How the retail industry discovers profit islands in the sea of ​​profitable businesses

“Can we apply profit margin management to the retail industry? How can we find profit islands in the ocean of profitable operations?” I spoke with a group of executives when a senior manager asked such a question.

Retailers place merchandise on shelves that seem to lack control over the customers entering the store and the products they purchase. What can retailers do to increase profitability?

In fact, there are many ways to improve profitability. A few years ago, the CEO of a large retail company decided to fundamentally improve the company's profitability. Through the profit map, they created a calculation model in a relatively short period of time to calculate the profitability and return on capital of each product in the store. The result was not unexpected: they found a profit island in the ocean of profitable operations.

During the process of exploring hidden profit-free areas and discovering potential new profitable businesses, this large supermarket has effectively managed in five fields to help it realize multi-party profits: classification management, merchandise substitution group management, customer management, product flow management, and The best way to manage. Leaders attach importance to these five major factors that can lead the company to the path of profit-making and high-speed income generation.

The shelf determines the success or failure of classified management, referring to what the supermarket decides to place on the shelf. A wide variety is not a good thing. Some research observations pointed out that too extensive classification in supermarkets, especially technical products, will make customers overwhelmed. In many retail sales, more than 60% of customers come to the store for a specific demand, such as a radio that can be played on the beach, rather than a product directed to a specific brand.

Therefore, it is necessary for retailers to select products that meet the specific needs of customers for each product category, from price points, products that attract traffic, technical icons, and fashion exhibits. In this case, retailers may choose to use a broader classification in a particular dimension to highlight their positioning and strategy. In addition, overly broad categories will reduce sales and increase the cost of goods. However, there are exceptions for specialty retailers who compete for high-end buyers within a limited range.

At the same time, strict classification is particularly critical for the successful operation of small stores (smaller sales). A shop should not be just a smaller version of a big shop, it must sort products in a more sensible way.

Large retail stores are like a fast-moving river: if you accidentally store slow-moving products, or if your products are mostly out of date, then this mistake will quickly spread to the entire system. The shop is like a stream flowing quietly: the mistake in product classification is like blocking large stones in circulation. The shelves are so full that it takes a long time to empty the shelves and order new bestsellers.

Excessive product categories are not good for the retail industry, but the above example also tells similar companies that substitution groups are crucial to a successful increase in profitability.

Alternative groups refer to a group of products that have the same use in the retail product category, such as low-price printers, and retail stores may have two or three products to meet customer needs. This is an alternative group. Almost all retailers monitor the availability of each product. However, monitoring alternative groups is even more important because the products of the same alternative group do not differ in the customer's eyes. This will allow retailers to save a lot of inventory costs, especially at the end of the product life cycle. Most importantly, it can align retail store categories with the products and experiences that customers really want.

When necessary, the salesperson can direct the customer to purchase products that have excess stock in the replacement group and reduce the purchase of products with insufficient stock. This requires a strong association between wholesalers and retail stores. This may take only 5% to 10% of the time, but it can have a particularly large and positive impact on the store at the end of the product life cycle.

For example, a well-known retail chain company has analyzed which products are expected to increase sales during the Iraq war. On the night of the outbreak of the war, it rearranged the placement of important products in various chain stores - guns, the Bible, and the national flag. The next day, the sales of these products soared.

More than half of the profits that customers manage in supermarkets come from 10% (or less than 10%) of them. As with most businesses, a very small percentage of customers in the retail industry have created most of their profits. What can retailers do about this? They must "recognize their eyes," and chase after them.

First, retailers can analyze the profit map to locate customers that can bring the highest profitability. I suggest picking several representative stores to analyze the range of products purchased by high-profit buyers: Are the customers demanding entry-level products or special products? Is it the product that attracts traffic, or is it for the foreseeable time – often when the product is just on the market, buy high-margin, high-end products? If the latter is the case, then you can focus on the product category, contend for a large number of sales to large customers, and no longer sell profitable products to profitable customers.

Afterwards, merchants can attract frequent visits through advertising letters and other highly targeted means to expand their shopping range and increase shopping frequency. In the process of locating profit islands and seeking maximum profits, customer loyalty programs are crucial. Businesses cannot be limited to winning the best customer. Actively looking for more similar customers can guarantee the continuous flow of corporate profits.

Walmart's Product Flow Management At present, the main potential profit of the retail industry comes from product flow management. And Wal-Mart's well-known “connected transhipment” process: The distribution center delivers products directly from trucks to retail outlets without storing and sorting. Retail product flow management is based on two important principles: supply chain differentiation and rapid distribution logistics model.

In a more differentiated supply chain, retailers group products according to demand characteristics, sales characteristics, and physical characteristics. I often cited the example of clothing retailing. There was a difference in sales between a clothing retail store, seasonal clothing such as underwear and bathing suits, and seasonal products such as sports team championship T-shirts. Therefore, managers need to establish a set of different operating policies and supply chain according to the characteristics of each product, so that effective management can be carried out accordingly.

The fast distribution logistics model is a process that minimizes inventory and disposal. This process can also save a lot of costs, but it requires a high degree of coordination within the organization and with the supplier.

For these two key ways to simplify product flow, classification management is very important. First of all, by compressing the classification, merchants can determine the quantity and stable demand that are indispensable for the logistics model in the remaining products. Second, alternative groups provide plenty of opportunities for attention and stability. For example, in an alternative group with three suppliers, you can assign the new demand of the alternative group (that is, the demand surge, or the demand exceeding the estimated level) to one supplier in exchange for guaranteed quantity and logistics. The model; the other two suppliers saw extremely stable demand, which prompted them to provide fast delivery.

In addition, the importance of analyzing profit maps and drawing on best practices from peers is one of the factors that retail companies have achieved quickly. The profit map also clearly shows merchants the profitability and return on capital of various products in the store. By building a detailed profit profile, businesses can also compare against similar stores. In many retail chains today, retail stores are often grouped, compared, and managed according to geographic location, but geographical grouping is not effective because it incorporates many different stores in the same group. Analyzing profit maps will help you group together similarly-sized stores in terms of size, population, competitive status, and other key elements, and analyze their relative performance. This approach provides extremely valuable supplements to geographic location-based store operations management.

One of the most effective ways to build a culture of profitability and consistently achieve high profit margins is to build a culture of profitability in the company. Focusing only on product revenue and gross margins is not enough. Businesses must understand the net profit margin of end-to-end (supplier-to-shelf), and the return on capital of each product in each store.

In addition to efficiency, supply chain and logistics managers must also understand the supply chain's productivity. Supply chain productivity includes two factors: (1) net profit of in-store products; (2) input capital to support in-store products, mainly referring to inventory. The store operations manager must understand the net profitability of all products in the store and the return on invested capital, and compare the performance of each store with peer best practices.

These functional team managers must meet regularly to systematically review storefronts and product performance. Moreover, they should jointly control all key factors for achieving profitability, coordinate, formulate joint initiatives, and jointly manage and improve profitability. These groups must use the same performance and compensation measures, namely net profit rate and return on capital. The implementation of this crucial standard is one of the most important factors for successful operations.

After correctly understanding and applying classification management, merchandise substitution group management, customer management, and product flow management, businesses can begin to create a profitability culture. Under the guidance of this culture, the company managers will promote retail enterprises to fully realize their profit potential.

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