CHICAGO — The pandemic caught us all off guard. For better and, more often, for worse, convenience retailers saw store traffic drop, market baskets change dramatically and foodservice completely shut down in some parts of the country. By the time you read this, I am hopeful that the coronavirus pandemic has eased a bit and the general public has become more mobile.
Assuming so, I expect the c-store industry will see customer counts rebound, especially in the morning drive, and normalize over time. With that, I hope, will come a renewed appreciation for c-stores. Whether it’s fuel, cigarettes, grocery necessities or beer—even toilet paper—convenience stores have proven to be essential and demonstrated the value of their services to both existing and new customers.
Ready for Next Time?
But should anything like this happen again, consumers may not be as willing to accept that retail was unprepared for this emergency reality. For them—and for our own sake—retailers need to take proactive measures to protect the profitability of the business.
To me, the key to that is attention to inventory-level management, or cost of goods sold (COGS). More than a line item, COGS has proven to be an integral part of running a successful store, and the solution to the difficulty of swiftly adjusting a store offer when sales plummet. Bottom line: Procuring and managing inventory levels must be a part of a business’ routine in both marketing and operations.
In the heat of the pandemic, I imagine many operators found themselves with excessive inventory in several areas of the store as customer counts dropped and ordering was not or could not be adjusted as quickly. Overstock conditions become apparent quickly as products’ days-on-hand supply levels increase and margins decrease. This will be readily evident in the cold box, snack and candy areas, to name a few.
Operators have at their disposal either a manual or electronic ordering system that helps manage inventory levels, but when the pandemic hit, undoubtedly many overstock issues became obvious to anyone with a close eye on their inventory.
Work the Numbers
One way to circumvent this issue is to periodically perform a gross margin return on investment (GMROI) exercise, as outlined in Investopedia. Very much like evaluating inventory turns for an operation, a GMROI can be calculated on a category to determine the gross profit earned for each dollar investment in inventory.
The formula is: gross margin dollars ÷ average inventory dollars. Take energy drinks as an example. If the gross margins dollars for the month is $5,000, and the average inventory cost is $4,000, then the GMROI = 1.25. The number higher than 1 indicates the store is selling its inventory at a higher value than it paid for the inventory. Or, in this example, the store is producing $1.25 in gross profit during that month for every $1 invested in inventory for the energy category.
In the heat of the pandemic, many operators found themselves with excessive inventory in several area of the store.
With good data, this exercise is relatively easy to implement for a category manager or analyst, and whether it’s calculated on a monthly or quarterly basis for a category or the entire store, this exercise could prove to be profitable and informative. The results can provide valuable data for profit goal-setting, and it would also be a tangible way to illustrate to the team the need for accurate ordering, which oftentimes is a challenge.
A gross margin return on investment application—executed properly and consistently—should expose and eliminate unnecessary overstock issues.
In closing, managing a store’s inventory levels on an ongoing basis will help prevent profit loss when unusual or unexpected events occur. And, of course, these measures will also improve profits during the good times.
Bill Nolan is a partner with the Business Accelerator Team. Contact him at wnolan@thebateam.com.
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