Retail, an asset allocation problem

I have been working in retail for almost two years now and have been learning a whole deal about how a good retailer is run. When you think of retail there are many components that make it great but at the core is one simple concept, what return can you get from your inventory investment and how do you maximise it?

There are two metrics that play a huge role in answering this question:

1) Gross profit Margin
2) Inventory turn


These two combined produce a version of return on inventory investment with the equation being [Gross profit] / [Average inventory investment through the year]. The way I have simplified it into an investment problem is by asking the following questions:

1) How much can I make off each investment? (GP)

2) How often can I make investments in the year? (Inventory turn)


Obviously this ignores any funding of the inventory but that is more of a financing decision than the raw economics inherent in each retailer. If the base numbers work then any gearing you can achieve is pure upside.


By driving either 1 or 2 you can significantly improve return on inventory. Another way to think about it is if you have a target Return on Inventory then you can set your strategy to either maximise GP% or inventory turn, example a petrol retailer has very small margins and are most likely fixed so if you were to Target a return of lets say 30% in the year and the margin was 2% then you would need to turn the inventory over 15 times. If you currently only turn it at 12 times a year then you know where to concentrate.

That's an example of a one product retailer, for a multiple product, multiple brand retailer the problem gets more complicated. If we had say three brands x, y and z the CEO would need to decide how much capital to dedicate to each brand to maximise return by either maintaining inventory or trying to grow inventory that has a superior return. At the next level each brand executive would need to allocate their pots of money to products to maximise the return of the brand. In essence these two people in the retailer are making the same decisions as an investor of funds would make, which funds do I allocate my money too and how much. Then at the fund level the fund manager asks what are the best allocation % to what stocks to maximise return.

The question for me is what good practices and techniques can a retailer use that the investment industry currently uses?

Next I will follow the concept but break it down for South African retailers that are publicly traded to get a feel for how differently each retailers economics are.

Hope you have a good 2011

Audio book list for September

I spend over an hour in traffic everyday so I try and listen to as many audio books as I can. I figure I might as well use the time wisely. Here are two books I love and have listened to more than once:

Tha Black Swan by Nassim Taleb, this book keeps me in check and reminds me that my brain is far from perfect at getting to right conclusions when looking at data. I suggest if you work with making decisions from data, interested in investing or work with other people that make decisions from data that this book is a must read.

The Art of Profitability by Adrian Slywotzky, I will concede that this book is written in a very different style but I couldn't put it down (pull the plugs out my ears in this case) I finally got the idea behind the term business model. The book forces you to think in terms or where and how does the profit in the business come from and how do I grow it. I find myself standing in the pizza store try to figure out how they make their money and what the opportunities would be to increase the profit. So if you like trying to understand business and how the cogs turn then this is a must listen.

Hope you enjoy these as much as I did

The Matrix .......structure

Well the all powerful Google Analytics says we have had 12 people read this blog in the last couple of weeks, the fact that the average time on the site is close to zero must be a data glitch right ;)

Anyway in conversation with one of my company's executive we got to discussing matrix structures. Now I have a history with matrix structures....I don't like them. I know they can be extremely powerful and efficient but i have found they are very hard to manage and often take up so much energy to manage people the right way to get anything done that I don't know if its worth it. But there is more to it, I believe that it removes responsibility to things like a budget and leaves some players with skin in the game and others with none.

That said I can see how "commodity" and skills you require infrequently can be matrixed but I don't understand how you matrix entire departments.

So to our 12 readers, what are your experiences?

Happy spring day

Debate.....why isn't there more

This post has been brewing in my head for a while and is very close to the core of who I am. Simply I believe that a couple of bright people thrashing out an idea is the best way to get to a great solution. This is pretty old hat but not for all, corporate culture really dictates whether this happens or not.

The past two jobs I have had I have had two very different environments, one where debate was EXPECTED and another where it is not. Here are my findings:
1) Debate does create better solutions
2) It helps train junior people faster as they ask more questions
3) It helps avoid mistakes, if the CEO is making a bad call many people will challenge the call
4) Good people are attracted to companies where bright people interact and debate business issues
5) It makes works interesting
6) Employees feel like they are in control of the companies future

This all sounds really good, but many senior people react very negatively to debate and whenever their ideas are challenged, so how would you react if a guy two days on the job said he thought you were making a mistake? Will you listen or will human nature kick in?

The MBTI

Came across the following book in today's Washington Post's weekly best-seller list:

TYPE TALK: THE 16 PERSONALITY TYPES THAT DETERMINE HOW WE LIVE, LOVE, AND WORK
(Dell, $17). By Otto Kroeger and Janet M. Thuesen

It reminded me of a fairly detailed conversation that I had gotten into with a friend (This friend, Eric, has the coolest title short of the President of the US - he is a Futurist. He does for a living, what we all do over coffee breaks. Anyway, I digress...) a couple of weeks ago about the whole MBTI personality types. I have never been very sure about how much faith to put into this. Do people change over time? Are they different personalities in different circumstances, etc.

The conversation with Eric was quite enlightening. He is clearly quite bought into this and talking to him got me convinced of the value of the framework. My questions were not necessarily answered, but I did feel that for the here and now, they were irrelevant. It was, more than anything else, a way to think about how people were behaving and what their preferences were. It gave me a framework to evaluate what was bothering me about my current environment, and come up with suggestions that might help address them.

So, apparently I am an ENTJ, doing a job that is probably best suited for an ESTJ, working for an ENTJ boss. My action point - hire an ESTJ to do the sensing for me...

mind of marketing: Grow or die! Product fertilizer to grow your top line

mind of marketing: Grow or die! Product fertilizer to grow your top line

A network of trust 2.0

As some of you may know I don't really get the valuations of these Web 2.0 business, nor do I fully understand the way they will or are making money today. I put it down to my age....I'm 31.0 which is bigger than 2.0. Recently I have found some users of Facebook that are really using it properly and by properly I mean not simply as a glorified contacts manager( Like I do) and one of these super users gave me an example which sparked a thought.

His wife had recently started making jewellery and had posted some pictures on her Facebook page for her friends to see, the next morning she had 3 orders.....WOW

Apart from being able to market to your friends has Facebook created a network of potential customers that trust you because you are a part of their network. No one asked her "Is this stuff for real?", they knew her and trusted her and they went straight to check out. That sparked another question, could Facebook be used to ignite the one man business, a business based on implied trust?

Will Facebook be the next place you sell your car?

Who knows, but I can tell you its a great place to count how many friends you have ;)

Negative people, the idea's killer

What a great title for my first post, but hey its the first conversation I feel like talking about.

Today in a meeting I came accross a very very negative person. It was like someone had passed him crib sheets of all the ideas I was going to come up in the meeting so he could counter them. Tom Peters says you should try and avoid these people like the plauge or read them the riot act, I agree with him as you just have to stay positive and want to win. One thing I can be certain about is that every company has these people so we all have to deal with it some way or another. Whats more is that in these tough times they seem to convert the good times fence sitters to the dark side, so dealing with them is more important in testing times.

My question is how do these people affect the organisation? Its obviously negativly but how bad can it get, could a group of dark siders sink an organisation? Furthermore who is likely to leave for greener pastures the negative or the positive? And lastly how does senior management ensure an idea / growth orientated environment when negative employees are on the rise?

Anyway don't join the dark side and stay positive, remember business is suppose to be challenging and fun.....ok its more of a goal but something we should all be working towards.