05 Aug 12 Critical Retail Industry Performance Metrics (2020)
Most Important KPIs for the Retail Industry in 2020
Navigating changing consumer tastes and the evolving technology landscape has always made retail a challenging industry.
Today, it is more important than ever for retailers to have a tight grip on the state of their business. Only with the right retail industry performance metrics can they 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?
Choosing the right Key Performance Indicators (KPIs) to measure and benchmark retail performance is essential to answering those questions. But of the myriad options, what are the KPIs in retail that will truly drive profitability and make the best use of a retailer’s substantial inventory investment?
In reality there are many different retail verticals with their own unique considerations. Choosing the most important KPIs for a specific retail business will depend on your industry, merchandise, supply chain structure, selling channels and many other factors. Here are 12 common retail industry KPIs, why they’re used and how to improve them.
Examples of Retail KPIs that Maximize Inventory ROI
The inventory sitting in stores and warehouses is the single biggest investment that a retailer makes. Throughout the history of retail, success and failure has come down to how well a company manages — and profits from — its inventory investment.
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. In a perfect world, every store would have every SKU in stock all the time while simultaneously not purchasing/stocking any inventory that will not be sold.
Why Measure In-Stock Percentage
Stock-outs result in lost sales and 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. 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 retailer’s most important and profitable items in their business. Specialty retailers often face unique challenges in maintaining optimal In-Stock Level. 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 high In-Stock Percentage while maintaining a low cost. (See Full Analytics Platform)
2. Inventory Turnover Ratio
The 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 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 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 the product in stock. Any product with a GMROI 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. This is another KPI that will vary depending on the retail vertical. Moreover, other factors like store geo-demographics can also have an effect as well. For example, when the North American Retail Hardware Association polled its members, it found that GMROI measurements ranged from 1.34 at hardware stores serving mostly homeowners to 1.63 at lumber yards that mostly serve contractors.
How to Improve GMROI
There are several factors that contribute to an improvement in GMROI. Analytics-powered price optimization can significantly improve both sales, and GMROI. Moreover, a highly accurate demand forecast helps retailers ensure they bring the right amount of inventory to the right location. This avoids markdowns that cut into profit margins. In addition, by better understanding their 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 business metric is obvious does not mean it is not an effective KPI. Revenue Growth lets retail executives and merchants track the evolution of their businesses. Seasonality requires retailers to balance their product mix to keep steady revenue growth. In the longer term, product categories rise and fall as technologies or customer tastes change.
Revenue Growth Benchmark Example
Revenue Growth rates vary across retail sectors and even within a sector’s product categories. For example, the CTA trade association’s forecast of 4% annual Revenue Growth for consumer technology retailers masked variations within this innovation-dependent sector. The CTA expected wireless earbuds (31% growth) and smart speakers (14% growth) to lead the industry while TV sales remained flat.
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.
KPIs in the Retail Industry for Improving 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
Calculate Sales Per Square Foot by dividing a store’s sales by the area of its sales floor. 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 KPI 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. Over the past few years, the average Sales Per Square Foot among US retailers has declined from $375 to $325. But that average belies retailer-specific conditions. Apple achieves more than $5000 per square foot thanks to relatively small stores and high-priced products.
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 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
This KPI is calculated by dividing sales by the combined number of full-time employees and full-time-equivalent of part-time 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
Monitoring Sales Per Employee over time helps a retailer understand its productivity and plan future staffing levels. When planning for seasonal sales, for example, Sales Per Employee calculations help define the number of temporary employees to hire.
Sales Per Employee Benchmark Example
Retailers should understand the structural differences of competitors within a benchmark and how the benchmark is calculated. A comparison of large American retailers identified significant variability even between superficially similar companies. Sales Per Employee were ten times higher at CVS than at drug store competitor Walgreens thanks in large part to CVS’ non-retail operations.
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.
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, labor-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 behavior 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 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.
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 mean 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
Customer Lifetime Value is a barometer of a retailer’s relationship with its customers over the course of years. A recent Bain & Company survey found that market leaders were nearly twice as likely to use Customer Lifetime Value as a KPI. They were also 3.5 times as likely to employ dedicated marketing staff to understand the customer experience.
How to Improve Customer Lifetime Value
Selling to existing customers is easier and more profitable than acquiring new customers. 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.
Which Retail Industry KPI is the Most Important?
While all of these KPIs can help a retailer improve specific aspects of its business, only a few like GMROI are broadly applicable to the business as a whole. Measuring and benchmarking GMROI generates unique insights into the profitability of inventory investments regardless of the sales channel.
While measuring KPIs is a good start, Retalon’s advanced analytics take it to the next level by recommending the most profitable actions to improve your KPIs, and lower costs. Take a look at these customers’ stories to learn about which KPIs they chose to work with and how retail AI helped them hit and surpass these targets.