Cost Of Doing Business: The Naked Retailer Exposed!

Perhaps more than any other single metric,
the Cost Of Doing Business number shows
just competent retail managers truly are.
Consulting for the world of retail is some of the most fun any consultant can have professionally and potentially offers an incredibly broad experience: with a vertically integrated player, you get to see planning, product development, purchasing, marketing, store operations, logistics and advertising: it's got it all.

Try doing that with a trucking firm!

Naturally, the bottom line is what counts when it comes to judging success. But there is one particular measure which I place tremendous emphasis on in analysis, which tells me the reality of just how good management is.

It's the Cost Of Doing Business (CODB): simply, it's what is needed to run the business operation. You get it whilst adding up all operating costs of the business (namely your labour, rental, electricity, hire purchase, marketing, cleaning etc, but not your cost of goods) and divide into your total turnover - naturally there are a few more ifs and buts, however that's the general gist of it. It's expressed as a percentage, and it is one of the most vital components of any financial analysis I do.

Why? Simply, it is the truest measure of managerial effectiveness. An unacceptably high CODB number (depending on specialization, country and a few other factors, generally anything over 30% is too high, and anything north of 40% is usually grounds for a CV update) - indicates laziness and sloth: too much fat in the organization and an indication of managerial inattention...or outright incompetence. Indeed, the CODB is the one snapshot number that shows the Naked Retailer - just how good are the guys running the show in the cold light of day?

To a fair degree, you cannot easily influence sales in a competitive market with tight margins: this is often heavily driven by external factors. However, there is no excuse for not controlling your internals: so often, fat builds up in an organization with time...and often, in very short order.

Some young organizations that experience fast growth fall into the all too common trap of what I call Lucifer's Mirror: they look at their results, then look at themselves and love what they see...and assume that they are "it". They simply believe that they are doing things right, that all their success is due to their own brilliance and that it is a vindication that all they are doing is brilliance personified.

Wrong. And the CODB number is often the first indication that a dangerous path is being trodden. 'Luxury' type projects which study possible future ideas of structures, new resources hired that are "preparing for future growth". Often, these types of companies got lucky with teh right idea at the right time...but the right time is no the same as a long time. Other operators can move in, older ones can adapt...and suddenly, the real mettle must be shown.

And then the more mature organizations: those who have been around for a while, who have people who have grown with the company, who have been 'looked after' for their loyalty. People who are in plum roles of dubious ultimate utility, or who may have once been a vital part of the company, but who have been made more senior than the business perhaps needs.

The above is what I often find out when I start querying the CODB. It comes down to inactive vs. proactive thinking, which I then have to 'gently' (ahem!) nudge into reactive mode to get the numbers into a more decent level.

So what do I recommend? Well, without giving away too many trade secrets (and putting myself out of work!), I find the following food for thought...

  • Projects to Nowhere: Are all these really going to add revenue or cut in NOW? What could these people be doing otherwise?

  • Time Unused: In retail, there is so much time wasted by staff, especially in luxury/bulky goods. Examine tasks that staff can be trained during downtimes that can be used to limit other FTEs.

  • The Costly Erasers: The big one: how many of FTEs are fixing problems created either internally or externally? This is one of the huge, somewhat hidden costs and is a surefire sign of a CODB that is too high, but that can be fixed 'relatively' easily.

The CODB is a number that all retailers need to manage both proactively and reactively....and aggressively. It will define just how capable you are, almost as much as your bottom line profitability in some instances. Don't let it slip.

With a high CODB number, the Naked Retailer starts to look less like the Wolford girls and more like guys in the fishing department... ;-)