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CHAPTER 12
EVALUATING RETAIL
PRODUCT MANAGEMENT
PERFORMANCE
LEARNING OBJECTIVES
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Become familiar with terminology and principles
associated with RPM performance evaluation
Understand that performance analysis
approaches will vary between retailers
Appreciate the contribution that cost control and
shrinkage control can make to financial
performance
Understand how customers evaluate a retailer’s
product range, including qualitative measures
PRODUCT PROFIT

The profit margin a product earns is a well
established performance measure
 Gross

margin (mark-up)
The difference between cost and selling price
 A mark-down
is a price reduction that reduces
the gross margin
SALES
Another well established performance
measure
 High sales generates cash flow, but not
necessarily high profits
 High sales means high stock turnover,
prevents obsolescence and allows
retailer to change ranges according to
seasonal demand
 Price sensitivity should be considered
when setting retail prices

PROFITABILITY

The profit a product generates depends on:


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gross margin
rate of sales
GMROI (Gross margin return on investment)
allows a retailer to compare the performance
of products with different % profit margins and
different sales turnover
GMROI calculations can be made at SKU,
category and department level
GMROI does not consider the variation in
costs of selling
Illustration of GMROI

Insert table 12.1
DIRECT PRODUCT
PROFITABILITY (DPP)

Considers the costs associated with
stocking a product in order to obtain a
more sophisticated measure of product
profit
 selling
costs (e.g. chilled fixtures, high levels of
personal contact)
 supply chain costs (e.g. transportation, handling)
 also considers any revenue a product generates,
such as promotional allowance
ACTIVITY BASED COSTING
(ABC)
Takes DPP a stage further
 Includes allocations for indirect as well as
direct costs such as

 product
development costs
 overseas sourcing costs

ABC has been recommended as measure
of efficiency in ECR systems
THE IMPACT OF MARKDOWNS

Mark-downs are used to stimulate demand
for non-staple items, especially
 fashion
 seasonal
Mark-down analysis by SKU is a good way
to evaluate buying decision-making
 High total mark down values (deep price
cut x number of SKUs) indicate poor
buying decisions

PRODUCTIVITY

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Sales and profits are often expressed in terms of
the productivity of space (e.g. sales per square
foot of floor space)
Product management decisions may be required
in response to productivity performance (see
chapter 8)
 allocate
better quality space
 improve profit margin
 introduce more variation of product in category
SHRINKAGE
The term applied to stock that is removed
from outlet without payment
 Shrinkage control includes:

 reducing
mark-downs
 reducing retail crime
 better store management (reduction in
damages and shop soiling)
 good stock rotation
COST REDUCTION

Efficiency gains (see ECR chapter 3) can
be achieved by reducing costs associated
with
 product
development
 undertaking promotional activity
 poor replenishment
 having the wrong assortment

Negotiating better prices from suppliers
NEGOTIATION

Negotiation implies a mutuality of wants,
resolved by exchange, not necessarily
focused on achieving the lowest
possible price
 Preparation
stage
 Meeting stage
 Implementation of agreement stage

Negotiation takes place within the
framework of the retailer’s price
positioning strategy (e.g. premium,
discount, EDLP – see Box 12.3)
AVAILABIITY

Availability performance indicators are
growing in importance because they are
customer-focused
 the
availability of the total (ideal) product
assortment to customer
 stock cover (how long the retailer will remain
in stock)

Poor availability will damage a retailer’s
image
QUALITATIVE PERFORMANCE
MEASURES

Many measures of customer satisfaction are
qualitative including:
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retailer’s image
retailer’s reputation
retailer’s brand value (equity)
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These measures are all multi-attribute evaluations

Attributes that are directly under RPM control
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prices
merchandise quality
range of merchandise
BLENDING QUANTITATIVE AND
QUALITATIVE MEASURES

Interpreting various performance indicators is a
challenge for retail product managers

Analytical powers and objectivity are needed to optimise
product ranges so that both short- and long-term
performance objectives are achieved

This supports the argument (see chapter 2) for
considerable training period in which experience,
knowledge and understanding can be accumulated
about the product market and the retailer’s strategic
objectives