Week 19 retail pricing strategies monitoring financial performance
- 1. Retail: Theory and practice Retail Pricing Strategies
- 2. Price and financial control –topics Retail pricing and its role in strategy Financial control and analysis Monitoring retail financial performance Key ratios
- 3. Last week Describe the various methods of determining retail pricing Understand the theories and concepts relating to retail pricing Discuss the relationships between pricing policies, positioning and customer demand Apply pricing strategies and tactics
- 4. Learning Outcomes: At the end of this session should will be able to: Understand the importance of financial planning and control in retail operations List the key financial measures used to monitor retail activities Explain the measurement and cost of finance for retail operations Demonstrate awareness of the need for a balanced approach to retail strategy
- 5. But the retailer must consider more than simply the financial aspects of the business Consider also marketing performance and the need to balance this with financial performance (McGoldrick, p150) The Balanced Scorecard Financial stakeholders Customers Internal business process Innovation, learning and growth (Kaplan and Norton, 1992 in McGoldrick, 2002)
- 6. Financial performance key general measures Productivity: relates a single input factor to an output measure, other inputs being assumed to be constant Efficiency: measures the effects of all inputs in combination Effectiveness : additionally takes into account goal achievements
- 7. Monitoring retail financial performance (a) quantitative measures Profitability ratios Gross profit margin Operating profit margin (EBIT) Net profit margin Return on capital employed Return on total assets
- 8. Relative cost of goods sold Source: Competition Commission 2000 Company Lines % of average (top 5 lines) % of lines bought for less than average Tesco 126 96.2 80 Sainsbury’s 125 97.7 74 Asda 127 97.8 66 Morrisons 122 99.8 46 Netto 24 104.2 21 Waitrose 103 104.4 23 Booths 74 104.7 26
- 9. Monitoring retail financial performance (b) Mark up and Margin Mark up: Difference between buying and selling price (often expressed as % of buying price) Margin: Difference between buying and selling price expressed as % of selling price. Initial margin –initial price difference Maintained margin -allows for reduction in margin due to markdowns (total SP – total CP) Markdowns : price decreases, in response to trading conditions, over time
- 10. Monitoring retail financial performance (c) Direct Product Profitability DPP of an item is the gross margin , after adjustments, minus direct product costs. Adjustments: These could be discounts obtained from the supplier Direct product costs: These are the costs of handling, storing and selling the product.
- 11. Measures of success CRITICAL SUCCESS FACTORS MEASURES AND TARGETS Volume growth Turnover % increased * Leadership in sector Market share increase Profitability Increase in ROI Value of business Increase in share price relative to sector
- 12. Monitoring retail productivity Sales volumes/turnover Like for like sales Sales per sq foot (or sq. m) Sales per employee (full time equivalent?) Sales per department Sales per store
- 13. Productivity measures Source: IGD 2000 Company Sales £ per sq m Sales £000 per FTE employee Tesco 92 146 Sainsbury’s 98 139 Asda 81 163 W H Smith 33 112 Superdrug 37 122 M & S 51 160
- 14. Seminar 1 With the knowledge you have gained on pricing strategies from the lecture notes and additional reading: 1. What do you think are the advantages and disadvantages of 'seasonal sales’? 2. Do you think that having very frequent sales (for example as Debenhams have) is good or bad for a) the retailer and b) the industry in general? 3. Justify your reasons regarding question 2.
- 15. Seminar 2 not for 2010/11 Last week we looked at the case study: ‘ Supermarkets put 160% premiums on ‘green’ groceries’ Express your opinion on whether or not a premium price on organic food is justified Suggest ways of applying the multidimensional framework of retail pricing to supermarket organic foods at a supermarket of your choice
Editor's Notes
- #7: Productivity – sales/sq foot etc Efficiency – stockturn, fixed asset t/o, trade debtor collection period, trade creditor collection period Effectiveness – profitability ratios: ROCE, GP, net profit, mark-up Could divide into: Profitability Efficiency Liquidity – acid test (current assets – stocks/current liabilities) Investment – PE ratio (market price per share / earnings per share), earnings per share, capital gearing (debt/total equity)
- #8: GP – sales less cost of sales Gross profit ratio = gross profit / sales revenue x 100 Operating profit (EBIT – Earnings Before Interest & Tax) Net profit – total revenue – total expenses ROCE – primary ratio – profit before tax & interest / year end capital employed x 100 – could an investor have earnt more elsewhere