I recently began talking with a prospective client about helping them become more profitable. As we talked, it became evident that their entire organization needed to be stripped down to the foundation, then rebuilt from the ground up.
At the store level their payroll was out of whack, they had opened stores in far-flung regions which left them impossible to manage and they most likely didn’t have a person with the right experience running the stores.
On the corporate front, they built the team for the long-haul. While the thought was admirable, it’s sinking the company because the stores can’t support the overhead. Additionally, they are using a specific category of merchandise as a loss-leader to drive traffic (a no-no given that they company is only working with keystone margins).
THE REAL WORLD RETAILING TAKEAWAY
Are your expenses in line?
I’m intrigued by this company I’m taling with because I think there is opportunity across every department. The low-hanging fruit has now fallen off the tree and is rotting on the ground — that’s how much opportunity they have.
Here’s a few benchmarks and thoughts on expenses:
- Your store level payroll ideally should be 15% of sales. Hit this mark and you’re doing great. If your payroll is more, then you need to look at the types of employees you have and how they’re scheduled. Awhile back I wrote a post on the subject. Check it out here and here.
- Your rent should be about 6% of sales. While it’s tough to renegotiate rent in the middle of a lease, it’s something you should be aware of for a future location or a renegotiation after the lease term ends.
- Marketing should run 2-4% of sales. If you concept is new, then you should target the higher 4%percent. If you’re established, try to head toward 2%. Sometimes you may even need to go above the 4% to drive traffic. Try to resist the urge as the return on investment usually isn’t there.
- Savings on insurance premiums are usually out there. With one company I am working with, we went after all-new insurance in every category – health, worker’s comp., property/casualty/liability. By shopping the insurance, we saved 22% on health care, 32% on worker’s comp. and increased our property/casualty/liability coverage by 50% with only a 16% increase in premiums.
- Watch out for supplies. Nearly every company I’ve worked for and worked with is “oversupplied”. There are 40 rolls of paper towels, 100 rolls of toilet paper, boxes and boxes and boxes of staples, tape, pens, etc. We’ve been able to reduce supplies expense by up to 50% simply by keeping less on hand. And take note of where you’re buying supplies. One company I’m working with makes the trip to a warehouse club to save money on supplies, but we’re paying an employee $13 in mileage every time he goes, negating the savings he’s getting by going to the warehouse club. Factor in his hourly wage and we’re actually losing money versus if he just went to the local grocery or drug store.
- Shipping. This is another area where costs usually can be greatly reduced. We’ve turned into a “gotta have it overnight” society when that usually just isn’t the case. Ship via ground, or 3 day to save a considerable amount of money. Again, you can usually reduce your shipping up to 50%.