What can you change today to increase your business profit tomorrow? Expert practitioner Natalya Chinenova analyzes global retail practice and the mistakes of domestic companies in order to derive accurate formulas for the Russian market.
In any business, there is an indispensable rule: any costs should be directed exclusively to increasing the profitability of the business, that is, to make a profit. At the same time, costs and investments should not be confused. For example, buying additional commercial equipment or advertising in the media is an investment. Costs include only those expenses that are aimed at ensuring the daily economic activity of the enterprise and at increasing sales directly at the point of sale. In Russian practice, often small investments in a working store, and practically the entire advertising campaign, are expensed. Accordingly, in any unusual situation, these costs are ineffective and unprofitable for the retail enterprise. Therefore, before lowering the costs of a retail store, you first need to figure out which costs relate to costs and which to investments.
International practice of cost effective
Effective costs allow you to increase the profitability of the business, inefficient - do not generate revenue or cause direct losses to the retail store. A decrease in cost-effectiveness is a situation when an enterprise spends the usual standard amount on the maintenance and development of a business, and the amount of the planned income is steadily decreasing or is much less than the calculated one. Costs are considered effective if the average annual estimated forecast for the profitability of the store is at least 10% of the turnover.
In order to determine when costs are effective, it is necessary to use the average statistics of international practice:
· Average monthly sales margin of at least 53% of turnover
· Lease payments - 12 - 15% of the turnover
· Wage Fund - 11 - 17% of the turnover
· Advertising costs - no more than 2%
· Transport costs - not higher than 1%
· Other expenses within 8% - 10%
As can be seen from the cost indicators, the highest costs are incurred in paying rent and staff wages; accordingly, it is necessary to begin reducing costs of the enterprise in these two directions.
Cost Reduction Practice in Russia
The practice of reducing costs in Russia shows a picture of reducing the costs of a retail store (or network), which is exactly the opposite of logic. Most companies begin to save, first of all, on “toilet paper”. Consumables procurement cut, payment of corporate mobile communications, travel tickets, use of Internet resources, etc. stops or is reduced to a minimum. Employees panic and think no longer about work, but about the time when the queue reaches them. The productivity and efficiency of staff decreases, which, in turn, leads to an even greater drop in sales.
Secondarily death All advertising budgets are “killed”. Nobody looks at the fact that seasonal re-window dressing, changing images on the trading floor, accompanying sales promotion campaigns, and even printing shelftockers about a new collection are related to the advertising budget. Accordingly, outdated or absent seasonal clearance of sales areas does not attract buyers and annoys landlords.
Then comes the turn of the staff. Sellers and maintenance staff are cutting back, change the motivation system or reduce wages. These are of course the right measures from the point of view of reducing costs, however, there is always a shortage of qualified sellers in the market, in most chain stores there are not enough staff even on a regular basis. Therefore, thoughtless reduction or incorrect steps to change wages lead the company to the loss of loyal and qualified personnel and to the next round of decline in turnover.
Almost the last thing negotiations are starting to lower rental rates. It is no secret that rental rates in the capital start from 2,5 and reach up to 11 thousand rubles per 1 sq. m per month, depending on the patency of the shopping center, its location and popularity. Often, rates are tied to the exchange rate of the dual-currency basket and are formed of two parts: a fixed amount and a percentage of turnover. Lease agreements are draconian. Either the contract is concluded for 11 months and is not registered, or is registered and provides for huge penalties for early termination. And in both cases, the company is on the verge of bankruptcy. In the first - the store will simply be thrown out into the street, in the second - they will condemn. The situation is almost hopeless.
Today, many media write that landlords went to fix the dollar at the pre-crisis level, someone agrees on a percentage of the turnover, but even these measures do not save the retail store, since rental rates in Moscow for Russian operators range from 25 to 50% to turnover, which is very far from ideal. Most importantly, the turnover of most retail stores as of April 1 2015 in units fell by 50-60%, and in ruble terms either remained at the pre-crisis level, or decreased by 10-15% (almost doubled in dollars).
Ways to increase cost effectiveness
What to do in such a situation? First you need to try to negotiate with all contractors to reduce rates or tariffs for services:
· The fixed rental rate for a dual-currency basket should not exceed 35 - 40 rubles per 1 conventional unit.
· The currency rate should be fixed in rubles and set at an acceptable level for the retail business
· A deferred payment proposal is possible when the existing rental rate is reduced due to future higher payments
· Contracts for the export of TBI, operating contracts and contracts for other services should be revised downwards
In the case when it was not possible to agree, or it was possible to agree, but the results do not suit you:
· Discuss with the landlord the possibility of moving to a smaller area
· We are trying to change the assortment and organization of the store’s sales area, since empty areas of walls, floors or even shelves are a disease of many stores, this is payment for air
We agree amicably about the termination of the lease relationship - losses need to be reduced, not increased
If it is not possible to agree, we break off relations: it is better to go to court than to become bankrupt and leave the market
What do we do with the staff?
We evaluate the actual result of the fall in turnover and conversion rate and compare the result with the sales efficiency per seller. If the seller sells one or less products in 1 hour, staff can be reduced. In fact, the number of sales per seller per hour is a standard that each company sets for itself, but less than 1 products per hour is already a luxury.
Remaining sellers can not reduce salaries. The motivation system can be changed, only first you need to talk with the staff. In general, talking and negotiating are two main tasks in a crisis. When you hire a repairman, you pay him only for the work done, so the seller needs to tell you what kind of work, for what level of sales per hour, day or month you are ready to pay him bonuses and bonuses.
After or in parallel with the fact that you have resolved issues regarding the most significant cost items of your store, you can revise the cost of transportation, advertising and other costs. The best option is to review the entire store management system. The best place to start is with logistics. Logistics include storage and delivery of goods. Does your store, the rental of which is just “gold”, have a utility room or a warehouse? Is he needed today? Why is it needed if the company has a single distribution center? Maybe it is better to use the warehouse area at the store for the presentation of goods and convert the back room into a trading floor? Maybe it’s really more correct to move to a smaller area? Comprehensive answers must be prepared to these questions. For a shoe store, it is simply impossible to do without an auxiliary room; for a clothing store, accessories or cosmetics, a minimal area of pre-sale preparation of goods is needed.
The frequency and schedule of delivery of goods to stores is an article that takes a small share in costs, however, it can be optimized. For any retail operator, it is more profitable to outsource transport services. And less trouble, and VAT refundable.
Advertising costs are optimized only by compiling a tight sales calendar and evaluating the effectiveness of each ongoing sales promotion campaign. Given the specifics of Russian customers, showing increased loyalty to their favorite brands, to refuse advertising costs is wrong. The main thing is that they do not exceed 2% of retail turnover.
In any case and in any situation, the costs must be effective. To do this, you must reevaluate the entire retail business in all respects and parameters. Ideally, if the company, taking advantage of the current situation, deals not only with cost reduction, but also with the intensification of all processes existing in retail sales. Planning and efficiency come from the store’s shelf, not from the finance department or our wishes.
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