Whether same-store sales are up or down, analysts and other stakeholders want to know what drove results. If you’ve listened in on an earnings call for a major retailer lately, undoubtedly you’ve heard the question: was it ticket or traffic?
It seems Wall Street analysts who poke and prod retail executives during the sometimes contentious Q&A sessions have distilled the “what drove same-store sales” question down to these two variables — either more people came into the store and/or more stuff was sold to the buyers.
The “ticket or traffic” question certainly is relevant, so when analysts ask, retail executives are compelled to answer. Answering the “ticket” part is simple enough — any POS system can produce the answer to whether average ticket values have increased or not. But what about traffic?
While virtually every retailer can answer the “was traffic up or down” question, here’s the rub: most retailers don’t measure traffic in their stores. How is that possible? Simple: “traffic,” it seems, has more than one meaning.
When a retailer is asked if traffic is up or down, there’s a very good chance that the answer actually refers to the chain’s “transaction count” or what is sometimes ambiguously referred to as “customer count.” No one seems to probe this so, by default, transaction count has become an acceptable proxy for store traffic count. But there’s another rub: transaction count is not the same as traffic count.
Transaction Counts vs. Traffic Counts: Hits vs. At-Bats
To say that transaction count represents a reliable substitute for store traffic is analogous to saying that hits are a reliable proxy for at-bats in baseball. Yes, the two stats are related, but they are not proxies — not even close.
Transaction counts (hits) may be up, but knowing if that was a result of an increase in store traffic (at-bats), or that the retailer was more effective at converting the store traffic it got, is an important distinction. This is not a subtle point. Here’s why.
Why Store Traffic Matters
Store traffic is a measure of all the people who visit the store, including buyers and non-buyers. Traffic is a leading indicator that tells us something about a chain’s sales opportunity – more traffic, more opportunity. If traffic is trending up, this clearly is a positive sign; It suggests that the brand is in favor and opportunities abound. The converse is also true. If store traffic is waning, this is disconcerting and it could indicate that the banner is falling out of favor. The number of sales opportunities is decreasing. The problem with relying on transaction counts as a proxy for traffic is that transactions could be going up regardless of whether actual store traffic is going up or down. To understand this apparent paradox, you need to consider the retailer’s batting average.
Conversion Rate: Retail Batting Average
As mentioned, store traffic count defines the sales opportunity and is analogous to at-bats. Transaction count represents buyers only and is analogous to hits. So, a retailer’s batting average, or conversion rate, is calculated by dividing the transaction count by the store traffic count — just as with calculating batting average.
Store traffic and conversion rates tend to be inversely related. When store traffic falls, associates can deliver a higher level of service, check-out lines are shorter and generally buying is easier. The transaction count often goes up, despite the fact that there is actually less traffic in the store. In this case store traffic didn’t increase, but if the retailer only relies on transaction counts, then he reports “traffic is up.” But it’s not; and all parties — the retailers and inquisitive analysts – seem to tolerate the ambiguity.
Some Retailers “Get It”
The vast majority of retailers today don’t track traffic in their stores and therefore can’t even calculate conversion rates; however there is a small minority of what I call “conversion champions” who not only track these critical metrics but use them to run their operations on a daily basis. These conversion champions couldn’t even imagine not having traffic and conversion data.
One of the very best examples is upscale leather goods retailer Coach, Inc. On August 2, 2011, the company reported year-end results of same-store sales up 10.6% ― another stellar year.
The results were impressive enough, but even more impressive is what Lew Frankfort, Chairman and CEO, had to say about how these great results were achieved. According to Frankfort, “…overall comp results were …driven by significant increases in conversion from prior year while ticket and traffic essentially were the same.” He went on to say, “We were particularly pleased with the improvement in the conversion rate since it is the driver over which we have the most control….”
I find it more than a little curious that a company like Coach attributes a good part of its success to improved conversion rates ― something most retailers today don’t even measure. What does Coach know that most other retailers don’t?
Delivering positive same-store sales is hard and isn’t getting any easier. Retailers like Coach not only deliver great results, they also understand how they delivered them. How matters if you want to replicate it. Retailers who track traffic and measure conversion rates in their stores have a significant edge over those who do not.
Mark Ryski is Founder of HeadCount Corporation and author of Conversion: The Last Great Retail Metric and When Retail Customers Count. For more information, please visit www.headcount.com.