Running a successful retail business? You’re probably making unprecedented sales across channels, and the picture of the future looks golden. But there is something that’s bothering you, right?
Revenue is sexy, but what really matters is Profit. And if you have growing revenue and your profit isn’t growing and further accelerating with scale, something is wrong.
You know that these are issues that will only compound over time. In the United States, retailers lose over $60 billion a year because of stock theft, often by their own staff. This is behavior that cannot be changed overnight. This is also behavior that you cannot afford to overlook if you have any plans of building a sustainable business.
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Here are a few not-so-obvious ways by which your business is losing money, and what you can do about that.
1. Overstaffing
If you operate a retail store or a chain of stores, overstaffing is a very real concern. Some retailers, in a bid to ensure the best consumer experience, fill their store with people who have a similar job function. Imagine paying two people twice the amount of money to do one person’s job. Don’t use Christmas as a benchmark for the number of people you need. You should be reviewing staff productivity every quarter to accurately predict whether you need to hire more staff or not.
Take a good look at all of your stores. Which ones have the highest footfalls, and which ones don’t? It makes sense to re-allocate staff to your high-volume stores from the ones that move slowly in comparison.
2. Pilferage
As we’ve mentioned earlier, U.S. retailers are losing billions of dollars due to stock theft from their own employees. In the UK, this trend is reversed a bit, as it is some of the consumers who pilfer and cause losses.
If this is a problem in your warehouses, you need to first acknowledge that it exists. Consider amping up the security and installing CCTV cameras inside the warehouse that can be continuously monitored. It is important that you send a strong message out to your company and remove the people responsible for pilferage from your team. Needless to say, hire only those employees who come with a clean track record from earlier organizations.
If your consumers are responsible for the theft, there are several things you can do. Make smart tags a constant across products in your retail stores. CCTV is a big deterrent, and add a sign at the entrance that “this store is monitored.” While no one wants to make an enemy out of a customer, if you notice someone stealing and are 100% certain about it, take them aside and explain to them that there will be consequences should you press charges. Never engage in heated discussions without first calling local law enforcement.
3. Returns And Replacements
Most online retailers have a very flexible returns policy in order to serve customers better. However, some consumers do take advantage of the policy and return a product after using it a couple of times. They may then claim that the product was damaged in transit, and ask for a refund. In most cases, you have no choice but to comply. The worst part — these products cannot be added back to the inventory.
What you sometimes don’t realize is that it is not just the product being returned, but you will be bearing the forward and return shipping of the product. Most online retailers who do not factor this into their margin estimation end up having their profits wiped out by 30% or even more in some cases.
Even consumers returning products for genuine reasons (such as a size mismatch, or not liking the product enough) can cause losses. They may return the products at a time when they are just going out of fashion or expiring, which means that you cannot hope to resell them. Consequence? Dead stock whose value you will eventually deduct from your profits.
While a flexible returns policy is key to doing business today, ensure that you put in conditions to protect your interests. Only accept returns that you receive within the specified timeline. Pack your products well for shipping so the chances of damage in transit are minimized. If you do end up with stock that is about to be dead, consider selling it off at a markdown price to salvage some of the losses.
4. Ignorance About Data
In retail, numbers are everything. Stock counts, revenues, the number of invoices, sales in a week, the number of items shipped…and the list goes on and on. You need to stay on top of these numbers. Some retailers swear by their Excel spreadsheets while others prefer retail management systems.
Whatever your choice of data handling is, it needs to be accurate, up-to-date and immune to human error. For example, you may assume that you have ten units of a product because your data says so, but you may not know that your sheet was last updated a week ago. You then proceed to sell products without actually having them in your inventory — a quagmire that only brings you down with delayed deliveries and disgruntled customers.
Likewise, you may not have a smooth system for accounting for your product returns and replacements, meaning that you actually have more products than you think you do. You just don’t know what to do with them, or how to determine which of them are fit to be sold again.
Reports about your business health need to be taken very seriously. Depending on which retail sector you are in, you need to set a frequency at which these reports are to be generated. FMCG retailers and stores selling fresh produce need a weekly, or even a daily stock vs. revenue audit, while apparel, accessories and electronics sellers can go with a longer duration.
5. Overstocking
We have all heard that overstocking is bad for business. But even two years ago, retailers were losing over $500 billion due to overstocking, and the number is continuing to rise.
Overstocking is bad for many, many reasons. For one, too much stock that isn’t moving holds up warehouse space (expense #1), ties up your working capital (expense #2) and may even become unfit for sales after a period of time, when you will finally have to write it off as losses (expense #3).
Why do so many retailers overstock? Because they don’t have an accurate picture of their inventory. If you sell on multiple channels, it is important that you know how much inventory is selling where. Not knowing this will cause you to keep selling even after you have run out of stock. To avoid this problem, you begin to overstock and the loop continues.
Simple inventory calculations can help you determine just how much stock you need. Using a robust inventory management practice that shows you the latest inventory levels can help you use these calculations effectively and order products only when you need them.
6. Hidden Taxes
As a retailer, are you aware of all the taxes you need to include in your invoice? If you sell to global markets, have you accounted for the customs fee? Not declaring these taxes and fees upfront means that your customer doesn’t pay for them, and you do.
Customs fees across borders can often be quite expensive depending on the products you ship. Each product has a different profit margin, and if you have a low margin, high customs fee product that you eventually end up paying for, that is a product you have given away for free.
It is always good practice to generate and include an invoice for all the purchases made either in-store or online. You can then synchronize these invoices with your accounting software to see what part of the sale is a profit and what part is a tax. When you generate an invoice with all the relevant taxes added, you also come across as a more honest business.
These are just some of the many ways in which your business is losing money without your knowledge. Depending on the domain you operate in, take a good, hard look at your business to see what needs to change in order for you to build a sustainable business model.
Mohammed Ali is the Founder and CEO of Primaseller — a MultiChannel Inventory Management software that also helps sellers build brand credibility by ensuring that accurate stock information is reflected across sales channels and orders are fulfilled on time. When not running a startup, Ali is often caught lapping up the latest book in fantasy fiction.