Rate of sale really does matter

Rule one

It is not the profit you make on an item that is important for the success of your business; it is stock turnover in relationship to gross profit.

In the US, Costco makes a very small profit on toilet paper. If you looked at its gross profit you would judge it a loss leader that is not worth stocking. But you also need to consider rate of sale. Costco turns this product 360 times a year. Looking at it this way, you realise this is a very profitable item for the company.

Compare this to a story someone told me recently.

He felt he was making good money on an item, achieving 75 per cent gross profit.

But when I analysed his sales, he was not even selling this item once a year. It was draining profit from the business.

All products in a convenience store will sell at different rates, but each item should sell at least every three months.

There are exceptions which need to be stocked to help you create a point of difference or to provide depth of range to give you credibility, but beware of having too much slow-selling stock.

Rule two

When you or your staff order stock, you need to ask yourself one question: Can I sell this before I have to pay for it? If you can, you will have a very profitable business. I am not suggesting you delay payment.

Instead, you should be assessing the number of items you are purchasing in relation to how quickly they will sell.

I know of one retailer who invests $12,000 in stock at the beginning of the year and makes $1.5million on the investment purely by careful stock management.

Rule three

I often work with retailers who tell me that a specific product has sat on the shelf for 12 months.

When I ask what they have done about it I often get a blank look.

The winning retailer monitors stock; if a product is not selling they will make a decision to sell it. What they do depends on the product.

They may change its position in-store, the message on the signage, what they say to customers when they talk about it, bundle it with another product to create a new product, or use it as a marketing tool to generate more sales.

The last thing they would do is place it on a sales table to destroy the image of their business.