CHAPTER 12 EVALUATING RETAIL PRODUCT MANAGEMENT PERFORMANCE

LEARNING OBJECTIVES Become familiar with terminology and principles associated with RPM performance evaluation Understand that performance analysis approaches will vary between retailers Appreciate the contribution that cost control and shrinkage control can make to financial performance Understand how customers evaluate a retailer’s product range, including qualitative measures

PRODUCT PROFIT The profit margin a product earns is a well established performance measure  Gross margin (mark-up) The difference between cost and selling price  A mark-down is a price reduction that reduces the gross margin

SALES Another well established performance measure High sales generates cash flow, but not necessarily high profits High sales means high stock turnover, prevents obsolescence and allows retailer to change ranges according to seasonal demand Price sensitivity should be considered when setting retail prices

PROFITABILITY The profit a product generates depends on:  gross margin  rate of sales GMROI (Gross margin return on investment) allows a retailer to compare the performance of products with different % profit margins and different sales turnover GMROI calculations can be made at SKU, category and department level GMROI does not consider the variation in costs of selling

Illustration of GMROI Insert table 12.1

DIRECT PRODUCT PROFITABILITY (DPP) Considers the costs associated with stocking a product in order to obtain a more sophisticated measure of product profit  selling costs (e.g. chilled fixtures, high levels of personal contact)  supply chain costs (e.g. transportation, handling)  also considers any revenue a product generates, such as promotional allowance

ACTIVITY BASED COSTING (ABC) Takes DPP a stage further Includes allocations for indirect as well as direct costs such as  product development costs  overseas sourcing costs ABC has been recommended as measure of efficiency in ECR systems

THE IMPACT OF MARKDOWNS Mark-downs are used to stimulate demand for non-staple items, especially  fashion  seasonal Mark-down analysis by SKU is a good way to evaluate buying decision-making High total mark down values (deep price cut x number of SKUs) indicate poor buying decisions

PRODUCTIVITY Sales and profits are often expressed in terms of the productivity of space (e.g. sales per square foot of floor space) Product management decisions may be required in response to productivity performance (see chapter 8)  allocate better quality space  improve profit margin  introduce more variation of product in category

SHRINKAGE The term applied to stock that is removed from outlet without payment Shrinkage control includes:  reducing mark-downs  reducing retail crime  better store management (reduction in damages and shop soiling)  good stock rotation

COST REDUCTION Efficiency gains (see ECR chapter 3) can be achieved by reducing costs associated with  product development  undertaking promotional activity  poor replenishment  having the wrong assortment Negotiating better prices from suppliers

NEGOTIATION Negotiation implies a mutuality of wants, resolved by exchange, not necessarily focused on achieving the lowest possible price  Preparation stage  Meeting stage  Implementation of agreement stage Negotiation takes place within the framework of the retailer’s price positioning strategy (e.g. premium, discount, EDLP – see Box 12.3)

AVAILABIITY Availability performance indicators are growing in importance because they are customer-focused  the availability of the total (ideal) product assortment to customer  stock cover (how long the retailer will remain in stock) Poor availability will damage a retailer’s image

QUALITATIVE PERFORMANCE MEASURES Many measures of customer satisfaction are qualitative including:  retailer’s image  retailer’s reputation  retailer’s brand value (equity) These measures are all multi-attribute evaluations Attributes that are directly under RPM control  prices  merchandise quality  range of merchandise

BLENDING QUANTITATIVE AND QUALITATIVE MEASURES Interpreting various performance indicators is a challenge for retail product managers Analytical powers and objectivity are needed to optimise product ranges so that both short- and long-term performance objectives are achieved This supports the argument (see chapter 2) for considerable training period in which experience, knowledge and understanding can be accumulated about the product market and the retailer’s strategic objectives