What are the four biggest expense costs in retail?

13 Oct, 2023

As discussed in our Driving Improved Store Performance blog, operational performance in stores is a mixture of four things, one being expense costs. In this blog, we will dive deep into the four biggest expense costs when it comes to Retail. The four biggest expense costs in retail are:

  • Store Labour (Payroll)
  • Occupancy costs (cost of space)
  • Distribution from warehouses to stores or to customers’ homes
  • Marketing, depending on how promotion-driven the retailer is

The major assets in stores are inventory, space and related fixtures and fittings. We will examine each of these in turn.

Store Labour (Payroll)

UK staff churn averages 40% a year in stores and is getting worse.  In the US it is 50% to 60%.  In the current market, stores can’t always recruit the staff cover they need.  Of the 40%+ that leave in their first year, more than half leave in the first three months. Hence, many retailers minimize training costs as far as possible, until they know that workers will stay long enough to be worth investing in.  This has an adverse effect on the customer service achieved and hence sales.

We now move on to consider how we can minimize expense costs and improve the yield from assets.

As mentioned earlier, staff churn is a big issue for retailers and recruitment costs are high.  Pay is obviously a factor in reducing churn and needs to be addressed, but not the only one.

Others include:

  • Giving store employees more of a career path and opportunity for promotion. Provide online access to training during and outside work hours, so that those that are hoping for a career can study in their own time, initially for the job they have, and then for the job they want next.  In your reporting, look for people that do some of the training in their own time and also train for the next job.  In your staff development planning, give them credit for making an effort outside of work time and flag them up for further development.

  • People like to be successful. Provide them with the tools to be successful, such as access to past customer purchase history on a tablet, so they can offer the best advice.  In appropriate market segments provide full clienteling tools.

  • When a product is not stocked in the store, or is out of stock, provide mobile devices or kiosks, so the salesperson can place a customer’s order with the shopper, wherever they are in the store.

  • Ensure that any store bonus scheme recognises and gives the store staff credit for online orders entered in the store.

  • You could use digital screens in store to promote C items that are not displayed in the store.

  • Use labour scheduling systems together with knowledge of staff domestic arrangements and preferences, to schedule shift patterns that work best for the biggest number of people.

  • New store staff take 3 to 6 weeks to get to full productivity. During that period, their sales performance averages 50% of what it will be when up to speed.  The right training can cut this time in half, thereby driving extra sales and potentially reducing churn as more new hires perceive themselves as successful, before disenchantment sets in.  E-learning and digital performance support can help this.

  • Greater use of self-service options can reduce the number of staff hours needed and keep customers happy. For example, some retailers are implementing kiosk systems to process online orders returned to stores.  Marks & Spencer in the UK is a good example.  More and more retailers deploy some self-checkout systems alongside staffed checkouts.

  • Terminals or kiosks can be provided to check coupons or other incentives available from loyalty schemes, or to order in store from the extended online assortment.

  • Where affordable, use of RFID tags in stores greatly reduces stock counting hours.

  • If you have accurate traffic counters in stores, you can calculate a shopper to store associate ratio per week or month, using total store traffic in that period divided by store hours. Analysing this ratio over time allows you to improve labour scheduling by having more of the hours worked at the right times.  Analysing it across stores highlights those that perform better or worse and Area Managers can take corrective action.

Occupancy Costs

 Occupancy costs include all costs associated with the space, including:

  • Rent or lease costs
  • Rates (property taxes)
  • Utilities, such as heat and light
  • Maintenance and repairs
  • Security

These costs are controlled at headquarters by the Property or Real Estate Department.  Stores are measured by the yield from that space, measured as sales per square foot and gross margin per square foot. The advent of omni-channel retailing now gives an opportunity to drive store space productivity by opening smaller stores that only stock A and B items, and possibly display a selection of single units of C items, which are only sold through online orders and fulfilled via click and collect or home delivery when purchased. This reduces the store selling and stockroom space needed, reduces rates, maintenance and utility costs and other costs too. You may choose to take this approach only for the smaller stores and still keep large flagship stores in big cities.

Distribution Costs

Distribution costs are measured from central warehousing to stores or customers' homes. The import costs of bringing goods into the central warehouse are accounted for as part of the cost of goods sold. The Buying Office owns the inbound to central warehouse share of the costs and the Warehouse Management owns the distribution cost. Distribution to stores is typically 4% or so of sales revenue. Home delivery costs are typically more than double this.

Most distribution costs are owned by warehouse management. Where it impacts stores is how deliveries into stores are performed.  Some stores get daytime deliveries and suffer increased costs through traffic delays, ease of access to stores delays, parking problems and the like. Some stores overcome these challenges by delivering to stores at night time when traffic is low, parking is not an issue and stores are unmanned, so carrying goods through the front door does not interfere with customers' shopping.

Marketing Costs

Marketing costs are somewhere between 1% sales and 6% sales, depending on how promotion-driven the retailer is.  At the lower end, marketing is window displays and promotional graphics in stores. At the higher end, it includes all advertising costs and perhaps

As TV advertising has become so expensive and social media networks have developed, a lot of advertising has switched to social media and with the advent of Internet shopping, CRM has resumed growing.  It is now more cost-effective because the incentives to get customers to participate are much less costly as they provide much of their data to register for online shopping.

In  this blog we  reviewed how to improve customer service, grow sales,  ways to improve expense management, eliminate or reduce  costs and improve asset productivity.  We have reviewed the problems and challenges that face Store Operations and identified a range of potential solutions to be considered.

HSO can assist you in implementing these solutions in various ways. These include:

  • Various customer service solutions including mobile point of sale and mobile point of service solutions, integrated omni-channel best practices and customer self-checkout in appropriate environments.

  • Inventory management systems and processes to maintain optimum on-shelf availability and minimize unnecessary overstocks.

  • Store-focused sales and gross margin reporting, space and store staff productivity analysis, all with a focus on improving Store Operations' overall contribution to the business.

  • Customer relationship management solutions that help drive store-specific merchandise assortments and targeted customer service improvements.

  • Financial systems and reporting to support effective management of store controllable expenses.

The next blog article in this series will address online operations.  It includes a section on payment systems, which is equally applicable to stores and should be reviewed even if online operations are not your direct responsibility. If you would like further input on anything covered above or clarification on anything covered here, please contact us and our professional team will be pleased to respond.

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