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Retail Hardware Stores

( Originally Published 1939 )

A good deal of significant information is available on operating costs of hardware stores. In addition to Census figures and those from Dun & Bradstreet, the Hardware Retailer publishes each year detailed and comparable data for a representative group of large and small stores in cities of various size. Figures from the different sources are in general agreement in showing average expense ratios for 1929 and 1936 of around 24 to 26 per cent-lower than department store costs, but considerably above those of grocery and meat stores. The smaller sales volume of 1935 resulted in higher expense ratios than in 1929 and 1936. In the latter year--unlike most lines of retail trade-average expenses were slightly below 1929. This seems to indicate real improvement, since expenses showed a steady rise from about 21 per cent in 1923 to 24 per cent in 1928 and 1929. Because of the sharp decline in sales and relative inflexibility of expenses, costs rose to a peak of 35.2 per cent in 1932, but have since been steadily reduced.

Although the Association's figures are based on a relatively large sample, it is not improbable that the typical reporting store is somewhat more efficiently operated than the average.

Effect of Size of Store and Community on Expenses

As in the case of department stores, retail hardware expenses are definitely related both to the size of store as measured by sales volume, and to the size of community in which the store operates. Irrespective of the size of city, expense ratios show a decided tendency to become smaller as the business becomes larger. Department stores appeared to show just the opposite tendency, but it must be remembered that the typical department store has a much larger sales volume than the typical hardware store. Hardware stores with annual volume of less than $25,000 had total costs of 26.8 per cent of sales. The next larger size-group showed a sharp decline, and the remaining groups less marked decreases, while the largest group, with sales of more than $100,000, had operating expenses of 21.5 per cent.

Some of the reasons which may account for the lower costs of the large stores are the larger volume of sales per employee, the more rapid rate of stock turnover and the better credit experience, as evidenced by the smaller volume of outstanding accounts on the books at the end of the year. Although gross margins charged by the largest stores were lower than for any other size-class, their profit on investment was the highest, and earnings on sales were well above the average.

The stores with sales of less than $25,000 show up badly in comparison with all other size-groups. Gross margins and expenses were higher for this group, while earnings on sales, profits on in-vestment, stock turnover and average sales per employee were lower than for any other size-class, and their credit position was especially poor. The small sales volume of this group, which means that fixed expenses are larger per dollar of sales, is undoubtedly the immediate cause of their unfavorable record. But perhaps the low sales volume is itself due to the fact that they lose business to the larger stores because their mark-up is greater, or because of a poor selection of goods, or because they do not employ efficient help, or possibly because they are unsuccessful in granting credit to customers.

The medium-sized stores made the greatest earnings on their sales, but in most other respects were about average in their performance. In spite of their favorable credit position the larger stores do a substantially larger proportion of their business on credit than other groups. Apparently they are willing to grant credit, but are shrewd enough to control their credits. Certainly no one factor, but a variety of causes, appears to be responsible for the better experience of the larger stores.

Operating expenses are also affected by the size of community, being markedly higher in the larger towns (at least up to 50,000 population) than in the smaller centers. Here it appears that higher salary and rental expenses account for practically all of the difference in total costs, as there is no evidence of appreciable differences in the rate of stock turnover, sales per person employed, or profit on investment.

The contrasting effects of the size of store and the size of town on expense ratios are made strikingly clear in Table 25. Costs increase steadily and substantially in every store size-class as the size of town increases. And in towns of every size expense ratios decline with every increase in size of store. Thus the little business in the big town is at one extreme of cost, with an expense ratio of 32.2 per cent, and the big store in the small town, with 15.7 per cent, is at the other extreme.

Shoe stores show wider variations in operating expenses than most other lines of retail trade. These differences, as in the case of department stores, reflect the size of store and size of city, but are also related to the type of operation and the quality of merchandise carried.

Average expenses amounting to 30.4 per cent of 1936 sales and average profits of 3.8 per cent were shown in a survey of seventy stores made by Dun & Bradstreet for the National Shoe Retailers' Association. But stores with most of their business at less than $5 a pair had expenses of only 28.3 per cent and a profit ratio of 4.2 per cent. At the other extreme of quality, expenses rose to 34.3 per cent and profits fell to 2.2 per cent in a group of stores reporting three-quarters or more of their sales at $5 to $10 a pair or over. The lower-priced stores had a much higher rate of stock turnover than the higher-priced ones and an advantage in most individual items of expense, particularly advertising and rental costs.

Costs also varied widely for stores managed under different systems of operation. Leased shoe departments of department stores had the lowest costs, with an expense ratio of 24.9 per cent of sales, while costs rose as high as 35.8 per cent in multiple stores operating from two to four branches. Independent single stores and chain stores fell between these extremes, with ratios of 29.2-and 30.6 per cent, respectively.

With their marked cost advantage leased departments were able to make profits of 8.2 per cent on sales as compared with only 3.8 per cent for all other stores covered in the survey. Leased departments also had more rapid inventory turnover than the other stores (3.2 times per year as compared with 2.6 times) and reported annual sales of $13,055 per salesman as compared with $9,810 for the others. Largely as a result of this, leased departments had a payroll expense of only 13.7 per cent as compared with 16.8 per cent. Their advertising costs were also much smaller, reflecting dependence on the institutional advertising of the department store.

The figures for the independent group of shoe retailers, when compared by size of store, showed a general tendency for costs to mount as store size increased. The smallest stores (with $10,000 to $30,000 sales) had a total expense ratio of 28 per cent, payroll expense of 13.4 per cent and profits of 4.2 per cent, on sales. Costs rose to 32.9 per cent for the $100,000 to $500,000 class and pay-roll expense for this group amounted to 17.5 per cent of sales. Single stores with more than $500,000 annual volume, however, had slightly lower total expenses (31.1 per cent of sales) and pay-roll expenses (13.7 per cent) , but a profit ratio of 6.2 per cent-higher than for any other group of single stores.

The higher expenses of the large stores are probably due chiefly to the location of such stores in big cities. An analysis of expenses of a group of chain, single and multiple stores by size of community shows that the largest cities present more difficult competitive conditions than do the smaller ones.

The most pronounced differences are found in the smallest population size-class (under 25,000) and in the largest (over 500,000). The expense ratio of stores in the smallest cities was 26.9 per cent of sales, and in the largest, 36.3 per cent. In the three intermediate population classes-ranging from 25,000 to 500,000-average expense ratios were almost identical-30.7 per cent. The small-town stores appeared to enjoy a special advantage over the big-city concerns in labor and advertising costs. Profit ratios were much higher in the small cities than in the big ones-4.7 per cent compared with 1.0 per cent of sales.

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