The time for running a business by the seat of your pants is gone. It is time to rely less on gut instinct and more on the numbers.
Figure A- Do You Know?
• The cost of each UP that walks into the store?
• Average number of UPS handled by salespeople each month?
• Closing ratio spread from high to low?
• Average sale spread from high to low?
• Current inventory level?
• Merchandise age by category?
• Turns by category?
• Adjusted gross margin by category?
• Open number of customer service cases?
With the twin shocks to the economy of the recession and the 9/11, furniture stores are going through a "Darwinian Process" of selection. The "Dinosaurs" are dying. Dinosaurs are stores that are not able to adapt to rapidly changing business environments. With the demise of so many established furniture stores over the past several years and so many new stores coming online, one has to notice that the furniture business is rapidly changing. These changes used to occur over decades. Now we see trends develop in months.
The level and sophistication of the competition has grown at the same time that traditional barriers to starting a furniture store have fallen. Furniture retailers are now competing against many other types of retailers who are adding furniture to their merchandise mix. This reflects the changing lifestyles and needs of our customers and must receive ample consideration when we consider how to best approach and service them.
The time has come for furniture retailers to look deeper into the science behind the art of retailing. That means looking at the numbers. Every business has "key indicator numbers" used to help managers make business decisions.
•For hotel managers, the key number indicator is the "Occupancy Rate."
•For airlines it is "Load Factor."
•For investors it is the "Dow Jones Industrial Average."
•For furniture storeowners, it is their "Performance Indicator."
Percentage Of Retailers Who Know Their Numbers
• The cost of each UP that walks into the store? 7.0%
• Average number of UPS handled by salespeople each month? 10.6%
• The closing ratio spread from high to low? 15.7%
• The average sale spread from high to low? 15.7%
• Current inventory level? 83.6%
• Merchandise age by category? 56.5%
• Turns by category? 51.9%
• Adjusted gross margin by category? 42.2%
• Open number of customer service cases? 11.0%
These numbers tell us that as an industry, management focuses too much on the inventory process side of their businesses and not enough on the people process side of the business. This is the cause of most problems seen in furniture stores. Stores that have been able to check every box are stores growing sales revenue at a double-digit rate, and are successful at pushing double-digit nets to their bottom line.
Your "Performance Indicator Number (PIN), when properly used, gives you a summary of all the other key indicator numbers involved in running a furniture store. It is calculated by taking your total sales volume and dividing it by the total number of store UPs over a given period of time. If your store had 20 UPs for the day and total revenue of $10,000 your PIN for the day is $500. This number gives you an overview of the effectiveness of the total selling efforts of your sales team and is just one of many performance indicator numbers storeowners can use to fine tune their operations and drive more dollars to the bottom line. Every area of your business has it’s own PIN.
Not knowing what the "key indicators" are for a retail furniture business is one of the main reasons why owners cannot accurately explain or deal with changing market conditions.
I recently attended a baseball game with one of my clients who ran down the stats on every player. I was amazed. Here was a guy who didn’t know the basic indicator numbers affecting his own business, who could effectively predict the outcome of each play based on his knowledge of the performance levels of the players. Just imagine the level of profitability he could reach in his store if he applied the same level of knowledge to the players in his own game!
The state of the economy in your market may be trending up or down, but the results you achieve as a manager are dependent on how quickly you can react to shifting conditions and leverage them into opportunities to increase your profitability.
The difference seen in stores with steady long-term revenue and profit growth rides on management’s ability to identify trends and act appropriately before they impact the bottom line. In the case of a dip in the economy, there are plenty of places management might turn to begin belt-tightening, but often such tactics are little more than knee-jerk reactions to bad news. Poor decision-making based on questionable information can be avoided by looking at PIN’s over time.
Charting trends in the various PIN’s in your business can function as a safety valve when added to your knowledge and experience. They are often the key element that determines management’s ability to make appropriate business decisions.
Over the past year, we have asked retailers around the country to fill out an informal survey to see how many use key indicator numbers. You can take this test right now (Figure A on page 29). If you already know a key indicator, make an "X" in the box. If you don’t know this number, leave it blank. The impact these numbers have on your business decisions will be discussed in future issues of FURNITURE WORLD Magazine. Figure B gives the percentage of furniture retailers who indicated that they knew each key indicator number.
By studying the numbers over time, managers can make incremental improvements to the various business processes. This ultimately leads to geometric increases in profitability. Using numbers never replaces common sense and experience, but it does give you an impartial view of the money flowing through the business to your bottom line.
By looking at the percentage of retailers who know the numbers associated with each performance measure, we see that the factors most retailers focus on in making strategic decisions are merchandise based. The fallacy in this approach is that merchandise does not sell or buy itself. People sell merchandise and people buy it. The most profitable stores focus on the people who work on both sides of this selling process.
If you are looking for ways to improve the profitability of your store, using performance indicator numbers can speed up the process.
Using Numbers To Improve Profitability
In the first half of this article we introduced you to the concept of using numbers to improve the operations in your store and drive more dollars to the bottom line. In the next issues of FURNITURE WORLD, this series will explore how to create and use these numbers to achieve positive operating results.
The time for running a business by the seat of your pants has come and gone. It is time to rely less on gut instinct and more on the numbers.
Numbers have a way of clarifying what is happening in a way that gut instinct never will. I remember working with a store that was so over stocked that the only reason they were able to stay in business was because they had no rent expense and some rental income. After a detailed look at the performance indicator numbers in key areas, the owner of this firm made a comment I’ll always remember: "I guess that gut feeling was indigestion."
Now let’s look in more detail at each performance indicator question presented in Figure A.
Do you know the cost of each UP that walks into the store?
As you can see by taking a quick look at the numbers in Figure B, many retailers don’t know how much they have to invest to bring each person into their store. Once they learn the cost of each UP, they start to critically examine how those valuable assets are being handled on the sales floor. Assigning a dollar value to every UP that walks into the store can be a valuable tool for looking at many other aspects of your operation. The first key measurement in determining "Cost Per UP" is floor traffic. Floor traffic is the basis for everything else that happens in your store.
To learn your customer cost, divide the floor traffic for the month into the advertising and marketing dollars spent for that month. This will give you a value for each person that walked in the door of your store that month. You can use this number in several ways. You can determine the effectiveness of your advertising and marketing efforts over time. An uptrending number is bad. It means that more resources and effort are being used to entice people to visit your store. If this measure is going down, it is good because fewer resources and effort are being used.
If customer cost is going up, you need to take a critical look at your marketing efforts. Are your ads clear and compelling? Do your advertising messages create a clear differentiation between you and your competitors? Is your message going to the right people? Consider having an audit done on your advertising to make sure your messages are hitting the target market, at the right times and being seen in the numbers promised by the various media outlets.
If the number is going up, the cause could also be due to factors external to your marketing efforts. Has a major employer announced plans to lay off people or close? Is a new competitor coming into the market and doing a massive grand opening sale? Is an established competitor doing a G.O.B. sale that is drying up demand?
Once you discover the cause, you can take decisive actions long before serious damage is done to your bottom line. If there are negative factors impacting your market, consider adjusting your stocking orders back. Look at your inventory aging report and consider blowing out slow turning or low margin items to raise cash.
Pilots learn to use instruments such as a turn and bank indicator, artificial horizon indicator and an effective ground speed indicator to supplement their gut feelings because flying by feel alone is flying blind. Many furniture storeowners are in the same position. When we see storeowners using numbers to complement their business sense, we see storeowners who are making dramatic and positive improvements to the profitability of their operation.
John Egger, CEO of Profitability, Inc., helps retailers refocus their marketing strategies from the current M.A.D. (Mutually Assured profit Destruction) policy trend, to compete against other industries and stores based on value. Inquires can be sent to John care of FURNITURE WORLD at firstname.lastname@example.org.