Friday, February 17, 2006

DANGER! Retail Marketing Analyst Alert

RadioShack to close up to 700 stores, very disappointed earnings, CEO admits lying on his resume

I'm going to do a sales marketing analysis story which I haven't done in a very long while. (I'm supposed to be finding a box for a wedding gift so I might skimp on some important details.)

While the lying CEO and switching technology vendors in an extremely important part of the business are worth discussing I am going to key in one paragraph.
"Our business model for many years has been based on high-margin, slow-moving products," Edmondson said during an investor presentation. "These products are taking up valuable space in the store that can be much more efficiently utilized.
They had not been using or paying proper attention to gross margin per square foot analysis which all retailers should know is key now.

Used to be everyone looked at gross margins and everyone looked at sales per square foot and thought they knew what was going on. Wrong. Retail space is valuable and profit per square foot is key to how profitable locations can be. Properly evaluating it can make the difference between happy shareholders and someone losing a job.

Retailers need to have all the merchandise square feet evaluated in terms of what is selling, how much it costs* to sell it, what is the gross profit margin, and how fast it turns over. The key thing Radio Shack seems to have finally realized is the last item. They hadn't plugged the last bit into the equation. The items like antennas are highly profitable individually but Radio Shack wasn't properly recognizing their slow turn. Gross Margin per square foot recognizes all these factors.

* Costs should be properly assigned to each item and often aren't. What is the true transportation and warehousing costs? How much space is the merchandise taking up in limited storage areas and is that cost assigned? How much time are sales clerks spending to sell each item? Are advertising costs spread accurately? Are other items space and sales linked? How is general overhead assigned?

My last retailer had a supposedly advanced Retail Transportation Management Information System. Transportation costs went through the roof one quarter. We attempted to analyze and it became obvious costs were not properly assigned to merchandise and departments. The advanced system wasn't telling us what a retailer really needed to know. (Hey, we have these great deals on Chinese weight sets, wonder why no one else is selling them so cheap?)

Properly evaluating how much the merchandise is really contributing to the bottom line also involves a few other aspects. Consider the cross-ties to other merchandise and the much more profitable accessories (if they turn over fast enough) or the money-for-nothing** service contracts that can be offered.

** From the retailers perspective service contracts are the perfect product. They take up no space and the retailers don't even usually perform the service. The service company pays them to sell the service contract. A product which for the retailer is nothing but sales clerk time. Those clerks will be strongly encouraged by threats of firing for low service contract production and bonuses for selling to get the retailer some of that free money. Sales clerks will be more rewarded for service contracts than any other aspect of their job. Much like Sears made all of its profit from its credit card and financing services some years the same thing happened with electronic departments and stores. The merchandise was almost just there so they could sell the real profit maker - service contracts.

Well, this expanded a bit into an overview of part of a retail marketing analysts world. Maybe next time I'll write about geodemographic analysis, data-mining and loyalty programs, and getting the most bang for your buck advertising for retail locations. Links I just gave are to get a feel for the field.

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