In the late 1990s, many grocery supermarkets shifted from regular storewide sales to issuing membership in discount and points programs,
In the late 1990s, many grocery supermarkets shifted from regular storewide sales to issuing membership in discount and points programs, much like frequent flyer programs run by airlines.
A supermarket chain with $120 million in annual sales and an asset turnover of 6.0 ponders whether to institute a customer membership program. It currently earns a profit margin of 1.6 percent on sales. Its marketing research indicates that a customer membership program would increase sales by $25 million and would require an additional investment in inventories of $2 million but no additional retail floor space. Costs to run the membership program, including the discounts offered to members, would reduce profit margins to 1.5 percent.
What would be the effect on the firm’s return on net operating assets of adopting the customer membership program?
Asset turnover is sales divided by total assets. Important for comparison over time and to other companies of the same industry. This is a standard business ratio.
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