Invest When You Can, Not When You Have to: Capital Investment and Debt
Contributed by FMS Solutions
After discussing the different characteristics that make up a profit leader in our previous articles, we’d like to close the series by covering capital investment and debt.
Image a customer that shops in your store for 20 years, mainly because of its convenient location. The worn floors, aged ceiling tiles, and the cases painted electrostatically twice have never been a problem because the nearest store is “too far.” But now, they can shop easily online with home delivery and worse, there’s a competitive opening down the street.
While the customer is “loyal” to your store, their friends won’t stop talking about the new store and sooner or later, curiosity will drive them to check it out. Will your customer return to your store when there’s a brand-new alternative providing a better look and feel?
When ownership takes too much money out over the years and invests little back in, a store can end up in need of a major overhaul and begin rapidly shedding customers.
A store that reinvests a certain percentage of profits each year in upgrades will be more appealing to customers and have a stronger retention rate.
While it is true that customers judge stores by more factors than just physical appearance, market leaders consistently invest in in-store updates and training their staff.
Profit leaders also spend more on CAPEX as a percentage of sales each year. Why is this important? They are investing year over year.
Rather than investing regularly, operators often wait until there’s a competitive opening to take action and “freshen up” their stores. What happens then? They end up with increased debt payments and reduced sales due to the new competition. One thing leads to another, and when sales go down is when we usually start seeing cuts in labor, tweaks in pricing, and management issues.
Grocers should be investing when they can, and not when they have to. This is why profit leaders carry lower debt to equity ratios and lower debt percentages overall.
Invest regularly, keep your store modern and don’t forget that nowadays it is all about the total experience!
About FMS Solutions: Helping retailers succeed by transforming historic accounting activities into timely, accurate decision support tools.