RETAIL PROFIT MODEL

Objectives and
Goals
First step in the strategic planning process involves
articulating the retailers objectives and the scope of
activities it plans to undertake.
These objectives guide the development of the retailers
Strategy.
Three types of objectives retailer might have are:
1) Financial objectives
2) Societal objectives
3) Personal Objectives

Financial
Objectives
Most people focus on profit to assess the financial
performance and this is not RIGHT!!!
It is not profits it is RETURN ON INVESTMENT (ROI)
Aiming for profit

Amount of money
Invested

ROI

Performanc
e

Rs 100,000

Rs 500,000

20% Excellent

Rs 100,000

Rs 2,000,000

5%

Poor

A common used measure of ROI is RETURN On ASSESTS (ROA)

Societal
Objectives
Societal objectives are related to broader issues about
providing benefits to society-Making the world better
place to live.
Examples: retailers might be concerned about
providing employment opportunities etc.
Performance with respect to societal objectives is
more difficult to measure than financial objectives.
We rely on percentages for example percentage of women
Employed in the retailer Business.

Personal
Objectives
Many retailers especially owners of small business
have personal objectives such as self-gratification,
status, and respect

Strategic Profit
Model

The strategic profit model is a method for summarizing the factors that affect a firms
financial performance by ROA.
The model decomposes ROA into two components:
1) Net profit margin and
2) Asset turnover

The net profit margin is simply how much profit (after tax) a firm
Makes divided by its net sales.
It reflects the profits generated from each Rupees of sales .

Strategic Profit
Model

Asset turnover is the retailers net sales divided by its assets.

This financial measure assesses the productivity of a firms
Investment in its assets and indicates how many sales
rupees are generated by each rupee of assets.

Components of the Strategic Profit

Model

6-25

The Strategic Profit Model:

Profit Management
Sales
Gross
Margin

100

40

Cost of
Goods
Sold

Net Profit
Net Profit
Margin

15

15%

6-26

Sales

Total
Expenses

100

25

60

Income Statement
Net Sales: refers to the total revenue received by
a retailer after all refunds have been paid to
customers for a returned merchandise.
Sales are an important measure of performance
because they indicate the activity level of the
merchandising function.

6-27

The Strategic Profit Model:

Asset Management
Inventory

5
Sales
Asset
Turnover

100

Current
Assets

10

2.5

Accounts
Receivabl
e

Total Assets

40

6-28

Fixed
Assets

Other
Current
Assets

30

Components of Gross Margin

Gross Sales
Less Returns
Less
customer
allowances

Gross Margin

Net
Sales
COGS

6-29

Operating Expenses
Operating Expenses = Operating Expenses %
Net sales

6-30

Types of Retail
Operating Expenses

Selling expenses
Commissions +
General expenses
Miscellaneous

Sales staff salaries +

Benefits
=

Rent + Utilities +
expenses

Administrative expenses
other than

Salaries of all employees

salespeople + Operations of
buying
offices + Other
administrative expenses
6-31

Net Profit
Net Profit = Net Profit %
Net sales

6-32

Inventory Turnover
Cost of Goods =
Average inventory

6-33

Inventory Turnover

Asset Turnover
Net Sales = Asset Turnover
Total Assets

6-34

Return on Assets
Net Profit Margin x Asset Turnover = Return on Assets

6-35

Gross Margin Percent

Gross Margin = Gross Margin Percent
Net Sales

6-36

Operating Expense Percent

Operating Expenses
Net Sales
Stores:

= Operating Expenses %

$250,000
$700,000

GiftstoGo.com: $150,000
$440,000
6-37

35.7%

34.1%

Net Profit Percentage

Net Profit = Net Profit Percentage
Net Sales

6-38

Stores:

$ 59,800
$700,000

8.5%

GiftstoGo.com:

$ 45,500
$440,000

10.3%

The Strategic Profit Model

Net Sales

Cost of
goods sold

Gross
margin

Variable
expenses

+
Fixed
expenses

Total
expenses

Profit Management

Net profit

Net profit
margin

Net Sales

x
Inventory
Net sales

+
Accounts
receivable

+
6-39

Other current
assets

Total
current
assets

Fixed assets

Return on
assets

Asset
turnover

Total assets

Asset Management

Setting and Measuring Performance

Objectives
Retailers will be better able to gauge performance if it has
specific objectives in mind to compare performance.
Should include:
numerical index of performance desired
time frame for performance
necessary resources to achieve objectives

6-40

Setting Objectives in Large Retail

Organizations
Top Down Planning
Corporate Developmental Strategy

Category, Departments
and sales associates
implement strategy
6-41

Setting Objectives in Large Retail

Organizations
Corporate

Bottom Up Planning
Buyers and Store
managers estimate
what they can
achieve
6-42

Operation managers
must be involved in
objective setting
process

Financial Performance of
Retailers
Outputs Inputs Used by
Performance
Retailers
Sales
Inventory (Rs.)
Profits
Real Estate (sq.
Cash flow
ft.)
Growth in sales, Employees (#)
profits Same
Overhead
store sales growth (Corporate Staff
and Expenses)
Advertising
Energy Costs
6-43

Performance Objectives and

Measures Used by Retailers

6-44

Benchmarks
Performance of retailer over time retailer can
compare its recent performance to its performance
in the preceding months, quarters or years.
Performance of a retailer compared to its
competitors

6-45

THANK YOU