MSG Team's other articles

9362 Fixed-Rate Mortgage vs. Adjustable Rate Mortgage

We already know that a mortgage is one of the biggest expenses that any investor has. It is also common knowledge that the interest rate is the biggest determining factor of the dollar value of each month’s mortgage payments. The interest rate of the mortgage is often the subject of a lot of discussions. This […]

12670 Cash vs. Accrual Basis of Accounting

Cash Basis of Accounting Cash Basis of Accounting uses receipts and payments of cash to record incomes and expenses. Therefore, under the cash basis of accounting, if a corporation makes salary payments of January, 3 months later in April, it will be considered as expenses in the month of April, since that is when the […]

12280 Advantages of Job order Costing

Possible To Appraise The Job: Job order costing is the only way that companies can appraise the jobs that they are about to take up. In the absence of a job order costing system, companies will not have enough data to ascertain whether or not the job will be profitable. Job order costing system enables […]

10590 Pension Funds Vs. Mutual Funds

Pension funds are an investment vehicle that has a special focus on retirement. Many people think that pension funds and mutual funds are very similar. This is true to some extent. Both pension funds and mutual funds allow investors to pool their resources and hire professional fund managers to invest on their behalf. However, the […]

9059 The Economics of Blue Bonds

Oceans account for over 70% of the surface area of the earth. This makes them important for life as well as for commerce. More than 90% of the international cargo around the world passes through water. Also, millions of people depend upon the ocean for their livelihood. Tourism and fishing and many other such occupations […]

Search with tags

  • No tags available.

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.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Customer Footfall Analysis

MSG Team

Changing Cost Structure in the Retail Industry

MSG Team

Causes of Shrinkage in the Retail Sector

MSG Team