Monday, September 17, 2012

It's not whether you have a high or low margin, it's the rules you use to play the game.

ALDI plays by different rules than most retailers, instead of using a cost plus planning system with an average gross margin percentage goal, they use contribution margin-based pricing.

Trader Joe's which seems to be a totally different company probably uses the same system when making assortiment decisions.

LIDL: I don't have a clue.

Primark: I don't know.

HEMA uses cost plus pricing with a gross margin % target, I used to work there in 2000 and they are still using SAP Retail Solution, which is based on the Retail Inventory Method.

Sears, K-Mart use cost plus pricing with a gross margin % target substantially higher than Wal-Mart's and in practice focus on high GM% and GMROII.

Wal-Mart uses cost plus pricing within the constraint of having lower prices than competitors. They have lowered average gross margin targets from 30% to 22% and have no plans to increase them. It is probably just a coincidence that Wal-Mart went bust in Germany where ALDI is strong and that ALDI is growing in the US, but it might have to do with the difference in their ability to "see" the bottom line contribution that a single SKU delivers.

COSTCO has lower prices than Wal-Mart and uses cost plus pricing (10% margin) with extra income derived from membership fees.

Megacorp and Good Old Company both used contribution models, then in the fifties switched to the Retail Inventory Method and used a mix, at the end of the nineties they were a pure play cost plus operation and now use a bit of both.

IKEA ignores the cost plus, gross margin target rules to a great extent. In practice when merchandising, setting prices and deciding on assortment cuts and additions they use contribution margin based systems. But the textbooks and manuals they have lying around are still based on cost plus pricing and a precise company wide gross margin target is still set.

Ahold and most other supermarket chains use a mix of systems known as Category Management.

Comments, criticism and especially additions to this list are more than welcome !

E-mail: ajbrenninkmeijer (a)

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