WHY THE ATTENTION ON RETAIL PRODUCTIVITY?
Because the feature most strongly correlated with profitability is sales per
square foot. (Generally, the higher the productivity, the higher the
probability for profit, 73 percent of the variance explained). Click here for a summary or here for the
detailed relationships.
The economic fundamentals of a retail operation may either be viewed as a
snapshot (# 1 and 4 below) or as a process (# 2, 3 and 5):
1. In a typical chain selling the same standardized merchandise, there are huge differences among the stores in productivity and therefore in profitability. Click here for five examples of the system-wide productivity of Canadian retail chains.
2. In nine out of ten cases, a new chain store will not make a profit immediately on opening. One in ten new stores will hit the market running at or above average productivity of the chain. Click here for our experience with new chain stores. It takes a while for ingrained shopping habits to change in the mass market. Our research shows seven visits are needed before a customer feels really comfortable in a new store. The learning curve is much shorter, of course, in those chains with consistent cookie-cutter layout.
One out of seven new stores will never make a profit. There’s a whole range of reasons: poor location, bad adjacencies, superior competition, poor visibility, poor management and/or a combination of the above. Such stores are generally closed when the five year lease expires—unless they are department stores, of course, which have sometimes signed one hundred year leases in return for favours, and they’re in for the long haul.
After trying the chain’s best marketers and merchandisers, and using up an inordinate amount of their precious time, the only alternative for too many long term leases is CCAA in Canada or Chapter 11 in the United States.
3. Within 1,000 days, however, most new chain outlets should have become profitable. Within the first 365 days, opening costs usually exceed margins, generally by a considerable amount. A reasonable new store should be coming out of the red by day 400. Such a new store is rarely advertised until a day or two before opening; it is kept secret because the lead time for newspaper flyers is six weeks, and with only a couple of days notice, competitors are thus prevented from ambushing a new market entrant.
A new, professionally-run store should have grown into its market within one thousand days, by which time operating costs, turns and margins should have stabilized. Of note, average productivity (equivalent to the chain as a whole) typically arrives sooner if the store is near to other draws (“synergy”), rather than built as a stand-alone. Recently, major chains seem to be more interested in known shopping routes, because of the built-in support they receive there, so that their sales ramp up much faster to expected performance levels than isolated, stand-alone stores.
The greater the synergy, the higher the sales productivity and the profits. Click here for our experience. The same effect is obtained with a higher module draw or attraction. Click for typical draws.
After year two, it should be abundantly clear whether a store will be a success or not. (On the average of the five chains shown, we have pin-pointed day 635 as the most likely point when a reasonable new store should achieve average, chain-wide productivity). Based on this material, we usually analyse the third full-year of operation as the “pro-forma” or “target” year: start-up costs should be paid and profits should be stabilized. This third year of operation is also a standard criterion among retailers and shopping centre developers.
4. When ranked by productivity, stores in a retail chain approximate a bell curve. Bell curves have standard properties related to the distance the store is from the average, usually measured in terms of standard deviations from the mean. Click here to see what we mean. Retail profits are made at the front end of the bell curve, particularly at or above one standard deviation from the mean. Real star performers are at two standard deviations from the mean. These two percent of the stores contribute significantly to annual profits. Click here.
5. At one standard deviation below the average (mean) productivity, the stores generally operate at a loss, with costs exceeding margin. In the cases we know, one standard deviation below the average can mean sales per square foot of between $50 and $150 below the average chain-wide productivity. Click here. The real dogs are at two standard deviations from the mean. These clunkers include the stores that should never have been opened (the locationally dyslectic) and, at the first opportunity, are rapidly closed.
6. The dogs and clunkers, the expense sink-holes, are the ones closed in CCAA or Chapter 11 situations. Click here. Usually the lowest quarter to one-third of the stores in a chain are not generating any profits. The more difficult the CCAA reorganization is, the higher the proportion to be closed. Half or more stores to be closed is an indication of a real basket case chain. Anecdotal evidence is everywhere. For instance, page three of the February 19, 2001 edition of DSNRetailing Today notes: (a) Lechters: “The restructuring plan includes shuttering ... 1/3 of entire store base” and (b) Shopco: “The stores to be closed were, on average, between three and four years old, and generated about half the sales per square foot being generated by the remaining store base”.
7. Incidentally, even with a profitable chain store, up to half the space of any module may not be throwing off any profits (such space is usually to the rear of the unit, where fewer customers penetrate). Better use of existing space can work wonders for the bottom line.