05 Aug 12 Critical Retail Industry Performance Metrics (2023)
12 Critical Retail Industry
Performance Metrics (2023)
Every retail executive is optimizing for some sort of retail KPIs.
But changes in technology and consumer behaviour have made some executives question if they’re focusing on the right retail industry performance metrics to grow their company in 2022 and beyond.
In theory, choosing the right retail industry performance metrics can help retailers answer questions like:
- Do they have the right product mix?
- How effective are their promotional campaigns?
- Is the right product getting to the right place at the right time?
But in practice, there are dozens (if not hundreds) of metrics that retailers can track — some of which are less important than others. Optimizing the wrong KPI might generate an impressive-looking report, but may have no effect (or a negative effect) on the bottom line.
So what retail KPIs truly drive profitability and make the best use of a retailer’s investments?
The reality is that no two retailers are going to focus on the same exact things (nor should they). Depending on your unique vertical, merchandising process, vendors, supply chain, etc. — some KPIs will be more important for you than they are for other retailers.
But despite that fact, there are some KPIs that nearly all retailers should be optimizing for in 2022. For example;
- In-stock percentage
- Inventory turnover ratio
- Revenue Growth
- Sales per square foot
- Sales per employee
- Promotions Uplift
- Foot traffic
In this article, we will be breaking down these crucial retail metrics – and more, to clarify their importance and how they can be improved to increase business growth and revenue.
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Examples of Inventory KPIs & Metrics for Retailers
Inventory sitting in stores and warehouses is the single biggest investment that a retailer makes.
Throughout the history of retail, success and failure have come down to how well a company manages — and profits from — its inventory investment. As such, the most important retail performance metrics are typically tied to inventory.
Here are some of the most important inventory retail KPI examples:
1. In-Stock Percentage
Inventory management teams calculate the In-Stock Percentage by dividing the number of stores that have a SKU in stock by the number of stores that should stock that SKU.
Why Measure In-Stock Percentage?
The in-stock percentage calculation will aid in inventory balancing and help to prevent stock-outs that result in lost sales that degrade the customer experience.
Merchants and inventory analysts must be aware of how well they are getting their products to the stores. In particular, effective promotion planning depends on having accurate measurements of In-Stock Percentages.
As mentioned earlier, retailers must maintain a healthy In-Stock Percentage for every product at every store, in order to avoid out-of-stocks, lost sales, failed promotions, and costly markdowns.
In-Stock Percentage Benchmark Example
With the dynamic nature of retail and supply chains, North America’s top retailers aim to have 98.5% in-stocks on the most important and profitable items within their businesses.
Different types of retail verticals will face their own unique set of challenges when measuring and optimizing the in-stock percentage retail metric. In fact, specialty retailers often face the most unique challenges in maintaining optimal In-Stock Levels.
For example, Hard Rock International faced a unique challenge as each of its stores had a unique mix of products. Adopting Retalon’s Predictive Analytics & AI let Hard Rock stabilize its In-Stock Percentage and open a pathway to approach 100%.
How to Improve In-Stock Percentage
Bridging the gap between calculated In-Stock Percentages and reality is a perennial challenge for retailers.
Maintaining a healthy In-Stock Percentage at an efficient cost requires a unified approach to retailing.
Advanced retail analytics like Retalon’s platform dynamically optimizes planning, purchasing, allocation, replenishment, and promotions to ensure that your products are at a high In-Stock Percentage while maintaining a low cost.
2. Inventory Turnover Ratio
he Inventory Turnover Ratio represents the total cost of goods sold over a period divided by the average inventory cost.
Why Measure Inventory Turnover Ratio
Much of a retailer’s cash is tied up in the inventory sitting in stores and warehouses.
The faster that inventory sells, the more efficiently the retailer uses that inventory investment.
On the other hand, inventory that sells too quickly could be a sign that the retailer may be missing sales.
Inventory Turnover Ratio Benchmark Example
An Inventory Turnover Ratio that strikes the best balance between inventory efficiency and sales maximization will vary by industry segment. CSI Market estimates the retail industry turns its inventory around 7.5 times per quarter.
Grocery stores can turn over their inventory nearly twice as fast. The home improvement sector, on the other hand, only turns over its inventory 4 times per quarter.
How to Improve Inventory Turnover Ratio
The temptation to optimize this KPI by tightly managing inventory levels can be counter-productive. The effect could be an immediate loss of sales due to stock-outs and long-term business declines due to customer dissatisfaction.
Retailers must maintain sufficient inventory levels to meet forecasted demand through volatility such as seasonality, promotions or lead-time variability.
Gross Margin Return on Investment is the ratio between gross margin dollars and the average inventory costs.
Why Measure GMROI
Of all the retail industry performance metrics in this list, GMROI may be the most important for modern retailers.
Whereas the inventory turnover ratio measures how efficiently a retailer uses its inventory investments, GMROI lets retailers evaluate how much profit those investments generate.
A GMROI greater than 1.0 indicates that the product generates more profit than it costs to keep product in stock. Any product with a GMROI of less than 1.0 loses the retailer money.
Merchants can use GMROI to create more profitable assortment plans and develop more effective promotions.
GMROI Benchmark Example
A retailer’s GMROI does not simply depend on the profit margins of its products.
In fact, there are a number of factors that will influence a retailer’s GMROI – resulting in slightly different calculations even within the same verticals due to the different types of monthly costs they will incur.
Some of these costs include;
- Real Estate
Moreover, other factors like store geo-demographics, vendor prices, market positioning, etc. can also have an effect on GMROI.
As an example, statistics from The Retail Owners Institue show that GMROI measurements for Hardware Stores in 2021 were $1.77 compared to $3.05 for Lumber and Building Material Stores (both serving primarily the same customers).
How to Improve GMROI
It’s important for retailers to remember that they should have their own individual GMROI benchmarks. With that being said, there are several factors that can contribute to an improvement in overall GMROI.
Pricing and inventory optimization are two significant levers that retailers can leverage to improve their GMROI – and sales. Ensuring the right products are in the right place at the right time with an optimal price point for maximal GMROI per SKU / store is a good place to start.
In addition, by better understanding inventory needs in advance, retailers are able to negotiate better deals with vendors further reducing inventory costs and increasing GMROI.
4. Revenue Growth
Revenue growth is the ratio of the change in revenue between two reporting periods to the revenue of the earlier reporting period.
Why Measure Revenue Growth
Just because a retail metric is obvious does not mean it is not an effective KPI to measure.
Revenue growth lets retail executives and merchants track the evolution of their businesses.
As an example, seasonality requires retailers to balance their product mix to keep steady revenue growth.
If retailers fail to take this important factor into consideration, they will see a drastic decrease in revenue growth and without proper measurement, might not understand why.
Revenue Growth Benchmark Example
Revenue Growth rates vary across retail sectors and even within a sector’s product categories.
For example, the Consumer Technology Association report shows an increase of 4% annual revenue growth for the U.S. consumer tech industry in 2020. As mentioned, different categories within industries contribute to the whole but can vary from product to product.
Breaking down this same report, the CTA expected wireless earbuds to be the dominant force behind this growth (31%) and smart speakers to be close behind seeing a 14% growth.
How to Improve Revenue Growth
Retailers can use many strategies to drive Revenue Growth from expanding store count to adding new product categories.
If top-line growth is a critical KPI, then exiting from slow-growing product categories is another option.
Retalon’s retail AI tool makes it easy to see top-performing products, categories, stores, and vendors and recommends tangible actions to improve revenue growth.
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Retail Metrics for Improving In-store Efficiency
If a retailer needs to focus on internal execution, it should choose KPIs that measure store performance or marketing performance.
5. Sales Per Square Foot
Retailers can calculate Sales Per Square Foot by dividing a store’s sales by the area of its sales floor.
It’s important to remember that the stockroom, offices, and other areas not directly generating sales are not included in the calculation.
Why Measure Sales Per Square Foot
Measuring Sales Per Square Foot is a way to understand how efficiently a store, or areas within a store, generate revenue.
Company leadership can use this retail metric to answer questions about the cost of rents and future store openings.
Sales Per Square Foot Benchmark Example
Clearly, retailers want their stores’ Sales Per Square Foot to be as high as possible. However, this metric is very sensitive to market conditions and the nature of the retailer’s business.
For example, the COVID19 pandemic forced many consumers to adjust their shopping habits and transition to online shopping and e-commerce. This had an influence on brick and mortar retail stores and also their sales per square foot.
In fact, according to Colliers International, average sales per square foot in the U.S. decreased from $382.90 in 2019 to $338.30 in 2020.
But, it’s important for retailers to remember that the average belies retailer-specific conditions. According to Investopedia, Apple achieves approximately $5500 per square foot thanks to relatively small stores and high-priced products whereas Walmart achieves approximately $400 per square foot.
How to Improve Sales Per Square Foot
Store-level measurement of sales per square foot supports a retailer’s long-term real estate decisions. But if a retailer can make these measurements within the store, by department or by product category, sales per square foot KPIs become even more powerful.
Retailers can use this metric to evaluate the effectiveness of their merchandise layouts. Moving high sales-per-square-foot categories to the back of the store, for example, can increase foot traffic and sales in less efficient categories.
6. Sales Per Employee
The sales per employee KPI is calculated by dividing a company’s total sales by the current number of employees.
This calculation can be made at the company level, by store, or by each sales department within a store.
Why Measure Sales Per Employee
Retail businesses can use this metric to develop a better understanding of how much money each employee generates for the business.
As mentioned above, retailers can dig deeper into various departments within their stores to pinpoint underperforming areas and devise new strategies to increase productivity, efficiency and revenue.
Sales Per Employee Example
When calculating the sales per employee metric, it’s important for retailers to be comparing “apples to apples”.
There are a number of factors that can influence the sales per employee KPI – especially in retail. Some of these include;
- Age of the company
- Industry vertical
- Employee turnover
- Types of product
As an example, employee turnover within the retail industry requires resources to be put into hiring and training. During this time, the focus on sales tends to decrease. Even if this is only for a short period of time, the impact on the sales per employee metric could be substantial.
How to Improve Sales Per Employee
There are several approaches a retailer can take to improve this KPI. Increasing the mix of online sales will improve Sales Per Employee for the company as a whole.
Retailers with assisted-sales staff can use training and incentives to raise sales per employee. Better-skilled salespeople will close more sales and improve attachment rates of accessories and services.
Other retailers can improve Sales Per Employee through more effective merchandising or promotion strategies.
7. Promotions Uplift
Measure the Promotions Uplift by taking the ratio of a promotion’s incremental sales to the baseline sales of the promoted product(s). A best practice is to avoid over-estimating incremental sales by including any post-promotion sales slump.
Why Measure Promotions Uplift
Promotional spending is a significant expense for all retailers. While necessary to drive traffic and revenue, promotions must generate an appropriate return.
Measuring Promotions Uplift lets merchants evaluate the effectiveness of their campaigns. Having these numbers also strengthens a retailer’s position in vendor negotiations.
Promotions Uplift Benchmark Example
Comparing the effectiveness of promotions is a challenge for most retailers.
The true Promotions Uplift is a function of variables that are difficult and time-consuming to quantify in a spreadsheet.
For example, different kinds of promotions will cannibalize sales of similar products or generate ancillary sales at different rates.
How to Improve Promotions Uplift
Retail AI & Predictive Analytics solutions for retail promotions can significantly increase promotional uplifts by suggesting profitable promotions in advance.
For example, Retalon’s Promotional Optimization solution can not only recommend the best promotions, but it will also forecast the promotional uplift and automatically suggest the optimal inventory levels you need to have at each location to successfully execute the promotion.
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Retail KPIs that Answer Questions About Customer Behavior
What are the KPIs in retail that put customers at the center of retail decision-making? They can start with simple counts of how many people walk through the front door. But they can also be more direct measurements of how the best customers improve the business.
8. Foot Traffic
Foot Traffic can be a simple count of the number of people entering the store.
Why Measure Foot Traffic
Foot Traffic helps retailers understand how their stores’ business changes during the day and seasonally. It is also an input into several other KPIs.
Despite its importance, Foot Traffic has always been a difficult KPI for the retail industry to measure consistently. Today, labour-intensive counting has been replaced by technologies like thermal mapping that let retailers monitor Foot Traffic throughout the store.
Foot Traffic Benchmark Example
A retailer can make month-to-month and year-over-year comparisons of Foot Traffic counts to gauge how well its marketing campaigns drive awareness and interest among customers. Even without historical data, benchmarking efforts can produce quick results.
How to Improve Foot Traffic
Foot Traffic is a function of customer awareness and a retailer’s merchandising strategy.
Customers must know where to find the retailer and have confidence that they will find the products they want when they visit. Brand-level advertising and customer loyalty programs lead to sustainable Foot Traffic.
Price promotions have a short-term impact but are expensive and counter-productive with overuse.
9. Conversion Rate
Once traffic counts are measured, the Conversion Rate is a simple ratio of the number of transactions to the foot traffic during a given period.
Retailers that adopt in-store fulfillment processes for online sales must take care not to double-count traffic when measuring the store’s Conversion Rate.
Why Measure Conversion Rate
Nothing a retailer does will matter if it struggles to close the sale.
Conversion Rate is a retail KPI that lets retailers question where and why they are leaving money on the table. Addressing these issues quickly is essential as the underlying causes could damage the retailer’s business in the long term.
Conversion Rate Benchmark Example
Even though online Conversion Rates are much easier to measure than in-store rates, web operations have notoriously lower conversion rates that hover around 3%.
Customers who walk into a store have already made a psychological investment in a potential purchase. As a result, retail stores can achieve Conversion Rates anywhere from 18% to 60%.
How to Improve Conversion Rate
Conversion Rates are the result of execution across the retail organization. Store-level execution of sales and merchandising plans can be the deciding factor.
If Conversion Rates fall across multiple locations, however, then the problem may be found at the head office. Lost sales due to inaccurate forecasts or late replenishment will waste all the effort to promote store traffic.
10. Average Transaction Value
The Average Transaction Value is the total retail sales revenue divided by the number of transactions.
Why Measure Average Transaction Value
Average Transaction Value is an example of a retail KPI that lets retailers understand customer purchase behaviour as well as operational performance.
This KPI is also effective in combination with other metrics. Comparing the change in Average Transaction Value with promotional uplift, for example, provides a more complete picture of a promotion’s impact.
Average Transaction Value Benchmark Example
At the company or store level, Average Transaction Value conveys a sense of how well the business is running.
Overall, North American retailers generate an average of $56.44 per transaction. This is a very general statistic as this KPI varies between retail verticals and markets they target.
For example, specialty food stores’ average transactions are only $30 while jewelry stores can easily average more than $100 per transaction.
How to Improve Average Transaction Value
Retalon’s advanced analytics and basket analysis can improve Average Transaction Value by suggesting cross-promotions and up-sells. In the retail store, merchandising and employee training are the best ways to add more products to the customer’s purchase.
11. Profit Per Transaction
Take gross margin dollars and divide them by the number of transactions to measure transaction profitability.
Why Measure Profit Per Transaction
Many retailers are adding new revenue streams such as subscriptions and advertising.
Under traditional retail industry performance metrics, these high-margin revenue sources mask the actual profits from retail operations. Profit per Transaction separates the two and restores management insight into store and product performance.
Profit Per Transaction Benchmark Example
The granularity of Profit per Transaction measurements will determine the effectiveness of this KPI. Identifying historical trends within a store’s sales departments or within a retailer’s product categories will generate actionable information the retailer can use to improve its business
How to Improve Profit per Transaction
Viewed by product category, the KPI lets buyers identify products that generate higher accessory attachment rates. Advanced analytics will not only identify these products for buyers but also ensure there are no out-of-stocks of these items that lead to lost sales.
Promoting these products more heavily can improve the overall promotional uplift.
Monitoring Profit per Transaction at the store level also helps managers identify scheduling and training issues.
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12. Customer Lifetime Value
Among the many approaches to calculating Customer Lifetime Value, a simple method is to divide the average monthly per-customer gross margin dollars by the monthly churn rate.
Why Measure Customer Lifetime Value
What KPIs like Customer Lifetime Value means for retailers is a strategic orientation around the customer experience.
Whether using a simple equation or a more nuanced calculation, basing company performance on the profitability of customer relationships produces different kinds of business decisions.
Customer Lifetime Value puts the high cost of customer acquisition in perspective and leads to a narrower focus on customer retention strategies.
Customer Lifetime Value Benchmark Example
It’s important to remember that not all customers are created equal.
Customer Lifetime Value is a barometer of a retailer’s relationship with its customers over the course of years. It provides retail executives with an understanding of what type of customer is the most profitable for their business.
To put this into perspective, some retail businesses will run promotions to attract new customers. This approach may work to bring new customers in and create profitable long-term relationships but, it may also only attract bargain hunters.
Capitalizing on collected data, retailers can use the customer lifetime value calculation to better understand their customer’s habits such as purchase frequency and average purchase value to make informed business decisions.
How to Improve Customer Lifetime Value
Of course, selling to existing customers is easier and more profitable than acquiring new customers. In fact, according to Shopify, the probability of selling to an existing customer is 60-70% whereas for a new customer is only 5-20%.
Whether in-store or online, a retailer must focus on creating positive experiences every time it interacts with current customers. Loyalty programs should go beyond simple discount offers by encouraging engagement and repeat business.
Measure Retail Metrics that Support Business Objectives
As the old saying goes, “if we can measure it, we can improve it”.
Today’s retailers have so much data available for them that can be used to optimize their businesses.
Aligning retail metrics and KPIs with business objectives will help ensure retailers are measuring the critical elements of their business. Without clear goals and objectives, it’s almost impossible to know what KPIs or metrics to measure.
Unfortunately, measuring isn’t enough. In order to optimize retail metrics and KPIs, retailers need to take action and do something with the data they are measuring.
This is where an advanced analytics solution can take it to the next level by recommending the most profitable actions to improve your KPIs, and lower costs.
If you’re ready to see how to generate profitable actions from your data that will improve your metrics and KPIs, book a free demo with our team today.