Don't Forget About Profit Per Square Foot

Originally seen in the October issue of Power Equipment Trade Magazine - By Jeff Winsper

One of the key indicators on the health of an independent power equipment retailer is profit per square foot

It is not unusual for retailers to use various key indicators to measure success. Profit per square foot is just one of a few critical metrics to judge the health of an independent power equipment dealer, such as Gross Margin Return on Inventory (GMROI), Product Turnover Rates, Asset Turnover Ratios, and more. Each represent the downstream outcome from everyday decisions, based on long-term strategies.

Case in point, Tractor Supply Co., is keen on continuing to sell more through its existing stores, while using the formula to help forecast its future long-term growth goal of having nearly 2,500 locations nationwide. A considerable and admirable feat, since currently they operate about 1,500 now. At 2,500, they would have as many, if not more than Home Depot and Lowes. Of course, the footprint comparison of “big box” versus Tractor Supply Co is different, with Tractor Supply having an average of 15,000 sq. feet per store.

As an independent retailer of one store, or maybe even a few branches, may be asking yourself, “there is no way this is an apples-to-apples comparison,” since Tractor Supply gross sales of about $258/per square foot. On the surface, this has merit, as the larger branches have greater buying clout and more centralized manpower than can be spread across multiple locations, as one highlighted advantage. However, on the most basic level, these fundamental metrics can’t be ignored when managing a store of any size.

Knowing your profit per square foot is an easy calculation you can do on the back of a napkin, but knowing what your next best decision is takes a deft approach to maximizing all of your opportunities. Let’s say, for example, you want to think about improving your profit per linear foot of wall space. With about an average about $100/profit per square (wall) foot according to industry guru Bob Clements, how do you stack up? What can you do to continuously improve that?

Consider taking it one step further than just using general ratios relative to the wall length; consider having a more precise understanding which product SKUs are driving the highest margins for each linear foot. Some may have much higher turnover rates, at lower margins, or vice versa that account for the $100. What if you dedicated more linear footage to the optimal higher turnover ratio, that yielded the maximum profit, and sunset the stagnant, or latent inventory that frankly is dragging down your potential? Sure, you may have a couple customers express disappointment that a particular SKU/product is not available, but that is not nearly as disruptive as if you don’t have product inventory available for the fastest moving product that most likely represents a broader, high repeat customer base.

Take it further.

What if you analyzed which one of the power equipment brand’s total product mix offering drives higher margins to the next adjacent “competitor” per linear foot? This could give you ample, yet empirical evidence to make smarter supplier decisions. For example, you may now elect to go single line exclusive and add no more SKU’s from them; or expand product SKUs from the same company; or use the remaining wall/floor space for a different product category that exceeds the now defunct supplier. Believe it or not, you probably already have the data from your Dealer Management System/POS system. But to do this, you need nimble product analytics to make these sound decisions.

These product analytics can arm you with very powerful decision making power, especially when sales reps try to convince you to buy more, without the evidence. Perhaps, you ask them what they drive for average profit per square foot (wall or floor) for other dealers to get some perspective. Or ask them if you decided to add more linear feet, if there is a tipping point for maximum revenue/sq. foot. If they don’t know the answer, then work with them to help them understand that these are the type of decisions you need to keep up with rising costs, and help build the long-term health of your independent power equipment dealership. In the meantime, leverage your own dealer data to maximize your opportunities.


About the author:

Jeff Winsper is the president of Black Ink Technologies, which helps the power equipment industry sell more, faster and smarter. The SaaS platform provides more visibility across the entire supply chain—from a manufacturing plant, to distributor, to territory managers, to dealers, to the local marketplace. Connect with him @jeffwinsper, and on LinkedIn.