Monday, September 17, 2012

Buying for Margin (%) Rather than Assortment : Sears Kmart Lampert

"“notions” and curtain hook hangers were the highest margin items in the store"

Sears Holding (which includes Kmart) just posted a loss and another decline in same store sales. While Kmart thinks it makes the most profit on "notions" (zippers, buttons, buckles, snaps, charms and beads) because they have the highest gross profit percentage. Wal-Mart focuses on selling articles with higher values at higher turnover speeds.

I don't agree with the article below.

From Retail Systems Research: "Retailers are also using technology to focus on gross profit rather than just sales. Hence we see continued interest in price optimization and management software along with that which supports inventory localization and tools to measure what have become irregular patterns of behavior.
Retailers are also working with the most responsive merchandise vendors they can, which often translates into those vendors with the best infrastructure and optimal distribution network.
Once you’ve decreased all your spending, you find yourself into a very different philosophy. You stop trying to fill up the stores with merchandise and instead, you let unprofitable space stay empty. This brings us to Edward Lampert, an early adopter of this philosophy when he took over K-Mart. His philosophy was to stop growing the chain, and start growing margin. Early on, Wall Street rewarded him for this. We are fully aware that Mr. Lampert is not the most beloved CEO in retail, but in these times, his philosophy is not wholly without merit.
Mr. Hastings tells of taking a store tour in Kmart in 2003. Senior executives were talking about margin and expenses. It turns out that “notions” and curtain hook hangers were the highest margin items in the store. They made a huge contribution to pre-tax profit. Mr. Lampert’s philosophy was to maximize the inventory value of those peg hooks.

He believes “buying for gross margin” is here to stay. A philosophy that was lurking on the periphery has been put into the center of the game for most retailers. It is worthy to note he believes Walmart is not adopting that philosophy. It doesn’t have to. While many retailers may believe it’s better to be out of stock than to take excess liquidation markdowns, Walmart can push much of that risk back on its vendors. Being big has its privileges. "

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