Lecture Retailing management (6/e): Chapter 6 - Levy Weitz

Chapter 6 examines the financial strategy associated with the market strategy. The following will be discussed in this chapter: Retailing strategy, retailer objectives, financial tradeoff made by retailers to increase ROI, the strategic profit model, components of the strategic profit model,...

Retailing Management, 6/e Copyright © 2007 by The McGraw­Hill Companies, Inc. All rights reserved.

Financial Strategy

Retailing Strategy

Retail Market Strategy

Chapter 5 Financial Strategy

Chapter 6

Retail Locations

Chapters 7,8

Human Resource Management Chapter 9

Retailer Objectives

Financial – not necessarily profits, but return

on investment (ROI) – primary focus

Societal – helping to improve the world

around us

Personal – self-gratification, status, respect

Financial Tradeoff Made by Retailers to

Increase ROI

Asset Turnover Net Profit Margin

The Strategic Profit Model:

An Overview

Profit Margin x Asset turnover       =   Return on assets

Net profit x Net sales (crossed out)   =   Net profit

Net sales (crossed out) Total assets       Total assets

Components of the Strategic Profit Model

The Strategic Profit Model:

Total Expenses

Sales

Cost of Goods Sold

-The Strategic Profit Model:

Fixed Assets

Inventory

Accounts Receivable

1

30 + +

Net Profit Net Profit Net Sales

Total Assets = Net Sales x Total Assets

Net Sales Total Assets

Net Profit Net Sales

Financial Implications of Strategies Used By

a Bakery and Jewelry Store

     Net Profit X Asset = Return on Assets Margin Turnover

La Madeline Bakery 1% X 10 times = 10%

Kalame Jewelry 10% X 1 time = 10%

Income Statements for

Federated Department Stores and Costco

Profit Management Path

for Federated and Costco

Net Sales

Types of Retail Operating Expenses

Benefits

expenses

salespeople + Operations of buying offices + Other administrative

expenses

Asset Information from Federated’s and Costco’s Balance Sheet

Federated and Costco

Inventory Turnover

Return on Assets

Net Profit Margin x Asset Turnover = Return on Assets

Federated: 4.41 x 1.05 = 4.63%

Costco: 1.83 x 3.29 = 5.84%

Strategic Profit Model Ratios

for Selected Retailers

Income Statement for Gifts to Go

Gross Margin Percent

Gross Margin = Gross Margin Percent

Operating Expense Percent

Operating Expenses = Operating Expenses %

Net Profit Percentage

Net Profit = Net Profit Percentage

Balance Sheet Information for Gifts to Go

and Proposed Internet Channel

Total expenses

Net profit

Net Sales

Net profit margin

Asset turnover

Return on assets

-

Productivity Measures

Input Measures – assess the amount of resources or

money used by the retailer to achieve outputs such as

sales

Output measures – asses the results of a retailer’s

investment decisions

Productivity measure – determines how effectively

retailers use their resource – what return they get on their investments

Retailers will be better able to gauge performance if it has

specific objectives in mind to compare performance

Should include:

• numerical index of performance desired

• time frame for performance

• necessary resources to achieve objectives

Setting Objectives in Large Retail Organizations

Top Down Planning

Corporate Developmental Strategy

Category, Departments and sales associates implement strategy

Setting Objectives in Large Retail Organizations

Productivity - Outputs/Input

• Corporate Level

– ROA = Profits/Assets (ROE = Profit/Equity)

– Overhead/Sales

• Buyers (Inventory, Pricing, Advertising)

– Gross Margin % = Gross Margin/Sales

– Inv Turnover = COGS/ Avg Inventory (cost)

• GMROI – Gross Margin/Average Inventory – Advertising/sales

• Stores (Real Estate, Employees)

– Sales/Square Feet inv Shrinkage/sales

– Sales/Employee

Performance Objectives and Measures

Used by Retailers

Measures Used by Retailers

Corporate Net sales Square feet of Return on assets

(measures of store space

Examples of Performance Measures Used by Retailers

category) Gross margin Markdowns Inventory turnover

Growth in sales Advertising Advertising as a

expenses percentage of

sales *

Cost of Markdown as a merchandise percentage of

sales*

* These productivity measures are commonly expressed as an input/output.

Measures Used by Retailers

Store operations Net sales Square feet of Net sales per

(measures for a selling areas square foot

store or

department Gross margin Expenses for Net sales per

within a store) utilities sales associate

or per selling hour

Growth in sales Number of sales Utility expenses as

associates a percentage of

sales *

* These productivity measures are commonly expressed as an input/output.

Illustrative Productivity Measures

Used by Retailing Organizations

Corporate Net profit Owners’ equity Net profit /

Store operations Net sales Square foot Net sales /

store manager)

*Inventory = Average inventory at cost

Performance of retailer over time – retailer can compare its recent performance to its performance in the preceding months,

quarters or years.

Performance of a retailer compared to its

competitors

Federated’s and Costco’s Financial

Performance Over Three Years

Financial Performance of Federated and Other National Department Store Chains