Resource Allocation in Retailing

In allotting financial resources, the magnitude of various costs as well as productivity should be examined. Each has significance for asset management and budgeting.

1. The Magnitude of Various Costs

As noted before, spending can be divided into two categories. Capital expenditures are long-term investments in fixed assets. Operating expenditures are short-term selling and administrative costs in running a business. It is vital to have a sense of the magnitude of various capital and operating costs.

These are a rough average of capital expenditures (for the basic building shell; heating, ven­tilation, and air conditioning; interior lighting; flooring; display fixtures; ceilings; interior and exterior signage; and roofing) for erecting the following single freestanding store for these retailers: big-box stores (including department stores), $5.65 million; supermarkets, $5.0 million; home centers, $2.7 million; and convenience stores—$685,000. Thus, a typical home center chain must be prepared to invest $2.7 million to build each new store (which averages more than 44,000 square feet industrywide), not including land and merchandise costs; the total could be higher if a bigger store is built.²¹

Remodeling can also be expensive. It is prompted by competitive pressures, mergers and acquisitions, consumer trends, the requirement of complying with the Americans with Disabilities Act, environmental concerns, and other factors.

To reduce their investments, some retailers insist that real-estate developers help pay for building, renovating, and fixture costs. These tenant demands reflect some areas’ oversaturation, the amount of retail space available due to the liquidation of some retailers and mergers, and the interest of developers in gaining tenants that generate consumer traffic (such as category killers).

Operating expenses, usually expressed as a percentage of sales, range from 20 percent or so in supermarkets to more than 40 percent in some specialty stores. To succeed, these costs must be in line with competitors’ costs. Costco has an edge over many rivals due to lower SGA (selling, general, and administrative costs as a percentage of sales): Costco, 10 percent; Walmart, 20 percent; Target, 20 percent; Kohl’s, 23 percent; Dillard’s, 25 percent; and Macy’s, Inc., 30 percent.²²

Resource allocation must also take into account opportunity costs—possible benefits a retailer forgoes if it invests in one opportunity rather than another. If a chain renovates 15 existing stores at a total cost of $3.5 million, it cannot open a new outlet requiring a $3.5 million invest­ment. Financial resources are finite; consequently, firms often face either/or decisions.

2. Productivity

Due to erratic sales revenues, mixed economic growth, high labor costs, intense competition, and other factors, many retailers place great priority on their productivity, the efficiency with which a retail strategy is carried out. Productivity can be described in terms of costs as a percentage of sales, the time it takes a cashier to complete a transaction, profit margins, sales per square foot, inventory turnover, and so forth. The key question is: How can sales and profit goals be reached while keeping control over costs?

Because different retail strategy mixes have distinct resource needs as to store location, fix­tures, personnel, and other elements, productivity must be based on norms for each type of strategy mix (such as department stores versus full-line discount stores). Sales growth should also be measured on the basis of comparable seasons, using the same stores. Otherwise, the data will be affected by seasonality and/or the increased square footage of stores.

There are two ways to enhance productivity: (1) A firm can improve employee performance, sales per foot of space, and other factors by upgrading training programs, increasing advertising, and so forth. (2) It can reduce costs by automating, having suppliers do certain tasks, and so forth. A retailer could use a small core of full-time workers during nonpeak times, supplemented with part-timers in peak periods.

Productivity must not be measured from a cost-cutting perspective alone. This may under­mine customer loyalty. One of the more complex dilemmas omnichannel retailers face is how to handle online purchases returned to the store. To control the higher costs associated with pro­cessing online purchases in stores, some retailers have decided not to allow online purchases to be returned at their stores. This policy has upset a lot of customers and resulted in most of these firms changing their policies.

Here are two examples of strategies that diverse retailers have used to raise productivity:

• Many firms are using computer software to improve their allocation of shelf space to be more productive per square foot. The Winn-Dixie and ShopKo supermarket chains are among those that utilize SAS Retail Space Management software.
• Department store retailer Macy’s, which also owns Bloomingdale’s and BlueMercury, is rely­ing on cost efficiencies and a flatter, more agile organizational structure to pursue growth and regain market share in its core omnichannel businesses. Measures include reducing the store portfolio and reinvesting resources online and with stores having the highest sales potential. Savings in labor costs will come through a 2 percent reduction in store personnel, back­office staff, and voluntary separation options for senior executives. Consolidating Macy’s Inc. credit and consumer service facilities and reducing budgets for meetings and travel will further reduce costs.²³

It is vital that retailers, in their quest to become more productive, not alienate their customers and diminish the shopping experience. Increasing sales productivity by reducing costs is common, but the true challenge in a retailer’s performance is to build productivity profitably.

Source: Barry Berman, Joel R Evans, Patrali Chatterjee (2017), Retail Management: A Strategic Approach, Pearson; 13th edition.