Retail Math for Walmart Suppliers

This article will discuss some of the more important retail math metrics, the physical calculations, and why they are important to Walmart ... and thus, to you!

Walmart Key Performance Indicators

There are dozens and dozens of account metrics that you can use to assess the performance of your account — product sales, margins, ROI, and a host of others.

Now, that's a lot of data to consider! But it isn't as hard to decipher as you might initially think if we approach it from the standpoint of "major metrics". Walmart breaks everything down into three major metrics: Sales, Profitability, and Asset Efficiency.

Sales (Volume)

This is the metric that every supplier searches for first upon learning how to extract data from Retail Link and Decision Support. Sales is "how many dollars did the consumer give to Walmart", which is obviously a very important metric!

But, what if this is the only data point you looked at? Sales, in and of itself, can be a very good number in isolation. But, what if the reason for the high sales is due to high markdowns? That means that, even though Walmart is selling a lot of your product to the consumer, the profitability that they are realizing is smaller than they were expecting, sometimes significantly!

Here are some common retail math metrics relating to sales volume:

• % Sales Change = (Sales TY - Sales LY) / Sales LY
• Sales Variance % = (Sales TY - Budgeted Sales) / Budgeted Sales
• Comp Sales % = (Sales TY of stores open >12 Months - Sales LY) / Sales LY
• Average Price = Sales / Quantity

Profitability

Profitability is a group of measurements relating to how much money Walmart made, not just how much money the consumer gave them. It is the second, and arguably the most important, metric of all.

Initial Margin %

There are several metrics that you can lump into the category of profitability. The most common one is Initial Markup % (often abbreviated IMU). This is simply the amount that your inventory is marked up at the stores. If Walmart buys a widget from your company for $5.00 and lists it on their shelves for $10.00, the IMU % is 50%.

• Initial Margin = ( (Retail - Cost) / Retail ) x 100%

Think of IMU as Walmart's potential profit. Assuming there are no markdowns or reductions in their established retail price, they would make 50% when the customer purchases your item from Walmart!

The key phrase above is "assuming there are no markdowns ...". Well, if you have any retail experience at all, you know that markdowns happen. Period. While some categories are more markdown intensive than others, I have never worked in a category that had no markdowns.

A markdown is simply a reduction in Walmart's expected sales price. It can be expressed in terms of dollars or as a percentage of retail sales.

• Markdown % = Mark Down $ / Sales: Store markdowns represent the first reduction in Walmart's expected profitability. It is a critical metric to consider when assessing the overall performance of your account. So, what is left after all of these markdowns? The answer is a metric called Maintain Margin. This can also be expressed in dollars or as a percentage.

Maintain Margin %

Maintain Margin is, simply, the margin remaining after markdowns. In other words, this is how much profit Walmart actually realized (or maintained!) after the consumer purchased your item.

• Maintained Margin = Initial Margin % - (Mark Down % x Cost Complement)

In the above calculation, the Cost Complement is simply the "cost" part of the IMU %. It can be calculated as:

• Cost Complement = 1 - IMU %

While all of these profitability metrics are important, in my experience it is Maintain Margin (abbreviated MM%) which Walmart pays attention to the most. This is the metric that feeds into their overall return on investment.

Asset Efficiency

Asset Efficiency, as the name suggests, is a group of metrics that help define how efficiently Walmart is handling their assets (in this case, your inventory!). There are several metrics that get lumped into the category of asset efficiency, but the one you will hear the most about is called inventory turns.

A turn is a conceptual metric and is a bit more difficult to understand at first glance. Simply defined, inventory turns is a ratio of sales to inventory. In other words, it is a measurement of the relationship between the amount of inventory carried by a retailer and the quantity of that inventory that the consumer purchased in a given time range.

It might be easier to think of this with real numbers. Let's say that Walmart sold 1,000 units of your product in a 52-week period. During that same time frame (52 weeks) the average number of units that Walmart carried on the shelves was 5,000 units. In this simple example, the inventory turns for this item would be 1,000 / 5,000 = 0.2.

• Inventory Turns = Units Sold / Average Inventory Units for the time frame

Obviously, the target is "the higher the better". Walmart wants to maintain as little inventory as possible, while still maintaining the same level of sales to the consumer.

There are certainly some disclaimers to this statement, since inventory turns looked at in isolation can be misleading. We will discuss this in much greater detail when we review the Supplier Performance Scorecard.

Nobody likes inventory, but it's a necessary evil in the retail game. This is exactly why inventory turns and asset efficiency in general are incredibly important metrics to consider when assessing the performance of your account.

Let's Put It All Together

OK, so we have Sales, Profitability, and Asset Efficiency. How do these work together?

If there is a "score" on the Supplier Scorecard, it is the metric that combines all three of the metrics that we have covered so far into one metric: Gross Margin Return on Inventory Investment, or GMROII.

Similar to inventory turns, which as you recall is a ratio of sales to inventory, GMROII simply adds the profitability metric to the mix. In its essence, GMROII is the ratio of gross margin to inventory investment.

Think about it this way:

• Sales is how much the consumer purchased
• Maintain Margin is the margin that Walmart realized when the consumer bought the item.
• Average Inventory (at cost) is how much Walmart had invested in that inventory between when they purchased it and when they sold it to the consumer.
• GMROII simply adds profitability to the inventory turns metric!
• GMROII = (Sales x MM %) / Average inventory at cost