Lowering the Ceiling on Overhead
Any owner of a retail beverage business who pays the bills at the end
of the month knows finding ways of reducing those dollars floating
out the door or flying away electronically is a “no brainer.” But a no
brainer is a lot easier to put into action if the owner has a thoughtful plan
for cost reductions. Such a plan needs a business philosophy as well as
a set of tactics.
KPMG is one of the largest firms supplying consulting and tax advice to retail businesses, and Wayne Eckstein, KPMG’s director of advisory services for retail supply chain, strategy and operations, has a simple guiding principle for looking at business costs. A successful business, he says, has “a deep understanding of the controllable costs—labor, inventory, leading practices, efficiencies—and [knowing] what levers the owner can pull to impact them.”
We asked a couple of business advisors and selected retail store owners which levers have worked for them.
BEGIN BY TAKING A CRITICAL LOOK AROUND YOUR SHOP.
Are there things you’re paying for in rent, servicing or energy costs that you don’t need? Are you thinking about purchasing equipment or services that may be nice but not necessary? “Every so often I just walk around the store and look at everything,” says Theresa Rogers, owner of Horseneck Wines & Liquors in Greenwich, CT. “I’ll ask myself, ‘Do you really need three coolers?’” Similarly, stores which have customer delivery may need fewer vehicles. Even if an extra van has been paid for, there are still tags and insurance costs.
EVALUATE YOUR FLOOR SPACE AND STORAGE AREAS. Rent is one of your biggest expenses, so don’t pay for floor space and storage space you don’t need and don’t use. Michael McGrail, manager director of Tiger Group asset managers, says you should prepare to challenge rental fees when leases come due. In the current economic environment, building owners will often favorably negotiate a lease extension rather than lose you. Gary Burhop of Great Wines & Spirits in Memphis, TN, urges that you periodically re-examine your part of shared costs—such as utilities and mainte nance—if you’re in a shopping center; and be ready to challenge, or ask for, tax re-evaluations.
MAKE SURE YOUR STAFFING IS RIGHT FOR THE TIME. Owners will debate whether more full-time or part-time employees is better. Part-time employees mean lower costs for benefits—an especially volatile issue right now—and they are more flexible to schedule during the ebb and flow of peak customer hours. On the other hand, full-time employees often command strong customer loyalty, require less training and are usually more flexible in the tasks they can do. Either way, you need to put emotions aside and do the math.
BALANCE YOUR INVENTORY. There is always a fine line between having items that aren’t moving versus not giving the customer enough choices.
“I only buy what I can enthusiastically sell,” says Linda Collier of Collier’s of Centreville in Delaware. “I do not take product given by distributors,” she adds, because that would create an obligation.
Similarly, Brett Zimmerman of Boulder (CO) Wine Merchant likes to work with distributors who offer small lots of wines exclusive to his store, permitting better markups.
“Maryland now allows distributors to have quantity discounts, and I like to take advantage of that,” says John Murray of State Line Liquors in Elkton, MD. “My inventory has actually gone up in recent years—but I keep it moving.” In some markets, retailers are able to rely on just-in-time stocking because distributors will deliver daily.
KPMG’s Eckstein says you need to keep in mind the rule that “the typical ratio between sales and inventory is that 20% of inventory items account for 80% of your sales. Never be out of stock on best sellers, and evaluate the bottom feeders.”
If all else fails, Burhop is unsentimental: “I put my slow sellers on my discount ‘rack of death’ or give them to charity events.”
DO AN ANNUAL REVIEW OF YOUR INSURANCE. In Memphis, Gary Burhop annually asks for bids and reviews them with his current agent to see if he will match what competitors are quoting.
It also makes sense to review the types of insurance you have and whether you need all of them and in what amounts. Your deductibles may be determined by your cash reserves. “If the cost is too high, then we’ll assume a larger part of the risk,” Burhop says.
ASK FOR AN ENERGY AUDIT. As counterintuitive as it may sound, most energy companies will help you find ways to use less electricity. Strategicallyplaced energy-efficient lights alone can save lots of money. So can adjusting the thermostat.
Also check out the possibility of rebates. “We benefited when the city of Boulder and Xcel Energy offered rebates,” Zimmerman says. “I changed the lighting in my coolers and could tell difference in my energy bill the first month.”
CONSIDER ENERGY EFFICIENCY WHEN REPLACING EQUIPMENT. Most owners dread the up-front costs of replacing older equipment with expensive, if energy- efficient, new equipment. But when existing equipment fails, you may want to think twice before buying second-hand, previous-generation replacements.
“We’re building a new cooler with fabulous insulation,” Murray says, “and we’re redoing our lighting.” He says he always expects efficiencies to recoup outlays in three to five years, and then he will further depreciate costs.
CONSIDER OUTSOURCING FOR SOME FUNCTIONS. If someone else can provide a function or service cheaper and better than you can, or will free up your time for something more critical, then outsource it. Burhop found that he could save money having a specialist do his payroll services. Retail stores that also own a healthy internet business may outsource some of their shipping functions.
BETTER UTILIZE E-MAIL AND SOCIAL MEDIA FOR MARKETING. Newspaper advertising is still critical to many high-volume stores, but Burhop echoes a refrain of many store owners. “The value of advertising,” he moans, “is my most non-quantifiable expenses.”
Most stores these days rely heavily on electronic newsletters, Facebook, Twitter and other social media to get word out about events, new arrivals and specials. Murray, who loves quantity discounts to bring stock in, uses the Internet to move it out. “I got a deal on Côtes d’Auxerre,” he chuckles, “and sold 19 cases in five days.”
REVIEW COMMUNICATIONS COSTS. Because of all the opportunities they afford, communications these days has become a huge expense. But do you really need all those land lines, note pads and apps? Is your staff spending too much time on social media? Do a serious communications audit.
