Bhairav Kothari, Managing Director, SuperCFO, a virtual CFO solutions company
All businesses have a few important KPI's (Key Performance Indicators) and if you track them carefully, a lot gets addressed automatically. Sell-Through ratio is one such important tool to understand the intricacies of a retail business. As a part of the management, it helps you take necessary and corrective steps. But let's understand some of the key definitions, before we delve deeper into the topic.
In simple terms, this represents sales over inventory procured (which can be from a supplier or a factory).
Season: Most retailers operate their business around various seasons. Normally, one would see two big seasons-Spring Summer and Fall Winter. Within these, you could see further divisions, but this is also specific to each business.
Full Price: This represents retail sales price of the product, also referred to as MRP (Maximum Retail Price) in certain countries.
Mark Downs: Discounts offered to customers either directly or through promotional pricing.
EOSS: End of Season Sale. Normally, brands/retailers undertake stock clearance by providing attractive discounts usually at the end of a season, hence the term End of Season Sale. Retailers/brands offer an attractive discount to liquidate inventory and is part and parcel of their sales strategy.
Full Price Sell Through: Sell Through calculated for the full price period, i.e. the period during which the products were sold for their full price.
Let me now share some quick pointers on how one should interpret and action on various Sell-Through Ratios:
- If the Full Price Sell-Through is low: It means the company has not been able to sell well and would witness accumulation of inventory which could go through mark-downs/discounts, impacting margins and working-capital requirements.
- If the Full Price Sell-Through is high: This can have a mixed response. It means the company is able to sell its products well during full price months, which is obviously a good sign. But, it also means that the company has perhaps bought/manufactured less, and thus has now lost additional sales opportunity (if it had more products available, it could have sold more).
- If the Sell-Through Ratio for the full season is low: This can spell trouble for the company. Either consumers are not buying because there is an issue with the product, or the company has mis-calculated demand and has now procured much more than what it could sell, resulting in higher inventory accumulation, locking up working capital as well as profits.
- If the Full Price Sell-Through is low overall, but high for the full season: It means the company sold many more products during the EOSS period. This clearly means that the market is price-sensitive. Consumers like the products, but would want to buy them only when those are on sale/discounts/promotion. The company should work on its pricing and marketing strategy to tackle this problem.
As seen above, one needs to monitor the sell-through ratios very closely and work towards striking the right balance. By closely monitoring the sell-through ratios on daily/weekly basis, a successful company plans product promotions to push sales of products that are witnessing low sell-through ratios, along with considering an increase in prices of products that continuously see good sell-through ratios.
Successful retail companies use this ratio in deciding their buying/manufacturing requirement and also decide on how to move products from factories/warehouse to stores. With good quality planning using this important ratio, a company can maximise its revenue & profitability and achieve sharper working capital cycles.
(The author is Managing Director, SuperCFO, a virtual CFO solutions company.)