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David Brown

By the Numbers: Which Comes First — The Sales or The Inventory?

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[dropcap cap=I]t’s a little like the chicken and the egg question. Do you need higher priced inventory and lots of selection to have a successful store, or does your level of sales decide the inventory selection and level you should be carrying?[/dropcap]

An interesting question, and one that’s debated by many in the industry.

So what is the difference between a larger store with higher sales and one without? What obvious differences in their inventory holdings, average sale and units sold are there? What percentage of their overall sales comes from different departments? What does a larger store do differently from a smaller one?

This month we’ve investigated those questions further. For the first time we’ve prepared an analysis that splits stores that are doing over $1 million sales per year from those that are doing less. The details are shown below:

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April 2010 Monthly Results Small KPI Up to $1M Large KPI $1M +
Gross Sales $ $41208 $83831
Repair & Service Sales $9356 $14003
Total Sale # 359 591
Avg. Sale Value (excl. repairs) $161 $189
Avg. Sale Value (incl. repairs) $115 $142
Margin 52% 49%
Overall Gross Profit $ $21358 $41584
Average Stock Holding $496752 $859516
Average Stock-turn 1 mth 0.5 0.6

Unsurprisingly, the larger stores are achieving better results in the area of gross profit, as you would expect. They are also selling more items per month – again as you would expect. What is interesting from the data, however, is the average sale is higher in stores achieving more than $1 million sales than those that don’t.

Now some might say that isn’t unusual as they are bigger stores – but let’s think about that for a moment. If you have an average sale that is higher than another store you would have to have a higher average retail price of the inventory you carry compared to that store. After all, you can only sell the value of what you carry. You couldn’t achieve premium prices from a car yard that stocked nothing but budget vehicles.

Is the size of your store a factor that controls the average value of what you carry in inventory?”

No. That’s a decision you make as the owner.

From the information above we can see that the typical store over $1 million in our sample is achieving more than double the sales of the typical store under $1 million. There are 65 percent more units being sold in the larger stores (591 units vs. 359 units). There is a also 23 percent higher level of average retail sale value in the larger stores ($142 vs $115).

In summary therefore, it would be fair to say that if the larger average store only had the same number of sales as the smaller average store (all things being equal) then the larger store would still achieve an additional 23 percent in sales simply because it would be selling its items at a much better average retail sale value.

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So in conclusion, it would appear the typical average small store could achieve a 23 percent increase in storewide sales just by the decisions they choose to make regarding the average retail sale value they intend to achieve. Now this may be a little simplistic but it would seem that even if other variables come into play there can be significant gains of 10 percent or more made in storewide sales just by targeting the growth in average retail sale value as a store policy.

Yes, but don’t bigger stores sell a lot more diamond product and doesn’t that make it easier for them to achieve a better average?

Not necessarily. Let’s go back to the information above but explore it in more detail:

The summary above is the percentage of sales achieved in each category for both average store types over the month.

You will notice that although the larger stores are achieving 42.1 percent of their sales in diamond product versus 38.1 percent for the smaller stores this is only a 9.5 percent difference – not enough to explain the 23 percent better average retail sale value overall.

In other words, they aren’t doing better because diamonds are a much more significant part of their business.

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In fact the larger stores are achieving a much lower percentage (7.7 percent) in diamond rings than their smaller counterparts (8.7 percent). The numbers are largely similar for many of the categories, with the most obvious point of convergence being the dependence on repairs as a percentage of overall sales (18.7 percent for the smaller store versus 13.4 percent for the larger one).

Our conclusion: The difference lies in the sales being achieved with each customer and each item – not the mix of products being sold.

Average Retail Sale Value achieved Up to $1M $1M+
Diamond Average $1177 $1532
Gold Average $157 $186
Silver Average $51 $53

As you can see from the information above, the typical larger store achieves a better average retail sale value in each of the three main categories of diamonds, gold and silver. The result for diamonds isn’t surprising with an average retail sale value that is 30 percent better. But is there any reason for the better averages in gold and silver just because it’s a larger store?

These stores aren’t achieving a better average retail sale value in gold and silver because they are bigger stores; they are bigger stores because they are achieving a better average retail sale value in gold and silver.

This information most clearly illustrates the difference between a larger and a smaller store. It comes down to the average being achieved with each and every customer who walks through the door. Is size a factor when it comes to selling silver? Is it that much harder to achieve an average sale of $53 than $51? Of course not. Two dollars is nothing. But multiply that across 16 percent of your sales and it becomes more significant. Multiply a $29 difference in gold ($186 versus $157) across every gold item sold and it begins to add up.

So suddenly it becomes a little more apparent that a percentage of the success of a larger store isn’t only about the opportunities they have to sell (the number of customers and the amount of foot traffic) but what they decide to do with each selling opportunity (what average retail sale value they choose to stock, what they show the customer, and how they look to sell up).

It is less about the factors that are hard to control and more about those things that you can influence.

Yes it may require a greater investment in inventory (perhaps at a higher value rather than carrying a greater selection). But it is hard to be a big store if you keep acting like a small one.


 

David Brown is president of the Edge Retail Academy, an organization devoted to the measurement and growth of jewelry store performance and profitability. For further information about the Academy’s management mentoring and industry benchmarking reports, contact Carol Druan at [email protected] or phone toll free (877) 5698657

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