The Hidden Math of Retail Profitability: Expert Strategies for a Tougher Holiday Season

The media has been reporting that some shoppers are spending big and taking on more credit card debt while Gen Z is spending less. Concern over slower holiday sales growth amid inflation and economic uncertainty has created an atmosphere of hesitation for shoppers as well as higher risk for retailers this holiday season. Retailers are approaching potential top-line revenue erosion by looking for ways to tighten spending organization-wide. The question is, where to cut back and how should cuts be done that won’t create more risk to a brand’s bottom line? Here are a couple of suggestions for retailers as they think through their evaluation process.

Labor Optimization isn’t a “one-size-fits-all” methodology.

When I was working directly in retail, responsible for a workforce management program, I was asked to cut labor costs by 10%. The only guidance I was given was to take 10% off each store’s labor distribution. The problem with that approach, as anyone who allocates labor would know, is that not all stores are the same. Each store has its own unique DNA, including its physical location, the type of center it resides in, the competitive environment, its merchandise assortment, and its shopper demographics. But the critical influence on revenue is in-store traffic. Considering the number of expected shoppers in relationship to labor provides better insight into expected services levels and shoppers’ propensity to purchase. In other words, traffic represents revenue “opportunity,” so it should be factored in comparison to the labor spend. It is a more equitable way to distribute labor hours and one that guards against breakdowns in customer service. I used this approach to avoid the arbitrary 10% reduction for all stores and still managed to meet the objective of an overall brand 10% cut, but with less service erosion. The interesting outcome was that I was able to increase some stores’ labor allocations without raising the brand’s budget. This was because the stores that really needed more hours due to their unique circumstances received them at the expense of stores that didn’t need the hours that were based solely on sales expectations.

One of the important aspects of a traffic-based process is that if you have traffic data inside the store (not just at its perimeter), you can drill down and ensure that your schedules match up with shopper’s needs throughout the store. For example, a perimeter counter may tell you that your peak time on a Friday is 10:00AM, just as the store is opening. But if you are zoning your store for traffic by key departments, you might find that a critical, and high revenue, department within the store gets busy at 3:00PM, between lunch and dinner. Best practices for leveraging zone traffic data include the traffic counts, shopper dwell times, the dominant paths shoppers take throughout the store, and Shopper/Associate Presence % (ensuring that customers are actively being attended to). If you are not a high-touch brand, this information is just as valuable to ensure that tasks are being performed at the right time to maximize shopper buying patterns.

More informed “right sizing” strategies

Some retailers are looking for ways to expand merchandise assortments and capacity or to simply eliminate unprofitable areas within stores. As discussed earlier in labor allocation, each store has its own unique footprint that requires greater insight into where to make these modifications. Optimizing floorspace typically involves a calculation, such as sales-per-square-foot. Since sales are really an outcome that happens as the result of many things (layout, placement, selling strategy, in-stock performance, promotions, to name a few), why not look at an INPUT that reflects selling opportunity? The most interesting one for making square footage allocation decisions is traffic-per-square-foot. This measures the number of shoppers within the targeted selling space. More traffic-per-square-foot indicates a greater selling opportunity.

Leveraging traffic-per-square-footage improves the understanding of each store’s specific circumstances. As an example, let’s look at a store that carries both toys and shoes. The current square footage is similar for both. The question is whether the shoe department should be expanded at the expense of the toy department. The sales-per-square foot in shoes is $78 while it is only $32 in toys. But the critical difference is that the traffic-per-square-foot for shoes is 2.7 while its higher at 4.1 in toys (eliminating children from the count). Since both departments have very similar conversion rates, it means that the propensity to purchase in both departments is the same. But more people are traveling through toys, meaning that the toy department is creating more shopping opportunity throughout the store. This can also be proven by analyzing shopper journey metrics taken from department traffic counts. Looking at the numbers in this way may result in a different decision for expansion and contraction.

And while you would typically use traffic OUT counts to measure conversion rates because transactions typically occur just before a shopper leaves the store, you would want to use IN counts with square footage to better understand sales opportunity. As discussed above in more advance scheduling best practices, it’s critical to have an interior traffic counting program to make this strategy work because you will need to understand traffic-per-square-footage within each department to be assessed for optimization.

Targeting Marketing Opportunities More Effectively

Traffic per square foot is not just helpful for remodeling questions. It can provide further insight to the marketing team, especially in situations in which marketing spend is determined by individual department opportunities. In their recent holiday infographic, Bain suggests that retailers “go big” on sales events to maximize revenue opportunity. But which events qualify and for which departments? If you have traffic data, you can use history to help you determine when the maximum audience will be shopping and in which departments they will shop. For example, you might observe that while Black Friday and Super Saturday get all the shopping attention each year, there may be a brand-specific event that drives significant traffic in between these dates. And traffic-per-square-foot helps to identify which departments provide the opportunity for maximum shopping exposure. Marketing teams can also use traffic counts to identify unique trends that may help not only with broader programs but also with individual sites or metropolitan areas.

Recapturing Lost Revenue Opportunities

While the mandate may be to find costs to cut, at the same time if you leverage perimeter and in-store traffic insights appropriately, you might also find the holes in your merchandising, marketing and operations on a store-by-store basis that lead to increasing your revenue. Using this data, you can build a plan to answer questions like “when are my shoppers most likely to shop and do I have the appropriate in-store response?”, “do I have the right number of POS terminals or fitting rooms at just the days and times that shoppers demand them?” and “what is the ideal time for in-store recovery to ensure that everything is available to my customers just before they need it?”

All of this will help determine the best strategies for containing costs and growing incremental revenue at a time when profit margins are a precious commodity.

Please reach out if you would like to build a strategic program around your individual needs.

Brian is VP of Analytics at StrataVision, focusing on helping clients maximize their ROI by transforming desired outcomes into actionable use cases, leveraging data to provide insights into shopper and associate behavior.