Sales per Sq. Ft. as a Primary Retail Indicator?

By Brian Moore, Global Retail Consultant and CEO of EMR-NAMNEWS

Given that rental levels and business rates are based on sales area, and with retail rents in prime spots in London’s Oxford Street reaching £1,000/sq. ft./annum – equal to best-in-class grocery sales/sq. ft./annum – it could be said that selling intensity i.e. sales/sq. ft./annum is a pretty good indicator of retail effectiveness…

In other words, in the case of Oxford Street, a store achieving sales of £1,000/sq. ft./annum is using all of its sales revenue to pay the rent, leaving costs of business rates of say £300+/sq. ft./annum, cost of goods say 75% of net sales, overheads and store maintenance etc. to be met from other parts of the business.

Incidentally, on a macro level, sales/sq. ft./annum, can also steer a balance between investment in Bricks & Mortar and online – where space is infinite, and ‘free’ – helping to temper corporate online enthusiasm as one begins to realise that fulfilment costs make online less profitable than well-run B&M…

Given that online space is infinite and ‘free’, a retailer contemplating switching resources to online development needs to have one foot firmly anchored to its Bricks & Mortar base, with its costs, in order to constantly re-evaluate the opportunity costs of developing its online channel vs. traditional retail.

By the same token, Amazon’s decision to take the ‘retro-step’ of opening B&M bookshops can be seen to be state-of-art in that, using online sales results as a basis for B&M assortment, allows them to stock the most demanded 4,000 titles – in 10% of the space a traditional bookshop needs in order to carry a minimum assortment of 40,000+ titles…

In terms of personalising the shopping experience here on earth, as shopper perception of shop-floor assistance can be based on staff numbers/sq. ft., minimum wage legislation can make adding people to the aisle an increasing burden.  However, if a retailer hopes to go even further in terms of being different to online – using real people – by employing demonstrators and sales assistants, it is imperative not only that a non-pressured balance be arrived at in terms of salary and commission, but also that the combined costs of these expensive resources be calibrated against square footage…see GMROS and GMROL in KamTips, over the page.

Having calculated the sales and sales costs per sq. ft. for the whole organisation, it is then possible to examine different components of the business in terms of their relative contribution to overall performance.

For instance, a store by store comparison of sales/sq. ft./annum will indicate which outlets are merely ‘showing off’, while others do the real work…  Seriously, it is obviously important to have showroom outlets in key parts of the country as physical anchors for the online business, but if these outlets generate lower than average sales/sq. ft., they become a drain on the business, besides starving other outlets of necessary upkeep and maintenance.

Think about it – the greater the difference between a flagship outlet and a ‘worker-store’ the more confusing for the shopper, besides raising the problem of which version to feature in the advertising, with a local real-life store visit possibly contradicting shopper expectations generated via national media…

Moving from store-by-store to instore department-by-department comparison adds more insight, making category comparisons a no-brainer in terms of determining a balance of resource and investment.  In fact, using this approach of developing a basis for measuring the sales/sq. ft. of the entire organisation, and then tracking the contribution beyond category to every SKU (on & offline) to that of overall performance becomes possible, even essential…

Having done so, tracking supplier trade investment by sq. ft. performance allows a retailer to rank individual brands/categories and suppliers, whilst gross margin by the same measure shows relative contribution by SKU, eventually justifying the calculation of net profit/sq. ft.

In fact, with GMROII barely out of the closet following 15 years of ‘digestation’, it is perhaps time to explore the possibility of the next phase of the process, Net Margin Return On Inventory Investment, providing even deeper insight into the retail value of brands.

Finally, if suppliers see major customers moving towards everyday use of these measures, it follows that incorporating a similar approach to assessing brand contribution per sq. ft./annum, has to provide a joint-basis for possible synergies….

All else is detail…

See KamTips: Optimising the Sales/Sq. Ft./annum metric…

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