In A Multi-Segment Retail Business, How Profitable Is Each Segment?
I had a conversation last week with a colleague who told me about a retailer who also does a significant wholesale business. Their business has been off over the past several years, although they are still profitable. But how is each segment, retail and wholesale, doing? The suspicion is that the wholesale business is subsidizing the retail side of things, but nobody really knows, because the businesses have never been broken out and accounted for separately.
Many independent retail businesses are pretty straight forward. Buy, sell, buy more, sell it, buy more, and so on. But there are many others that aren’t quite so simple. There are independent retailers that also wholesale, import, export, refurbish, repair and manufacture. There are retailers who generate a significant percentage of their revenue from servicing activities. There are retailers who sell from their own inventory as well as sell consignment goods.
Almost always, these businesses have grown organically, driven by opportunity and need, with little distinction between one business segment and another. In some cases, it’s the retailing that came later, rather than the other way around. The point is that each of these segments are discreet business units, no matter how tangled the accounting might be. For each business segment, there are discreet revenues, costs and profits (even if some of the costs are shared costs between segments).
If you have a multi-segment business, do you know how profitable each segment is? For many multi-segment retailers, the recession has altered the bottom-line contribution of the different segments. Segments that were once profitable may no longer be so. You may be now unknowingly subsidizing unprofitable segments with other, still profitable segments. Overall, your business may appear to be doing okay, but underneath the surface there’s trouble brewing.
When a segment of your business is unhealthy you need be able to identify it and address it. To allow a sick business segment to muddle along, draining resources, is to risk that it will only deteriorate further and begin to drag everything else down with it. Take the time to separate out the different business segments (even if it requires you to allocate shared expenses) and get a handle on how much each is contributing to bottom-line profitability and cash flow. You might be surprised by what you learn.