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0 10-July-2020

Study Guide in RETAIL MANAGEMENT Module No. 5

STUDY GUIDE FOR MODULE NO. 5

Chapter 5: Retail Arithmetic

MODULE OVERVIEW

The retail industry is at the center of a dramatic shift in the way consumers shop and interact with
retailers. Retail is, indeed, a numbers game. Here we have provided you with the basics of retail math. Still,
they are only the basics. Along the way, you will encounter nuances of retail numbers that will only add to your
experience in this competitive, thriving, and ultimately rewarding field. Knowledge is the key to success.
Knowing the numbers before you start your retailing adventure is vital to your success. Certainly, there is a lot
to learn, but understanding the basics will help you fine tune the rest and, in the meantime, will keep you alive
and well, the latest addition to the thriving retail industry.

MODULE LEARNING OBJECTIVES

After studying this unit, you should be able to:

 Define retail arithmetic

 Describe health of your business
 Discuss quantitative terms related with a retail store and its calculation
 Explain marketing-retail

LEARNING CONTENTS

Health of Your Business

To determine how well or (perish the thought) how badly their business is doing, retailers routinely
compare each month with the same month a year prior. This is because, given the large seasonal swings
almost all retailers experience, there is little meaning in comparing this month’s sales with last months. So, if
this February you did 110,000 in sales and last February you did 100,000, your business would be 10% ahead
of last year. And, if this continues for a while, you can be happy with your trend. Of course, if the numbers
were reversed and you did 100,000 this year and 110,000 last, you would be 9% behind, and you would have
to take prompt remedial action.
Therefore, both cost (the amount you pay for an item) and markup (the amount by which you increase the
price to cover your expenses and profit) must equal 100%.
In looking at these figures, you must exclude new stores or departments you opened. To determine how
healthy your business is, the comparison between years must be apples to apples, that is, same store
performance.

Quantitative Terms Related with a Retail Store and its

Calculation
Math is used at every level of retailing. From the basic functions of counting money and making change,
to computing the total amount of a sales transaction involving calculating percentages to determine discounts,
sales tax, and shipping charges. More complex retail tasks require more advanced retail math skills. Use
various retail math calculators and formulas to calculate gross profit margins, cash flow, start-up costs, break
even analysis, retail profitability, and control.

To discuss the retail concept of margin it is important to have a few definitions under our belts first. For
starters:

 Cost: Cost of Goods (COG) is what you pay the vendor for products.
 Retail Selling Price: Retail Selling Price of Merchandise is what your customers pay the store for
these goods.
 Initial Margin: Initial Margin is the difference between retail and cost (Retail – Cost = IM), expressed
as a percentage of retail.

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Let’s run through a few examples:

 When cost and retail are known (and you want to find out what your margin percentage will be):

Retail – Cost = Initial Margin % retail

Example: If you buy a lamp for 6 and it retails for 10, Initial margin % is 10 – 6 = 4 = 40%

 When cost and margin percentage are known (and you want to figure out what the retail should be):

Retail = cost (100% – margin %)

 When retail and margin percentage are known and you want to find out what you can afford to pay the
vendor, the calculation is Cost = Retail (100% – margin%)

 Inventory Turn
Turnover of inventory, or turn, is the calculation of how many times you sell and replenish the
merchandise in your store over the course of a year.
To figure out your turn, divide your annual sales by your average inventory (at retail). For instance, if your
sales are 400,000 for the year and your average retail is 100,000, your turn is 4. The more times you can turn
over your inventory, the better it is because:

 You will have less old merchandise.

 You will have more opportunities to buy, which should lead to better buys.
 The inventory will be more up to date.
 Less money will be tied up in inventory.
 You’ll make more profit on your invested capital. (If you need 100,000 of inventory—tied up capital—
to feed 400,000 worth of sales and profits, you’re obviously better off than if you need double that
inventory for the same results.)

Stock to sales ratio is the monthly view of turnover. It is the amount of merchandise in the store at the
beginning of a given month divided by the amount of sales of merchandise for the month. It provides you with
a quick view on how well you manage the inventory. For instance, if you have inventory of 120,000 and
30,000 in sales for the month, then your stock to sales ratio is four to one. This means that it will take four
months of selling at your current rate to sell through the average monthly inventory.
Knowing that there are twelve months in a year, this means you are turning your goods at the rate of three
times a year (twelve months divided by a four stock-to-sales ratio). However, if your (realistic) goal is to
achieve a stock-to-sales ratio of three to one, that is a turn of four—you are overstocking and need to find
ways to operate on less inventory or to sell more!
Your goal should always be to develop the highest level of sales from the smallest possible inventory. But
be careful what you wish for. If you try to push your turns too high, you may run out of merchandise that your
customers want, and they may go elsewhere.
The number of turns for which you should aim varies by type of retailer. Thus, before you set your target,
you should find out what is the industry norm. This is another reason to belong to the trade association most
related to your type of retail store. Such organizations can give you the average guidelines for turn and stock
to sales ratios for different seasons that should help you keep the right amount of inventory on hand,
particularly through your first few years in business.
The higher the turnover, the stronger the retail business will be. With a high turnover, you have less
money invested in the inventory at any given time and a lower risk of carrying products your customers do not
want to buy. You get higher sales from the same amount of space, have fresher goods in the store, and can
always feature new items to tempt your customers. There’s nothing more disappointing to a repeat customer
than seeing nothing but the same old stuff. While turn rates are innately different between different categories
of retail; within each category there are two basics, and quite different, strategies that you must decide upon
when setting your turnover objectives:

1. High margin, high price, and low turnover

2. Low margin, low price, and high turnover
A low turnover item must give you a high margin to pay the rent for sitting on your shelf for a long time. In
contrast, a high turnover item obviously must pay less rent, and therefore can make a lower margin.

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Strategically, you can mix these two turnover concepts if one dominates the other, so you are giving a
clear message to the customers. For instance, in your toy department, you may price Barbie at cost to create
a high turnover, but price her accessories higher to create more margins, expecting that customers who buy
Barbie because of the price will pick up the other items because no little girl can exist without at least three
new outfits for her doll!
Obviously, you want to turn all your merchandise as quickly as possible. The trick is to recognize that you
may have to stock low turnover items as a service to your customers to induce them to come to your store
and buy the more popular items.

Determining How Much Margin to Go After Realizing the retailer’s creed

Always strive to squeeze as much margin as possible. The more margins you can extract from one item,
the more money you must cut prices (and margins) on the products and deals that drive traffic through your
store. However, when trying to raise margins, you must bear in mind what the consumer is willing to pay in
your store environment. If you are a discount store, you cannot expect to make the same margin the
department store down the street makes on the same item. In your store, your customers are only in the mood
for bargains.
In general, margin decisions should be based on:

 Competitors’ retail. If an item is carried throughout your trading area and it’s an item you cannot do
without, you must decide if you are going to be parity priced with everyone else or have the lowest
price in town. Having the lowest price will hurt your overall margin, but it may increase turn and build
customer traffic.
 Last year’s sales on this item or a similar product . Once you have a history of an item, you can
determine how price-sensitive it is and if you have room to get more margin.
 Planned turnover of an item. If you expect sales to be limited and you’re carrying the item only as a
convenience for the customers, take the extra margin. I always thought the president of the cosmetics
company I referred to earlier should have up priced all the colors that hardly sold and called them
“premium shades”! Not only would he have improved his margins, but I bet he would have sold more
of those shades. Cosmetics buyers are always looking for something “exclusive.”
 Wholesale costs. Be sure to shop around among wholesalers (if you are not dealing directly with the
manufacturer) to see if you can reduce the price you are paying. Even a few pennies saved can
accumulate into good margin gains at the end of the year.
 Manufacturer’s suggested retail. Although this is only a guideline, it gives you a sense of the worth
of products. If you are a discounter, this also allows you to prove to your customers how much you
have cut your price.
 Handling and selling costs. Products can vary dramatically in what they cost to sell. Some products
(like glassware) break easily so customers or salespeople are likely to damage a certain percentage
of the stock. Certain goods tend to disappear because of shoplifting (electronics). Others are
extremely heavy or awkward to move from the warehouse to the selling floor, so the freight and
handling costs may be high. Some may be shipped from across the street while others may be
coming from across the country, so transportation costs need to be considered. Some goods may
come in pre-ticketed while others require a lot of handling and ticketing in the store, adding to your
cost. Some goods tend to have a high return rate. All these costs need to be factored into the
product’s retail price.
 Nature of the goods. If you are dealing in fad- or fashion-oriented merchandise know what an item’s
likely shelf life is. How will the manufacturer help with markdowns? These, too, are factors you need
to consider when thinking through how to price merchandise and how much initial margin to achieve.
 Correlation among departments. For instance, infant clothing should not be selling higher than boys
and girls clothing.
 Demand and supply of goods . If you have the exclusive distribution of a hot item, you can usually
squeeze out additional margin. If there is a high demand but short supply, and you find there is little
price resistance for an item, you can get additional margin there as well.

 How to Increase Your Margin?

There are several different tactics you can use to help increase your margin while at the same time not
changing the customer’s experience in the store:

Import Merchandise

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It sounds complicated at first glance. However, importing merchandise can take on several different
phases as your store grows. You may want to start off small, dealing with an importer using his label on the
products. Once you reach a certain volume, however, you may be able to bring in your own private label
products at considerably lower cost. In addition to saving money, here are some reasons to investigate
importing:

1. No middleman. If you are dealing with an importer directly or eventually importing your own products,
you have eliminated the wholesaler or distributor from whom you were buying the goods. Thus, you
have added their margin to your own.
2. Control. Once you establish a personal relationship with the overseas manufacturer, you may better
control the quality, quantity, and timeliness of the merchandise you are buying.
3. Exclusivity. By importing a product featuring your name (and, possibly, your specifications), you can
display an item that no competitor carries. That means you can sell it for whatever the market will
bear without having to worry too much about what your competitors are doing.
4. Competitive Retail. You can bring in a high quality, private label item to compete effectively with a
higher-priced, branded product carried by your competitors. In this way, you may be able to enhance
your low-price reputation while still maintaining a comfortable margin.

Cash Discounts

Vendors are generally forced to extend credit. However, because cash is king to them, they often
encourage you to pay before the due date by offering you a cash discount for early payment or a payment in
advance of a specific date. Among the more common cash discounts are:

1. 3/10 EOM. A discount of 3% if the invoice is paid within ten days from the end of the month.
2. 2/10 Net 30. A discount of 2% if the invoice is paid within ten days from the date it is issued. Ten is
the number of days the rate is available. Thirty is the number of days within which the invoice must be
paid.
3. 3/10 ROG: A discount of 3% if the invoice is paid within ten days of receipt of goods

Delivery Terms

Delivery terms indicate when and where the title of the merchandise passes from the seller to the buyer.
That is the time and place at which your risk of ownership begins. From that time and place, you own the
goods, and you pay for insurance and transportation. Therefore, you can save money by delaying the point at
which you take possession of the merchandise. Two common delivery terms are:

1. FOB Factory. Your store owns the goods as soon as the carrier picks the shipment up at the factory.
That means you pay the freight from there.
2. FOB Warehouse or Store. In this case, because the seller owns the goods until they arrive at your
location, the seller pays freight, insurance, etc.

Dating

Dating extends the time by which you must pay for merchandise. As the saying goes, “Time is
money.” Dating is valuable for two reasons. The first reason is the interest you save on the money that you
keep under your control for longer. This value depends on the prevailing rate at which you can borrow money.
The second reason, and often the more determinant one, is that you are likely to find that, like most retailers,
you are chronically short of cash. This is not necessarily unhealthy (although it is uncomfortable) because
there is a good reason for it.
If your business is growing (as you hope and intend that it will), you will need more inventory. Even if
your turn is a very impressive six times a year, in the short run you are still putting out more cash than you are
collecting—six times a year turn means you must buy two months of extra inventory to service your growth.
Typically, you must pay for the extra inventory in one month. Of course, you’ll get your money back in time,
plus the profit on the extra volume, but you’ll be strapped until then. Dating helps overcome this problem.
Fortunately, it also helps your supplier because you can buy, display, and sell more of his merchandise.
Dating is always helpful, but there is occasion when you have a particularly strong argument to ask for
it. Two such occasions are:

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1. Opening a new store. The goods will be sitting in a store with no chance of selling or turning until the
store opens, usually for thirty days.
2. Shipping to a warehouse instead of a store. The store loses the turnaround time it takes to get goods
out of the warehouse. Goods could sit in a warehouse for thirty days or more before moving to the
store.

Other Retail Practices to Change Prices

Since the price you change your customers will always affect your bottom line, you can never
overestimate or underestimate the importance of price. Here are some other retail practices sometimes used
to change prices:

1. Additional Mark-Up. As the name implies, this practice changes the price upward. It is mostly used
in one of the following occasions:

 A special sale is run at a marked down price, then the price is marked up to its previous level
after the sale.
 A vendor increases the price on the next shipment of a certain item. Because the competition
will be forced to increase their prices, those items already in your store are marked up.

2. Mark Up Cancellation. When you introduce a new item into your store, you may initially mark it up to
establish a high price. Then, once that value is established, you may cancel the additional mark up
and reduce the merchandise for a special sale. To some extent, you may be able to use the extra
margin you earn when you first bring the item in (and it’s still new and exciting enough to attract
customers despite its higher price) to help finance the lower margin sale you run subsequently.

 Break Even Point

The point in business where the sales equal the expenses. There is no profit and no loss.

Formula: Break-Even Point = Fixed Costs ÷ Gross Margin Percentage

It is also known as Breakeven Analysis

Example: A retail store buys widgets for 15 each, marks them up and sells them for 30. Our monthly expenses
(fixed costs) are 10,000. This means that breakeven point would be 20,000 or 667 units.

10,000 ÷ (15/30) = 20,000

20,000 ÷ 30 = 667

 Retail Method of Inventory, or Stopping Shrinkage

Shortages, also called shrinkage of inventory or just shrinkage, can cause a store to go out of
business. Fast. That is why it is important to have procedures in place to keep track of everything happening
in the store, from receipt of goods to final sale. There are two definitions of inventory:

1. Physical inventory. This is the counting of the stock that is on hand.

2. Book inventory. This is the record of what should be on hand. To derive the book inventory, begin with
the starting inventory (either from store opening or the results of last year’s physical inventory). Add
all purchases, all returns that are in saleable condition, and any make goods the vendor may have
provided for substandard merchandise.

Subtract all sales and the amount of any markdowns that were below the price you paid for the goods.
Shrinkage, or overage, is the difference between the physical inventory and the book inventory. The only
cause for an overage is a booking error that should be avoided by double-checking everything. Some
shrinkage is inevitable, and you need to plan for it. It represents the loss of merchandise for reasons that
cannot be precisely specified. Those reasons include:

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 Vendor mistakes or fraud. Sometime, containers don’t include the full count of goods.
 Employee theft. This includes outright theft for profit (e.g., letting a few cases “fall off the back of a
truck”), pilfering merchandise for personal use (taking home a box of detergent), and using store
merchandise for legitimate reasons but without paying for it (a store clerk who needs a pencil
opens a pack of a dozen and tosses the rest).
 External theft. The most frequent method of external theft is shoplifting. More rarely, theft from
your warehouses may occur.
 Clerical mistakes and bookkeeping errors.
 Unrecorded markdowns and allowances. These result in the quantity of product sold for the dollar
volume recorded being greater than the recorded amount.
 Unrecorded breakage

How to Minimize Shrinkage?

 Record merchandise as soon as it arrives.

 Properly mark, price, and identify merchandise before moving it to the selling floor.
 Record all price changes.
 Record each transaction.
 Change records before transferring goods or returning them to the vendor.
 Take precaution against theft, as discussed in the following sections.

Strengthening Store Security

A secure store is a store that is experiencing less shrinkage than its competitors. Security may be
costly, but so is shrinkage. Often the mere appearance of security, to both your customers and your
employees, is enough to do the trick. Here are some timely tips for strengthening your store’s security:

1. Equip the store with a security alarm system hooked up to a central service company. Give each
employee his or her own code so you can monitor who comes and goes.
2. Use locked trash dumpsters to decrease the risk of merchandise being thrown into the dumpster and
retrieved later.
3. Do not permit personnel to park near loading docks or exit doors. A longer walk to stash or transport
items can be a real deterrent to employee theft.
4. Strictly enforce inventory control and tracking procedures.
5. Follow up on all references when hiring any new employee.
6. Implement an anonymous tip program that motivates employees to report theft, drug abuse, and other
business abuses by both coworkers and outsiders.
7. Keep a close tab on customers who spend a lot of time in your store. The closer you watch, the less
likely a shoplifter is to target your store.
8. Place observation cameras at strategic locations.

Marketing in Retail
Marketing has been defined as “the process by which individuals and groups obtain what they want and
need through creating, offering and freely exchanging products and services of value with others”.
Meaning of marketing is to identify the customer needs and satisfy those needs as desired by the
customer. But every player who exists in the market is doing the same. Therefore, the companies started
wondering what next? They realized that they need to focus on long term profitable customers. Only the way
is to best of the best action plan and relationship building. For that purpose, every marketer is quoting their
own business equations.
The Return Exchange is evolving to become the Retail Equation. This change is all about growth and
opportunity. While The Return Exchange has been focused on return authorizations, today we are seeing
strong demand for broader return optimization solutions that extend well beyond fraud. Therefore, our new
name is an evolution, not a dramatic change, reflecting the fact that our business growth will be driven by our
ability to predict shopper behavior and optimize all retail transactions.
The marketing channel design is largely based on the level of service desired by the target consumer.
Here, the retailer provides valuable inputs to the manufacturers on the products and the consumers.

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Manufacturers or suppliers who offer products for immediate consumption are known as direct manufacturers
or suppliers.
ACTIVITY

Review questions:

1. Define the term retail arithmetic.

2. Why is retail arithmetic needed?
3. What is the significance of retail arithmetic?
4. What are the characteristics of secure store?
5. What is meant by turnover of inventory?

SUMMARY

 Retailers typically keep a two-column ledger to fully understand what is going on with their business.
 A low turnover item must give you a high margin to pay the rent for sitting on your shelf for a long
time.
 In contrast, a high turnover item obviously must pay less rent, and therefore can make a lower
margin.
 Products can vary dramatically in what they cost to sell.
 Some products (like glassware) break easily so customers or salespeople are likely to damage a
certain percentage of the stock.
 Certain goods tend to disappear because of shoplifting (electronics).
 Others are extremely heavy or awkward to move from the warehouse to the selling floor, so the freight
and handling costs may be high.

REFERENCES

Berman B. Evans J. R., (2004), Retail Management, 9th Edition, Pearson Education Berman, Barry. Evans, Joel R.
Mahaffey Tom (2005). Retail Management: A Strategic Approach, Pearson Education
Gopal, R. Manjrekar, Pradip (2010), Retail Management, Excel Books, New Delhi Notes Iyer, B. Sriram (2011). Retail
Store Operations, Tata Mc Graw Hill

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