Managing Your Biggest Expenses - Payroll and Occupancy Costs

After your cost of goods, a retailer's largest expenses are payroll and occupancy costs. These two areas if not controlled, can choke a retailer's cash flow and eventually lead them into bankruptcy.

While the retail industry standards for these expenses vary greatly, they should fall within the following ranges:

• Payroll Costs: between 10 - 15% of gross sales
• Occupancy Costs: between 7 - 10% of gross sales

Controlling Payroll
Some things you can do to make sure your payroll costs are being controlled:

• Monitor your payroll costs monthly to make sure they are in-line relative to gross sales. On a month-to-month basis your payroll costs as a percentage of gross sales will vary but on a yearly basis your overall labour costs should fall within the industry guideline.
• Review your sales trends by day of the week and hours of the day to determine when you need to add extra staff or where you can cut back.
• When scheduling use shorter shifts instead of full days across the board. This will give you more flexibility to have more staff at peak periods of the day or react to cut back on staff on slow days, especially due to bad weather.

Controlling Occupancy Costs
Unlike payroll costs, your occupancy costs are often not controllable other than at the time of negotiating your lease. However, there are a few things you can do to make sure your occupancy costs are within the industry guideline:

• Make sure that you understand all of the lease costs you are responsible for when negotiating your lease. Common area costs, management fees or rates based on gross sales often become contentious issues if not clearly understood at time of signing.
• Review your controllable variable costs such as utilities. Install efficient thermostats that reduce the temperature at off-hours. Use timers for your outdoor lights so that they are off for a few hours in the middle of the night.
• Maximize the space you are renting by reducing non-selling space: storage, office, or any other use other than selling floor.

If you can contain your occupancy and labour costs as well as your inventory levels, you should be on your way to a profitable year!

Buy Plan - Plan your Buying Trips Before you Travel

Many of you may be scheduling your January buying trips now and making sure you are booked into the right hotels and are taking the right staff along. However, the most important thing you need on your trip is what most retailers forget about; their Open-to-Buy and Buy plan.

The Open-to-Buy and Buying plan are integrally related. The basis for your Open-to-Buy should be your last year's performance and your plan for growth, margin improvement, improved stock turns and/or inventory reduction. These factors will all help determine how much and when you should be buying.

The Buy Plan takes the Open-To-Buy a step further. In the Buy Plan you need to incorporate how much of your budget you want to actually spend, how much you want to use for re-orders and how much you want to allocate for opportunity or discounted buys. Most retailers go out and spend their entire open-to-buy budget up front and don't have the funds available to take advantage of hot sellers or special purchase opportunities, usually heavily discounted vendor excess stock.

As a general rule of thumb plan on spending only 75-80% of your buying budget up front. Keep the remaining balance in your back pocket to allow for in-season reorders on fast sellers (10-15% of budget) and the remaining (5-10% of budget)dollars on opportunity buys as they present themselves. These ratios may differ a little from retailer to retailer but the the basic premise is the same.

Remember that it us (almost) always better to chase more product than to be faced with too much inventory and excessive discounting.

Implementing a Shrink Reduction Program - Manager Bonuses

Regarding bonuses based on shrinkage – this is commonly one of the bonus criteria for store managers.

The best way to implement is to set a target shrink factor based on industry average and your own historical store inventory shrink rates. If a store has a very high shrink rate it may be more motivational to base a bonus on a percentage reduction of the shrink rate for the first year or two until it gets to an acceptable level. It is also important to communicate the store shrink rate and targets to all staff. They should know what the last year's shrink rate was as well as the target. All staff should be made aware of the programs designed to reduce shrink and how they can help reach the target shrink goal.

It is amazing how just being aware of the shrink issue and how to prevent it makes the problem go away.

Sources of Retail Inventory Shrink

Before jumping too quickly to try to implement a shrink reduction program it is important to understand what is the source of the inventory shrink.

Although there is some variation depending on the type of retail store, most retailers' inventory shrink rate should be in the neighborhood of 1.5%-2%. Anything over this usually indicates a problem.

The following is the industry average for the source of inventory shrink in the retail industry:

1. Internal Theft 45%


2. Shoplifting 35%


3. Admin/Paperwork Errors 15%


4. Vendor Fraud 5%
   

Internal Theft
Based on the above breakdown, much of the shrink reduction program should emphasize internal controls & processes related to damages and write-offs. Also, cross-store and employee comparison of refunds and unauthorized discounts should be done to ensure that some of the shrink is not happening at the till. Parcel/Bag checks is a bit more extreme but some retailers do implement this.

Shoplifting
Customer Service is the best way to thwart customer theft. Acknowledging and servicing customers can avert many planned thefts. Also, signage indicating shoplifters will be prosecuted and arranging product so that low value items are near the doorway and expensive items are near the cash desk or under lock and key helps reduce easy shoplifting opportunities

Admin/Paperwork Errors
This is the inventory shrink category that you have the most control over. Review current procedures for receiving, transfers, pricing and write-offs to ensure they are being followed and to identify areas for improvement.

Vendor Fraud
This is most common when vendors are used to re-stock items directly in a store – usually this occurs only in larger department stores where vendor managed programs are in place.