What pulls down the profitability of a retail chain?
Usually retail chains enjoy mark-ups varying from 30% (grocery items, other fast moving items) to 100% (fashion items) over their payouts to the suppliers. Despite such significant mark-ups, most retail chains struggle to make profits. Most shops, in a retail chain, end up doing lower than targeted ROI.
Is it because of erroneous analysis of the potential demand or cost structure growing haywire as compared to initial estimations? With the extent of knowledge of customer profile and demographics available, market estimation cannot be way off mark. Each shop is opened by a retailer chain with proper due diligence and analysis of ROI. The initial estimation of the shop related costs (rent, manpower, electricity, etc) do not increase dramatically, to wipe out the initial estimation of the shop profits. It is also fair to assume that the shopping experience was not compromised. Other factors like proper access to shop etc were well thought out or at least immediately corrected. So the only reasons to be analysed are lower sales (than estimation) or lower net realized prices from customer.
One of the most important factor determining sales from a shop is the flow of people into the store or the footfalls. It is well established that higher footfalls is positively correlated with sales. And almost every store manages good footfalls initially due to excitement generated around the new opening. The first sign of an imminent downfall is gradually reducing footfalls.
So the key question to answer is: why does the flow of people into the store decrease? Assuming there is no overall economic crisis in the market, one of the primary reasons for reducing footfalls are factors related to the most important attraction (asset) of the store: the merchandise.
To understand the problem, let us differentiate two types of purchases (and stores) – one where the customer has a clear purchase list or in other words he knows what he wants (like grocery, stationary items or a white cotton shirt). Let us call this category as defined purchases. The other category is the one where list is not clear. Either because it is an impulse purchase item where availability triggers a demand (like chocolates or drinks) or the customer is only sure of buying a product category and would want to browse through a wide choice set before deciding on his or her final purchase (like high tech products and fashion items). Let us call this second category as the undefined purchases.
In the case of defined purchases, such grocery or stationary items, the customer would like to complete his or her shopping in one single visit. Unavailability of even a few items from his or her shopping list is viewed as huge inconvenience (as the customer has to make additional trips to another store). If unavailability, even if it is of different items at different times, is experienced regularly and if there is a nearby option, the chances that customer will try another store is very high. So the initial deluge of footfalls experienced during store opening starts dropping down. If a shop is real bad in availability, further deterioration is triggered by a negative word of mouth. As the customer flow decreases, the inventory turns decrease as the total inventory is held at same level as before and the sales have decreased. Lower inventory turns locks up the cash of the store. As inventory is not flowing as was expected, the limited capital/ budget (for a category) get tied up in items not selling immediately