As a manager, you know that effectively managing your merchandising strategies is essential to driving home furnishings sales and profits. However, without meaningful metrics for measuring performance, it can be difficult to accurately gauge the success of various merchandising promotions or product lines. That’s why it is critical to use key merchandising metrics to understand how well your initiatives are performing so that you can make fact-based decisions at each step along the way. This blog post will discuss how specific merchandising metrics can evaluate short-term and long-term opportunities to create more successful, profitable business strategies while enhancing customer satisfaction.
Not all of what you should be tracking to measure the health of your merchandising activities within your store appears on your financial statements. Sales per square foot, average sale, inventory to sales, inventory turns, freight costs, gross margin, and such are important vitals you need to keep track of. But guess what: There’s more. And keeping your eye on those additional key merchandising metrics will greatly improve your store’s financial health.
Ensuring you have the correct merchandising mix on your retail sales floor is the first step to making sure you are maximizing the performance of every square foot of your store. The key merchandising metrics you need to start with are your annual written sales and sales (dollars) per square foot.
But before we delve into the specifics of understanding your merchandising mix, let’s touch on the key metrics your financial reporting is tracking and what you should look for regarding your merchandising efforts.
It would be best to start by looking at how your actual sales performed against your budget. Did you meet or exceed your goal, or did your numbers fall short? Once we have a big-picture snapshot of the store’s performance, we will break it down to see where merchandising improvements can be made. Key metrics to look at are:
- Inventory to Sales
- Gross Margin
- Average Sale
- Inventory Turns
- Merchandise Aging
Inventory to Sales
It measures the inventory a store carries compared to the annual sales volume. Generally speaking, the less inventory you carry and the more you sell, the higher your cash flow and profits. The inventory-to-sales target percentage will vary depending on your business model, average cost point, and market availability. If your actual number compared to the target is too low, you might be missing opportunities, and if your number is too high, you might need to have the right mix on hand to meet customer needs. The 80/20 inventory management rule suggests that roughly 80% of profits come from 20% of products. Identify those best sellers and have them displayed and in stock while maintaining your inventory to the sales target, and you’ll increase sales.
Gross Margin
Gross margin is measured in dollars and percentages. Gross margin dollars are estimated by subtracting the landed merchandise cost from the selling price. The gross margin percentage is the gross margin dollar divided by the sales dollar. Many retailers are fixated on gross margin percentages, and here is where they need opportunities. Determining the selling price of an item is both an art and a science. Margin dollars, freight costs, discounting, and perceived value should all be considered. There are better practices than having the same margin for every product and letting your software system be the final determiner.
Average Sale
Average sale is the sales volume of a store divided by the number of sales transactions. Average sale is also a crucial part of the golden sales equation = the number of leads x average sales x conversion rate. While the average sale is generally tracked by sales management, knowing this number as a merchant is important. Having fully merchandised and curated vignettes increase add-on sales, increasing the average ticket. Measuring this number, in the end, measures the success of merchandising.
Inventory Turns
This metric divides the cost of goods plus freight by inventory. The best way to manage this number is to have your best sellers and primarily current merchandise in stock and that you do not have merchandise sitting in your warehouse that is not on display. Special Order items will always carry a higher turn rate as well.
Merchandise Aging
This number tells you the average time merchandise sits unsold in your warehouse. Generally, you do not want stagnant merchandise sitting there for optimal cash flow. Merchandising techniques that can help you keep this number at bay include consistent markdowns while the product is still on the sales floor, spiffs, earmarking aged products for special projects, and features or giveaways in marketing campaigns.
Measuring and managing these metrics will help keep profits healthy, but they don’t account for how effective your merchandising mix is. Your product assortment and allocation should directly correlate with your store sales targets. In addition to the metrics outlined above, your merchandising metrics as they relate to store sales should include the following:
- Price Points per category
- Square footage per category
- Styles per category
- Stock versus Special Order slots on the floor
- Number of slots per category
- Vignettes performance per square foot
We should put these metrics into practice for each category of your store. In that case, there should be a good/better/best price point, and the square footage each category takes up on the floor should represent that category’s percentage of overall sales. If bedrooms account for 18% of your business, they should take up 18% of your sales floor. If modern style represents 40% of your sales, 40% of your vignettes should represent modern styling. You can break down categories into slot counts as well. If stock sales represent 30% of your store sales, then 30% of your display product slots should be stocked. Similarly, if upholstered beds make up 30% of your bed sales, 30% of your bedroom slots should have an upholstered bed. And lastly, every vignette should perform at your sales per square foot target.
Ensuring you have the right merchandising mix and monitoring standard financial reporting results in a highly effective merchandising strategy.
Need help understanding or navigating your complex merchandising financials? Call us to book a consultation. We’re here to help!
