments and products.

Retail Math: Asset Ratios


Gross Margin Return on Space (GMROS) combines the margin the store operates at and the selling space available for that particular store. This ratio will allow you to understand how many margin dollars are being driven by each square foot of selling space—and if a department is over—or underperforming its space allocation

• Although sales per square foot is also a valuable indicator of selling efficiency, GMROS shows profit per square foot, and is a more accurate statistic to use when allocating retail space

• You can calculate this ratio to compare one store to another or to compare one department to another within the same store.

Retail Math: Asset Ratios


• Retail Inventory Method- Valuing inventory at the retail selling price of items. The method, in effect, revalues goods for inventory purposes whenever the sale price is lowered.

• Cost Method- Valuing inventory at the purchase price of items. Because the constant flow of inventory at different costs complicates tracking, a weighted average of the cost is used.

Retail Inventory Method Cost Method

• Estimated cost based on cost compliment (purchase markup) based on inventory and purchases

• Actual cost based on weighted average cost (WAC) by item, location based off sales and margin

• Department level margins mask success and failures of product performance (i.e., promo, vendor)

• Item level margins provide ability to measure margin of specific decisions and plans

• Markdowns impact inventory and planned margins when taken

• Price changes impact margins only when the item is sold; encourages timely action to increase rate of sales

• Finance and merchandising managing and planning at different levels of information

• Consistency of information across company (i.e., ties inventory to AP and company asset leverage)

Retail Math: Cost vs. Retail Accounting


Retail Math: Measuring Shareholder Value

Shareholder Value Analysis (SVA) measures the amount of value a company has created for its shareholders, given the amount of capital employed and the average cost of that capital. SVA = NOPAT - (Cost of Capital * Capital)


Key Retail Terms*

• SKU (Stock Keeping Unit) - A way to measure merchandise by item to assist in inventory management. A SKU represents the smallest unit for which sales and stock records are maintained. Sometimes referred to as a SKN (Stock Keeping Number)

• Assortment - The number, brand representation and selection of SKUs within a merchandise category

• Planogram - A diagram created from photographs, computer output, or artists’ renderings that illustrates exactly where every SKU should be placed.

• Conversion Rate - The percentage of customers or browsers that purchase merchandise (i.e., browsers that are converted into buyers)

• Shrink/Shortage - Any loss to the company calculated by the difference between the recorded value of inventory (at retail) based on merchandise bought and received and the value of actual inventory in stores and distribution centers divided by retail sales during a time period. Shrink is caused by employee theft, customer shoplifting, shipping or receiving errors, mis-keyed transactions and merchandise being misplaced, damaged or mispriced.

*Refer to handout for complete list of Retail terms.


• Retail Resource Organizations

– National Retail Foundation (NRF)

– Retail Industry Leaders Association (RILA)

• Online Retail magazines

– www.chainstoreage.com

– www.retailwire.com

– www.retailtechnology.co.uk

– www.wwd.com/tech

– www.risnews.com/CSS/index.shtml

• Industry Research Resources

– NPD

– AC Nielsen

– Information Resources, Inc. (IRI)

• Books

– Why We Buy by Paco Underhill

– Call of the Mall by Paco Underhill

Select Retail Industry Resources

retail overview oracle retail sales training july, 2004

Documents