Measuring Branch Performance
Posted by:
FSPRetail ,
26 January 2012
The economic outlook is not encouraging. Don Williams, BDO Head of Retail and Wholesale, was far from pessimistic at the Predicting 2012 seminar but suggested 2012 retail sales growth would only be 2.5% by value and 0.7% by volume.
In such a low growth environment, controlling costs is more important than ever. With so much of their cost in the shops, retailers necessarily want to identify which are non-performing. For this, a reliable and insightful measure is vital.
There are many ways of measuring the profitability of investment. For example, many businesses calculate the Internal Rate of Return (IRR) and Payback Periods. Given that the criteria for successful investments using these measures can vary dramatically between occupiers, the yardstick used by FSP is ROTA - Return On Trading Assets, a retail version of ROCE, Return On Capital Employed.
The Return is the Net Profit made at the branch level expressed as a percentage of the Trading Assets in the branch. Trading Assets are the cost of the stock used to generate the turnover and the average cost of the branch fixtures and fittings. Branches can then be ranked by ROTA and there is a case for reviewing all those ROTAs below the company average. Equally, in taking on new outlets, the projected ROTA should in normal circumstances also be greater than the company average.
The achieved ROTA can, of course, be set against standard benchmarks. One such, derived from observation of long-term survival rates amongst retailers, is that 25% ROTA is required.
Asset managers are probably less directly interested in the occupier’s ROTA than the Retailer Risk, expressed as the chances of either going bust or getting out of the lease obligations. The former risk is a problem at corporate level, helpfully illuminated by the Wealth Creation Index. Pioneered by the old Department of Trade and Industry (DTI) and sponsored until the recent Government austerity measures by the Department for Business, Innovation and Skills, this measure has proved, in experienced hands, to be a useful guide to Corporate Risk.
At the unit level, risk is measured by the relationship between Sustainable and Passing rent. The Sustainable rent is that which, given the turnover and other operating costs, enables a 25% branch ROTA.
FSP has invested much time and thought into the relationship between ROTA and Retailer Risk and is always ready to talk about its relevance to individual situations.
Tags:
GEOFF'S VIEW, RETAILERS, RETAIL RESEARCH