Spar InfoTech, Inc.
A program to increase retailer profitability by improving in-store labor efficiency
How Does it Work?
Retailers have low Net Income profit margins of 1% - 2%. Retailers know what negatively impacts margins and attempt to improve margins even tenths of a percent. The same issues impact retailers worldwide, and retailers in all countries approach the issues the same way. Over the last 10 years some retailers have addressed the problem of low profit margins in a more comprehensive way with excellent results.
The following are a list of items that impact retailer net margins and an estimate of the potential impact on margins. This varies by country, retailer, category, and channel of distribution so every retailer needs to make adjustments for their own situation. Labor is the biggest cost a retailer has other than the cost of goods. The following areas are focused on making labor more efficient. Often in more quantifiable areas such as warehousing or trucking, retailers will spend a great deal of money doing studies resulting in changes that yield a few tenths of a percent of margin improvement (if that). Yet in-store labor is very inefficient and material improvements can be made but the amount of effort that goes into this area is disproportionally low.
Out-of-Stocks (OOS) OOS is the most common issue studied. The studies vary but always show OOS has a material impact on retailer revenue and profits. A reason this is the most studied area is that the studies are funded by the CPG companies who have a self-interest in showing that not having their brands in stock is harmful to the retailer. What these studies ignore is that the impact on the retailer is less than the studies show. The reason is that the CPG’s have a self-interest in showing retailers they should make sure the CPG’s products are available on the shelf. What these studies do not show is how much of the lost sales for a brand being OOS is lost sales to the retailer. They generally assume that zero consumers will switch brands or sizes when a product is OOS and will not postpone the purchase until their next shopping trip. This has tremendous variability by category as in some categories a lack of a purchase can mean a reduction in consumption (usually high impulse products with variable consumption levels such as candy and soda). Others almost always require brand switching in the store as the consumer needs the product (e.g. many paper products such as toilet tissue, baby food, dog food) and some the consumer can wait until a later shopping trip (usually products with a long purchase cycle that the consumer has not 100% used up). While the impact on the retailer is overstated, OOS still has a significant impact. Studies show OOS averages 8% which is a material number. OOS’s vary considerably by category and such factors as Promotions and Holidays increase OOS just when having the product in store is most critical. Other studies have shown that for some categories 67% of the consumers will to go to another retailer to purchase that product (typically high loyalty categories which are often the most profitable for the retailer). Most of the work done by CPG’s companies use the OOS level to show the retailer how much they can improve their profits but 100% improvement is not possible. It has been our experience that a 40% improvement across the board is the top end of the ability to reduce OOS’s. If OOS is 8% and can be improved by 40% then a retailer could increase their overall sales by 3.2%. For many retailers that is likely to be on the high end since OOS does not impact their overall sales negatively by 8% and 40% is an aggregate saving. But in addition to whatever direct financial benefit can be derived from reducing OOS there is the intangible value of happier consumers and not having consumers go to another chain. Studies have shown that consumers who go to another chain to buy a product due to an OOS are more likely to continue to switch chains and be less loyal to the retailer. This is particularly true for new items.
Excess Inventory While not a material number on the surface all retailers have excess inventory that is typically in the back room. This varies greatly and perishability is one of the driving factors when back room cooler space is limited. There are many studies done on this subject because CPG companies always want a retailer to buy more of their products on the theory that a loaded customer is a loyal customer. As a result, not as much attention is paid to this issue as many others with the CPG emphasis being on reducing OOS, not reducing excess inventory. Our work over the years shows substantial improvement can be made and a reasonable expectation is .2% margin improvement. In addition to the margin improvement this also frees up cash flow which is critical for retailers. The improvement comes from eliminating inventory not on the shelf and our work has shown this can be reduced by 50% to 100% of the inventory now in the back room.
Additional In-Store Labor Just as study after study shows 90% of the drivers think they are among the top 25% of safe drivers, we have found that 90% of the retailers think they get more than their fair share of the labor CPG companies supply in store. Statistically if 50% of the retailers get more than their fair share of in-store labor supplied by CPG companies that means 50% are getting less than their fair share. The first step for a retailer is to determine which 50% they are in, those getting more than their fair share or those getting less. On the surface it seems simple but in reality it is not easy. Every broker, distributor, and CPG company will tell each retailer how much free in-store labor they are being supplied and they are getting more than their fair share. No one is going to tell a retailer that they are not getting enough free labor. There are also no published statistics on how much labor is being supplied to retailers so a benchmark is impossible to derive from outside data. Within retailers no one is responsible for making sure labor is being supplied by those selling the goods to the retailer and instead each buyer or purchasing agent is left to individually negotiate with each brand often on a promotion by promotion basis. This structure puts the retailer at a disadvantage. Lastly, the retailer can’t track how many hours they are getting in total over the course of the year. It is clear the retailer doesn’t have a good handle on what percentage of the labor being supplied in the market is going into their stores and it is in the interest of those supplying the labor to talk up how much labor the retailer is getting so it is not surprising that a lot of large retailers aren’t getting their fair share of the labor. Ironically, those retailers already getting more than their fair share of in-store labor can get an even greater share by an organized approach since the suppliers will usually just move labor from another retailer (who doesn’t know what the share of labor being supplied and doesn’t complain) to the complaining retailer. While every retailer can get more in-store labor, our work with retailers show the improvement is a wide spread but a realistic goal is a margin improvement of .8%. In other words, for every $10,000 in sales revenue a retailer has in a brand’s sales, they can expect to get 1 additional day of in-store labor (8 hours at $10/hour). World wide the countries are broken into two classifications of high-cost labor markets (e.g. U.S., Western Europe, Australia, Canada, Japan) and low cost markets (e.g. China, India, Eastern Europe, Africa). The dynamics between these two different market types is significant but our work has shown that .8% is a reasonable expectation in both market conditions.
Faster Cut-In of New Items Retailers take up to 6 weeks to cut in a new item. The math to determine the value of having items cut in the first week is not hard to do as benchmarked against a retailer’s own current speed. This varies widely by retailer as some retailers do a much better job than others so the value of improvements will be less. Our work and calculations show that a retailer can expect to improve their margin by .2% by a faster cut in of new items. With 35,000 new items being introduced each year it is difficult for a retailer to measure how well they are doing or to execute well since this is not a top priority for store managers who are overworked and under staffed and have more pressing issues each day. The economics of improving in this area doesn’t typically work if just done as a stand-alone effort. For example, if the retailer can generate $10,000 in additional new sales from getting new items on the shelf faster at a 28% margin the retailer will make $2,800 which at an all in cost of $20/hr. allows for 140 hours of labor. 140 hours of in-store labor can generate the $10,000 in additional revenue but not always. In any case, it is usually close to a break-even proposition and sometimes a losing one. But studies show that only 28% of the stores get a new item to the shelf in 2 weeks and 70% of the consumers return to a store where they originally purchased the new items. This number is deceptive however since most consumers purchase new items in the store they normally shop in and then of course return to that store. So the actual number of consumers who switch stores, buy a new item, and then return to that store is unknown. But determining the value of getting items on the shelf faster needs to consider customer satisfaction and long-term customer loyalty. The ultimate conclusion is that spending money just for faster cut-ins may not be incrementally justified unless it is part of an overall program to take advantage of some of the other areas where a retailer can gain incremental profit from in-store labor.
Shrink Shrink is one of the most talked about items and one of continual focus by retailers. In the U.S. 750,000 people are arrested annually for theft in retail stores and the estimated loss from shrink is $31 billion dollars. Shrink costs retailers 1.52% of their margin in the U.S. Getting to zero or close to zero is impossible. But our work with retailers indicate that a .4% improvement in margin is possible. In other words, shrink can be reduced by over 20%. Shrink comes from many places, customers, employees, and lost product. But a large retailer has tens of thousands of people going into their stores with access to the back room and they don’t know who these people are, how they have been vetted, and who has approved their access. If a retailer has 250 stores and 20 suppliers/brokers/distributors send someone into the store to merchandise product and each position turns over once per year that is 10,000 people going into a retailer’s store without the retailer having any idea who they are.
Labor Quality The value of improving in this area is almost impossible to quantify but we have seen material improvements when focused on. The average retailer has 57% turnover in part- time labor per year. Given the cost of benefits/taxes/regulations/costs of hiring/training, the actual hourly cost is materially higher than the nominal hourly rate. Yet the quality of work is generally poor. Labor is the highest cost for a retailer other than the cost of goods and over 20% of revenue. There are no solid studies but my own experience says that a 5% improvement is possible or 1 margin point.
Waste/Returns Since most waste/returns is paid for by the suppliers, the retailers tend to give this less focus. The average retailer has 1.8% waste/returns and studies and experience have shown that this can be reduced to 1.4% with a comprehensive approach.
Private Label or Own Brand Funding Most retailers don’t get adequate in-store labor to support their private label products. Our studies and experience have shown the retailer is losing out on 1% margin; most of which can be mostly recaptured so that margins for private label can be increased by .8%. If Private Label is 20% of a retailer’s sales that equals .2% overall margin improvement.
While intangible and not quantifiable, addressing the above issues not only will materially improve a retailer's margin (they can realistically be doubled) the improvements will result in higher consumer satisfaction and less labor issues.
What is needed is a comprehensive strategic solution to address all these opportunities at once since trying to address them individually is difficult and often not cost effective.