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Juggling Margins
By
James Grandillo,
Senior Retail Consultant
Maintaining gross margin percentage and dollars is the most
complicated aspect of running a retail store. If truth be told, most small retailers
have no plan for accomplishing this and just sort of wing it in this area. They price
merchandise with a formula (a favorite: cost + freight-in times 2.4), mark down items when
they are sick of looking at them, and cross their fingers and hope that the margin will
take care of itself and come out ok in the end. This is a very dangerous non-strategy. It
is true that setting prices can often be a shoot-from-the-hip process – but it doesn’t have
to be.
Your management information
system – be it a computer or a yellow legal pad – should be able to give you answers immediately
when you ask it the following questions:
1) What are my Delivered and Written Sales for this month up to yesterday?
2) What is my Gross Profit Margin percentage up to yesterday?
3) How many Gross Profit Dollars have we generated up to yesterday?
4) How do these numbers compare to our budget?
Hitting
gross margin targets is like piloting a sailboat: you can’t sail in a
straight line towards any destination – you have to tack or zigzag,
back and forth, always keeping your eye on the goal, be it the pier
or the correct Gross Margin Percentage. Having the above numbers 1
thru 4 (and in some businesses, by product category as well!)
immediately available is absolutely vital to your ability to manage
the gross profits of your company. A true gross margin percentage is
a constant rolling average of your sales and costs day to day;
understanding 1 thru 4 will allow you to shift, up-price, down-price,
advertise, promote, provide incentives, increase or reduce
commissions – in short, it gives you the current information you need
to make the many judgment calls running a retail business often
entails.
In addition, maintaining a steady gross profit margin means looking at merchandise
differently. Some items – especially seasonal goods – must move quickly through our
stores. These items are marked higher when they hit the floor (typically before their
actual season is in full force), at average mark-ups in the middle of their life cycle,
and are then drastically marked down to move them out at the end of their usefulness.
Think Christmas decorations, pumpkins, and summer outdoor furniture, etc. Some items –
electronics, for instance – have unpredictable shelf lives. If you are stuck with some
740p flat screens you know what I mean. Fashion also dictates the
velocity of an item
through our system and how long you can hold onto its markup. The effective
merchandise manager must juggle this information constantly, always keeping his eye on
the ‘pier,’ for there will be higher margin items losing velocity and needing to be
marked down, fad items turning into fashion, and stock becoming obsolete. Remember:
you must “tack” to keep the average gross profit margin within your acceptable
range.
In these difficult economic
times keeping the margins respectable is a challenging job. Customers are more selective,
they are wary of promotions, and they are slow to pull the trigger when they do purchase.
Those luxury items of bygone days are no longer necessities – we just don’t need another
set of dishes or a newer car. The retail manager has a real challenge: to find products
that are unique, that the customer will find lasting value in and that can be sold for
decent profit.
What has always been
difficult is now even harder: maintaining margins in a tough economy. The product manager
must shop selectively and advertise creatively; the sales manager must train relentlessly
and teach his staff to use consultive selling processes with every customer; the store
owner must be fair and demanding of every member of his staff – and we will get through
this eventually.
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