"The much publicised differences in promotional strategies over the festive period emphasise the ability of like-for-like sales to mask real performance." ― Julie Carlyle, Retail Head, Ernst & Young
The sales and profits of a company/firm determine its success rate. Sales vary with a number of factors, like acquisitions, raw material, product quality, business strategies, etc. Among the plethora of terms used in this vast field, a name (rather, a topic) that is frequently debated upon is like-for-like (LFL) sales. The meaning of like-for-like in this case is a comparison. And a comparison is always undertaken among equals. You will learn more about this concept in the paragraphs to follow.
- According to reliable sources, the term 'like-for-like' seems to have taken root in the United Kingdom about three decades ago.
- LFL indicates a similarity, thus the term LFL sales indicates a comparison between two entities that are almost similar.
- Most of the companies/firms use this concept to compare figures over a period of say, a quarter, a semester, or a year or two.
- The term is widely used in the retail industry, however, other enterprises also use it to determine a change in sales. It helps determine what changes must be brought about in the production and how the changes need to be implemented.
- LFL is a measure of how sales undergo a change over time. The change could indicate a sales growth or a decline.
- This comparison has to be done on equal terms, i.e., the basis of measurement has to be same.
- According to Investopedia, LFL is a valuation method and it does not include any entities that may affect the sales.
- The activities performed to establish the record for the last period must be the same in the current period.
- Any new product launch or a change in marketing strategies or any merger should not be considered while calculating sales.
- This calculation proves beneficial for a small period, say comparisons of sales revenue on a monthly or quarterly basis. This is because no major changes generally take place within a shorter period.
- On the other hand, the same statistics cannot be used to measure sales growth over a longer period, say every 2 years, or every half a decade. It is inevitable that the firm would undergo major/minor changes during this period.
- And since LFL sales ignore the changing strategies, the resultant measure is not completely accurate, which results in an error in judgment.
- Consider a very simple example. Let's say, there is a small bakery in town and the owner decides to open another branch in the same town at the beginning of the year.
- Now ideally, he is expected to compare the sales revenue of both the shops to calculate overall sales. But he will not do so.
- Assume that he wants to calculate the sales generated on a quarterly basis.
- Since he has launched a new shop, he will use the LFL technique to calculate sales growth.
- He will compare the sales generated by the old shop itself, in the months of October - December of the previous year to January - March of the current year, instead of even considering the sales of the new shop.
- In the next quarter, however, he will compare the sales of both his shops, i.e., he will calculate the sales generated by the old and new shop (together) between January - March and between April - June, and conduct a sales analysis to calculate the percentage growth.
- Consider another example. Let's say, there is a major cosmetic company that has a main store in one town and two branches in another.
- It calculates sales from its principal store and branches every semester.
- If it generates a revenue of USD 1 million from its main store in the first half of 2013, this figure will be compared to the revenue generated by the same store in the next half of 2013, and not the revenue from the other two stores.
- The same theory is followed in case of the branch stores as well. This is called LFL sales.
- Now, if a new product is introduced in one of the branches, the revenue for that semester is not considered at all, i.e., the LFL strategy is not used in this case, and the sales generated by the branch stores are not calculated due to the launching of a new cosmetic.
- Thus, the LFL measure helps decide what changes can be made, what products gain more consumer attention, etc.
How to Calculate?
There is no special formula to calculate like-for-like sales. It is a basic math calculation that is used several times in various problems.
- Consider the 2 graphs depicted above.
- The first graph displays the sales generated by a huge company over the 2nd quarter of the year 2014, while the second graph displays the sales generated by the same company over the 3rd quarter of the same year.
- Since we are using the concept of LFL, you are to assume that there has been no new product/service launch, merger, or any major change in the company during these six months.
- In the first image, you can see that the revenue has significantly increased from USD 15 to USD 30 million from April to June.
- In the third quarter, there has been a dip in sales in the beginning, but they have caught on eventually and reached a staggering revenue of USD 35 million at the end of September.
- Thus, there has been a change of USD 5 million in the sales revenue of the company over a quarter.
- Remember that if any major change had been implemented in this period, the figures would not have been considered at all.
LFL Sales = [(Revenue for the current period - Revenue for the previous period) / Revenue for the previous period] * 100
- Now, calculate the change in sales by subtracting the revenue for the initial quarter from the revenue for the final quarter. This means, USD 35 - USD 30, i.e., USD 5 million.
- Divide this value by the initial revenue. Thus, 5/30, i.e., 0.1666.
- Multiply this value by 100. This is because LFL is always calculated in terms of percentage.
- You will get the LFL sales value as (0.1666 * 100) = 16.66. This means there has been a change of 16.66% in sales from the 2nd quarter to the 3rd quarter of 2014.
The Retail Sector
- Retailers in particular, use LFL as a major tool.
- While a majority of the retail sector is supremely content using LFL as an indicator, experts vouch that it does not suit all the retailers; courtesy, the lack of a proper definition.
- Helen Dickinson, Head of Retail at KPMG, UK, explains that if a certain standard is convenient for one firm, it need not be the same for the other, and that one needs a more clearly-defined, standard entity that could be unanimously used by all to measure performance.
- Retail outlets are a part of a large distribution chain, like drugstores and hotels, and LFL helps them calculate the increase or decrease in sales from the various stores that there are.
- The changes that are not considered during calculation vary from one retailer to another.
- Off late though, online sales are more common due to the increasing number of online retail stores and shopping sites. The retail industry has undergone a major change over the last decade, and this may be one of the reasons why LFL does not comply with all retailers.
- Time periods thus affect the sales tremendously; for instance, sales fluctuate at Christmas time and may dip around the middle of the year. Ideally, LFL does help stores measure retail sales throughout the festive month.
- A lot of store owners may be confused about the things to include, like VAT, inflation, promotional change, etc. As of now, this is an individual preference.
- All in all though, LFL provides prime evidence regarding how a store needs to progress in future, whether any new branches could be opened, how performance could be optimized, etc.
- Perhaps, if a standardization is set for the future, LFL may simplify the calculation of sales revenue and growth analysis.
While many might vouch that LFL is not a very useful indicator for changes in sales, it is still used as an effective measure. This is especially true for smaller ventures with lower risk management strategies, since such firms do not implement methodologies with major changes very often, and if they do, LFL helps steer them onto the right path.