Chapter 5: Retail is a Numbers Game
Nobody likes to talk about math but I'm here to tell you that math is probably the second most important thing in running a store. It's also the second reason why people will go out of business. You need to know your math.
Some of the formulas, I mean there's hundreds of formulas, but some of the formulas that you need to know, at least what they mean and how to calculate them in your store, is retail mark-up and we'll talk a little more about that, how to actually price things. The turnover, how quickly things turn over in your store and you get new things in.
The sales to stock ratio, which is the proportion of how much sales you want to make versus how many goods you have on the floor. The sales per square foot, this is incredibly important because so many stores spend a lot of usage of retail space by putting sofas and chairs and play corners for little kids to read in. At the end of the day, every inch of your store needs to make money for you, so understanding the sales per square foot is very important.
The open to buy which is your actual budget. Think of it as a checkbook that every month you write a check to yourself of how much merchandise you can buy and need to buy for your store. Of course, the last one is return on investment. Everything that you put in your store, everything that you buy for your store, everything that you do that's related to your store, has to have a return investment.
I want to tell you a quick story about one of our clients that we had a few years ago. Her husband had called the office. She had had four other businesses. She had been a stylist, she had been an antiques dealer, a gallerist, and a personal decorator, home decorator. Her husband said, "Well, now in this venture, we have to make money. We have to make money because I can't afford to keep throwing money into these other businesses."
She came, she sat down, she wanted to open up a lingerie store which, by the way, lingerie business is really great because your two competitors are Victoria's Secret and Macy's, so it's easy to compete in this niche. She comes in, she sits down, the location of her store is in a very conservative town in Virginia. Okay. Now we sit down, the first thing that her and her friend say, because she came with her friend to the meeting, is that they want to carry La Perla. La Perla is the most expensive racy underwear that you could possibly purchase on the planet.
I said, "Well, why do you want to carry that brand?" "Because me and my friends wear it." Remember when I said that you and your friends will put your store out of business, right? Now, we talk, we chat a little bit, and I said, "Listen, you know maybe not La Perla's the best pick for it." I gave her some suggestions, something like shapewear and you should have seen the face of horror that she made, like shapewear -- who wears that? Ninety percent of the population wears that.
Then I said, "Listen, because it's also a smaller town, maybe you need some sleepwear." She said, "What, you mean like teddies?" I'm like, "No, like pajama tops and sweatshirts." "No." The look of horror again on her face because again, she broke rule number one which is we're not buying things for yourself, we're buying the things that sell.
Fast forward, we buy La Perla and I figure after three months, we'll look at the numbers. The numbers won't lie to us. Three months went by. She was selling. She did great at the store. We come back. We look specifically at that vendor. La Perla. Fifth percent of it was sold at 50 percent off. Twenty percent of it is missing from the store. Somebody says she took it home. She stole from the store. Thirty percent was sold at 20 percent. That's the discount that she was giving her friends.
When we looked at the math, La Perla was not making any money whatsoever for her and her store. Then she says to me, "But Mercedes, everybody calls up and asks for the brand?" I'm like, "What do you mean they call up? Are you advertising?" She said, "No.
The brand, because it's a big national brand, international brand, advertises in popular magazines so when they would list the brand in the picture of the item that they wanted to promote that month, they would put on the bottom "Available in these fine stores" and one of her fine stores was listed. People would call up, "Hey, do you have the tulip bra?" "Yes, we do. We have the tulip bra. Come on in." They would come in, see that the tulip bra is $400 and say, "What else do you have?"
That, in the industry, is called a loss leader. We know from the beginning we're not making money but we bring it in because it attracts people to buy our other things and also our private label which is very important. The industry would actually tell us that we're supposed to [inaudible 00:04:15], which means we're supposed to take the cost of the good plus our freight, all of our expenses, and double that. That's called keystone.
I'm here to tell you that if you were to keystone, you will go out of business. You need to understand what people are willing to pay for something. Now, as a buyer, I want you to go to market and look at something. Look at the sweater, look at this pant, look at this teacup, whatever it is, and first say to yourself what is my customer willing to pay for this?
Now you make the decision. Once you make the decision of how much it's going to cost, let's say $30, now you as the vendor what's the cost of this product? If they say $10, you understand there that there's enough margin. The minimum margin in today's retailing standards you want to get is at least 2.3; 2.5 would be ideal and anything that's a margin builder is usually 3.0, so just keep that in mind. You never want to just keystone or double your money.
Now we look at the price. Now what if the vendor says this costs $30? This is where it's a whole other game but you have to be able to negotiate, and you do. You say, "Listen, my customer's not going to pay more than $30 for this teacup," and they might say, "Well, this is special bone china made by artisanal tribal people in the mountains of Tibet," and that's a really good story but is the customer wiling to pay for it? That's where you need to make that determination.
When you comes to retail math, it's 90 percent of the game. It's something that you can't live without knowing.