Through a special arrangement, presented here for discussion is a summary of a current article from the Mark Heckman Consulting blog.
More than a few years back, I had the special privilege of taking part in a strategic discussion with Feargal Quinn, the iconic Irish grocery retailer. The question was raised as to how Mr. Quinn prioritized his day. Without hesitation he noted that the very first thing he did each morning was to look at how many customers he had the previous day. He would then look at them in the context of the previous week, previous year. For him, it was not about sales but rather answering the question, "Are my customers coming back to shop with us?"
Certainly, Mr. Quinn eventually looked at sales and other metrics, but his personal prioritization of "Customers" set the tone for how he ran his business, knowing if the customer returned, sales, profit and even EBITDA would likely follow. They did. The resulting customer-driven culture was contagious. His associates were consistently rated the best and his stores as well.
The learning here is not necessarily that we should all run our stores as Mr. Quinn did, rather we should be aware that prioritizing certain success metrics often have unintended consequences. For example, those that dwell on a metric like "gross margin rate" often elevate "hitting a specific number" to such a level of importance that they forget that the "wrong" gross margin number can negatively impact sales and customer count.
Unfortunately, the finance department determines the metrics and goals for many retailers. In my career, I met two, maybe three finance people who actually understood the importance of the customer and the intangibles that drive shopper loyalty and sales. Most do not. They assume that their set of financial metrics live in a purely linear relationship with each other.
There is a better way and it starts with an acknowledgment of shoppers and the competitive environment. To establish more thoughtful and useful goals, operators should build a financial plan within the context of the specific investments in margin, capital and labor needed to delight shoppers and effectively take market share.
It's not a coincidence that companies that think about the customer first are generally growing and healthy while those who begin the planning process with EBITDA and gross margin rate mandates are steadily finding themselves measuring declining sales and margins.
Are EBITDA and gross margin rate over or underemphasized as a metric supporting retailers' financial plans?