Use Our Analysis to Help You Choose New Store Products
You’d like to add more products to your showroom. You already have hot tub customers coming in to buy their spas and then later to have their water checked. There has to be a way to get them to spend more money with you.
“That’s what everybody in retail is thinking,” says Jeff Bailey, co-owner of Spring Dance Hot Tubs with three stores in Pennsylvania and New Jersey. Spring Dance carries hot tubs and swim spas, saunas, The Covana, The Big Green Egg and recently added patio furniture.
The Big Decisions
Which products do you choose and why? There are several criteria and numbers to consider, but first and foremost, decide who you are.
“How are you trying to compete and position yourself in the market; what do you have vis–à–vis your competitors?” asks Dave Riley. Riley founded the Gemini Program, which helps midsize companies find and implement missing success factors through analysis of its financials. He is also a regular SpaRetailer columnist.
This is probably the hardest question to answer in your business, and you aren’t always going to get it right. Do you want all your product offerings to focus around hot tubs? Do you want to be a destination for the entire backyard? Or do you want to be a broad specialty retailer, carrying all kinds of luxury and leisure products for the home? Maybe your thing is appliances, so you’ve got hot tubs alongside refrigerators or outdoor products with spas and ATVs.
There is no right or wrong answer, and what you decide should come after careful study of your market and demographics.
Debi Skain’s store, All About Spas and Leisure Living in Roswell, New Mexico, carries hot tubs, swim spas, Tempur-Pedic mattresses, patio furniture, patio covers, outdoor kitchens and a plethora of other products and accessories for each. Skains says most of the products it has added over the years are due to specific clients’ needs. The company also does construction, so when it is working on projects and a customer has a certain look or product in mind, Skains will find it, and sometimes that
will be a product it continues to carry in the store.
Once you’ve made the big decisions about who you are and where you’d like to see your business go, Riley says a retailer should consider revenue per square foot, inventory turns and gross profit margin prior to adding a new product.
Revenue Per Square Foot
Take your gross revenue after discounts and allowances and divide that by the total number of square feet you have dedicated to selling space, giving you the revenue per square foot you generate annually.
“Avoid bringing on products that are going to reduce that number,” Riley says. “If you’re going to bring on a swim spa that’s 17 feet by 10 feet and the space around it, you look at your cost on that and say, ‘How many of these things do I have to sell in order to maintain my gross revenue of $500 per square foot, and is that plausible?’ ”
Gross Revenue ÷ Square Feet of Selling Space = Revenue Per Square Foot of Selling Space
Let’s say your store is 10,000 square feet and your gross revenue is $8 million. Your revenue per square foot would be $800.
You want to bring on BBQs and will devote 500 square feet to them. You are better utilizing your space and not taking other inventory from the showroom. If you sell all of the BBQs, your gross revenue will increase to $8.5 million, making your revenue per square foot $850.
But let’s say that to make room for your BBQs, you had to reduce the number of hot tubs on your floor. Now you’ve lost some hot tub revenue to add the $500,000 worth of BBQs. Your gross revenue
decrease to $7.9 million, making your revenue per square foot $790.
You give away cash to add material items to your floor. “The question becomes how quickly you get that cash back,” Riley says.
If you’re considering a new product, determine how much of an impact it will have on your cash flow, and how quickly you’ll need to sell it to regain the initial investment and generate additional revenue.
Cost of Goods Sold ÷ Average Inventory
Going back to our above example — the store with net sales of $8 million — let’s say that store’s cost of goods is $6.5 million, and its average inventory is $1.5 million. That store’s inventory turnover for
the year is four, which means that inventory is typically on the floor 91 days before it’s sold.
If that store adds its desired BBQs, we know it would add $500,000 of revenue, and the cost to get that extra half a million is $350,000. That brings the company’s cost of goods up to $6.85 million, giving it an inventory turnover of five — meaning its inventory is on the floor for 73 days before it’s sold. If those were real numbers, the BBQs would be a good addition to this company’s showroom.
Gross Profit Margin
Gross profit margin is the money you have left after your cost of goods. “If you bring in a product, it should improve your overall gross profit,” Riley says. “That goes to cash flow and your ability to operate the company.”
Net Sales – Cost of Good ÷ Net Sales
Back to our friends who want to bring on BBQs: Its net sales are $8 million, with a cost of goods of $6.5 million. So its gross profit margin is 18.75 percent. If it adds BBQs given the numbers we’ve already established, it’s gross profit margin increases to 19 percent.
You don’t know how well a new product is going to sell — but for it to be worth your time, floor space and cash, these numbers can tell you how many and how often you should be selling.
When a retailer asks Riley what he thinks about a product, he thinks about how it helps that store compete; whether it is helping further the message; whether it’s consistent with your message. “Does it give you a great gross profit? Inventory turns?” Riley says. “If it goes down the checklist and meets the needs of all those components, put it on the floor.”
If you don’t have enough people to assemble a new product or deliver it — or there isn’t enough space in your warehouse to keep it stocked — you will have a problem no matter how good the numbers look.
“Are you bringing a product on board because you’ve heard it’s desirable — but your competitors aren’t carrying it?” Riley asks. “Are you bringing it on because you want to be first in the market? Is it a new innovation in the industry? Those considerations are important as well, and they aren’t so easy to identify in terms of hard numbers.”
When Bailey was looking to add a furniture line, his criteria included not having to carry inventory. “It needed to be clean and simple, not have 50 sets,” he says. “To accent the showroom and give it a ‘We’re doing more than just hot tubs’ look.”
Spring Dance chose Sol Casual: After placing an order, the store could have it in two days. It didn’t have its money tied up in inventory, but customers could still get the furniture quickly.
Bailey says the learning process includes meeting the numbers it set at the beginning of the year. “We need to merchandise it better and advertise more,” he says.
Riley encourages his retailers to look at products that have what he calls a concentric circle — products where “the retailer makes the investment, puts it on their floor and doesn’t have to touch it again,” he says. “Doesn’t have to inventory anything, doesn’t have to maintain it, doesn’t have to deliver it and doesn’t have to cover the warranty. They don’t do anything. The manufacturer stands behind it, delivers it and sets it up. If there’s a problem with it they send out their own crew to fix it.”
Skains company started out as home builders, so they have the skillset to provide everything for their customers: decks, custom outdoor kitchens, shade structures, patios — whatever the job requires. She suggests that if a retailer wants to offer those products and services to their customers to build a relationship with local contractors.
“Find subcontractors and help each other,” Skains says. “We even do that. We don’t do landscaping, so we bring in landscapers.”