Practical answers for tough business questions.
Question: My business partner thinks we can increase our total sales 25 percent by doubling our jewelry area. How can I tell if this is true? To give you some numbers: Our overall sales this past year were $480,000, and jewelry sales were $146,800. We have 1,400 square feet of sales space, and the eight display cases in the jewelry area take up 400 square feet.
Answer: Any time you look at expanding or decreasing an area of your store, it’s good to start by looking at the feasibility of the move from a financial standpoint, yet also remembering there may be other factors to consider.
In this case, we begin by determining exactly how much you would need to increase sales and whether that increase is feasible. If your total sales are $480,000, then a 25 percent increase would be $120,000. Of the total sales, your jewelry sales are $146, 800, or 30 percent. You also generate $367 per square foot in jewelry sales ($146,800 divided by 400 square feet), which is a very solid number, and $24.15 per square foot more than your overall sales per square feet.
So, if we take your current jewelry sales of $146,800 and add the $120,000 you wish to see as an increase, and then divide that total of $266,800 by the anticipated square footage of 800, you would have to generate $333.50 per square foot in the new jewelry section. That is less than you do now and even less than your average sales per square foot for the entire store ($342), so it looks possible.
Now that we know, strictly by the numbers, your partner’s projections are possible, there are other things to consider. First, remember there are no guarantees doubling space and merchandise will double the results you already achieve.
Ask yourself: Do you have the money it will take to double your inventory? You did not tell me the average inventory in your jewelry section, but based on your sales, I am going to say your Cost of Goods Sold for this section is 40 percent of your sales, or $58,720. (You can always adjust these equations to match your actual numbers.) So, to double space and inventory, do you have an additional $48,000 (40 percent of $120,000 in anticipated sales) to invest in inventory? Even if you can get N30 or N60 terms, that is a huge risk to take without the capital up front to start.
And, say you do have the extra money to invest in jewelry inventory, do you know new vendors or jewelry lines you want to bring in? Will these lines complement or enhance your current offerings? Do you feel your customers will respond to the new jewelry with double the enthusiasm to double your current sales? It’s something to think through, because if you are incorrect in this assumption, you will have a whole lot of dollars just sitting in pretty display cases.
And speaking of display cases, would you use the same kind you have now or would you configure the space differently? Have you priced the fixtures? Will they match what you have currently?
Another consideration is the flavor of your store. Right now, your jewelry area is a little over 28 percent of your total sales floor space. If you double it from 400 to 800 square feet, you can possibly meet your goal of increasing sales 25 percent, but you have effectively changed your store, because it will now be more than 57 percent jewelry. So, jewelry goes from just under one third to almost two thirds of the total space, which can change how you are seen and what you are known for in the community. That may be fine with you, or it may be a point of concern.
It’s also a good idea to look at how the rest of the store inventory will change. What will you need to move or remove to expand the jewelry section? How are the sales in that area? What are the sales per square foot? And how does the merchandise that will be discontinued affect your overall brand? Hopefully, you are planning to get rid of some slow sellers, and whatever is currently in the planned new jewelry space can be removed or relocated easily.
Since there are no guarantees, and much of this is speculation, my suggestion would be definitely to expand jewelry, because you obviously do well in that area, but I might do it in smaller increments. Could you add an additional 100 square feet, see how it goes for four to six months, and add more if the results meet your sales goals? If you add two additional cases now, with an approximate inventory investment of $12,000, you can test your numbers in a few months, see how customers are responding, determine if your sales per square foot are rising or falling, and adjust accordingly.
First published in Vol. 27 No. 6 of Retailing Insight. © 2013 Continuity Publishing Inc. All rights reserved.