Retail Innovative Management Training - Lesson 2

COUNT YOUR STOCK

Convenience Stores are Grocery Stores On Steroids

by Bill Scott

The two pictures above look similar, but they are not. The picture on the left is typical for a 40,000 square foot grocery store, while the one on the right is a 2,200 square foot convenience store. If you have worked in a convenience store, more than likely you would notice two major differences right off... the shopping cart in the grocery store and the wider aisles. But there are many other differences that are not so easily detected.

The average number of brands in a grocery store is 39,500, while the convenience store carries 3,000 or so. You may live your entire life without seeing a grocery cart in a convenience store.

The average profit in a grocery store is 2.2%, "The Retail Owners Institute" recently reported 2019 profit for convenience stores at 3.2%, but that sounds a little high to me.

When you examine each environment clearly, you can see more differences than similarities, and suggest a metaphor.

Why are convenience retailers putting horseshoes on cows?

Yeah, I know. That may be a terrible metaphor, I agree. But if you read it, you will probably not forget it anytime soon. Convenience stores are not grocery stores and we need to stop using grocery store management philosophies to run them. There is a myriad of opportunities being lost by convenience operators who rely too much on grocery store policies, especially in the area of inventory selection, procurement, and management.

I found the following charts quite interesting. These charts are taken from one of my convenience customers that operates in south Mississippi and the charts contains the data collected from over 40 convenience stores.

These charts cover the period from 1/1/2020 thru 10/12/2020. I could have run them today, but I doubt they have changed a great deal. In both charts the vertical axis is in dollars. In the 'Fuel Sales Chart' the tan line is 'Fuel Dollar Sales' and the blue line represents gallons sold.

The horizontal axis at the bottom of both charts is the day of the year. For example, 1 = 1/1/2020 and 282 = 10/12/2020. On March 22 (due to expected grocery shortages) retailers' fuel sales dropped and retailers responded by dropping prices to move product. But after that, fuel sale dollars and gallons began rise again. The sharp drops and spikes are due to hurricane activity on the Gulf Coast.

Fuel Activity

Groceries Activity

If we compare grocery activity in the above chart to the fuel activity in the chart above that we can see the sales for both fuel and grocery items, that except for that dip in March, began to return to normal fairly quickly. This suggests (in the case of grocery sales) that dollar sales have increased due to inflation. People were hoarding, and yes retailers took advantage by raising prices.

Following trend lines, taking recent history into account gives us the information we need to predict a more accurate future. It's doubtful that in the future convenience stores will increase item volume sales. When we add a trendline to the grocery chart we do see a positive trend line that covers the 282 days represented. But if we move the beginning of the trendline to May 1, 2020 where 85,451 items were sold and end it October 12, 2020, when 73,303 were sold the trend is definitely downward.

It's a different world!

Increasing inside sales margins can take us just so far. Sooner than later we are going to have to find new ways to cut costs and practically no one is paying attention to the virtually invisible carrying cost that's pulling profits down. For example:

How much does it cost to keep 24 cases of non-selling soft drinks cold, so they don't spoil?

That should spell opportunity for you, to the tune of doubling your profits during the next 12 months, while your competition is busy trying to make more sales. Empirical research has proven that 45% of all sales transactions in retail stores are non-profitable and adding more foot traffic can be hurting you for a variety of other reasons. You do not want your store(s) jam-packed with happy customers, masks on, or mask off. We need better traffic control; you need to choose the right kinds of customers for your specific geographical area. Does that sound weird? Choose your customers? You are not large enough to be everything for everybody who passes by. Yes, specialize in specific customers and discourage the ones that cost you money.

Back in the late sixties, while I was going through the line at a Chinese Buffet, right outside of NASA's main gate, I observed the owner of the establishment scolding a 300+ pound construction worker who had been intimidating a small Chinese server to give him, "More meat... More meat."

"How come you no eat more vegetable?" the owner screamed as he burst from the kitchen. "You get out and you no come here again," he added. As the guy was leaving the whole buffet line erupted in cheers. I applaud the Chinese owner for his actions.

In an article published by The Retailer Owners Institute, they reference the "Diamond of Doom", showing how operating profits are effected by carrying unnecessary stock in your store(s). They point out: poor cash flow, pressure from suppliers, excessive debt servicing, excessive obsolescence, pilferage, lower gross margin, high advertising and selling expense.

And I'll add to that a few my own: disorganized appearance, cannibalization by lesser profitable brands, unhealthy environments for customers and employees, opportunity losses, cost of audits, higher insurance costs, dangerous work environments, higher electricity costs, loss of customers, etc. It's no wonder that estimated carrying costs range from 20% to 35% annually based on the initial cost of your stock. But in truth, the determining factor is the amount of overstock within brands in each individual store.

How do you determine how much overstock is in your store?

The first thing you must do is to find out what is in your store(s). How many Snicker Bars, how many cans of Campbell's Mushroom Soup, how many packs of Marlboro Golds, etc. My guess is you just assume you have enough and that's all you care about. Hoarding stock is a real problem in convenience stores. It seems to have a life of its own to the tune of hundreds of days of inventory rotting on shelves and feeding the mice. Some stores have stock on shelves that will take over a year to sell, and in storerooms that they know will never sell. That's called hoarding at it is one of the largest drain on profits in the retail industry. Stop decorating your stores with stuff no one buys.

Most of you put too much faith in your suppliers to make that decision for you. Suppliers have no way of knowing what is selling in your stores, nor should you expect them to. They don't have the time or the staff to determine what you should be selling. It is NOT their job. Yet I hear them being blamed for it constantly. 

In the average convenience store, 30% of your stock is making 100% of your profits, 10-15% is dead, and the amount you are making on the rest is ambiguous. It's not a sin to lose money. The sin is in not knowing you are losing money and consequently doing nothing to stop the losses.

Track Your Sales

So how do we begin? First with baby steps, and as we know, the first step is the hardest step of all. But if we don't learn how to walk, we will be handicapped for the rest of our business lives. We all know that. But if that's the case, why do we open convenience stores and immediately think we know how to run one. I can't think of anything more important in running a store than getting control of your stock. Sure, there are other things that may be important as well, but controlling your stock is probably the easiest exercise of all. In fact, it's so simple, it could be done with a tablet and a pencil with an eraser on it. But there are much easier ways to accomplish this without handing out a lot of cash.

In our previous video we talked about downloading your data into a spreadsheet and going from there. And we said we need only the UPC-A or EAN-13 (for European and Asian products), the time and date of the sale, the number of units sold, and the price each item was sold for.

Download your data

Don't think about anything else for the moment. Because if you can do that, 90% of the work is done. If you know how to do that already, you can skip this section, but if you don't. consult the manual that came with your POS, call the seller, or manufacturer's help line. If you are not allowed access to your own data in your POS, buy a POS that will let you.

Import your data

Now that you have the file, import the data into an Excel spreadsheet. If you know how, you can skip this section. If you don't know, find someone locally that is willing to help you. Pay them a few bucks to show you how to do it. Ask your children, someone at your local school. It's not that hard. Drop an ad in the classified, etc.

Hopefully, the data will come in a nice CSV format and you can just open it with Excel. Download the data each day and add it to the spreadsheet. During that time, or at any time you want, you can create a simple pivot table so you can see how much you are selling of each item and for what period. Remember, we need a minimum of 90 days, but it doesn't hurt to look at it every day or so. Creating simple Pivot tables is simple compared to everything else. You don't need to buy a bunch of books or take a course. Just learn the basics. That's enough for now. 

Putting it all together

With the Pivot Table sorted by UPC, Date of Sale, Item, Units Sold, and selecting the records for 90 days and dividing the units sold by the period (in this case 90 days), you will get you daily turn rates. Note: If you only have one store you do not need to identify the store in each record, but it is a good idea to give the store a number and include it anyway if and when you open another store you can combine the data in one file and identify which store the data came from.

Delivery Cycle

How often does your supplier service your store? Different suppliers have different delivery cycles. Some deliver once a week, some twice a week or every other week. Most group their orders to deliver in large quantities and deliver using 18-wheelers. This is bad for the retailers and bad for the suppliers, and results in large areas of your parking lots being block off by huge trucks and stores falling into states of utter confusion impeding customers from buying fuel and groceries. They'll likely go someplace else. This kind of situation cannot stand for long. If stores were delivered what they needed goods, two, three or four times a week, the negative effects of handling deliveries would easily be cut by 75% or more.

Nevertheless, retailers should order only what the retailer can sell during whatever frequency of delivery you and your suppliers agree upon. Wouldn't it be nice if your suppliers could forecast the needs of their retailers and bring you only what you could sell before their next visit with an emphasis on what we refer to as ""High Risks" items?

Rather than looking for a place to park their 18-wheelers and spending and hour or longer at each store, using small vans, drivers could deliver to more stores in the course of a day, saving time, fuel, money, unnecessary risks, not to mention your time and loss of manpower and customer traffic during delivery times.

Most suppliers give you 10-days to pay your invoice. If goods were delivered on Monday and the bill was due on Wednesday or Thursday of the following week, and you sold that stock by Sunday of the week of delivery, you would gain use of the supplier's working capital. We refer to that as "Float".

To make this simple to understand, let's look at one, single brand and track it through from the time you received the items until the time you have to pay the supplier's bill.

1. You receive 10 items of a brand on Monday and the invoice for $10.00, (10 * $1 each)

2. You mark up each item for 45% profit $1/(1 - 0.45) = $1.82

3. On day seven, you have banked ($1.82 * 7) =12.74 and you keep operating for 3 more days using the supplier's $10 as working capital. If it takes the supplier 3 days to clear your check, that's even better. This is called "Float" and it's one thing that made commission agents for companies like Texaco millionaires in the seventies and eighties and turned them into 'independent jobbers' until suppliers began drafting payments on the due date and ran thousands of them out of business. This is not likely to happen in the grocery business because there is too much competition.

4. On day 10 you will have banked (1.82 * 10) = $18.20 and pay the supplier ($10.00) leaving a gross profit of $8.20. Three days of that profit, $2.46 was made from an interest free loan from the supplier, but the important thing to remember is that you have set up a virtual consignment arrangement with the supplier because you never paid for the inventory. You simply gave the supplier his cut AFTER the sale. Keeping the money in an interest-bearing checking account allows you to make a profit off of the money accumulating in that account.

Now this sounds like a paltry sum to be dealing with and is one of the things that make it difficult to see the advantage. But if we go to a store that displays 2,000 brands, multiplied by the number of occurrences of each brand on a continuing basis you get a whole new perspective in real, actual benefits.

Remember this, the convenience store business is a penny-nickel-dime business, and our goal is to use the economies of scale to roll those coins up into a healthy profit.

I am going to end this lesson for now and pick up again next week where we left off. Just keep in mind that these things are possible and the steps it takes to turn this into reality are really quite rudimentary, but the payoff makes it well worth the time and effort you put into it.