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A Numbers Game

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What small and independent retailers can learn from baseball stats.

It's finally April and the start of another baseball season. Football may be our most popular game, but baseball is our national pastime, and the start of every new season brings with it essays and odes to the game.

This week, CBS's 60 Minutes ran their own feature to mark the new season, a profile on Bill James. For the uninitiated, James is one of the game's most creative and influential statisticians, and has been credited with changing many long-held beliefs about how to evaluate players and think about the game. He started out over 30 years ago, writing and self-publishing an annual statistical abstract for each coming season. Today he works for the Boston Red Sox, and his approach to statistical analysis has been almost universally accepted and adopted throughout the game.

James' essential insight was that looking at baseball through in-depth analysis of the statistical data could shed new light on old preconceptions, and tell a story of what's happening on the field, and why, far beyond what the eyes of players, managers, executives and fans actually were seeing. He demonstrated, for instance, that slugging percentage and on-base percentage were far more accurate predictors of on-field success than the traditional statistics of batting average, home runs and runs batted in.

This insight -- that the numbers can add nuance, depth and understanding in ways that mere observation cannot -- has direct application for small and independent retailers. For retailers, the playing field is the store, the front door, the merchandise displays, the cash wrap, the backroom. The players are your associates and your customers, and the statistics derive directly from their interaction.

Many small and independent retailers are very astute observers of what's happening in their store, and very much focused on sales and profits, but less familiar and comfortable with more in-depth quantitative analysis. In-store observation is critically important, but in-depth quantitative analysis can open up new lines of thinking and shed new perspective and insight on what's actually being observed.

What are some of the key metrics to analyze? Many of these metrics are comparatives to prior years or seasons, and expressed as percentage changes. Let's start with the front door, and move back into the store.

How is your foot traffic? In the recent business downturn, this is where many retailers have struggled. They simply don't have as many customers coming through the front door.

How is your transaction count? If traffic is off, transactions are likely off as well. But how's your conversion rate, the ratio of transactions to traffic count? Has your transaction count held steady, or has that slipped as well?

How are your average units sold per transaction, and your average sales dollars per transaction? Can you divide these metrics down between destination items and impulse items?

Let's look at things from a merchandising point of view.

What departments and categories are trending up in sales? Which are trending down? How is the sales composition changing, as measured by the percentage contribution of each department and category? Is this due to shifting demand, or other internal factors, such as positioning and display on the sales floor?

What's happening with sales units by department and category? What about average selling price? Are customers trading down from higher priced items for lower priced items, or perhaps vice versa?

What's happening with markdowns by department and category? Is the percentage of your markdown sales to all sales increasing? Is the markdown percentage on your markdown sales increasing? What about the discount percentage, resulting from markdowns, on your total sales? Are markdowns increasing because of inventories backing up, or perhaps a result of you being locked into an ever increasing pattern of promotions?

What's happening to your gross margins by department and category? Are they increasing or decreasing? Is attributable to a shift in the sales mix, a change in your initial markups, or changes in your discount percentage resulting from markdowns? How can you shift your sales mix in your favor? Is it a matter of remerchandising existing programs on the sales floor, or does the assortments that you carry need to be adjusted? What other steps can you take to increase your gross margin percentages and gross margin dollars?

And what about your inventory?

How is your inventory composition by department and category? Is inventory backing up on you, or looking to be coming in light? How is inventory turnover trending for each department and category? What can a close analysis of your gross margin return on inventory investment (GMROI) tell you?

What's the average retail price of your inventory for each department and category? What about the markup of your inventory by department and season? If margins are off, could it be because markups have been eroding? Is it because your invoice costs from vendors have increased more than you've allowed for in your markups, are you locked into pre-priced branded goods, or is competition tying your hands on pricing?

How efficient are you in processing new receipts of inventory? Do you get it to the floor quickly? Is it completely ticketed, and is the ticketing accurate? How well do you deal with exceptions, late shipments, over-shipments, misshipments and unauthorized substitutions? Are you returning goods as expeditiously as possible, and are you diligent about assuring that you are getting full credit.

How is your shrink? Are you cycle counting frequently? What do your results show? Are you able to pinpoint the cause of the shrink, and close the holes in your policies and procedures that are contributing to shrink?

Finally, let's look at that all important metric, your cash.

Do you have a cash flow plan, a budget that details the cash you anticipate bringing in, and the expenditures of cash that you'll need to make. Does it look far enough out into the future so that you can foresee when you might experience a cash crunch (which is extremely important for seasonal retailers)?

Does your plan provide you with the benchmarks to allow you to monitor your performance as you go along, and point out to you the areas where you might need to take immediate, corrective action?

This is just an initial list of metrics that any small or independent retailer should always be watching. For any given retailer, there's other critical metrics appropriate for their specific business. But for any retailer, like any good baseball fan, the key point is to not rely solely on your eyes. You probably won't be seeing the whole picture.

Last updated: Apr 23, 2008




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