Store economics: the numbers that decide profit
Work through one store: sales per square metre, gross margin, shrink, like-for-like growth, and inventory turns, then see how the supply chain behind the store works.
Industry brief, with a one-minute summary: RetailKey takeaways
- In retail, the unit is the store. A store earns its place if its sales per square metre, after margin, shrink, staff, and rent, leave a clear profit, and if its stock turns into cash quickly.
- Forecast demand for each product in each store, using past sales, season, and promotions.
- Receive goods at a distribution centre, sort them by store, and send mixed truckloads.
Key idea
In retail, the unit is the store. A store earns its place if its sales per square metre, after margin, shrink, staff, and rent, leave a clear profit, and if its stock turns into cash quickly.
Worked case
Does one supermarket earn its space?
The prompt
An illustrative supermarket in Spain has 1,500 square metres of selling space and sells EUR 6,000 per square metre per year. Its gross margin is 26 percent. Shrink is 1.5 percent of sales. Staff cost 10 percent of sales, rent is EUR 450 thousand a year, and other store costs are EUR 300 thousand. What is the store contribution (profit before head office costs), and what happens if shrink rises to 2.5 percent of sales?
The structure
- Store contribution = gross profit minus shrink minus staff minus rent minus other store costs
- Sales = selling area x sales per square metre
- Gross profit = sales x gross margin
- Store costs: shrink and staff move with sales; rent and other costs are mostly fixed
Working it through
1. Sales
1,500 square metres times EUR 6,000, shown in EUR thousands.
Sales (EUR thousands):1,500 × 6,000 ÷ 1,000 = 9,0002. Gross profit
26 percent of sales.
Gross profit (EUR thousands):9,000 × 0.26 = 2,3403. Shrink
1.5 percent of sales is lost to theft, damage, and waste.
Shrink (EUR thousands):9,000 × 0.015 = 1354. Staff
10 percent of sales.
Staff cost (EUR thousands):9,000 × 0.1 = 9005. Store contribution
Gross profit minus shrink, staff, rent, and other costs.
Store contribution (EUR thousands):2,340 - 135 - 900 - 450 - 300 = 5556. Contribution margin
Store contribution as a share of sales.
Store contribution margin (percent):555 ÷ 9,000 × 100 = 6.177. Shrink rises to 2.5 percent
Shrink becomes 225 instead of 135, so contribution falls by 90.
New store contribution (EUR thousands):2,340 - 9,000 × 0.025 - 900 - 450 - 300 = 4658. Size of the fall
The fall as a share of the old contribution.
Fall in store contribution (percent):(555 - 465) ÷ 555 × 100 = 16.229. Sales needed to make it back
At a 26 percent gross margin, each euro of extra sales adds 26 cents of gross profit.
Extra sales needed (EUR thousands):90 ÷ 0.26 = 346
The recommendation
The chain should keep the store but make shrink a priority, because it earns EUR 555 thousand, about 6 percent of sales, and one more point of shrink would cut that by about 16 percent, to EUR 465 thousand. This means the store would need about EUR 346 thousand of extra sales just to stand still. The reason is that shrink comes straight off profit, while extra sales earn only a 26 percent margin. The risk is that shrink figures are estimates, since stolen goods are only found at stock counts. As a next step, count stock more often in the categories with the most theft and waste.
Risks: Rent and other store costs are treated as fixed; in practice energy and cleaning move a little with sales; Shrink numbers are estimates, because stolen goods are only found at stock counts.
Like-for-like growth: are existing stores doing better?
A chain can grow total sales just by opening stores, while each old store sells less. Like-for-like (LFL) growth removes this effect. Always ask for LFL before praising a retailer's growth. Then split LFL into its parts: more transactions (footfall and conversion) or a bigger average basket (more items, or higher prices). A basket that grows only because of inflation is not real volume growth.
Worked case
Total sales up 8 percent, but are the stores healthy?
The prompt
An illustrative grocery chain had 100 stores and sales of EUR 500 million last year. This year it has 110 stores and sales of EUR 540 million. The 10 new stores sold EUR 45 million. What is total growth, and what is like-for-like growth?
The structure
- Split total growth into new stores and existing stores
- Total growth = this year versus last year, all stores
- LFL growth = existing stores only
Working it through
1. Total growth
From 500 to 540.
Total sales growth (percent):(540 - 500) ÷ 500 × 100 = 82. Sales of existing stores
Remove the new stores.
Existing store sales (EUR millions):540 - 45 = 4953. Like-for-like growth
Existing stores this year against the same stores last year.
LFL growth (percent):(495 - 500) ÷ 500 × 100 = -1
The recommendation
The chain should not treat 8 percent growth as healthy, because its existing stores shrank 1 percent like for like, from EUR 500 million to EUR 495 million. First, the 10 new stores added EUR 45 million, which hides the decline. Second, opening stores cannot go on forever, so the chain must fix the base. The risk is that new stores are taking sales from nearby existing ones. As a next step, split like-for-like sales into transactions and basket size to see which fell.
Inventory turns: how fast stock becomes cash
Inventory turns = cost of goods sold in a year / average inventory held. Days of inventory = 365 / turns. For the supermarket above, cost of goods sold is 74 percent of EUR 9,000 thousand, which is EUR 6,660 thousand. If it holds EUR 444 thousand of stock on average, it turns stock 15 times a year, about every 24 days. A clothing chain may turn stock only 4 times a year, about every 91 days, because it must hold a full season of sizes and colours. Fast turns free cash. Grocers often sell goods before they have paid the supplier, so suppliers partly fund the stock.
How goods reach the shelf (the retail supply chain)
- 1Forecast demand for each product in each store, using past sales, season, and promotions.
- 2Order from suppliers. Grocery orders are daily or weekly. Apparel is usually bought 6 to 9 months ahead, with a small share bought close to the season.
- 3Receive goods at a distribution centre, sort them by store, and send mixed truckloads. Some suppliers (bread, drinks, newspapers) deliver direct to the store.
- 4Fill shelves, check prices, and remove expired fresh food. Staff hours are planned around deliveries and busy times.
- 5Sell, then reduce the price of slow items (markdown) before they lose all value.
- 6Count stock and compare with records to find shrink.
In India, much of Africa, and parts of Southeast Asia and Latin America, a large share of groceries is still sold through small family shops (kiranas in India, dukas in East Africa, spaza shops in South Africa). They buy from wholesalers and distributors, offer credit to regular customers, and deliver locally. Organised chains compete with them on price and range, not on nearness. The Consumer packaged goods module explains how brands reach these shops.
A convenience store in Japan has annual sales of JPY 240 million on 120 square metres. What are its sales per square metre, in JPY thousands?
A pharmacy chain in Brazil grew sales from BRL 1,000 million to BRL 1,200 million. New stores opened this year sold BRL 150 million. What is like-for-like growth, in percent?
A fashion retailer in the UK has yearly cost of goods sold of GBP 60 million and holds GBP 15 million of stock on average. How many days of inventory does it hold? Use 365 days and round to the nearest day.
Why is shrink so important to a grocer's profit?
A retailer says sales grew 12 percent. What should you ask first?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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