Store size, count, not governing factors in SKU turn rates - discount store inventories

Discount Store News, May 23, 1988

Store Size, Count, Not Governing Factors in SKU Turn Rates

NEW YORK--Inventory stock turned a median 2.9 times last year among 15 of the nation's top discounters, slightly below the 1982 level of 3.0, according to a survey released last month by Coopers & Lybrand, an accounting, tax and management consulting firm based here.

Among the survey respondents, inventory turns ranged from 2.4 to 4.96, a dramatic difference.

"How come someone does it [turn inventory] twice as good as somebody else?" asked Robert M. Zimmerman, partner and chairman of Coopers & Lybrand's retail industry practice.

The data does not provide a clear answer. Company size appears to have little to do with inventory turns.

Mid-size discounters with annual sales of between $500 million and $999 million turned their inventory at a faster rate than either large or small discounters. The turn rate for these discounters averaged 3.52 times a year, compared to 3.46 for companies with annual sales of over $1 billion, and 3.06 times for companies with sales from $200 million to $499 million.

Number of stores also is not a factor. Discounters with more than 200 stores turned merchandise at a rate of 3.38 times a year; they were followed by operators with between 50 and 99 stores, totaling 3.27 turns; and by retailers with 100 to 199 stores, 3.13 turns.

Within certain categories of merchandise, turn rates fluctuated even more dramatically, from a high of 5.2 for soft goods merchandise by one discounter in the $200 million to $499 million million category, to a low of 2.5 turns for a $1 billion-plus company.

"The report shows that smart management exists wherever it exists," said Zimmerman.

The report, entitled, "Discount Store Inventory Stock Turn Survey" sought information on inventory turns from 25 of the nation's top discounters. Fifteen responded. Of those 15 discounters, seven reported annual sales exceeding $1 billion, four had sales in the $500 million to $999 million range, and four posted sales in the $200 million to $499 million category.

Discounters reported turn rates for soft goods and hard goods, by comparable units open one year or more, for all stores, their warehouse operation, and total company turns.

Retailers were promised anonymity for their responses.

Although the study was last done five years ago, Zimmerman said the survey will become an annual report.

Zimmerman found the wide spread in inventory turns among discounters quite surprising. He reasoned that since retailers are selling the same merchandise at the same gross margin and under relatively the same conditions, the difference boils down to merchandise productivity," a product of controlling costs and effective sku management, key variables in the distribution system.

"Retailers need to look at this variable at POS, scanning, getting the merchandise through the pipeline faster with higher service with lowerq inventory costs," he said.

Zimmerman predicts that in the next two to three years, a few discounters will push their inventory turn rates to 6 or 7, and discounters with inventory turns under 3 will "drop out."

The survey has already shown that discounters can achieve 5 turns a year. Two of them have already done it in two different categories: soft lines and comp store turns.

The warehouse club concept of higher turns and lower margins will filter into discount stores, he said.

Warehouse clubs usually report 15 turns a year with gross margins at about 10 percent.

"Discounters are going to have to [raise turn rates] by being more efficient, buying what customers want, and shortening the pipelines from manufacturer to stores," Zimmerman observed, adding, "You have to be clever."

Apparently some discounters are quite clever.

One discounter in the $200 million to $499 million category, with fewer than 100 stores, posted a turn rate of 5.2 in soft lines merchandise, higher than any other merchant in the study. This same company recorded 3.92 turns in hard lines, second only to one mid-size discounter, also with fewer than 100 stores, that posted 4.62 turns in hard lines.

According to the survey, soft goods merchandise turned a median 3.2 times for all the stores and 2.95 for hard goods. Comp store turns were a median 3.25, and all stores turned their merchandise a median 3.34 times a year.

Large companies averaged 3.5 turns in soft goods and 3.02 in hard goods, 3.74 in comparable stores, and 3.77 for all stores. The company average for discounters in the $1 billion-plus category was 3.46.

Mid-size companies reported soft goods merchandise turned an average of 3.43 times, and hard goods, 3.24 times a year. Comp store turns were an average 3.38, and all stores, 3.35. Total company turns for companies with sales of $500 million to $999 million was 3.52.

Small firms reported soft goods turns at 3.43 and hard goods at 3.39. Both comp store turns and all stores turned an average of 3.42 times a year. The total company turn rate in this category was 3.06.

Several companies did not fully report their turn rates by category, only by total company. The discounter ranked No. 1 for turns--with sales exceeding $1 billion--reported a rate of 4.96.