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Department Stores

( Originally Published 1939 )

The typical big-city department store is really a host of individual shops brought together under one roof and single management. Commonly located in a congested urban center and offering its customers a wide range of goods and services, it is one of the more costly forms of retail distribution. The largest department stores-those with annual sales of more than $10 million, for example-show an average expense ratio of more than 35 per cent of net sales, nearly twice that of combination grocery and meat stores.

However, as indicated in a study of the Harvard Bureau of Business Research, from which these figures are taken, cost ratios de-cline steadily as the size of store declines. Operating costs in stores with annual sales of $1 million to $2 million amounted to less than 34 per cent, while the smallest stores-with less than $150,000 volume-paid only thirty cents out of each sales dollar for expenses.

Since the big stores are usually in the large cities and the smaller stores in the smaller centers, the size of the city rather than the size of the store is probably the most important influence on operating expenses. Payroll and real estate costs per dollar of sales are higher in the larger cities, while the big stores spend up to twice as much for advertising as the smaller ones. Another important element in the higher cost of big-city department store operation is the fact that returns and allowances in the largest stores amounted to 14.5 per cent of sales, as compared with only 7.7 per cent for stores in the $1 million to $2 million class. In spite of higher expense ratios the big stores made the biggest profits. Profits measured against sales rose steadily from zero in the two smaller size-classes to 2.4 per cent in the largest.

Other surveys tend generally to confirm the figures quoted above. Average operating expenses of department stores of all sizes were 34.9 per cent of net sales in 1936 and 35.8 per cent in 1935, according to the Harvard studies. Average expenses of 34.2 per cent in 1936 and 33.9 per cent in 1935 were reported by Dun & Bradstreet on the basis of data from the Controllers' Congress of the National Retail Dry Goods Association. The slight difference in the figures from the two sources is due to the fact that the Harvard figures include items-especially financial expenses-which are not covered by the Controllers' Congress. In both cases, however, the figures are larger than the 1935 Census figure of 29.2 per cent, which is probably partly due to the comprehensive cover-age by the Census of a very large number of small department stores. These have the lowest expense ratios. Also the fact that the typical store reporting to the Census does not keep detailed records or a close check on costs may result in some understatement.

While total costs of department store operation range from 30 to 35.6 per cent, according to size of store, payroll costs run from 15.7 to 17.9 per cent of sales. But the latter do not consistently increase with the size of the store. Except for the smallest size-class, and the two largest, payroll expense is uniformly close to 17 per cent of net sales. Real estate costs, however, show a fairly consistent rise with increasing size, running from 3.3 to 5.4 per cent of sales, which doubtless reflects the higher rentals of the big cities, where most of the large stores are located.

Department Store Chains

A further interesting expense comparison was made for 1934 by the Harvard Bureau of Business Research between two types of firms commonly referred to as department store chains, but with quite different characteristics. The first type, called ownership groups, includes mostly large-city department stores which are linked together in common ownership, but which perform most of the important operating functions independently. The second class (called chains by the Bureau) comprises companies in which there is much more central control and whose stores are usually distinctly smaller than those of the ownership groups.

The chains showed a much lower cost of operation, with a ratio of 23.9 per cent of sales in 1934 compared with 37.5 per cent for the ownership group-a remarkable spread. Moreover, the chains had a gross margin of 28.3 per cent, and therefore a profit of 4.4 per cent on sales, compared with 36.3 per cent, and a 1.2 per cent loss for the ownership group.

Although all items of expense were lower for the chain department stores, it was in payroll costs that their advantage was greatest over the ownership group. The differential was 6.3 per cent of sales. The higher personnel costs of the ownership groups may have been partly due to the fact that they perform several functions, such as delivery service and extensive granting of credit, not performed to the same extent by the chains. Also the clientele of ownership stores demand more personal service from more capable and highly paid individuals than do chain store customers. These chains, in contrast with the situation existing in other lines of trade, operate primarily in smaller communities, where wage rates are lower. The ownership groups place more emphasis on fashion merchandise than do the chains, and fashion merchandise always involves higher salesmanship costs.

These reasons obviously raise no presumption that the lower personnel expense of the chains is due primarily to their form of organization. Nevertheless this possibility seemed to the author of the report "sufficiently great to encourage the executives of department store ownership groups to continue and to intensify their experiments in centralized buying and merchandising and in centralized control of operations.

American versus Foreign Costs

American department store costs appear to be higher than those of department stores in foreign countries, notably England and Germany. A comparison for 1930 shows that in the United States expenses were 33.9 per cent of sales, as against 26.7 per cent in Germany. Payroll and advertising costs were noticeably higher in the United States: payrolls amounted to 17.3 per cent of net sales and advertising to 3.5 per cent in this country, as compared with 13.5 per cent and 2.15 per cent, respectively, in Germany.

English department store costs appear to be even lower. A study made by Philip J. Reilly of the Associated Merchandising Corporation shows that in 1933 British costs were 24.7 per cent as against 35.5 per cent for the United States in that year. In this study the figures for American and English stores were adjusted to make them as comparable as possible. The greatest differences in expenses were found to be in rents and taxes and in the costs of buying and selling.

Both the American and the English figures are for 1933, a depression year with exceptionally high costs in the United States, but of more nearly normal volume in England. Average American department store costs showed a decline of nearly 2 per cent of sales from 1933 to 1934 while expenses of English stores were virtually the same in both years.

Reasons for Low Costs in England

Among the reasons given by English department store managers for their low expense rates are "that they have tried to keep their top executive organization simple and free from the over-specialization that exists in American department stores, and that they have persistently challenged the introduction in their management routine of any extraneous `system' unless it virtually can be proved beforehand that such system will assist management in the maintenance of a low expense rate, or in the elimination of such wastes in merchandising or operation as to more than compensate for its cost.""

Other reasons for smaller running expenses of English stores are that the amount of charge business is lower than in the United States, which results in smaller losses from bad debts; rentals and rates (taxes) are lower in England than in America and more restricted advertising space is used and smaller publicity organizations are needed. Newspaper rates in England are relatively much more expensive; no radio publicity expense is incurred, since commercial broadcasts are not permitted in Great Britain; customer returns and adjustments average less than 5 per cent in England as compared with 12 per cent of gross sales in the United States; and employees' duties are more comprehensive and their rates of pay lower.

A common salary for an assistant buyer in England is $30 a week; and, besides their buying activities, many of them also act as floormen or sales clerks as well as being responsible for a simple form of unit stock control. Likewise, buyer specialization has not been carried as far as in the United States. Central buying has made notable progress in England in recent years, however, and according to this report the trend undoubtedly will be to develop the department manager type of buyer who will be obliged more and more to take over direct responsibility for all selling activities.

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