Wednesday, December 28, 2011

Retail Mysteries

The holiday sales season is of great importance to retail. We hear that every year. The National Retail Federation provides some rationales. The Federation reports that in 2010 19.4 percent of all retail sales took place in the holiday season, which season they define as the 61 days of November and December. For many retailers, that season accounts for somewhere between 25 to 40 percent of revenues.

Now arithmetic tells us that 61 days are 16.7 percent of the year. Therefore if 19.4 percent of sales fall into this period, the holidays represent a 2.7 percent jump over average. That seems a rather small amount until we consider some of the mysteries of retail. That mystery hides in the fact that the number of products sold is very large—but number regularly purchased is a small fraction of these.

I came across these interesting facts published by Focused Management, Inc. (link). Looking only at the grocery segment, a typical supermarket carries 22,000 items. Of a quarter of these, thus 5,500, the stores sell fewer than one unit per month. And 8 percent (7,260) represent 85 percent of all sales.

Let me stay with groceries a moment longer to develop the nature of this mystery—or paradox. In retail turnover is the key to profitability; it reduces the carrying costs per unit of time. Therefore the slow moving items, that 72 percent of all items carried, costs much more to carry—but having them is what increases patronage. Reaching always for low-hanging fruit, retail consultants perpetually urge their customers to rid themselves of slow-moving items. To be sure, small grocers, exploiting convenience, do that routinely. But they are small precisely because they do not carry all of the items a supermarket does. And with a smaller customer base and lower volume, they have to charge higher prices.

It strikes me now that the ratios we encounter in grocery stories must be even more pronounced for those who sell general merchandise we don’t consume on a daily basis. This would suggest that their profit margins are even lower—and the surge in holiday demand is therefore even more welcome. Profits are reached after a sufficiently large volume pays for all costs first.

Herewith a comparison of a big general merchandiser (Kmart/Sears) and a big grocer (Kroger). The data come from the two companies’ 10-K reports:

Retail Examples. In million dollars or percent.
Sears Holdings (Sears/Kmart)
Revenues
Net Profits
Net as %
2007
50,703
826
1.63
2008
46,770
53
0.11
2009
44,043
253
0.57
2010
43,326
133
0.31
Kroger
Revenues
Net Profits
Net as %
2008
76,148
1,250
1.64
2009
76,733
70
0.09
2010
82,189
1,116
1.36

What this tells me is that retail profit margins are quite low for those who carry a range of merchandise—as do these two retailers—but those based on staples recover more rapidly from a total meltdown than those who carry the less absolutely necessary merchandise. Kroger’s very low profit percentage in 2009 was due to a goodwill write-down linked to one of its elements, Ralphs. Had that unusual charge not been levied, Kroger’s margin would have been 1.54 percent in 2009. The savvy reader may also fault me for using Sears/Kmart as an example; that merged entity has been suffering for a while. But it is difficult, these days, to find a big general merchandiser who is not also selling groceries…

1 comment:

  1. Wonderful post, Arsen!

    I see that you have gotten a head start on analyzing the retail sector. Very interesting.

    ReplyDelete