Tag Archives: Three Buckets

Topshop Brings Fast Fashion to Nordstrom

The idea of combining fast fashion with traditional department stores has intrigued me ever since JCPenney went into partnership with Mango few years ago.  I can’t help but be fascinated by the concept of fashion clothing that is meant to be frequently replaced by consumers, and therefore must be updated weekly in stores (just think of the supply chain implications, not to mention the labor involved in changing a sales floor weekly.)  Bringing this high-turnover merchandising concept to stores known for carrying high margin/low turn merchandise is, well, fascinating.

It seems that the latest duet to try this concept is Nordstrom and Topshop, and this particular combination looks like a winner to me.  Whether it will be successful in the long run is always a matter of debate, but it’s an interesting concept from a three bucket perspective.  After all, Nordstrom is gaining not only the Topshop brand image, but also a fashion oriented product with a high turn rate (and great asset efficiency.)  On Topshop’s side of the table, they gain a large increase in distribution and an accompanying increase in volume.  (Sources:  Nordstrom Dresses British With Topshop to Win Back Women: RetailTopshop is Coming to Nordstrom)

Speaking of interesting partnerships, I’ve been reading several articles about how Neiman Marcus and Target are teaming up to create a limited edition of holiday merchandise (designed by top names such as Oscar de la Renta and Tory Burch) to be sold in both of their stores this coming December.  The partnership even has its own logo – an exclamation point with a Target’s bulls eye as the dot.  I understand what Target is getting out of this, but can anyone explain to me the benefit to Neiman Marcus???  (Sources:  Neiman Marcus and Target join forces to create holiday gifts; Retail’s New Odd Couple)

Current Events & Retail Math

One of the best parts of teaching a retail class is that I never have a shortage of current news articles to use for examples and discussions.

Recently The Telegraph published an article concerning Walgreen Co.’s purchase of a stake in European retailer Alliance Boots (see “Walgreen to spend $6.7 billion on stake in health and beauty retailer Alliance Boots” by Harry Wallop.) Several great applications of this article come to mind (such as discussing it while covering international expansion, or using it while covering the retail life cycle.) But if you want to get creative, it can also be used in a discussion of retail math.

In an earlier post, I mentioned the three buckets and discussed how each one represents a category of retail math formulas. The buckets are: volume, profit, and asset efficiency. Each bucket is an area of financial performance retailers must constantly monitor. They are also the three areas management and merchandising will look to when needing to improve their performance.

When assigning an article like this one, I ask students to use the three buckets to determine how this move might affect Walgreen’s performance in the next 12 months.

The great part of this particular story is that there are multiple points for students to consider and comment on. For example, the expansion into a foreign market will increase Walgreen’s overall sales and therefore their volume in the short term. Other considerations could include how the addition of private label Alliance Boots products into Walgreen’s U.S. stores could affect their profit bucket, and what this very large investment could do to asset efficiency.

I’ll probably use this as an assigned reading this Fall, and then follow it up with a class discussion. It should be a lot of fun since there are several viewpoints to be argued concerning the financial impacts of this move by Walgreens.

ThreeBuckets.com Formula Sheet

  • Average Price = Dollar Sales/Unit Sales

  • Dollar Sales = Unit Sales * Avg. Price

  • Sales Increase % = (TY – LY)/LY

  • Initial Markup = (R – C)/R

  • Cost Complement = (1 – IMU)

  • Markdown % = MD $/Sales$

  • Maintained Markup = IMU – [MD(CC)]

  • Retail Turn = Annual Sales/Avg. Retail Inventory

  • Cost Turn = Cost of Goods Sold/Avg. Cost Inventory

  • Unit Turn = Unit Sales/Avg. Unit Inventory

  • Weeks of Supply = 52/Retail Turn

  • Weeks of Supply = On Hand Inventory at Retail/ Weekly Sales at Retail

  • Sell-Through = Units Sold/ (Units on Hand + Units Sold)

  • GMROII = Gross Profit/Cost Inventory

  • GMROII = (Turn/CC) * MM

**This is not a comprehensive list.  Just a few of the formulas we’ve received multiple requests for over the years.  If you have a request for a specific formula, please leave a comment or email me, and I will try to include it.

PRINTABLE VERSION AVAILABLE HERE

Why 3 Buckets???

That’s a pretty legitimate question. Why on earth did I name a blog about retail math “3 buckets blogging?”  It really does sound like it should be about farming, not teaching math.

The answer has to do with something I learned when I first started studying all the various formulas and ratios used in analyzing the performance of retail merchants. All of these formulas/ratios fall into what are basically 3 categories:  analysis of sales performance, analysis of profitability, and analysis of asset efficiency. Three categories, or three buckets of measurements.

Many of us find it easier to understand and remember multiple concepts when we can put them into logical frameworks.  That’s the idea behind the three buckets.  Think of all of those retail math formulas as being sorted into these three buckets.  For example, same store sales obviously goes into the sales bucket while inventory turnover goes into the asset efficiency bucket.

I’ve found that covering concepts this way in class helps my students better understand the relationships between the measurements.