How to control costs in your retail business
4 minutes read
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. In 2020, Canadian retailers 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.
The following four expert tips will help you better control your costs.
1. Review your expenses
In 2020, the cost of goods accounted for 73% of operating revenue, according to Statistics Canada. After that, the largest operating cost in a retail business is usually employee salaries, which in Canada typically represents about 39% 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,” says Rony Israel, Senior Business Advisor, BDC Advisory Services.
2. Track employee productivity
One trick, Rony Israel believes, 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.
3. Create an online store
To avoid some of the largest overhead costs, many retailers 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, some brick and mortar retailers have found their business model needs to change as well.
“Pricing is different online,” Israel says. There is a lot more competition from all around the world.”
According to Israel, 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.
“If I provide my customers with the convenience of a pick-up close to where they live and save them the cost of shipping, then it becomes a competitive advantage.”
4. Level the playing field
“New digital tools have leveled the playing field for small retailers,” says Michael LeBlanc, Senior Retail Advisor at the Retail Council of Canada.
LeBlanc advises entrepreneurs who are looking to cut costs and be competitive to look into the following three areas.
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.”
Workforce planning tools
As an entrepreneur, your time is one of your most valuable assets. If you have staff, managing their schedules can be a burden.
LeBlanc advises retailers to consider mobile or other workforce planning tools to make their scheduling more efficient. These tools are flexible and can simplify planning.
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.
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.
Learn how to analyze your company’s financial data to boost your bottom line by downloading our free guide for business owners: Build a More Profitable Business.