How to control costs in your retail business
Read time: 4 minutes
In retail, a great location, great products and a good sales team are all essential elements for success. However, none of that will matter if you can't control your costs.
Profit margins in the retail sector are typically very thin. Canadian retailers in 2017 had an average operating profit margin of just 4.9%, according to Statistics Canada. Therefore, controlling your operating expenses can make or break your business.
Breaking down your expenses
The cost of goods sold accounted for 73.3% of sales in 2017, according to Statistics Canada. After that, the largest operating cost in a retail business is usually employee salaries, which in Canada represented about 38% of all expenses.
With fierce competition and paper-thin profit margins, small retailers have no room for error.
“Once you’re bringing in the revenue per square foot that’s appropriate for your location, it becomes crucial to control your operating expenses,” BDC Business Advisor Rony Israel says.
Track employee productivity
One trick, he says, is to calculate the average productivity per employee to see which employees generate the most sales.
This can be done by dividing your annual or monthly sales by the number of employees you have. From this, you will get an expected sales volume per employee that can be used as a benchmark.
Next, you can shift people or teams into different time slots to see how it impacts your sales. In this way you’ll be able to measure the effectiveness of your workers and manage them accordingly.
Creating an online store
To avoid some of the largest overhead costs, many retail operations have invested in an online store. This not only helps you reduce staffing and inventory costs, but can also reduce fixed costs such as rent, utilities and insurance.
However, as they’ve gone online, brick and mortar retailers have found their business model needs to change as well.
“The pricing will be different online,” Israel says. “There is a lot more competition from all around the world.”
To make a successful transition to online retailing, you need to use your storefront operations as a showroom where customers can see and handle the products, Israel says.
“If I provide my customers with the convenience of a pick-up close to where they live and save them on the cost of shipping, then it becomes a competitive advantage.”
Leveling the playing field
New digital tools have leveled the playing field for small retailers, says Michael LeBlanc, a Senior Retail Advisor at the Retail Council of Canada.
LeBlanc advises entrepreneurs who are looking to cut costs and become more competitive to look into the following three areas.
1. Digital marketing
Every business needs to invest in marketing to attract customers. How you spend that money offers opportunities to increase the productivity of every marketing and advertising dollar you spend.
Social media and online advertising are great places to invest your marketing dollars and time because they allow you to target specific consumers, in specific geographic areas at a precise time. Since the ads are targeted, they are equally advantageous to large and small companies.
LeBlanc adds: “Even if you’re not in e-commerce or investing in paid advertising, you should take advantage of all the free stuff you can. For example, you can create enhanced listings for your business on Google Maps and on Facebook at no cost to you.”
2. Workforce planning tools
As an entrepreneur, your time is one of your most valuable assets. If you’ve got staff, managing their schedules can be a burden.
LeBlanc advises retail entrepreneurs to consider mobile or other workforce planning tools to make their scheduling more efficient. These tools are flexible and can simplify the daily grind of scheduling.
Tools that allow hourly staff to choose their hours using mobile phones are particularly useful in encouraging employee engagement.
There are a number of free or low-cost online timesheet tracking tools that are worth considering.
3. Customer relationship management
Investing in customer relationship management (CRM) software will allow you to better know your customers and work to keep them coming back.
“The more you spend on customer loyalty, the less you spend on acquisition,” LeBlanc says. “You reduce your cost if you reduce your churn.”
CRM solutions fall into different categories, from online solutions to complex multi-site implementations, including a variety of free and low-cost CRM solutions.