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Retail Profit: Sales Down 23%, Profit Up 22% · The Resilient Retail Game Plan - retail insights, retail trends and best practices

• 0:00
  A client finished their sales month down 23% on the year in
• 0:04
  terms of sales, but their profit grew by 22% in the same month.
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  How does that happen?
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  That is what we're going to be unpacking today.
• 0:28
  One of my favourite phrases, something that I like to wheel out from time to
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  time, is the phrase, "Turnover's vanity, profit is sanity, and cash is reality."
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  It is a cliché or an old business adage, but it is absolutely true.
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  And what I find really fascinating about Stock Doctor and the results that we get
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  for the clients is that we can really see that turnover's vanity, profit is
• 0:53
  sanity being played out in real time.
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  If you want to know more about the Stock Doctor service, head over
• 0:58
  to stockdoctor.net where you can find out all the details and apply.
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  So what I wanted to do is really delve into some of the client results and talk a
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  little bit about how we can find ourselves in this situation where somebody is down
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  on the year in terms of sales, but they are up on the year in terms of profits.
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  So one of the things that we are taught, or one of the kind of accepted
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  wisdoms in the business world is that a big sales number in a month
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  is a good number, and a bad month is if you have a small sales number.
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  But I really do believe that is the vanity part.
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  Most independent retailers were never taught to actually run their
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  numbers, thinking about turnover's vanity and profit is sanity.
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  And a lot of the time, what we're doing with our Stock Doctor clients
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  is we are working on ways to really not just look at their sales.
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  And it was actually quite unusual for this particular client to be
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  down on the month against the year.
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  But again, what we're really looking at is not so much whether their
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  sales are going to be okay, but we're really looking at that bottom line, that profit.
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  So top line revenue can hide things that really matter.
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  Another example is a client that we worked with who had seen enormous
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  growth in their e-commerce side.
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  They're a bricks and mortar store.
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  They also had an e-commerce website.
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  They had had huge growth on their online sales, and as a result, they had to really
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  increase the amount of staffing that they had, people fulfilling online orders.
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  But they also were actually less profitable after their sales had grown.
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  So we delved into it, and we dug into it, and what we found was that, as can
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  sometimes be the case with e-commerce, especially if you're investing heavily
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  in paid advertising, the cost of the advertising just wasn't
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  washing its face.
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  It was actually losing money after all of the costs of the products and after
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  all of the costs of fulfilling them, the extra staffing and so on and so forth.
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  So in terms of your actual business performance, yes, having a great
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  sales number can feel really exciting.
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  Having these big numbers up on the year can be really exciting.
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  But ultimately, it can hide a lot of issues.
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  It hides things like how much are you actually paying for those sales?
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  How much are you paying for the stock that goes to creating those sales?
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  And what are you left sitting on what's unsold?
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  It also doesn't really drill into, well, how much stock, how much did you outlay
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  on stock, how much stock do you have tied up, which is basically cash just sitting
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  there instead of you being able to access that cash and have a healthy bank balance.
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  So let's look in a little bit more detail into this particular instance of
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  a client that was down on the year in terms of sales, but up in terms of profit.
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  When we looked at the detail, what we found was the number of orders
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  that they had were down 13%, so there were fewer transactions coming in.
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  Now, typically you wouldn't plan for this.
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  You wouldn't be aiming to have fewer transactions, but that was
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  offset by the fact that their average order value was up 21%.
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  So even though they had fewer transactions, they already had seen
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  an offset in terms of their sales by their average order value being up.
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  So we have to ask ourselves,
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  what's better for you as a business owner?
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  Fewer transactions with more money being spent on each one, or the same number of
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  transactions but less money being spent?
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  So, or indeed just everything staying level.
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  It actually can be better for your business if you're taking
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  fewer transactions, but each transaction is more valuable.
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  The reason for that is that if you think about it, if somebody buys one item from
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  you, it's actually not double the work for you to serve them or to bag up their
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  product, to talk to them, serve them, take the payment, or if
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  it's online, fulfil the order.
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  If it's two items that they're buying instead of one,
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  it's barely any more work at all.
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  So in other words, that transaction becomes more efficient when it's larger.
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  So that's why average order value is something that I recommend
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  that you really hone in on.
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  So in this particular instance, they'd had slightly fewer transactions,
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  and then they had actually got a higher average order value.
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  So those two things combined meant that the profit was protected
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  even though the sales were down.
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  So when you're looking at your sales going up, it's always useful to know, even
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  even if you're really happy, even if you're super happy with how your
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  sales are going up, if you're thinking, 'Wow, this is going really, really well.
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  I'm really happy with this,' it's always worth asking yourself,
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  are the right things going up?
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  Are your average order values also going up as well
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  as your number of transactions?
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  And are your costs also going up to fuel those sales,
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  or are those sales happening organically?
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  Or maybe your sales are up twice, but your costs are only up one time.
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  That's fine.
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  Just make sure that you're aware of it.
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  Don't fall into the trap of thinking that, "Oh, well, as long as my sales are
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  improving, that is the most important thing," because it's only one piece of the
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  puzzle. So let's come on to the next point, which is about profit is sanity.
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  So this is where the crux of the performance came in.
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  In this particular instance, the client's profit margin or their sales
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  margin moved from 47.6% to 55.3%, which was a 22% gain on their profit.
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  So that is a big swing, and it's not something that happens by accident.
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  So how do you see your sales margin shift like that?
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  There's lots of different pieces that go into it, but a lot of the time
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  it's about a few different key areas.
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  One of those is pricing discipline.
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  In other words, making sure that your original price that you're
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  setting to sell something at is going to be generating enough money.
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  So in Tame Your Tiger, my book, I talk about the in margin and the out margin.
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  So the in margin is the margin that you set when you are bringing
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  a product into a business.
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  So for example, if you are VAT registered and you are planning on selling a mug
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  for £12 and you buy it for £5, then after you take the VAT off
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  the £12, you would be left with £10 net, which means you had £5
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  cost and £5 profit, or in other words, you had a 50% profit margin.
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  That is your in margin because that's essentially theoretical.
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  When you set the prices, you're setting it saying, "I expect to be selling this
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  at £12." So it's a theoretical in margin that we talk about making sure that
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  as the product comes into the business, you're setting the margin correctly.
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  On the flip side, you have got what I call the out margin, and that's
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  what we're really looking at here.
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  So the out margin is the actual margin that happens once you've
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  sold all of your products.
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  So in this case, it went from 47.6% to 55.3%, so a big improvement
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  in the actualised margin.
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  Now, that has to start with your in margin.
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  You have to set those prices correctly because your out margin
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  is always lower than your in margin.
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  So your out margin is reflective of all of the discounts that you might have done.
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  You might have had to mark some products down to clear them.
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  You might also have needed to discount things.
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  Maybe you offer a welcome discount or a locals discount.
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  Maybe you do a short-term promotion.
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  Whatever it might be, you will have some reason for discounting in your business.
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  And so with your out margin, that is going to be reflective of that, and it
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  is going to be lower than your in margin.
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  So in this particular instance with this client, we've worked
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  with them now for over a year, so this was a long-term project where we
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  went and looked at all the different aspects that was driving the profits.
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  So one of those was the pricing discipline.
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  There were some products that were underpriced.
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  They were particularly underpriced when it compared to their margin.
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  And so part of that work that happened to allow this performance where sales
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  were down but profit was up, part of that was related to going and setting those
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  prices correctly, reviewing them all, making sure that they were
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  set correctly, making sure that the boundary was in place, that the
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  the business was set up for success.
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  So that was the first piece.
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  They had to look at the in margin, they had to improve that, and they
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  had to make sure that that was ready to go so that even when there were
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  discounts, it was still going to be better than the pricing structure before.
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  And it's, it's something that I've talked about a lot over time, but
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  it is still something that a lot of people miss, making sure that every
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  time you make a sale, you are making enough money, making sure that your,
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  your profit margins are correct. So that accounts for some of it.
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  Some of the reason that the profit margin was better
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  was simply because the prices were corrected, reviewed and corrected.
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  But that isn't the only thing that happened.
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  There's also a lot of other active decisions, so buying tighter and
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  more into the right categories so that this particular person
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  wasn't left with the wrong kind of stock that they had to discount.
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  Because they were really focused on only buying the stock that sold well
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  and really cutting back on stock that didn't sell so well, they were able to
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  focus on a real full price strategy and really drive sales without discounts.
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  They also really leant into the products that their customer
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  was telling them about.
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  So we've talked in the… Sorry, one more second.
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  Right, so we did definitely say it was the next episode after Stacey.
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  Sorry, let me just say that.
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  So last week's episode, episode number 314, where I spoke to Stacey Dorrian
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  about the importance of data, we were talking about this exact idea that there
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  are signals that buyers give you, that your customers are giving you about
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  what they want to see more of, and signals that they're giving you about
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  what they don't want to see as much of.
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  And if you're not looking at your data, you can miss those signals, which is
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  why we, when we see people start to work with us on Stock Doctor, typically
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  we do see sales increase, not just profit increase, because
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  they are able to really focus in on the stock that makes a difference.
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  So in this particular instance, the client that we're
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  talking about here, it wasn't a magic solution.
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  It was something that was very intentionally done over time where
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  we fixed the pricing, but then we also fixed the product assortment
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  so that we were selling more things at full price because we were really
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  tuned into those buying signals.
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  We were really understanding what it was that the customer wanted and doing more
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  of that, and we were looking at the areas where the customer wasn't responding so
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  much and we were pulling back on them.
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  Which meant that over time, those two things combined meant that the
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  profit margin really increased because they were simply selling
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  more at full price of the things that the customers really wanted to see.
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  They looked at their range.
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  They really understood the different categories in their business.
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  They understood where they needed to lean into and where they needed to pull
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  back from, and that's how they were able to achieve this result. So it's
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  also about keeping an eye on this over time, making sure that you're
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  looking and responding to changing signals, because wouldn't it be great
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  if the customer just gave really clear signals that stayed the same over time?
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  But of course they don't do that.
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  They change, they shift.
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  And so a lot of the work that's done in Stock Doctor as well is the monthly
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  updates where the Stock Doctor is telling you, "Okay, well, this is
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  what's happening this month. This is what we're seeing from the customer,
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  and this is how it's shifting."
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  And you can stay ahead of those shifts so you don't suddenly wake up one
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  day and realise you've got a load of stock that the customer maybe wanted
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  a couple of years ago but has slowly over time been telling you has become
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  less and less appealing to you.
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  So I think it's a really interesting example, this particular client example,
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  because we hear this fairly often, you know, "If sales are down, I can't
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  justify spending on stock support," or, "I can't justify spending on the
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  analytics support because what I really need to do is push my sales further."
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  And of course, as I said, everything that we do in Stock
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  Doctor is related to cash flow.
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  So we are definitely looking at ways to grow your sales, and there's always
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  a lot of great advice from our Stock Doctors who are extremely experienced
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  in the retail industry on things that you can do, tactics that you can try.
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  But equally so, I would just challenge you to say, is it more sales that
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  you need or is it more profit?
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  Oh, do you know why it went beep?
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  The camera beeped.
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  The
• 14:20
  camera.
• 14:21
  Yeah
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  Check it's not about to self-destruct.
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  No, it's fine.
• 14:31
  Oh, just felt like beeping.
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  Felt like getting in the conversation.
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  It might be, um, 'cause it's on a dummy battery-
• 14:37
  It might, I think the
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  battery's running
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  out… right.
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  Yeah.
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  Got you.
• 14:40
  Yeah.
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  Ignore that.
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  No, that's all right
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  So that is my challenge to you.
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  Are you focusing on sales and the turnover is vanity part, or are you focused on
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  profit and the profit being your sanity?
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  So the third part of that saying, cash is reality, is where we really
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  see the benefit on Stock Doctor as well, because this is where we
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  have seen some incredible results.
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  For example, we have a client who has £900,000 less stock than last year and
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  are still trading level or slightly up.
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  And as you can imagine, if you think about the amount of money that has
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  freed up that they haven't been spending on stock, then that also is
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  hugely, hugely beneficial on cash flow.
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  And again, another area where we see for Stock Doctor clients
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  that they're seeing this additional profit, but they're also seeing
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  this freeing up of their cash flow.
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  So cash is the part that actually keeps the lights on, and stock
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  is where cash goes to die.
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  Not to be too dramatic about it.
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  So for example, that particular client has a very extreme example
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  of bringing down stock that was unproductive and doing it in a way
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  that didn't damage the brand, and now they're in a position where they've
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  got a much healthier stock position.
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  It's so much lighter than where it was a year ago.
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  It is a huge reduction.
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  It is something that allows them to free up the physical space, the mental space,
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  as well as the financial space to really reduce the amount of stock that they have.
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  And then also, the benefit that it has to be able to invest
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  into new stock is huge as well.
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  So often we're looking, when we have the monthly updates
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  with Stock Doctor clients, we're looking at this stock number.
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  Is it still coming down?
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  Is it turning fast enough?
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  We're looking at stock cover, and we're working with people
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  effectively. The whole name of the game is how little
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  stock can you have while still maintaining and growing your sales?
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  And that's the question that everyone is trying to work out all the time.
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  What is that sweet spot?
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  What is that number that will allow you to support your sales growth,
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  but equally turn your stock faster?
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  Because we look at the number of weeks cover, which is the number of weeks
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  worth of stock in the business that we have based on an average weekly
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  sales for the next 12 weeks coming up.
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  That is a really good indicator that helps us understand how a business is
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  turning their stock, and we're always looking to try and improve that, because
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  for every week's improvement in terms of the number of weeks cover, that
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  is a huge impact on the cash flow.
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  If you think about it, the faster you turn your stock, the
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  more cash there is in the business.
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  So for Stock Doctors, we're always looking at ways to improve that target
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  cover, to speed it up, and to identify what we call the clogs of stock in the
• 17:42
  business to really help move through it.
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  So the number of weeks cover is really the number that
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  tells you whether or not your stock is working for you or trapping your cash,
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  and turnover doesn't tell you this.
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  Profit doesn't really fully tell you this either.
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  So that's why you also need to look at your stock turnover because that is
• 18:04
  the reality of running your business.
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  As we all know, we need to have money in the bank to be able to pay our bills, to
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  be able to pay people to support us, to be able to pay ourselves for all of the
• 18:13
  hard work that we put into our businesses.
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  So what we often see in terms of Stock Doctor, because it is a service that
• 18:22
  pays for itself — the great thing about running a service where we
• 18:26
  track all the numbers is that we can see categorically that after six months people
• 18:30
  see on average 10% more sales with 10% less stock, which equates to £5,000
• 18:36
  worth of extra profit per £100K of revenue, and it sounds too good to be true.
• 18:42
  It's something that actually pays for itself.
• 18:44
  We also see when people work with us over a year, that
• 18:47
  actually improves even further.
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  So we see on average 17% more sales with 14% less stock.
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  So it compounds over time.
• 18:55
  And what we can really see with that and the reason it pays for itself
• 18:58
  is because often the answer to, "I need more sales" is not to buy more stock.
• 19:03
  Often sometimes the answer is you need to buy less stock, you need to spend
• 19:06
  less money, so people are able to tighten up their budgets, as well as also the
• 19:10
  benefit of having that real confidence and clarity in the business because
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  you've got a stock expert who's going through everything in your business,
• 19:18
  all of the information, and telling you what you need to do and to move forward.
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  So we're very big on things like making sure that you've got a to-do list at the
• 19:26
  end of each session with a Stock Doctor so that you just know, okay, if I do these
• 19:30
  five things this month, this is gonna help me move the profit forward in my business.
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  And of course, to get to those five key tasks, the Stock Doctor has done
• 19:38
  a huge amount of deep dive analysis.
• 19:41
  Some people love to delve into the detail as well.
• 19:44
  Some people just want to know what are the 5 to 10 things I need to do
• 19:47
  in my business this month to grow my sales, to grow my profit, to reduce my
• 19:51
  stockholding, and improve my cash flow.
• 19:54
  So it's often about freeing up cash that is currently sitting on shelves.
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  It applies especially when your budget is tough.
• 20:03
  If you feel in your gut that your business should be more profitable than it is, then
• 20:07
  Stock Doctor will help you really maximise that, and that's what we're seeing, people
• 20:11
  spending less money on stock, spending it in a better way, really understanding
• 20:16
  their data, just like I talked about in last week's episode with Stacey, and being
• 20:19
  able to make better business decisions.
• 20:26
  Okay.
• 20:28
  So bringing it back to this idea of turnover is vanity, profit is
• 20:31
  sanity, cash is reality, I think this is a great guiding principle
• 20:35
  for all retailers to think about.
• 20:37
  If you do nothing else, three things that you can always look at
• 20:40
  are what are my sales this month?
• 20:42
  What is my profit this month?
• 20:43
  What's happening to my margin?
• 20:45
  Is it moving in the right direction?
• 20:46
  And how much stock am I sitting on?
• 20:49
  And again, if you feel like this is something that you would love to delve
• 20:53
  into, but you just know yourself you do not have time, then head over to
• 20:56
  stockdoctor.net, where you can find out more about the service and apply.
• 21:01
  Thank you so much for listening.
• 21:03
  I really appreciate you tuning in and I would love it if you could
• 21:06
  rate or review the podcast wherever you listen to your podcasts.
• 21:11
  And of course, if you like, follow or subscribe, you'll be the first to know
• 21:14
  about each new episode. And of course, if you like, follow or subscribe, you'll be the
• 21:19
  first to know about each new episode, comes out every Thursday morning, and
• 21:22
  we'll see you next week when we'll start talking about that all-important element
• 21:27
  in the retail calendar, which is Christmas.