Five Steps to an Industry Analysis

Example: Retail Shoe Store located in St. Louis, Missouri

STEP 1: FIND THE SIC AND NAICS CODES

The first order of business is to find the NAICS and SIC codes for the industry of interest. This is done by going to the Web site sus.gov/epcd/naics02/. Plug in your keyword (industry of interest), click the 2002 NAICS search tab, and a listing is displayed that will tell you the six-digit NAICS code. Find the code you are looking for and click the link. This will lead you to the four-digit SIC code for the same industry. For example, for the retail shoe store, the codes are SIC 5661 and NAICS 448210.

STEP 2: DETERMINE THE INDUSTRY SIZE

To determine the industry size, go to the sus.gov/ website. Click on “Economic Census” in the business section and enter the NAICS code to find this information. The find the 2002 numbers, click on “Industry Series,” and then scroll down to find the first few numbers of your NAICS code, for example, 44-45 Retail Trade is listed. Since the NAICS code for the retail shoe store begins with 44, I chose this code, then clicked “more.” Again look for the first few numbers of your NAICS code. In this section, I see 448 for a listing of “Clothing and Clothing Accessory Stores.” This is the industry of interest. Displayed on the right hand side will be PDF reports. You can choose to look at the full report or the tables only. Click the PDF to view the information. Again look for the full NAICS number to get details. For example in the retail shoe store industry, the following information is given.

2002 — there were 28,388 businesses in this industry with sales of $22, 997,531.

1997 — there were 31,399 businesses in this industry with sales of $20,543,252.

STEP 3: DETERMINE PROFITABILITY

Call the Reference Librarian at your local library and ask if they have RMA’s Annual Statement Studies: Financial Ratio Benchmarks directory. Using the NAICS code or SIC code, the following information was gathered from that directory for retail shoe stores.

Gross profit 38.0%

Operating expenses 38.5%

Operating profit -0.4%

All other expenses 2.4%

Profit before taxes -2.8%

STEP 4: DETERMINE WAYS TO MAKE PROFITS

Based on the information collected so far, it appears we would need to find a way to make more profits in our retail shoe store venture. Information about making profits can be found by looking at trade articles and information or doing actual interviews. The following information came from two sources: One source is a trade site, National Shoe Retail Association (a.org/brightideas.pdf), and the other is from the home business site (erHomeBiz.com).

Question #1: What can be done to generate more sales?

° Excellent service

° Courteous and well-trained staff

° Diversity in product selection

° Competitive pricing

° Functional store design

° Location, location, location (more heavily populated cities have greater demand for shoes)

Question #2: Is it possible to charge a premium for a product or service?

° Depends on the market that you are catering to. If it is high end, then your target customer has the means to spend more money on more expensive (name brand) shoes. Also, if the store is located where families have higher discretionary income, the demand for brand name shoes will be higher.

Question #3: How do we keep the cost of goods/services below the industry’s average?

° Put adequate stock control in place to reduce inventory costs and increase stock turns. Loss prevention is critical in any retail establishment, as theft and shrinkage represent lost dollars for the retailer. Have systematized procedures for doing physical counts of inventory as well as clear policies on employee theft. It is also important to choose styles that are hot to the consumer to avoid inventory costs. Determine your store’s policy on returned merchandise, and work to keep returns to a minimum.

Question #4: How can we keep operating expenses below industry averages?

° Always check your freight expenses against freight charge on the packing slip. It is usually different. Charge the difference back to the vendor.

° Join forces with other same brand concept stores for savings on your direct mail advertising. In direct mail, the higher the quantity printed the lower the cost per unit. There are additional savings to be realized in the cost of mailing if all pieces are sent from the same location. Savings can be substantial.

° Use co-op dollars to reduce costs. Use some of your co-op dollars to co-brand with suppliers on things like business cards, shopping bags, and so on.

° If you are having an accountant prepare your profit and loss statement monthly, consider doing it quarterly. Chances are you are simply putting it in a file anyway and are not adjusting the operating budget that often. This can trim your accounting bill considerably.

° Negotiate better terms and rates with your bankers and other service providers to save on fees. For example, go to other banks to get competitive rates and then renegotiate with your bank or change banks.

° Get multiple estimates for things like construction/repair projects, insurance, contract services (such as refuse removal), and so forth.

STEP 5: COMPETITOR CONCENTRATION

Use a directory provider to find out how many competitors there are in an area. Using Yahoo’s online yellow pages directory, there are 200 retail shoe establishments in the St. Louis metropolitan area.

FINALLY: WRITE YOUR INDUSTRY ANALYSIS (example follows)

OVERVIEW

It seems as though the retail shoe industry is shrinking. From 1997 to 2002 the industry decreased by 10 percent. Using the information from the Industry Size section, we can determine that although the number of stores has declined, the sales have increased and gone from an average of $654 per store to $810. The retail shoe industry is very competitive, and it is important for hopefuls to be able to distinguish themselves in a mature market.

PROFITABILITY

The gross profit for this industry looks very good compared to other similar businesses. At 38 percent an owner could make a good living from this type of business, depending on sales. Operating profit and profit before taxes are negative, so it is important for those thinking of going into the industry to differentiate and focus on customer service and added value. Also, an owner should do everything possible to cut the cost of goods sold and expenses, or profits may not be realized.

DIFFERENTIATION AND COST

There are several ways to differentiate in the retail shoe business. There are many different categories for retail shoes. An owner could choose to focus on men’s or women’s shoes, kids shoes, or athletic shoes, or include all these categories in one store. Then within theses categories, there is low end, one price and discount, mass designer, and high end. Again, the shoe business is very competitive, so it is important to choose an image and stick to this image to establish and build a reputation with customers.

Once the image is established, there are six areas that must be covered to be successful and maintain a foothold in the industry. They are as follows:

° Excellent service.

° Courteous, honest, and well-trained staff.

° Diversity in product selection — offer a wide range of shoes appropriate for the surrounding environments. For example, if the location is near a beach, be sure to include plenty of sandals, thongs, and flip-flops in the inventory.

° Competitive pricing — be competitive with other stores in the area to maintain a loyal customer base.

° Functional store design so that customers may move around with ease.

° Location — locations in or near heavily populated cities tend to have higher sales.

Incorporating these elements well, along with a differentiating image, will cause an owner to have strong placement and be able to compete effectively in the industry. It would seem that with a solid business plan, a marketing edge, and great location, a retail shoe business could be very viable and rewarding.

BIBLIOGRAPHY

“Bright Ideas” from National Shoe Retailers Association’s February 2005 Conference (a.org/brightideas.pdf)

Jenny Fulbright, Starting a Shoe Retail Store, n.d. (www.PowerHomeBiz.com/vol136;Shoe.htm, July 2005.

Annual Statement Studies: Financial Ratio Benchmarks, Pennsylvania: Risk Management Association, 2004, U.S. Census, NAICS page, sus.gov/epcd/naids02.

Source: Adapted from Entrepreneurial Small Business, Jerome A. Katz and Richard P. Green, (McGraw-Hill Irwin, 2007). Written by Beatrice Emmanuel of Saint Louise University under the direction of Professor Jerome Katz.