A quick MOT of potential vulnerabilities and some pointers on how to protect your EBITDA
The consumer is nervous about the current economic climate with Brexit talks looming and general uncertainty ahead. This is reflected by a softening in trading on the High Street and profit margins under threat across the wider multichannel retail sector.
Many of us remember a decade ago when trading was tough following the banking crisis. In such times of uncertainty different approaches to business planning are required to protect cash flow and profit and ensure the business survives in the short term and is poised to take advantage of future trading upturns.
What are the key areas most likely to erode the bottom line that a business should focus on?
1. Your brand – your biggest asset. Optimize this asset and its reputation in your retail sector. With social media being an increasingly well used tool for everyday comment make sure that you use this tool to the advantage of your brand. Referrals are increasingly important as customers check out comments and share ideas with friends before making a purchase. Even negative comments can be turned to your advantage if dealt with speedily and effectively channel. Turn social media into a positive environment to both retain your customers and for them to share comments and ideas with you and also to recruit new customers.
2. Marketing spend - evaluate carefully the return on investment of each element of the marketing spend. What is really driving sales in this complex on and offline world. Cut back on any elements that are not generating the target ROI. The devil is very much in the detail when evaluating what the key drivers are. Be sure that all cost elements are accurate and update regularly – don’t just use planned costs. Report by detailed cells or media codes to enable you to review and action any activities that are not achieving budget ROI.
3. Customer retention – maintaining a high level of customer loyalty to your brand is key at all times but in a tougher trading environment it is critical. Understand your customer base, develop detailed customer segments to understand them better and monitor their behaviour, base frequency of contact and where practical content on the behavior of these different segments.
4. New customers are always the lifeblood of any business. But their acquisition can also be the riskiest in terms of allocating marketing spend. Understand their initial cost to recruit and their 12 month lifetime value together with longer term profit contributions. Understand the role new customers play in your sales strategy and the investment required to acquire them. How many do you need to recruit for the business to be static, how many for 5 per cent, 10 per cent, 15 per cent growth etc and at what cost. What if trading becomes more difficult and marketing strategy is less effective leading to increased, possibly unaffordable cost of acquisition. Ensure flexibility, set weekly / monthly goals – evaluate regularly and adjust spend accordingly. Be cautious.
5. Product – stock levels, choice - no of SKU’s, required investment, stock turn rate, availability versus demand, over stocks if not controlled all consume cash. Set the required stock holding levels in terms of cash requirements and de-stock regularly throughout the year to not exceeds these levels. This will help ensure that stock availability matches demand and improve first time fill rate.
6. Margin – an improvement in the net margin improves the bottom line and equally any erosion of margin. i.e. as a result of increased promotional activity , has a negative impact. Margin should be an important one of your KPIs. One client saw a slight decrease in sales in 2017 versus plan but as a result of decreased promotional activity and less margin erosions saw a major improvement on EBITDA year on year.
7. AOV – tougher trading does not always mean reduced response but it can affect basket size and average order value. Variations in average product price points can also impact on this. Monitor this carefully as often the cost of handling the order remains static so fluctuation in AOV can impact on profitability.
8. Returns cost the business money and leave customers dissatisfied. It is tempting to retain a popular line even if returns way exceed the average. If the problems with the product cannot be fixed then de-list and de-stock. Monitor carefully at the start of a new season / campaign and on an ongoing basis not just as part of an end of season review and take immediate action. Set a goal to reduce returns levels as these costs drop straight to the bottom line.
9. Delivery costs - look at this like a cost centre. Income from P&P and delivery charges versus costs to the business. Monitor the impact of Free P&P and free returns promotions versus their effectiveness in driving sales.
10. Business cost centres however minor– review each one in finest detail to determine where any cost savings can be made and potential impact on bottom line. Set cost budgets and monitor monthly to ensure these are achieved.
A lot of the points above are probably your everyday KPI’s. But don’t just do lip service to them. Can you improve on the goals you have set? What regular remedial action (daily, weekly, monthly) are you going to take to get the business back on track? Ensure the entire business is behind achieving these targets, are involved in the regular review process, implement any required changes and get rewarded for success.
By Rosemary Stockdale, Rosemary Stockdale Associates
This article appears in the July/August 2017 issue of Direct Commerce Magazine.