Key operational success formula in Retail Industry

The average foot-traffic and the customer conversion ratio are primary operational parameters that drive the revenue of a retail outlet. A retail store in a prime location will yield higher revenue per square foot. However, a rented retail outlet in a prime locality may have a higher rent, this may even exceed the revenue at times. A high rental expense can erode the EBITDA margin of a retail chain. As shown in the below graph, Reject Shop has a relatively low EBITDA per square feet, owing to its high rental expenses. A retailer can make a strategic portfolio of stores in both prime and non-prime locations, owned and leased, to ensure overall positive margins.

A store needs a high headcount when a higher foot-traffic is expected, but can manage with a lower headcount during non-peak hours. A retailer would want to employ the best salesman who can achieve a higher customer conversion ratio and can work overtime without the emolument of an overtime perk. These goals may seem mutually exclusive, but some retailers achieve them by aligning the terms and conditions of their staff with customer's requirements. The wage cost will be a small percentage of the revenue for a profitable retail outlet. This is shown in the underneath chart, through Televisory's research and analysis. The reason for the low EBITDA per square feet of Tuesday Morning, Gordman Stores and Fred's is their relatively higher employee expense.

Other Operational parameters that drive operational success are demand planning, inventory planning, SKU selection and pricing. A strategic mix of both fast-moving SKUs and slow-moving SKUs yielding high margins and will ensure overall positive margins for the retailer. The price of a product should be set such that the number of customers buying the product at that price yields the maximum gross profit per unit of that product. If the actual demand turns out to be higher than the forecasted demand, the retailer will lose his potential revenue. On the other hand, if the actual demand turns out to be lower than the forecasted demand, the company will have to bear the write-off. Thus, there is a cost associated with both overstock and understock. Inventory planning determines the stock of a product to be maintained, the quantity of product to be ordered, the stock re-order point, when should it reach the outlet and where should the stock be stored. Inventory planning also involves contract negotiations with the suppliers such that there are incentives and penalties to the suppliers according to the requirements of the retailer. If the supplier gets penalised for delayed delivery of Valentine's day greeting cards, in proportion to the loss incurred by the retailer, the supplier will ensure to deliver them on time. The graph shown below depicts, Reject Shop, Gordman stores and Fred's have relatively high inventory turnover days, which is another reason for their low or negative EBITDA per square feet.