A Better Method for Evaluating Store Performance

Last week I had an interesting discussion with my team about a customer whose focus is on improving store performance at their retail customers in 2017.  This customer is well represented with their entire product line at all doors at their key accounts, so they want to ensure each door is producing the maximum number of sales.  In our experience, brands selling products through retailers most frequently grade store performance using total dollars sold. The most common report shows total dollars sold by store for a rolling 4-week period, YTD and rolling 52 weeks. Stores with the highest total sales are assumed to be the “best” doors.  However, the top line sales figure doesn’t really give you the entire picture of store performance. The stores might have different assortments and inventory allocation can vary by store resulting in lost sales due to out of stocks. Total dollars sold is more useful when you look at a single SKU across stores, but in this case the goal was to choose one KPI for a door across all SKU’s.

Metrics you might use to determine store productivity include:

• Total dollars sold
• Sell-Thru %
• GMROI
• Inventory turns
• Gross margin $
• Average dollars per week per store

Let’s take a look at five stores and see which one is the ‘best’ store.   The table in Figure 1 shows the total sales for five stores over the most recent 52 weeks.  With a little sorting of our data by dollars sold descending we can add a store rank and identify that store 4758 is the “best” store and store 3529 is the “worst”store.   See Figure 2.

Figure 1

Figure 2

Unfortunately, this is where the analysis of store performance all too frequently ends. Using total sales as the only KPI doesn’t provide any information on the financial return of inventory in the store. The sales could be very high, but the margins might be very thin, or even negative, and what appears to be a very high performing store could actually be unprofitable.

A better KPI for evaluating store performance is gross margin return on investment (GMROI).  GMROI tells you how much profit your inventory generated. For example, if your GMROI is 3.7 then your inventory returned $3.75 for every $1 dollar you invested into inventory.  A GMROI below 1 indicates you are losing money on every $1 dollar of inventory. For a refresher on how to calculate GMROI, visit our prior blog.

In Figure 3 we added the GMROI for each store and then in Figure 4 the stores are ranked by GMROI.    Notice store 4758 which was ranked number one based on total sales is actually fourth when you look at the GMROI. Store 5463 is creating $4.10 in profit for every dollar of inventory invested.

Figure 3

Figure 4

When you consider retailers invest 60% to 80% of their available capital into inventory it makes sense to use GMROI as the basis for evaluating store performance.  Here are some actions we recommend you take this quarter with your key retail accounts:

1. Calculate GMROI by store.
2. Calculate GMROI by brand by store.
3. Ask your merchant for their GMROI target for your products.
4. Do some research on GMROI for similar products.
5. Create an exception report that highlights any store with a GMROI at or below 1. These are stores that need your attention.