Know Your Numbers
Know Your Numbers
It seems to me that the significantly inflated cost of doing business is a huge obstacle to the future financial success of independent shoe retailing on a wide scale basis. My premise is that the financial formula that the usual shoe store operates under is significantly impaired or damaged as a result of the inflated costs of expenses as contrasted against the stable nature of gross profit margins. If gross profit margins are not repaired soon (i.e., if they do not increase significantly) this theory would indicate future poor results for other footwear segments (including wholesale and distribution and for shoe manufacturing) since those segments depend on enough retail locations for footwear to be sold through.
The Pandemic was not a cause of all this, but the effects of it certainly sped things along. Already burdened by payroll cost increases over many years, who can debate the fact that the years since the Pandemic brought significant inflation in payroll costs that have significantly inflated the operating costs for shoe stores in recent years?
Let’s just say that your overall Personnel Costs (including wages, bonuses, vacation pay and benefits) went from 22% to 26% (of overall revenue) since that time. That’s an increase of about 20%. Did your maintained gross profit margins increase by 20%? I sincerely doubt it. And, no other operating expense ratio went down, did it? That’s my point.
The shoe industry is not repairing itself the way other industries are. You may have already noticed that quite a few other industries have altered their own financial formulas in obvious ways. I am sure no one will disagree that grocery stores have increased their prices. Restaurants have significantly increased their menu prices and some even charge fees added to your receipt. If you’ve traveled recently, you might agree that the travel industry (specifically airline and hotel rates) seems to have figured out a way to repair itself. So, when is the shoe industry going to make its repair?
I am sure you might agree that the intent of any business is to make a profit in the form of a return on investment. The retail shoe business is considered capital intensive due to the comparatively high cost of maintaining a proper inventory compared to other businesses.
In retailing, the expenses of operating the business (which one might describe falling under major classes such as Administrative, Marketing, Occupancy, Personnel) are intended to remain sufficiently below the maintained Gross Profits of the business to allow for a Net Operating Income. And, out of that Net Operating Income must come Interest, Taxes, Depreciation, Amortization, Debt Service and Investments for the Future. After those are met, the owner can make a Distribution to the shareholders… if there is anything left.
According to an article published February 21, 2023, in businessnewsdaily.com and written by Shayna Waltower, 2 in 3 Business Owners aren’t paying themselves due to Inflation.
Start with the end in mind and plan for profitability.
A prudently focused business owner should seek to develop a go-forward plan for producing enough profit and cash flow from his business. This means, he or she should expect to have fewer expenses than gross profit.
• The main culprit here (although all categories of expenses have increased over time), particularly coming out of the Pandemic, is the percentage of Personnel Expense.
• Service takes time and since training takes time and some customers aren’t quick decision makers, average ticket and sales per hour would have to increase faster than compensation rates. It takes time to provide full service and unless your average “tickets” have increased the same percentage as your operating expenses, you might be “treading water.”
• Simply putting in the time to have a better knowledge of the numbers that make up the financial formula for your business is worth all the time and attention you put into it. Knowledge is king and realizing all the factors that make up your store’s profits is a key factor to your success.
Smart retailers know their margin numbers and work every day to maximize those margins and decrease markdowns.
• This usually employs a well-organized and detail-oriented approach to merchandise management. Often this includes an open to buy planning system.
• Many retailers I know establish good relationships with vendors in an effort to maximize the relationship.
• This involves sharing information with the vendor, hoping in return that the vendor will understand your business model and what it takes to keep you as a customer.
• Some retailers set goals for IMU and MMU and markdown control levels for each vendor they deal with.
Some shoe retailers, often multi location retailers, found some success importing shoes to augment their brand name collections.
Advantage: Significantly increased initial profit margins.
Disadvantage: Private and exclusive brands are subject to increased markdown rates.
Smart retailers realized over time that well-known brand names already come with built-in marketing and customer recognition and acceptance, so it is rarer to find a shoe store which carries only private or exclusive labels.
Expand. In recent years, many small regional chains have found success by acquiring smaller operations and this has allowed them to spread overhead across a larger volume. A buyer or a bookkeeper can easily expand their efforts across one more store, for example.
Plan to achieve increasing average transaction values through the strategy of employing extremely competent full-service sales staff. My contention is that service still means something.
• Which requires pushing out (over time) those salespeople who don’t perform and that harms the important tactic of retailers to staff their stores with consistent and friendly faces that customers recognize.
Increasing inventory turn, which reduces the cost of maintaining inventory.
• Employed partially by hashing inventory (a “lost art” in many ways).
Finding additional profit centers so that occupancy cost ratios are decreased.
• Perhaps this means doing some e-commerce (which is hard and technology dependent).
• It may mean expanding into additional product categories. Can you add a meaningful outdoor segment to your comfort and athletic business? Can you do a significant business selling appropriate shoes for medical professionals?
If anything in this column hints at some of the issues you, as an independent shoe retailer, are facing these days, I suggest it is time to consider your own financial formula to determine if your gross profits are outpacing your operating expenses to an appropriate degree.
While I believe there will always be independent shoe retailers, the financial issues facing those retailers are significantly impactful. Those who can understand and control their directions will be the survivors. Knowing your numbers will help to guide your strategies, tactics and solutions for the long run.
Alan Miklofsky is a semi-retired shoe industry veteran and contributor to Footwear Insight. This is his seventh article. After a 40-year award winning career as a retailer, long-term board member of the NSRA (which included a stint as its Chairperson), Alan is currently a business consultant.
For more information on Alan, visit his LinkedIn page at: https://www.linkedin.com/in/alanmiklofsky