Saturday, May 8, 2010

Sales Per Square Foot

One of the tools for determining if inventory is working for a store is to use sales per square foot. This is especially true in urban stores and very small stores, where there is a very high opportunity cost for displaying merchandise. Products need to earn their place, and larger products need to earn it even more. Sales per square foot is another tool you can use in addition to turn rate analysis, which rates merchandise on how often it sells. You can use these two together, always keeping in mind the space your merchandise requires.

For example, you might have a slow selling miniature game that has just a couple of turns. If these were board games, where a \$50 box could take up a couple of square feet by itself, you might be obliged to dump it. However, that same product space in miniatures might include \$300 in models. Suddenly turn rates take a back seat to sales per square foot. Likewise, a four turn \$100 poker table top might be considered a solid choice under turn rate analysis, but when you realize you could stock \$6,000 in miniatures in the same space, it might now be considered an enormous space hog that has to go. You can use your overhead numbers to calculate how much it costs to stock an item per square foot, but to keep it simple, just consider a product or department in relation to the rest of the store.

This all sounds theoretical, but when your store is small, like our last store, sales per square foot plays an important role. In my 900 square foot store, stocking a new collectible card game was an obvious choice. During the CCG boom, we sold over 35 different games. CCGs took up an insanely small amount of space. Each CCG takes up half a square foot at best, turns at between 8-100 times a year and requires a tiny amount of inventory at any given time. Nowadays, there aren't that many good sellers (we have five), but back then it was easy money.

Small stores will always benefit from CCG sales and many "card shops" can maintain a small presence because of sales per square foot. Providing the necessary game space is another issue, as high sales per square foot items, like CCGs, CMGs and miniature games, tend to require lots of organized play to boost sales. Miniature games are most dependent on play space to drive sales, even moreso than CCGs. Classic games and jigsaw puzzles are the pigs, and combined with slow turns for most hobby stores, they're usually considered window dressing at best. So a small store should definitely focus on high turn, low space product lines, but to stay in business, they also need to maintain a high level of diversification. There will be some necessary evils, such as average space consuming departments, like board games and RPGs, but they should avoid the space hogs. This is generally understood by small store owners, but using metrics justifies what they know intuitively.

Below is the layout of our store right now, created with Microsoft Visio. You can see the various departments: RPGs top right, tactical miniature games at bottom right, board and card games at the top left, and toys, puzzles and party games at bottom left. We sell CCGs in two of the display cases in the center of the store. Look at the space each department consumes. No department is more than around 20%, which shows our diversification.

What you rarely consider is whether the space a game consumes was earned. Does the RPG section still warrant it's space with declining sales? Do CCGs deserve a little more prominence with their high sales? Are some departments, like toys and puzzles hogging space based on their high square footage and lagging sales? All of these questions are moot if you don't need the extra space. As space gets tight, it's not uncommon for me to begin envisioning which departments should be rewarded and which should be penalized for their sales performance. Calculating sales per square foot provides metrics for this perception. Below are my sales per square foot in a handy diagram.

You immediately notice departments that are represented larger than their physical space. CCGs are obviously highly efficient space users. Toys and classic games fail to perform, as expected. Board games seem inefficient despite record sales. Again, if you do turn rate analysis, you already have a "hit list" of departments that seem to be under-performing. There's also the up-side of turn rate analysis, in which high turn departments can indicate they need more stock.

So is all this navel gazing helpful? Would I be better off at the store right now giving board game demos? Do you need these tools? The bottom line: It works for me. Owning your own business is terrifying and any tool or process that can create some solidity in a highly fluid environment is most welcome. Tools and inventory metrics will absolutely not save you from product ignorance, bad customer service, a dirty or cluttered store, or not enough capital. However, if you planned ahead and included all those things in your baseline, I strongly believe metrics can provide an impartial, accurate look at how your inventory is performing.

I see my store as a high performance race car. Without proper capitalization, I can't get a quality car in the race or a qualified driver behind the wheel. My inventory is my economic engine and my tools and metrics let me fine tune it, tweaking out ever more horsepower from the same block of metal. You can over-tweak the engine and blow it if you bury your head in your graphs and charts. However, if you listen to the entire car hum, if you can grasp the totality of your entire business, you can avoid catastrophe and maximize your performance. If this sounds like a game I'm playing, you're absolutely right.