Retail Economics

The primary tool used for assessing whether a retailer should venture into new markets or business areas is a Feasibility Report. A retailer may create feasibility report for any of the following reasons:

1) The basic purpose of a feasibility report is to determine the economic viability of the business in designated markets.
2) To provide guidance to the new business planner in organizing and controlling various planning activities.
3) To serve as a tool for obtaining the necessary financing.

A feasibility study is designed to provide an overview of the primary issues related to a business idea. A thorough feasibility analysis provides a lot of information necessary or the business plan. For example, a good market analysis is necessary in order to determine the project’s feasibility. This information provides the basis for the market section of the business plan.

A feasibility study looks at three major areas:

1) Market issues
2) Organizational / technical issues
3) Financial issues

Typically, a feasibility report comprises of the following areas:

1) A description of the business
2) Economic considerations for the business
3) Market factors
4) The cost of new premises
5) Start up costs and operating expenses
6) Cost of inventory
7) Cash flow requirements

Thus, a feasibility study starts with defining the basic business that the retailer is in and helps him understand the complete market and economic factors, which may be critical for the success of his business. Estimation is also made in terms of the cost of premises and the cost of premises and the cost of the inventory which needs to be sold.

Feasibility studies require a lot of hard work, and the market analysis research is the most difficult part of the process. If the study indicates that the business idea is feasible, the next step is the creation of business plan. The long term viability of any retail development requires a comprehensive and painstaking study of various influencers including a factoring in of the effects of future competition. With a well researched. With a well researched statistical analysis of project feasibility, developers can avoid expensive errors and develop a project that is closer to being a viable venture.

Typically a retailer acquires merchandise on credit, and then transfers them to the retail stores where they have to be sold. The duration between the purchase of a firm’s inventory and the collection of accounts receivable for the sale of that inventory is known as the cash cycle. In retail, this cash cycle becomes extremely important as it illustrates how quickly a retailer can convert the products into cash through sales. The shorter the cycle, the more working capital a business generates and the less it has to borrow.

Measures of performance:

To the investor in the business, financial performance is an indicator of the health of the organization. Analyzing financial performance is necessary for the following reasons:

1) To help identify the gaps in the targets
2) To identify the opportunities for improvement and
3) To evaluate past and present performance

As for any other business, for retail too, there are two basic methods of evaluating financial performance. The first is the Income statement or the Profit and Loss statement. This is an indicator of the profitability of the business. The second is the Balance Sheet, which is an indicator of the turnover.

The Components of an income statement:

The chief components of an Income Statements are:

1) Sales
2) Cost of Goods Sold
3) Gross Margin
4) The operating expenses and
5) The Net Profit

Let us understand what each of them means.

Sales: Sales refers to the total money received by the retailer from the sale of merchandise.

Cost of Goods sold: Cost of goods sold are the expenses incurred by the organization for making the goods. It includes the money the company spent to buy the raw materials needed to produce its products, the money it spent on manufacturing its products and labor costs.

Gross margin: Also known as the Gross Profit on sales. This is the difference between all the revenue the company earns and the sales of its products minus the cost of what it took to produce them.

Gross Profit on sales = Net sales – Cost of Goods sold

Operating Expenses: These are the expenses incurred in producing the goods, like labor, fuel, power etc. The difference between the net sales and the operating expenses is the operating profit, which is a commonly used statistics to judge the operational performance of the company.

The operating profit before Tax is the operating profit less interest and depreciation. Non operating income is the income that is not earned in the normal course of business operations. For example, interest earned on any investments made etc. Extraordinary income is non recurring income that is earned only once and there are no chances of earning that income again, like profit on sale of any asset etc.

Cash profit is PAT plus any all non cash charges i.e. charges that don’t entail any actual cash outflows but they are only notional charges like depreciation writing off preliminary expenses etc.

Measures of performances Evaluation:

The efficiency of retail operations is a function of Inventory, Staff and Customer management.

For any retail operation to be successful, it is necessary that these three areas are handled efficiently. One way of gauging the efficiency of an operation is to evaluate performance. In retail, there are three areas which are important in the measurement of performance. They are:

1) Merchandise
2) Store and Retail Space
3) People.

Let us now understand what performance measurement means with respect to each of the three aspects mentioned above.