Hurdles in hardware (Part 2)

By Peter Cox March 01, 2015 Industry news

In the last issue I examined four of what I see as the top 10 pitfalls in operating a hardware store: competing on price alone; location and the competition; coping with cutting prices; and matching your offering to your customer mix.

In this issue I will complete the list and you can explore whether any of these are affecting your store.

 

5. POOR STOCK PLACEMENT, HOUSEKEEPING

I have always said there are two ways to estimate the stock turn of a product on the shelf: go to the computer and look at the screen; or measure the dust around the base of the product.

I made the point in the last article about the importance of differentiation from competitors and not using price as your main weapon. Perhaps having a clean store, shelves, uncluttered counter and being an easy place to shop could make the difference?

 

6. SALES ARE GREAT BUT CASH IS KING

There is only one reason you go out of business – you run out of cash. Yes cash is tied up on the sales floor, drive thru and on the shelves but you are not out of the woods if the stock is sold to an account customer. Then the real fun can start – getting the payment in.

In this day and age I am still amazed at the number of stores that have no credit procedures at all. That is, no formal credit approval process for new trade customers or for existing account customers who substantially increase their exposure with the store.

Collecting the account becomes priority Z, probably because we like to make the sale and negotiate and hopefully the payment will look after itself. Remember a sale is not a sale until it is paid for!

 

7. RELYING ON ACCOUNTANT FOR PLANNING AND ADVICE

Most accountants run rings around me when it comes to tax advice. After all, this is a specialist field where professionals keep themselves up to date and practice tax accounting on a daily basis.

However I have always believed that the purpose of running a hardware store is to have a tax problem – and the bigger the tax problem the better (that is to maximise the profitability of the store)! Many retailers’ superannuation is the store itself and to maximise goodwill the store has to have a proven record of profitability and good asset management.

If you are in a member-based organisation, talk to other members about your challenges and what has worked for them. A good relationship with sales reps can also help as they are in a number of stores each month and can pass on successes they have seen in store layout and merchandising.

 

8. BENCHMARKING YOUR RESULTS

I am all for benchmarking your store’s key performance indicators against other stores. This can help you prioritise your attention areas and then put together a strategy to improve.

But this is based on one caveat – that you compare your results with similar operations in terms of sales mix and local building activity. After all, the Gross Profit Margin of a retail hardware store is usually higher than a trade-based store. Conversely, the stock turn is higher if sales are predominantly cement, pipe and building supplies. The rule here is, when benchmarking, compare apple to apples, not apples to oranges.

 

9. NOT SPOTTING THE TRENDS

If benchmarking isn’t possible then a simple trend analysis of the store’s results is handy. I have four key performance indicators which I review with my clients every quarter. They are:

  • Gross Margin and inventory management (GMROI).
  • Staff productivity: $ Gross Profit per person.
  • Risk: margin of safety.
  • Return: return on investment.

This review only takes a few minutes but is priceless when you have several years of data.

 

10. SUCCESSION PLANNING

My final pitfall to be avoided is lack of planning for the future. I have always worked on a rule of thumb that it can take up to five years to maximise the goodwill and plan an exit strategy.

In this publication I have published a series of articles on how to calculate goodwill and on my website (see http://petermcox.com.au/financial-mgmt-tools/free-tools.html) you will find a simple goodwill calculator for a hardware or trade store.

Hoping that one day someone will ring and want to buy the store is just that, hope! 

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Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au

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