The Way We Measure Retail Store Performance Needs To Change

If youre a retailer with multiple stores, measuring the performance of stores is critical to your business. Historically, there have been two metrics fundamental to evaluating retail store performance. The first is sales per square foot. That tells you how a store is performing regardless of its physical size and its a great measuring tool for comparing different stores. The second is a store income statement. That evaluates each store as though its an individual business with its own profitability. These two measures are longstanding and have been vitally important to assessing how stores perform.

Retail has changed a lot lately. Whereas the purpose of a store in the past was to hold products and sell them out the door, today stores do less of that and more of some other tasks, like:

stimulate online sales in the immediate geographic area

handle pickups and returns of products purchased online

provide venues for events of various kinds

With stores doing less of their historical functions and more of what theyre not being measured for, its important to ask ourselves how to evaluate store performance in light of the changed environment. Neither sales per square foot nor store income statements capture the effects of stores new functionality. With the old measurement tools, managers are likely to come to the wrong conclusions about store performance and whether particular stores should remain open or not.

No one has come up with the definitive list of key performance indicators for retail stores today and theres a few reasons for that. First, retail is changing so fast that which metrics will be most important when the changes are complete is not yet known. Second, retail stores of the future are going to be less like each other than they have been in the past. Where in the past retail stores could almost all be measured by similar metrics, measurements of the future performance of stores may have to be more particular to each type of retailer and each store. In the beginning of 2018, my fellow Forbes contributor Steve Dennis co-wrote this interesting take on the subject. Since that time weve seen retail continue to adapt and change and that has allowed the importance of certain key metrics to emerge.

There are three things that are going to be important for retail store metrics in the future:

1. The Catchment Area. Online sales in the immediate geographic area around a store are usually higher than in other places. The store acts as a billboard and awareness-builder for consumers. Its not unusual to see consumers stand in a store and order the product sitting right in front of them on their mobile device, or as soon as they get home or even standing on the sidewalk in front of the store window. In all those cases, the sales dont show up as store revenue and that needs to change, sales allocable to a store should include both the sales inside the store and the online sales in the local area that the store affects. To fix this, each store needs to have a catchment area, a geographically defined area for that store where all online stores are counted as sales of that store. The radius of the area will change by store depending on density and consumer habits, more like drawing congressional districts than like drawing a symmetrical circle because every neighborhood is different. But a designated area where online sales will be attributed to each store is needed to help account for the impact stores are actually having and not just to measure what happens in their four walls. It wont be perfect but it will give stores credit for more of the work theyre doing.

Gary Sankary, Manager of Industry Strategy for Retail at Esri, focuses on using the science of geography in retail analysis. He explained that for a multiline retail like Target or Macys, its a complex problem. The catchment area for candy may be very different than for blouses or dairy because of their market share, expertise, assortment and many other factors. So the way in which a store is assessed and given credit for online retail will depend very particularly on what theyre doing and where. They may need to have a different catchment area for different classes of product around the same store.

2. BOPIS. The phenomenon of Buy-Online-Pickup-Instore is real and here to stay. It provides a level of convenience that lets consumers have what they want right away without waiting for shipping times and makes their store visits more efficient. Retailers like it because its not just a sale, it gets the consumer into the store which is an opportunity to sell them something else and possibly experience the brand in a more physical way. The importance of BOPIS needs to be acknowledged as a key performance indictor (KPI) for every store.

3. BORIS. Like BOPIS, Buy-Online-Return-Instore is a key convenience for consumers and needs to be measured.

Im not claiming that the list of KPIs is complete but based on what we know now, its a good start to add to the list of things we look at to see how stores are performing. The way retail is going to look in the future is starting to emerge into view after all the changes weve seen and these three measures are emerging as important too.

One More Thing

While were on the subject of how to track stores performance, theres another accounting convention that is often looked at in a way that hurts stores and needs to change: depreciation. (If you didnt major in accounting in college, heres the short version: When you invest in opening a new store, the cost of building it out is not deductible as an expense to offset your income. You have to add up all those buildout costs and treat a portion of them as an annual deduction from your income over a period of many years. Usually the deductions are spread out over the term of the lease.) The idea of depreciation is that stores need to be updated regularly and the depreciation expense allows stores to recognize a portion of the cost of updating in every accounting period. But because the money for buildouts is spent in the past and the annual allocable cost is treated as an expense, depreciation can be seen as a fake expense and the cash associated with it is often assumed to be spendable on other things. Private equity buyers can think of depreciation expense as a source of cash to pay interest on debt and allow themselves to borrow more money and pay a higher price when they buy companies.

For retailers, thats usually a mistake. When the cost of a buildout is taken as an annual depreciation expense and the cash associated with it is used elsewhere, it ignores the need for regular store improvements. Stores dont last forever and if you walk into a retail store and it looks worn, theres a good chance youre looking at a retailer who has treated their depreciation expense as a resource for cash that gets used in other ways and a sign that they may be overburdened by debt.

The world of accounting has not convinced a lot of managers that depreciation is a real expense and it needs to be used for store improvements. Too often, managers use the cash from depreciation for something else assuming it will be a short-term strategy. Then they get addicted to the use of the cash in other ways and they fall into a trap, putting off store renovations past when it is sorely needed. Over the long term, that kind of thinking can destroy stores and opportunity.

Whats Next

The way we measure stores performance and viability is evolving. This is just a start. As we learn more about what stores of the future will do, there will be more metrics we need to develop. For example, were going to need a way to measure store effectiveness in events. If a store is having lectures or fashion shows in the evenings, how do we count that as a brand builder? Theres more thinking to go on this but understanding what stores do and being able to measure it will be critical for the right store strategies to develop.

1. How would you measure retail store performance in today's market?