Chapter 15

RETAIL OPERATIONS
AND PROFITABILITY
 Learning Objectives

Understand the concept of retail operations

Discuss the 5 ‘s of store operations
Describe the role of the store manager in creating operational efficiency
Understand the measures of retail performance
Comprehend the Strategic Profit Model
Explain the concept of retail economics
The Concept Of Retail Operations

Elements of retail store operations

 The Concept Of Retail Operations
The retail store is often the point of contact between the
customer and the retailer. The store also influences the perceptions
that customers form in their minds about the store, the products,
services and staff.
It is also necessary that all the employees employed in the retail store/s
have a basic knowledge about the organization and its vision and
mission.
Store operations in retail is a combination of the tasks that need to be
performed relate to:
• Store Administration and Management of the Premises
• Merchandising
• Customer Service/Management
 The Concept Of Retail Operations

Store Administration and Management of the Premises:

Management of the Premises: Managing the operations of a retail
store starts by determining how the tasks pertaining to the premises are
to be performed.
Firstly, the duration of the hours for business need to be determined
Some considerations, which need to be taken into account while
determining the business hours, are the target audience for the store
and the kind of products which are to be retailed
Second factor, which affects the working hours of a retail store, is the
location. A free-standing store can operate at hours that it chooses to,
while a store which is a part of a shopping centre or mall will need to
follow the hours decided upon by the management of the mall.
 The Concept Of Retail Operations

Store Administration: Store administration deals with various aspects like

the cleanliness of the store premises, maintenance of the store façade and
the display windows, for utilizing the store personnel effectively by keeping
a track of holidays and the shifts that the staff may be required to work etc.

An important task of administration involves ensuring that all the required

permissions and licenses to run a retail establishment are procured from the
right authorities.
 Managing Promotions, Events, Alliances and
Partnerships
In order to enable the success of an event or a promotion, many a times a
retail store promotes certain products or services.

India most stores would focus promotions around the following themes:
• Festivals – Durga Puja, Dussehra, Diwali, Christmas etc.
• Different Days-Mother’s Day, Children’s Day, Valentine’s Day, etc.
• The Annual Sale period planned Special events for example, Maha
Savings Day, Wednesday Bazaar etc.

While planning the promotions the store operations team is aware of the
schedule of the promotion and estimates the numbers of people expected
to visit.

• Staff requirements
• Merchandise requirements
• Infrastructure requirements
Key Factors Influencing Store Operations

Building efficiency in-store operation

 Key Factors Influencing Store Operations

It is primarily necessary to have clearly defined roles and reporting

hierarchy within the retail store. Also, Control of perishables and sanitation
are two important aspects of the operations of a supermarket.

Very often the practice of holding morning meetings is followed by many

retailers. This helps the manager and the staff reiterate some of the key
operational aspects. Other Requirements can be

• Staff requirements – in some cases temporary staff may be hired.

• Merchandise requirements – depending on the offtake expected per day a

budget needs to be made for the inventory replenishments that may be
required.

• Infrastructure requirements – in terms of additional security, parking and

electricity, etc.
 Merchandise Receipt and Display and Customer Service

Responsibilities with respect to merchandise at the store level involves

receiving and inwarding the goods.

Once received need to be checked with the document accompanying the

goods to detect any discrepancies.

Managing receipts involves defining the manner in which the retailer is going
to receive payment for the sales.

The most common method for receiving payments for goods sold in India is
cash or by credit card.

Customer service does not have to begin and end at the customer service
counter in the store. Each person on the floor of the store can ensure that
the customer who comes in contact with him or her is comfortable and has
a pleasant shopping experience.
The Critical Role Of A Store Manager

Customer
Service and
Communication

Role of a
Budgeting Legal
store
and Planning Compliance
manager

Personnel
 The Critical Role Of A Store Manager

Customer Service:
• Instill in the employees the meaning and importance of customer
service as outlined in the retail philosophy
• Promote and monitor quality of service among staff through training
and by acting as a positive role model
• Be personally available to all customers to communicate and identify
their needs and address their questions or concerns

Budgeting and Planning:

• Ensure that goals will be met through appropriate planning and
organisation of staff, inventory and expenses for short-and long-term
success
• Develop and monitor the capital expense budget to ensure that the
store is properly maintained and upgraded to meet the high
maintenance standards that reflect the store image
• Monitor a loss prevention program to protect the company’s inventory
and assets
 The Critical Role Of A Store Manager
Personnel:
• Hire the right people for the job
• Inspire employees so that each person contributes to the productivity
• Delegate work load appropriately and effectively
• Write performance evaluations and goal assessments
• Evaluate employee performance and ensure that the reviews are given
•When necessary, discipline employees consistent with the company
disciplinary policies

Communication:

• Communicate with the Regional/HO as per the requirements laid down

by the organisation with reference to sales, targets, customer service,
events and local issues
 The Critical Role Of A Store Manager

• Hold staff meetings to boost employee morale and drive for achieving the
results needed
• Ensure that company policy and procedures are communicated in a timely
manner and adhered to accordingly
• Motivate and develop staff in order to encourage their professional
development

Legal Compliance:

• Ensure that the store is in compliance with all employment laws, including
wage and hour, human rights and equal employment opportunities
• Maintain safe working conditions for employees and customers; resolve
safety concerns quickly
• Ensure store security from internal and external theft and know the proper
apprehension and prosecution procedures
 Retail Theft And Shrinkage

The primary cause of retail shrinkage is pilferage, which can be

stealing, employee theft and/or shoplifting and the other cause could
also be accounting errors.

In order to deter theft from occurring on their premises many retailers

install surveillance equipment include self-alarming anti-theft
tags, source tagging programs and closed-circuit TV/cameras across
the store. .

Radio-Frequency Identification (RFID) tags can serve as an effective

way to monitor/combat theft by shoplifters and employees.

Full displays, straight shelves, adequate lighting and the use of mirrors
can enhance visibility on cameras and within the store itself. Similarly
signage and posters reinforcing security messages also play a major
role.
The 5 S Of Retail Operations

The model is a
combination of five
key elements, of
which three
elements of space,
stock and staff are
controllable. The
other two elements
include systems
and standards.
 The 5 S Of Retail Operations
System and Standards: Systems here refers to how things are done at the retail
business Standards, on the other hand, refer to the set of guidelines. Systems
refer to the processes and the procedures that the retailer has in place for
ensuring the smooth functioning of the retail store, whereas standards refer to the
standards set by the retailer in terms of service within the environs of the store.

Stock: Tailoring the stock as per the requirements of the target population is a
key essential. Too much of capital tied up in inventory can lead to problems in
terms of cash flow. Thus, stock becomes an important aspect to be controlled.

Space. Once the stock has reached the store, it needs to be displayed accurately
in order to enable the customers to make a purchase. In this model the element
of space does not refer only to the selling space but also to the non-selling space

Staff: It is essential for customer contact. Systems refer to the processes and
the procedures that the retailer has in place for ensuring the smooth functioning
of the retail store, whereas standards refer to the standards set by the retailer in
terms of service within the environs of the store.
The Measures Of Retail Performance

The efficiency of retail

operations is a function of
Inventory, Staff and Customer
management,
In retail, there are three areas
which are important in the
measurement of performance.
They are:
• Merchandise
• Store and/ Channel
• People

Copyright © 2024 by McGraw Hill Education (India) Private Limited.

 Ratio Analysis
Ratio analysis is the most commonly used analysis to judge the
financial strength of a company. It’s comparing the number against
previous years, other companies, the industry or even the economy
in general. Ratios look at the relationships between individual values
and relate them to how a company has performed in the past and
might perform in the future.
Ratios are highly important profit tools in financial analysis that help
financial analysts implement plans that improve profitability, liquidity,
financial structure, reordering, leverage and interest coverage.
Ratios report mostly on past performances, they can be predictive
too and provide lead indications of potential problem areas. Also,
single ratio can never give the complete picture.
 Ratio Analysis
Key ratios which are usually analysed are listed below:
• Profitability ratios: Profitability ratios speak about the profitability of the
company. The chief among them are:
• Gross Profit Margin: = Gross Profit / Sales
• Operating Profit Margin = Operating Profit / Sales
• Net Profit Margin which is calculated by dividing the Net Profit by the
Sales for the said period.
• Return on capital employed (ROCE) which is calculated as: Net profit
before tax, interest and dividends (EBIT)/total assets (or total assets less
current liabilities)
• Liquidity Ratios: These ratios are used to judge the short-term solvency
of a firm. The most commonly used ratios are current ratio and the quick
ratio.
 Ratio Analysis

• Current Ratio = Current Assets/Current Liabilities

• Quick Ratio (or Acid Test Ratio)-This ratio is calculated by adding Cash +
Accounts Receivable/Current Liabilities
• Financial Leverage Ratios: -These ratios are used to judge the long-term
solvency of a firm.
The most commonly used ratios are debt equity ratio (total debt divided by
total equity)and long-term debt to equity ratio (long-term debt divided by
equity).
• Earnings Coverage Ratios: There are several ratios commonly used by
investors to assess the performance of a business as an investment:
• Earnings per share (EPS) = earnings (profits) attributable to ordinary
shareholders/ weighted average ordinary shares in issue during the year
 Measuring retail store and store performance

[Link]: It is calculated by dividing the gross margin by the retail selling

space. The gross margin return on selling space can be increased by either
increasing the gross margin or by decreasing the selling space or both.
2. Sales Per Square Foot: This is calculated by dividing the total sales by
the total square feet of selling space.
3. The Conversion Ratio:
The number of people who enter a retail store are termed as the walk-ins.
The number of people who actually make a purchase from the store are
termed as conversions. Thus conversation =(No. of customers who make a
purchase) × 100 / No. of customers entering the store
4. Average Sales per Transaction/Average Ticket Size:
This is calculated by dividing the total sales for the day by the number of
bills generated.
 Measuring Retail Store And Store Performance

Measuring Employee Productivity

There are two aspects by which the productivity of the people employed in
a retail store can be measured. They are:
1. Sales per employee
2. Gross Margin Return on Labour (GMROL)
1. Sales per employee is an indicator of the performance of the sales
staff. It is calculated by dividing the total sales by the total number of
employees in the store.
2. GMROL or Gross Margin Return on Labour : This is calculated by
dividing the gross margin by the total number of employees in the
store.
 Evaluating The Financial Performance

Financial performance is an indicator of the health of the organisation. It is

necessary for the following reasons:
• To help identify the gaps in the targets
• To identify the opportunities for improvement and
• To evaluate past and present performance
There are two basic methods of evaluating financial performance.
Income Statement or the Profit and Loss Statement: The Income
Statement is a record of the revenues earned by an organisation and the
expenses. It is popularly known as the Profit and Loss Statement
Components of an Income Statement:
• Sales: The total money received by the retailer from the sale of
merchandise.
• Cost of Goods Sold: Expenses incurred by the organisation for making
the goods
 Evaluating The Financial Performance
• Gross Margin: Gross Profit on sales
• The Operating Expenses: expenses incurred in producing the goods like
labour, fuel, power, etc
• The Net profit: Profit after deducting all the expenses
Balance Sheet: Gives details of the company’s assets and liabilities at a
particular point of time. Some of the key elements of the Balance Sheet are
Fixed Assets, Current Assets, Long-term Liabilities, Short-term Liabilities
and the Net Worth.
Examples:
• Long term Assets: Land, buildings, fixtures, computers
• Short-term Assets: Cash on hand, cash at bank, inventory and debtors
• The long-term liabilities: Loans, wages and salaries and payments to be
made to suppliers
The Strategic Profit Model
 The Strategic Profit Model
The Strategic Profit Model is a combination of the Balance Sheet and the
Income Statement. It combines the information provided by the Balance
Sheet and the Income Statement into one comprehensive model and is
based on three important financial ratios:
• The Net Profit Margin
• The Asset Turnover ratio and
• The Return on Assets
The bottom line is that there needs to be a good return on investment
(ROI). A key factor to remember is that Return on Assets (ROA) can be the
same for two or more firms, but it can be derived in a variety of ways. This
is because the profit margins and asset turnover rates will vary
considerably between types of products, industries and stores
 The Concept Of Retail Economics
The concept of retail economics would cover the planning for new ventures
and financial planning may also be needed for acquiring an existing business,
for expansion.
A feasibility study starts with defining the basic business that the retailer is in
and helps him understand the complete market and economic factors, which
may be critical for the success of his business.
A feasibility study looks at three major areas:
• Market issues
• Organizational/technical issues
• Financial issues
With a well-researched, statistical analysis of project feasibility, developers
can avoid expensive errors and develop a project that is closer to being a
viable venture.