21st Century Retail Profit Improvement Strategy
21st Century Retail Profit Improvement Strategy
The fundamental principles which underpin any successful business are the increase in profit and decrease in expenditure. The strict application of the above principles has been responsible for the success of most businesses. On the other hand, failing to apply these principles has been responsible for the demise of the large majority of failed business. Similar principle applies to the retail industry. Over 50% of retail ventures go bust before their 3rd birthdays.
The reason for this being, in the retail industry, the main performance indicator (KPI) is increasing sales without the application of the second part of the equation (which is decreasing expenditure). The key question that most retailers need to ask themselves is this:
Does increased sale really lead to increased profit?
In order to increase sales, a retailer has to carry out additional promotions, advertise, improve customer service, or offer a huge discount. Even though these measures are not guaranteed to increase sales, with their implementation there is a chance that sales could be increased. Decreasing expenditure on the other hand means one thing and one thing only to most retailers: making some employees redundant.
Those are antiquated techniques that have no place in the modern retail environment. The key element that guarantees a healthy return on investment (or increased profit) is increasing sales and decreasing shrinkage. The average retailer makes a 1% net profit out of each dollar, and the industry shrinkage percentage is 2.6%. This means that shrinkage is more than three times the average retailer's profit margin. Therefore, if we take the above calculation, we will see that if retailers reduced shrinkage by 50% - from 2.6 cents to 1.3 cents, they could easily more than double their profits: from 1 cent to 2.3 cents.
Consequently, instead of retailers following the conventional practices of decreasing expenditure by staff cutting, an implication of the above calculation is that retailers have the opportunity to increase their profit margin without necessarily getting rid of their staff.
Now, how can retailers decrease shrinkage? This question has formed the core of loss prevention discussions in many quarters, with expert after expert coming up with their own suggestions of how shrinkage can be reduced. While many of these suggestions may make for a great sound bite, they have still not been able to produce the desired result.
The shrinkage rate from 2005-2010 in North America remained stable: 1.48% to 1.49%. In Europe it stayed at 1.23% from 2006 to 1.33% in 2009. However, within the same period, loss prevention spending continued to rise to the highest rank of 0.46% in the US. Despite the increase in loss prevention spending each year for the past 10 years, retail shrinkage either plateaued or decreased by just a few percentage points, which does not correlate with the amount spent on loss prevention.
Why is that the case? To answer this question, I will relay a story:
On Monday 06/12/2010, I visited the Trafford Centre in Manchester, UK. On my way out, I noticed that the Electronic Article Surveillance (EAS) gates at John Lewis were located outside of the store and there were no staff members around monitoring the gates. The first issue here is that even if the gates sounded, there were no staff members around to speak to the person concerned. Secondly, the fact that the gate was located outside of the store, instead of inside, rendered it useless.
This is a classic example of the misuse of technology and the wrong application of loss prevention strategy. To place an EAS outside the store defeats the objective for which it was installed.
The above example clearly illustrates why, despite increased spending on loss prevention, retail shrinkage levels have remains the same. The application of loss prevention over the years has been completely incorrect.
In most cases loss prevention professionals focus on a single variable believing that the removal of that variable would result in an effective loss prevention strategy. Retail shrinkage results from a multiplicity of occurrences; therefore an attempt to resolve it requires a multi facet approach. I believe that the most effective way of reducing retail shrinkage and increasing profit is creating a culture of loss prevention that permeates throughout the DNA of the organisation. A culture in which employees are willing to help in the fight against shrinkage.
It is people who create shrinkage and it is only those same people who can reduce it.
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