Retail organizational fundamentals discussion.

Financial StrategyWe’re not going to spend a large amount of time on the financial formulas involved in conducting a retail firms financial strategy. We want to paint the big picture to give you an understanding of where and how the financial end plays into a retailers’ overall market strategy. As for the formulas and ratios, you do need to learn the basic ones and the text does a strong job of covering these.Last week we spent time studying what it means to create a sustainable competitive advantage. In order to do this, a firm must have a sound financial strategy. Remember we talked about how a competitor could sell a product for a loss- but not for a sustained time frame? Such action would not constitute the foundation for a sound financial strategy. In order to remain on top of the game, a retailer must learn to use financial analysis in order to objectively look at how well they are doing. Analysis will provide insight to what actions may need to be taken in order to achieve the financial goals the retailer has set.The most basic, and important, concept in examining a firms financial performance is called return on assets. This figure takes into consideration how much profit a company makes, in relation to how many assets it controls. Confused? Don’t be. Think of a figure. Call it $5 million in profits. Sounds like a lot, right? But what does it mean? You need a benchmark to compare this number to. For a company with $50 million in assets, $5 million sounds like 10%. But what if the company has $500 million in assets? Suddenly, $5 million isn’t so impressive. And if the firm has $25 million in assets, well $5 million in profits sounds great.Another important factor is to compare a firms’ financial performance against others that are the same size, and in the same industry. So a $5 million profit on assets of $50 million may sound great, but what if your primary competitor is making $10 million on their $50 million in assets? What if the industry standard is to make a 25% return on assets? Then soundly your 10% return on assets does not sound so impressive. Hence, the use of benchmarks, of tangible competition, is necessary to understand and measure a firms’ financial performance.We’re not going to do the math, but you can get a feeling for how well a firm is doing by looking at the return on assets ratio. You tell me, which would you rather invest in, all things being equal? Which company is more efficient with what they have? A $500 million firm with $5 million in profits, or a $25 million firm with $5 million in profits?Another good indicator for determining a firms’ financial acumen is asset turnover. Simply having a sales figure, a high sales amount, doesn’t mean a firm is efficient or profitable. In fact, a sales number onto itself is virtually meaningless. How can this be? Because a sales number doesn’t give one any sort of a benchmark to gauge the number against. Thus was born the asset turnover ratio. This looks at a firms net sales, divided by its’ assets. OK, we’re getting technical here, so let’s stick with the earlier discussed firms. Instead of profits, we’re looking at sales. Once again, we have the large $500 million asset firm, with sales of $1 billion dollars. Is that good? Well, we need to compare it. So we have the smaller firm with $50 million in assets, and sales of $1 billion. The larger firms asset turnover ratio is 2, while the smaller firms is 20. In this case, bigger is better.There are numerous other meaningful financial ratios which must be examined in order to gain a picture of how a firm is doing. But our goal is to give you a sense of how important it is to have something meaningful to judge a figure by. When you hear that a company had X amount in sales, that number really is completely meaningless without a barometer to measure it.On a final financial related note, although it is easy to be a little flip and say all firms want to make money, when examined more closely, there are frequently other objectives as well. Two of these are societal and personal. For example, from a societal perspective, a firm may be concerned about providing employment opportunities for a specific geographic area or group of individuals (Kinicki & Kreitner, 2008). There are firms which aim to, for example, hire people with disabilities. Personal perspectives (Kinicki & Kreitner, 2008) are more common in smaller stores. A book store which specializes in “mystery” books may not care to carry the top selling book in the country if it is, say, a self-help book. So as we study financial strategies, remember profit is not the only factor to examine.Store TypeBefore selecting a physical location, a store must beside which type of market location best meets its needs. Selecting the type of and the location for a retail store comes down to one reality: compromise. There are many different types of locations which must be considered, and each has a trade-off. One location type is a freestanding store. This is a store which is isolated and not connected to any other store. Key advantages to this type include: easy access, lots of parking, and there are no outside restrictions in terms of store hours which are imposed when a retailer goes into a mall. Although not connected to others, freestanding stores frequently are near other stores. Cabella’s and Dick’s Sporting Goods are two who fall into this category (Levy & Weitz, 2014). An outparcel store is also freestanding, but it’s located on the premises of a mall or strip center, such as in the parking lot. These have become more popular as real estate firms look to maximize the space available to rent to retailers (Levy & Weitz, 2014).Other options include the central business district, more commonly known as downtown. In small cities, this may be called Main Street. If a retailer is looking for a high population density, than an inner city may be an alternative. Shopping centers, with lots of parking, are obviously a popular way to go. If you feed the shopping center a diet of steroids, it’ll turn into a Power Center, where you see large retailers like Michael’s and Lowe’s. And of course, there’s the mall route (Levy & Weitz, 2014).These are just some of the alternatives available. What is key to remember is each option has positives and negatives, so the process is one of constantly making compromises. Questions and topics which must be considered and ranked in terms of importance include: easy of parking and the number of spaces, control of store hours, necessity of population density, accessibility of cite location, traffic congestion, mass transit, necessity of deliveries, physical store size and configuration, role of other retailers, local tax rates, store visibility, pedestrian or walk up traffic, signage needs, safety regulations, ease of competitors to operate nearby, role of adjacent retailers, advertising co-operative and promotional costs (Levy & Weitz, 2014). And you’ll notice we have not even mentioned the two most important: cost of rent, and the terms of the lease.So these are some of the issues retailers must decide before selecting the location. As mentioned earlier, it becomes an issue of compromise and selecting what factors are must necessary to meet the firms retail strategy. In the real world, site location is a complex and difficult job because of the need to select one factor, such as ease of parking, over another, such as the need to control of store hours.After reading the lesson answer discussion question: what strategies would you implement for stimulating profit?