Thursday, December 29, 2016

C&A can compete against Primark and win

Note: Those who can, do. Those who can't, teach. I do not currently work for C&A and am not a shareholder.

Ansgar John +31629547689
My C&A training started in Hamburg in 1989 and between 1990 and 1996 I was away from C&A in the Dutch Army and becoming a Master of Business Administration in Rotterdam. During that time C&A merged eight different national companies into one European organisation: a complex and confusing transition under any circumstance.

What surprised me when I returned to the firm, was that C&A (Germany) had increased its average gross margin by roughly 10% during my absence. I sent a letter to the uncle who had taken over the C&A holding companies, to ask what was going on, 20 years ago. I didn't get a response. This was in the years that "C&A is toch voordeliger!" was being removed from the facades of C&A stores in the Netherlands.

What I didn't realize at the time was that when C&A merged the different country organisations and switched languages from German to English, the company also switched merchandise math frameworks (mental models).

What happened was: Instead of trying to increase margins, C&A switched to increasing margins, which was disastrous for its margins....  (In retail the English term "margin" carries about the same amount of meaning as the word "smurf" in a forest occupied by little blue humanoids.)

In German it becomes clearer: Instead of increasing Deckungsbeitrag, we switched to increasing Handelsspanne, which was disastrous for our Gewinn.

The German math was simple: Gewinn = Deckungsbeitrag € - Kosten €

In this framework sales and gross margins are irrelevant; they aren't even part of the equation. Consider this example of the situation at C&A Germany and UK at the end of the nineties: (not the real figures). 
When considering alternatives for the assortment, if a choice is made for an alternative that generates fewer Gross Profit dollars than otherwise possible, the store incurs an Opportunity Cost (see )

The switch made with the introduction of European buying when I was still working for C&A, made things more difficult. In English the Formula is:

Earnings = Sales x (Gross Margin % - Expenses %)

Using this formula, you get the false impression you need a certain markup percentage to reach a profit goal. Consider the same companies as above:
This is incorrect. The gross margin percentage does not need to be maintained at any preset percentage for a retailer to be profitable, the idea that it does has led to the bankruptcy of many retailers that no longer exist. 

That is it. Too simple? 

If it is simple, why is it not part of retail theory?

At some retailers orders are still cancelled because original markup %s or average gross margin percentages are not "high enough". When your mission is to offer the best value for money but competitors are putting together assortments with much lower gross margins. The unnecessarily high gross margin % targets (using KPIs that aren't part of the simplified Earnings equation) are a stumbling block that prices unknowing retailers out of the market. Only if retail planners stop putting Product Managers and merchandisers in an impossible situation, comparable to putting a man in a round room and asking him to piss in the corner, is competing against new entrants possible.  

That is not to say the average price point has to go down or be lower than Primark's.  When discussing retail assortment profitability old C&A merchants often described the ideal product: a fur coat lined with diamonds. You order it on the first day of the year, the second day it arrives and is sold almost immediately, paid in cash, at a price many millions above the buying price. The store, which costs a few million to operate, can then be closed for the rest of the year, management can go on vacation and only has to remember to pay the supplier a few weeks later.

The key is, it doesn’t matter at what price the coat actually sells or what its gross margin percentage is. Sales are made up of Cost of Goods Sold and Gross Profit dollars. The Cost of Goods Sold (buying price) part of sales is money that the customer pays the factory for manufacturing a product. The retailer is merely a conduit of this money and should not consider it income. This is especially clear for supermarkets which never "buy" stock. 

Not understanding the simple basics has led to the slow demise and bankruptcy of some of the world's largest retailers through gross margin death spirals: higher gross margins, lower sales, gross profit dollars become too low to cover fixed expenses. See 

Don't hesitate to contact me. Your candid feedback is more than welcome: Ansgar John +31629547689

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