The ‘art of retail’ matrix
Here we are analysing your stock on two dimensions: sales versus gross margin (be it $ or % is up to you, I generally prefer % for this purpose) with the intention being to place your stock into four distinct categories: Stars – stock which has high sales and high gross profit; Cash Cows – stock which has high sales and low gross profit; Question Marks – stock which has low sales but high gross profit; Dogs – stock which has low sales and low gross profit.
This can be more easily illustrated in below:
Go over this with your staff to identify the stock items that fit into each of these four categories. There may be an element of subjectivity on the edges but I would think, based on the analysis you have done (from 1 above), you can add quite a deal of detailed financial data to corroborate or challenge the allocations.
Once allocated you really have a solid basis upon which to make some decisions. You need to be asking why are they so categorized and what that means in terms of store layout, merchandising, discounting, purchasing etc.
So for example, perhaps the dogs are the first items to be discounted and moved on (and there are a number of creative ways of doing this without ‘cutting the guts out’ of the price), or the stars need to be placed in high visibility and traffic areas, or more purchased, or the cash cows need to be located to maximise customer movement throughout the store (vis-à-vis the milk at the back of the grocery store).
All the categories require attention but the category you need to monitor and act upon closely is the question mark area because these could easily become dogs or stars with clearly the latter being your desire. So give them the important management attention they deserve.
This is an invaluable tool to train and assist staff in their daily work, and also as a basis for good management decisions. Could I suggest you try it on a departmental basis to start with. It’s very easy to do with staff over a cuppa or a quieter trading time.
The ‘science of retail’ matrix
The methodology is the same except the two dimensions being used are stock turn (rather than sales) and gross margin %. You can specify the mid point between low and high on both axis with a specific number so that there is no argument regarding the categorization of the stock. There may be ‘room for argument’ on the causes and resultant actions and decisions but the actual categorization is a reasonably black and white matter (scientific so to speak).
So, for example, you may make the mid point of the gross margin be 40%, and 2.0 for the stockturn. Thus any stock that has a gross profit of greater than 40% and a stockturn of greater than 2 is automatically categorized as a star etc. See below for the illustration of this matrix.
In some ways this science of retail matrix is easier to do, but it forces you to make some very considered management decisions. It is a good way to clear out the cobwebs, ‘put to bed’ some of the old ‘gut feel’ decisions, and challenge some of your presuppositions and ideas. In today’s business environment where the retail business model is being thoroughly scrutinized I would think that is a good thing.
The challenge both of these actions or tools pose for business owners and managers in the fashion industry is to make sure you have good reporting systems to enable you to do this type of close analysis of your business. For many it should be the first item placed on their management action list. The analysis is a good starting point but the hard work is the follow up action. I trust these two tools will assist you in that regard. Give them a go.
Brett Stevenson is Director of Excellere Pty Ltd, a company that offers a range of financial best practice services. www.excellere.com.au