I was in a review meeting with a client recently and we were going through the store level profitability with the CFO. Around 100 stores across India.
The sales team were quick to point out that many stores were profitable after paying rents and salaries.
Let alone the store fixtures’ depreciation, they were not considering the proportionate cost of warehousing and logistics as well as back office overheads. If the brand marketing costs (incl. making the Ads and releasing them) as well as Leadership + Management salaries were considered, then the bottomline was a pittance.
Yet, everyone wants to feel good about EBITDA, as if it were the holy grail of a retail business.
EBITDA positive is the first stept towards achieving a profitable and valuable business, no doubt.
But to feel excited just because there is enough margin after fixed and variable costs is the single most reason why brands drown the drain.
Another example, for renting stores, deposits are paid to landlords which carry no interest.
However, a notional interest @ 12% should be recorded in the P/L, as this is pure working capital being deployed elsewhere.
In another example, a client wanted to purchase a truck rather than renting out citing higher efficiency.
What the Client did not consider was the interest cost of the asset if it was borrowed from the bank (let alone from cash acruals) and / or, the efficiency of such cash if it was invested in a Capex (they run a factory too) which would yield finished goods that would fetch revenues.
It’s high time Corporate Leaders stop giving so much importance to EBITDA and leave the joy of celebrating it to the newage StartUps and their Investors rejoice over this word.
Not sorry for being blunt. This is what a true and honest Retail Management Consultant would say, after all.
Wish to have a no-obligation consultative meeting for your requirements? Mail me - Shri@MilestoGo.in
