Mathemagics applies to all retail

Headlines still mostly portray the old-fashioned adversarial view of retailers as being in a win or lose clash. The perception remains that when one retailer in a similar retailing space does something new, somehow shoppers leave one brand and flock to another, almost like sailors running from one side of the ship to another – the all or nothing picture.

The reality is very different, and is one that revolves around giving shoppers what they want from that store consistently and cost-effectively over a long period of time.

I’m going to focus on our weekly trip to grocery stores, only because it’s the easiest, most familiar and most universal “shopping experience” for us to understand.

Many shoppers only go to their pharmacist three times a year, the tyre store once every couple of years, or car dealership once every three years. But generally speaking we will go back to the same store as last time to buy that product or service, unless that store has truly let us down with a poor shopper experience.

While Coles was offering a poorer shopper experience than Woolworths in grocery stores during the early noughties, Coles shoppers didn’t flock to Woolworths, they just waited until things got better and then they began putting more items in their Coles baskets again.

When stores look after us – and as a result we spend money there consistently – good retailers can then focus on delivering a great service as cost-effectively as possible. They do it fundamentally by spinning the inventory as fast as possible without running out of stock.

Well run retailers with tightly controlled cost bases and well-managed inventory systems make lots of money.

There are regional chains in the US, and national chains in Europe that spin off cash at a truly impressive rate. HE Butts, Morrisons and Carphone Warehouse are just a few examples.

It’s a well used “mathemagics” formula in business that 1%+1%+1%=26%. Try it, it’ll keep you amused for hours. A 1% increase in revenue, linked with a 1% increase in gross margin, supported by a 1% decrease in costs generates a 26% increase in EBITDA. And EBITDA is just a six letter acronym for “cash”.

Coles ability to spin off $500 million more cash over the past 14 months, on a slightly increased top line revenue, is testament to this. And yet Woolworths arguably still retains a profit advantage over Coles when it comes to inventory management.

This is all proof in the pudding. Shoppers aren’t jumping ship. They’re just spending more across the board – because they’re enjoying it. And that’s because the retailers are investing in them.

Smart isn’t it. Maths always is.

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In his role as CEO of CROSSMARK, Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores. In this insightful blog, Kevin covers retail news, ideas, companies and emerging opportunities in Australia, NZ, the US and Europe. His international career in sales and marketing has seen him responsible for business in over 40 countries, which has earned him grey hair and a wealth of expertise in international retailers and brands. CROSSMARK Asia Pacific is Australasia’s largest provider of retail marketing services, consulting to and servicing some of Australasia’s biggest retailers and manufacturers.