What is Sales per Square Foot?
Sales per square foot is a metric commonly used by retail companies to determine the amount of revenue generated per square foot of retail space. Sales per square foot can be used to determine the sales efficiency of retail stores.
Formula for Sales per Square Foot
- Revenues refer to the amount of sales generated over a defined period; and
- Retail Space is the amount of retail space used by the company.
Example of Sales per Square Foot
A company generated $15,000,000 in sales through 10 retail stores last year. The average square footage of each retail store is 150,000. What is the sales per square foot for last year?
Sales per Square Foot = $15,000,000 / (150,000 x 10) = $10/square foot
Importance of Sales per Square Foot
Sales per square foot can be used to determine the efficiency of a company’s retail store. A higher sales per square foot indicates a retail shop that demonstrates strong efficiency and performance. For example, a retail company that generated $100/square foot would be deemed much more efficient than a company that generated $50/square foot. As with many financial ratios, sales per square foot should be used comparatively. The ratio should be compared to the figure for similar competitors and evaluated along with other metrics.
How to Increase Sales per Square Foot
1. Improve the layout of the store
A poor sales per square foot number could be due to retail space that is poorly utilized. For example, there may be a retail space that is cluttered by unnecessary equipment. As such, improving store layout by removing unnecessary assets from the retail store could help to increase sales per square foot.
2. Carry the latest products
Poor sales per square foot could be due to products that are unappealing to customers. For example, clothing lines that do not follow the current fashion trend would cause a retail shop to lose sales. Generating reports on the best-selling items and removing items that are poor performers can increase the revenue generated through the retail stores.
3. Invest in employees
Employees are drivers of sales in a retail store – store employees directly impact customer satisfaction and sales. For example, employees with a strong knowledge of company products are in a better position to cross-sell and up-sell the company’s products. As such, providing employees with adequate training (product knowledge, up-selling and cross-selling tactics, etc.) goes a long way in improving sales per square foot.
Main Disadvantage of the Sales per Square Foot Metric
The retail landscape is evolving – traditional retail operators such as Toys”R”Us and Sears filed for bankruptcy in 2017 and 2018, respectively. With the emergence of e-commerce, many analysts now neglect using sales per square foot as an efficiency measure for retail companies.
For example, if a company used an online store in addition to a retail space of 15,000 sq. feet to generate $300,000 in sales, the sales per square foot metric would not correctly gauge the efficiency of the company as it utilizes an online store in addition to its retail space. As such, the sales per square foot metric should only be used for companies that strictly operate retail space.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: