The 2% Solution. Average Store Scenario A Look Back.

The 2% Solution

Average Store Scenario

%Net Sales 100%Cost of Goods Sold 60.23%Gross Profit Percentage 39.79%Total Compensation 21.29%

Wages & Salaries 87.34%Payroll Taxes 7.54%

Employee Benefits 4.71%Payroll Service 0.31%

Total Other Payroll Expense 0.11%

Total Occupancy Expense 8.64%Rent 80.14%

Repair & Maintenance 7.34%Utilities 11.67%

Total Other Occupancy Expense 0.11%

Advertising/Marketing 2.08%Telecommunications 0.76%Professional Services 0.54%Office Expenses 1.44%Depreciation 0.97%Travel & Entertainment 0.40%Insurance 0.62%Interest Expense 0.65%Credit Card Services 1.30%Dues & Subscriptions 0.41%Freight Out 0.70%Miscellaneous Taxes 0.44%Web Expenses 0.25%Other Operating Expenses 0.93%Total Operating Expenses 41.44%

Net Income Before Tax -1.67%

Approx.10%

Membership

Participation

301 Locations

Approx. $451

Mill in Sales

ABACUS average of all

ABACUS 2003

197 Respondents

$ 1,500,000

903,418

596,881319,337278,91724,06215,028

980350

129,535103,807

9,51115,115

145

31,137

11,469

8,169

21,577

14,584

6,034

9,355

9,812

19,515

6,136

10,462

6,666

3,800

14,014

621,608

(25,112)

Mythical "average" store in $$$

A Look Back

1993Net Income Before Tax

Percent Change from

Previous Study

1.53%

1994

-61%

0.60%

1995

1.02%

70%

1997

0.14%

-81%

2003

-1.67%

-1293%

1996

0.72%

-29%

Moving from –1.67% to 2%Three Strategies

% $ Net Sales 100% 1,500,000Cost of Goods Sold 60.23% 903,418

Gross Profit Percentage 39.79% 596,881Total Compensation 21.29% 319,337

Wages & Salaries 87.34% 278,917Payroll Taxes 7.54% 24,062

Employee Benefits 4.71% 15,028Payroll Service 0.31% 980

Total Other Payroll Expense 0.11% 350

Total Occupancy Expense 8.64% 129,535Rent 80.14% 103,807

Repair & Maintenance 7.34% 9,511Utilities 11.67% 15,115

Total Other Occupancy Expense 0.11% 145

Advertising/Marketing 2.08% 31,137

Telecommunications 0.76% 11,469

Professional Services 0.54% 8,169

Office Expenses 1.44% 21,577

Depreciation 0.97% 14,584

Travel & Entertainment 0.40% 6,034

Insurance 0.62% 9,355

Interest Expense 0.65% 9,812

Credit Card Services 1.30% 19,515

Dues & Subscriptions 0.41% 6,136

Freight Out 0.70% 10,462

Miscellaneous Taxes 0.44% 6,666

Web Expenses 0.25% 3,800

Other Operating Expenses 0.93% 14,014

Total Operating Expenses 41.44% 621,608

Net Income Before Tax -1.67% (25,112)

% $ 100% 1,650,000

60.23% 993,760

39.79% 656,57019.35% 319,33787.34% 278,9177.54% 24,0624.71% 15,0280.31% 9800.11% 350

7.85% 129,53580.14% 103,8077.34% 9,51111.67% 15,1150.11% 145

1.89% 31,137

0.70% 11,469

0.50% 8,169

1.31% 21,577

0.88% 14,584

0.37% 6,034

0.57% 9,355

0.59% 9,812

1.18% 19,515

0.37% 6,136

0.63% 10,462

0.40% 6,666

0.23% 3,800

0.85% 14,014

37.67% 621,6082.12% 34,962

% $ 100% 1,500,000

56.23% 843,450

43.79% 656,85021.29% 319,33787.34% 278,9177.54% 24,0624.71% 15,0280.31% 9800.11% 350

8.64% 129,53580.14% 103,8077.34% 9,51111.67% 15,1150.11% 145

2.08% 31,137

0.76% 11,469

0.54% 8,169

1.44% 21,577

0.97% 14,584

0.40% 6,034

0.62% 9,355

0.65% 9,812

1.30% 19,515

0.41% 6,136

0.70% 10,462

0.44% 6,666

0.25% 3,800

0.93% 14,014

41.44% 621,6082.35% 35,242

% $ 100% 1,500,000

60.23% 903,418

39.79% 596,88119.16% 287,40387.34% 251,0257.54% 21,6564.71% 13,5250.31% 8820.11% 315

7.77% 116,58180.14% 93,4267.34% 8,56011.67% 13,6040.11% 131

1.87% 28,023

0.69% 10,322

0.49% 7,352

1.29% 19,420

0.97% 14,584

0.36% 5,431

0.56% 8,419

0.59% 8,831

1.17% 17,563

0.37% 5,523

0.63% 9,416

0.44% 6,666

0.23% 3,420

0.84% 12,613

37.44% 561,5652.35% 35,316

"Average" store Increase sales 10% Inc margin 4 points Cut expenses 10%

Combining All Three Strategies

% $ Net Sales 100% 1,500,000Cost of Goods Sold 60.23% 903,418

Gross Profit Percentage 39.79% 596,881Total Compensation 21.29% 319,337

Wages & Salaries 87.34% 278,917

Payroll Taxes 7.54% 24,062

Employee Benefits 4.71% 15,028

Payroll Service 0.31% 980

Total Other Payroll Expense 0.11% 350

Total Occupancy Expense 8.64% 129,535

Rent 80.14% 103,807

Repair & Maintenance 7.34% 9,511Utilities 11.67% 15,115

Total Other Occupancy Expense 0.11% 145

Advertising/Marketing 2.08% 31,137

Telecommunications 0.76% 11,469

Professional Services 0.54% 8,169

Office Expenses 1.44% 21,577

Depreciation 0.97% 14,584

Travel & Entertainment 0.40% 6,034

Insurance 0.62% 9,355

Interest Expense 0.65% 9,812

Credit Card Services 1.30% 19,515

Dues & Subscriptions 0.41% 6,136

Freight Out 0.70% 10,462

Miscellaneous Taxes 0.44% 6,666

Web Expenses 0.25% 3,800

Other Operating Expenses 0.93% 14,014

Total Operating Expenses 41.44% 621,608

Net Income Before Tax -1.67% (25,112)

"Average" store

% $ 100% 1,545,000

59.23% 915,071

40.79% 630,23819.44% 300,364

87.32% 262,277

7.53% 22,627

4.70% 14,132

0.31% 980

0.11% 349

8.22% 126,944

80.14% 101,731

7.34% 9,32011.67% 14,8130.11% 143

1.98% 30,514

0.73% 11,240

0.52% 8,005

1.37% 21,146

0.94% 14,584

0.38% 5,914

0.59% 9,168

0.62% 9,616

1.24% 19,124

0.39% 6,013

0.66% 10,253

0.43% 6,666

0.24% 3,724

0.89% 13,734

38.64% 597,0072.15% 33,231

"Model" store

Sales increased 3% = $18,356

Strategy #1

Contribution to profit


Gross margin increased 1% = $15,450

Strategy #1

Strategy #2



Gross margin increased 1% = $15,450

$16,640

Other expenses cut by 2% = $5,628

Strategy #1

Strategy #2

Strategy #3

Payroll cut by one full time person at $8 per hour =

Taxes and employee benefits reduced proportionately = $2,332


Strategy #3

Increasing Sales

Bring More Customers into the Store

Develop a plan for advertising using co-op dollars Implement a public relations plan Build a customer database to

Bring in new customers Bring back former customers Bring existing customers in more frequently

Use your web site as a marketing tool Use e-mail as a marketing tool Do more in-store events Use out-of-store events to reach new customers Reach out to underserved markets and special interest

groups Add amenities that build traffic (e.g., a cafe, a

magazine/newspaper section Improve the store’s visibility (signs, window displays,

lighting) Form marketing alliances with other businesses Join Book Sense

Increasing Sales

Sell More to Customers in the store

Re-model the store to improve traffic flow and displays

Improve merchandising

Introduce a customer loyalty program - customers will spend more of their book dollars in your store and you will build a customer database with purchase data

Bring in other merchandise (cards, gifts, etc.) for “add on” sales

Sell more gift cards/gift certificates

Increasing Sales

Sell more Outside the Store

Do out-of-store events

Incentivize Web Sales

Sell to corporations and institutions

Increasing Margin

Bring in higher margin merchandise (e.g., remainders, sidelines, used books)

Move high margin merchandise to high traffic areas

Give high margin merchandise more space

Increase purchasing discounts Buy more direct from publishers Plan ordering to maximize discounts Order electronically to receive EDI discounts Take advantage of stock offers Take cash discounts from wholesalers

Reduce freight costs

Plan buying to meet free freight minimums Use vendor of record programs to get free freight on books

from smaller publishers Participate in ABA’s freight program?

Reduce inventory shrinkage Use security systems (cameras, security gates) Change store layout to deter theft Train staff in security procedures Take steps to reduce employee theft Prosecute thieves

Promote & Sell more gift cards

Increasing Margin

"Average" Gross margin and Gross Profit

"Average" store sales $1,500,000

ABACUS average gross margin 39.79%

Gross profit at ABACUS average gross margin $596,850

Improvements to Gross MarginBring in higher margin merchandiseReplace 5% of book sales with sales of other merchandise

with an average margin of 50%$7,658

Buy more direct from publishersSwitch 5% of purchases from wholesalers to publishers at

an average discount gain of 4%$3,000

Order electronically to receive EDI discountsMake 10% of purchases through EDI at an average

discount gain of 1%$1,500

Reduce freight costs Reduce freight costs by accumulating orders for free

freight minimums and using vendor of record programs$1,000

Reduce inventory shrinkageReduce inventory shrinkage from 2% of sales to 1.75% of

sales$3,750

Additional gross profit $16,908New gross profit $613,758New gross margin 40.92%

Difference 1.13%

Increasing

Margin

Reducing Payroll Costs Use payroll budgets

Set a payroll budget for the whole company and for each department

Set budgets as a percentage of sales

Match schedules to payroll budgets

Budget by the month or season

Reducing Payroll CostsSchedule efficiently

Schedule according to store needs, not employee preferences

Use a written schedule showing all staff so that you know exactly how many staff are available at all times

Use overlapping shifts to cover peak hours and lunch breaks

Use “back office” staff to cover peak hours and lunch breaks

Replace 8 hour shifts with shorter shifts Judicious use of part-time staff Cross training - No specialists Design a user friendly physical layout Outsource specialized functions Adjust store hours during slow seasons

Reducing Payroll Costs

Control pay rates and raises

Set pay scales for different positions, with a pay cap for each position (no more raises once someone reaches the cap)

Make sure that raises fit within the budget

Tie raises to increased responsibility or cuts in overall staffing

Replace raises with profit sharing


Control overtime

Insist that all overtime be pre-approved

Put managerial staff on salary

Schedule full-time employees for less than 40 hours a week

Use more part-time staff

Use “on call” staff to cover employee absences and special events


Make your staff more productive

Use technology to improve productivity

Streamline purchasing, receiving, returns and accounting systems

Cut out unnecessary or duplicative procedures

Limit sales calls from reps

Training is the key

Reducing Occupancy ExpenseRenegotiating your Lease

Know that rent is going to be a problem before it becomes a problem

Project sales for the coming year based on current trends and known future changes (e.g., a superstore opening)

Know how much rent you are supposed to pay in the coming year (check your lease for scheduled rent escalations)

Calculate how much rent will be as a percentage of projected sales. Remember to include additions to rent such as common area maintenance (CAM) charges

Know how much rent you can afford to pay (make a projected P&L for the coming year)

Refer to Industry Standards ( ABACUS)


Calculate exactly how much of a rent reduction you will need

Remember to check your lease for scheduled rent escalations – you don’t want to be going back to ask for another reduction in a few months time

Give your landlord plenty of notice that you will need a reduction

Property owners tend to plan their finances well ahead and don’t like surprises

It can take a long time for a property manager to get approval from owners

Giving notice shows that you are a responsible tenant


Do your homework

Find out the market rate for your space Ask real estate brokers what comparable spaces are renting for Ask neighboring tenants what they are paying

Find out if your landlord has given rent concessions to other tenants

Ask neighboring tenants and real estate brokers

Collect articles/studies on the retail environment in your area


Make your case

If sales are down, explain why Focus on causes that are outside your control (e.g., a

superstore opening) Focus on causes that are within the landlord’s control (e.g.,

you are in a mall that has gone downhill)

Explain what you are doing to help yourself (e.g., bringing in new merchandise, advertising more, cutting

expenses)

Show how much rent you can afford to pay Use industry studies such as ABACUS to show how much rent

bookstores pay Use a projected P&L to show that you need a rent reduction

to stay in business

Stress how responsible you are being in addressing the issue before it becomes a “problem”

(Landlords live in fear of tenants who declare bankruptcy in order to renegotiate rent or get out of leases)

Mention the cost of finding a new tenant if your business fails

(e.g., lost rent while the space is vacant, brokerage fees, “build-out” costs)


Be realistic

Don’t ask for an unrealistic rent reduction

If your landlord won’t reduce the scheduled rent, ask for

a “temporary abatement”

Know whether your problem is temporary or permanent


Offer something back

Offer to pay percentage rent if sales are better than expected

Offer to pay a higher percentage rent over a fixed “break point”

Offer to “back load” rent if you think that business will improve

Offer to give back some space if you have more than you need

Offer to make improvements to your space

The 2% Solution. Average Store Scenario A Look Back.

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