Cost Saving Tips for Retailers

The financial environment in the retail industry is extremely competitive. This means that retailers are always under pressure from their competitors in order to reduce prices. However, at the same time, retailers also face escalated costs which makes any kind of price reduction very difficult. It is for this reason that over the years, retailers have become more creative and have started to find new ways to try and reduce their costs.

This article explains some of the common ways which are used by modern retailers to reduce their costs and obtain the competitive edge.

  1. Common Area Maintenance: Retailers generally tend to rent at high streets or shopping malls. Such upmarket retail locations tend to have a lot of common area. The cost to maintain and upkeep this common area is also divided and distributed amongst the tenants. Hence, common area maintenance becomes a part of the overall rent which is payable. However, the problem is that on a regular day, retailers are not able to obtain much utility out of the common area. As a result, it becomes an unproductive expense which adds to the costs without adding any corresponding value to the end user.

    Retailers must try to lower the costs of common area maintenance. This can be done by selecting locations where the common area maintenance is lower. Alternatively, it can also be done by utilizing the common area for generating a revenue stream such as branding for vendors. Proper utilization of common area maintenance can make a significant difference to the bottom line.

  2. Payment Processing Fees: Retailers receive most of their payments in the form of electronic payments such as via debit cards or credit cards. As a result, they have to pay a processing fee to companies such as VISA and Mastercard to process their payments. These companies have been known to charge significantly high processing fees to retailers. There are some big box retailers which have the ability to renegotiate the processing fee that they pay.

    Nowadays, even smaller retailers have started negotiating with payment processors. Since, the processing fee affects almost every sale made, it is important for the retailers to ensure that they have received favourable terms for the same.

  3. Stock Management: Retailers which have the lowest cost compared to industry averages also tend to have the best stock management practices. This should not come as a surprise since stock management is a critical part of the retail business and has a huge impact on the cost structure.

    Retailers who are able to implement “Just-In-Time” inventory systems are much more likely to save on costs related to warehousing, interest costs on blocked working capital, shrinkage costs etc. These seemingly minor costs can add up significantly over time. Also, a higher stock turnover means the retailer is able to optimally utilize their fixed costs. The fixed costs end up being spread over a larger number of units. This eventually leads to lower overall costs for the retailers.

  4. Cash Discounts to Vendors: Retailers must realize that the final cost of the product they pay also depends upon the cost of capital for their vendors. For instance, if the retailer has a policy of paying their vendors after two months, the vendors tend to build in two months’ worth of interest within their costs.

    The price therefore depends upon the cost of capital of the supplier. If the retailer has a lower cost of capital than the supplier, then they can offer to pay the supplier immediately in lieu of a better discount. Generally, this turns out to be a win-win situation for both the supplier as well as the vendor. Both stand to gain at the expense of the financiers.

  5. Insurance Costs: Retail businesses tend to spend a small percentage of their overall revenue towards insurance costs. They need to insure their stores, their stock and also to protect themselves in the event of lawsuits or liabilities. These contracts tend to be renewed year or year without consideration to whether the renewal premium is accurately priced.

    It is important for retailers to get competitive market quotes for their insurance needs before they decide to renew with a particular service provider. Being more diligent about the price being paid for insurance can help retailers save significant sums.

  6. Fixed Vs Variable Expenses: Retailers need to look at the scale of their business and then decide whether they want to keep a large portion of their expenses as fixed expenses or variable expenses.

    Fixed expenses cannot be changed in the short run. However, they can provide a better return on investment if the business operates on a large scale. On the other hand, variable expenses can be scaled down very quickly in the event of a negative adverse event but cost more to run on a day-to-day basis.

    Retailers need to be careful about the type of cost structure that they choose since it can be quite difficult to change it in the short run.

The fact of the matter is that cost cutting is not a straight forward exercise in the retain industry as of now.

Retailers have to be careful that when they cut their costs, they should not also simultaneously cut the value which the customer is expecting. Over the next few years, retailers will have to become increasingly innovative while cutting costs. The use of technology such as artificial intelligence and machine learning may also prove to be crucial.


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Finance in Retail