Running a successful business in the 21st century involves a heady mix including, financial control and prowess, customer and staff satisfaction and all while making sure your brand carries the right message. In the first of this two-part article, I'll look at tried and tested, actionable, ways for you to get a proper handle on performance across your retail enterprise.
I spend a great deal of time with business owners and managers discussing the 'position' of their enterprise. I have chosen the word 'position' to reflect the breadth of the aspects we consider.
In a business context, we look at successes and failures, financial performance, future direction, pricing, margin or innovation. On the staffing side, what about job satisfaction, performance, motivation, training, recruitment and job specs? Then, more generally, customer retention, equipment, production, merchandising and marketing.
At various stages I ask owners questions about their business and how they measure performance and what the indicators are that tell them whether or not they are doing a good job.
Now, as a consultant, if we are having this type of conversation then it’s probably because they have asked for some advice. There is no shame in that. Never forget that even large organisations with a huge resource of talent in a wide range of skills will ask for external advice – either from consultants or non-executives.
So why shouldn’t a family enterprise ask for some independent advice also?
As far as business performance is concerned; if you can't measure it, you can't manage it. Given that it is careers and often personal cash at stake, having a clear understanding is crucial.
Getting performance measurements right involves identifying the areas of business that it makes most sense to focus on and then deciding how best to measure performance in those areas.
Getting performance measurements right involves identifying the areas of business that it makes most sense to focus on and then deciding how best to measure the data available in those areas.
Performance measurements will be a more powerful management tool if we look at specific areas that determine the overall business success.
Whilst some may already have a good understanding of performance, I would recommend putting in some time to develop a strategic awareness of what it is that drives success for businesses in our industry.
So, it’s essential to first realise that there will be more than one measure and to tailor measurement to specific contexts and objectives.
Once we have identified the measures, we can then set about using these to improve performance.
As a final first word, this can be quite a long list – and I would also make sure we don’t waste valuable time with measures that are either irrelevant, or simply don’t feel right.
Understanding and assessing financial measures of performance is of course a crucial part of running a growing business. It will be much easier to find issues, look for improvements as well as to invest and manage, if there is a known way to drill into management accounts to find out what's working and to identify what’s happening.
It goes without saying that you first need to have the numbers to hand, and to take time to analyse the reports.
Most businesses ultimately target increased profits, so it's important to know how to measure profitability.
The key standard measures are:
This is an obvious one but, taken just on its own, is one to be wary of. However, everyone needs a top line figure by which to measure and compare. It can also be used to set targets.
This measures how much money is made after direct costs of sales have been taken into account. This is the first number to look at when assessing your Profit & Loss. Again, it sets a standard and can be used for budgets and targets.
There are various industry standards; both for retail and food service. These vary dependent on levels and type of service of each model. It is, however, a useful tool and will show a clear red light if cost of labour, as a % of income, is too high. Again, it’s a useful one for budgeting and setting targets.
The operating margin lies between the gross and net measures of profitability. Overheads are included, but interest and tax payments are not.
This is a much narrower measure of profits as it takes all costs into account; not just direct ones. So, all overheads, as well as financial costs, are included in the profit calculation. Some find this a surprisingly low figure which is simply a facet of these food and service-related businesses. Being low also makes it all the more important to keep on top of the others as the slip from profit to loss can happen easily.
Finding customers is a crucial task for every business; retaining customers is even more so.
So, when looking for areas of your business to start measuring and analysing, it's worth asking yourself if you know as much as possible about your customer base.
I always encourage retailers to try and see their businesses through their customers' eyes and with their customers’ experiences. To this end, feedback is very useful - the more you know about what your customers think and want, the easier it will be to cater for them.
There are a number of ways to do this, all of which go to help make up that all important information from which to look at ways to act and improve.
Look for ways of capturing this information including:
What your customers choose to buy or not to buy provides the clearest indication of their preferences. Again, having an effective EPOS solution will give you as much data as you need looking at rate of sale, quantity, repeat purchases with frequency, purchases within and outside promotions etc. This is all good data for product review and merchandising adjustments, targeted communications, reasons to de-list, discussions with suppliers and targeted staff challenges and incentives.
Using these to provide detail of trends and therefore issues. It's fine to deal with these individually but logging these and identifying underlying problems can only be useful.
With logging for any trends.
A very useful source of information. You might also consider using incentives to encourage more customers to complete them.
Having someone pose as a customer for research purposes can give a clear sense of how well you are performing.
Software for customer relationship management (CRM) can be a powerful tool for capturing and analysing information about your customers along with the products and services they purchase. CRM also enables you to push up service levels by ensuring that all customer facing staff have ready access to your customers’ history.
This can be a number over a given period – day, week, month etc., used to compare with a previous period, or the same period in another time frame. Let’s face it, without customers, we have no business. It’s good for looking at trends, and your EPOS system will drill down customer numbers over given periods. This is invaluable for example when planning staff rotas. There is no quicker way to go backwards than to have inactive staff on site with no income to pay for them.
More generally though, try to widen your focus beyond your current customers.
Selling more to existing customers is certainly an essential way of increasing sales but you will need to find ways of reaching new groups of customers.
This is not easy in the farm shop sector as we tend to cater to locals, and those with independent transport – and more importantly those that have shown an interest in great well sourced food.
However, knowing more about sections of the market you haven't yet tapped is crucial. We should look at tourism, differing age groups and generally ways to encourage people to visit.
Farm shops use this one frequently.
It’s a simple measure of sales against number of transactions but some farm shops are surprised at how low it can be. If there is an assumption that everyone comes in for a weekly shop, think again. Sale of a single jar of jam, or pint of milk is just as likely.
That said, it’s a good tool; sets a bar and can provide direction.
For example, if you had weekly sales turnover of say £10k, and you had 1000 purchases, this gives you an average of £10. You might then encourage everyone to aim for an extra £1 per basket, which if followed through would add over £50k to your sales line.
A good return for a relatively modest change.
In our retail business, a sold item provides revenue, but it also covers handling costs like stock value, transaction time and staff wages as well as costs of retail space.
Your EPOS system should be capable of providing you with helpful data.
If your transaction volumes are low, the number of items may seem insignificant, but when the sales volumes are higher, it starts to be important. For example, if your retail business has good average values per purchase, but the number of items is rising, it might mean people are buying cheaper products.
It might be worth checking on special offers which might be going too far and maybe you’re overdoing something?
Additionally, when you reach the following month, nobody buys your staples because your customers now have plenty at home. In general, if your average sale per transaction is going up, the item count rises too. That said, it would be better if the item count is slower to rise than the sales value average. Clearly you want to sell for more money, not just sell more.
I would also add not to worry if the average shopping basket has more items in it, as in most cases, bigger is better. It shows greater interest in a broad range of products. Its best to use common sense to assess the situation. It's perhaps that moment to look at a campaign for adding more items to the basket.
The large retailers use this to compare industry standards.
It’s also one to watch when looking at rent, allocation of space to sales as opposed to warehousing or admin (it only normally measures sales area) etc. This is simply sales divided by space. So, for example a shop with 3000 sq. ft. of retail space and sales of £2m has a sales per sq. ft. of £666.
It can, however, give insight.
With a basic understanding of sales per square foot it can be used to maximise sales looking at shop layout, traffic flow, selling the right products, optimising prices or promotions, increasing transaction / basket value, loyalty programmes, staff training and dwell time.
My constant reminder, across any analysis, is that you simply can’t manage these businesses if you don’t measure continually. Most enterprises have several aspects to them and so it’s even more important to see what is going on.
Whatever we think, we are also in a numbers business with costs that can easily get away from operators if they are not carefully tracked and measured.
Once we have identified key measures – or business drivers, we need to find the best way of measuring them.
Your priority should be to look for as close a link as possible with those elements of performance that determine success.
For example, you may decide that customer service is a strategic priority for the business and therefore to start measuring this.
Amongst the areas available to us, none of these is necessarily better than any other. The challenge is to find which specific measure (or measures) will enable us to improve.
Look out for the next 5 of my top 10 in part #2.
'Til then, happy retailing.
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Edward operates the Flying Fork, a food and retail advisory service for independent food retailers, farm shops, delis and food producers. He works closely with the Guild of Fine Food; judges Shop of the Year, Great Taste Awards and World Cheese Awards; has worked on projects for the Farm Retail Association (formerly FARMA); speaks on industry subjects; mentors at the Speciality Fine Food Fair and is a regular contributor to publications such as the Fine Food Digest.