The Number 1 Threat to Retailers: The Gross Margin % Death Spiral: unsound margin-raising instead of counting money.
In practice:
C&A UK
A&P : The largest retailer in the world.
IKEA The Strategy of the Ten Hotdogs by as written by founder Ingvar Kamprad
Super de Boer and Jumbo: The Caring & Amazing Dutch supermarket
The death of Kmart and variety store chains
Trader Joe's
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The end of C&A UK:
In practice, the following mistake was made at C&A during the late 1990s: Planners said BCP Fund / m2 is fine as an expression of Gross Margin income, but a certain predetermined minimum BCP% is needed to cover Operating Expenses. The BCP target percentage was set about 5% higher for C&A England than C&A Germany because sales per m2 in England were lower than in Germany. Operating Expenses expressed as a percentage of sales were higher in England than in Germany. As a result the target BCP% was set relatively high and customers could get better value for money at Marks & Spencer than at C&A. The increasingly high BCP% target set for C&A England was an unnecessary constraint for Product Managers (buyers) and merchandisers who should have been focusing solely on increasing Contribution (BCP Fund / m2) with articles with either high or low BCP%’s.
In short: If sales decrease in a bad year for any reason, a conventional store will often increase its BCP % target ‘to maintain profits’ and/or ‘breakeven’ the next year. The next year higher prices lead to lower sales and the company calculates a new so-called ‘break-even margin’ and raises its prices once again. Eventually, the store goes bankrupt.
(Ironically, in the last closing weeks, during a wildly successful “Goodbye, good buy” fire sale, many C&A UK stores were profitable for the first time in years, shortly before the lights went out…)
Many other chains have also gone into a gross margin percentage death spiral. It happened with Kmart and A&P in the USA and recently with Super de Boer Supermarkets in the Netherlands. If these stores had focused on the articles that Contributed the most to the bottom line instead of those with the highest BCP %’s, they might not have done so badly.
The founder of IKEA, Ingvar Kamprad, described the problem as follows:
Our pricing policy is fundamental. The stumbling block is when we price ourselves out of the market. Our retail “experts” constantly go on that we must keep our ‘total gross profit margin’ to a certain percentage. I say to the economists, ‘What the hell is ‘percentage’ anyhow?’
Kamprad sees this phenomenon occurring at IKEA as the Number 1 threat to the company. As he wrote on the last page of The IKEA Concept Description:
I can depict at least seven major threats to the continued success of the IKEA concept in the future. I would like to share these with you so that you recognize them when one or several appear in your working place, organization or neighboring organization. False steps may be insignificant in the beginning, but prove to be fatal later on. Be aware of these trip-wires:
Number 1. Mark-ups in pricing, resulting in an out-of-the- market situation, due to wrong pricing strategies, too high costs, and/or unsound margin-raising instead of counting money.
The Great A&P: The largest retailer in the world.
The preference for volume over margin was a matter on which the Hartford brothers (who owned A&P) did not see eye to eye. George hewed to a traditional understanding of retail profitability, preferring to maintain a generous markup on each item sold. John, though, downplayed return on sales as a measure of profitability. He preferred to watch the company's return on investment. Historically, A&P's pretax return on investment had exceeded 25 percent in most years, and John set that as the norm. The way to boost return on investment, he thought, was to make better use of capital by pushing more merchandise through A&P's stores and warehouses...Just as Henry Ford standardized auto production, the brothers pushed to standardize stores and later bakeries to minimize the amount of capital investment per dollar of sales... John inspired his executives with a secret goal: A&P would more than double its sales over a five year period, becoming in 1929 the first retailer in history to reach $1 billion in sales. ...
The two brothers' strengths were in unique alignment. John Hartford's high-volume, low price strategy, executed with George Hartford scrutinizing every financial detail, represented a radically new model for retailers...Never before had major retailers embraced the seemingly counterproductive goal of reducing their margins on the goods they sold. Rather than trying to increase profits per dollar of sales - the conventional strategy of the day - A&P was deliberately seeking to REDUCE profits per dollar sold in hopes of creating more sales. From 1915 through 1925, A&P's profit had averaged more than 3 percent of sales. Henceforth, Mr. John decreed, profits should never go above the 2,5% level. If the company's profit margin widened, it would not be a good sign but a bad one, an indication A&P was forsaking the cost discipline that would lead to domination of the grocery market.
...As John Hartford had foreseen, lower prices brought customers streaming into the stores: the grocery volume of the average store doubled from 1925 to 1928. Expenses as a percent of sales plummeted, and the number of unprofitable stores fell by half. The after-tax rate of return on investment topped 26 percent in 1928, the highest rate A&P would ever register. The Hartfords had transformed their company into a profit machine...
A&P's profits soared in 1930; although sales per store fell with the onset of the Great Depression, profits per store hit a record $1,954. John Hartford interpreted this jump in profits as negative, not positive. Piece managers were setting prices too high, boosting profits in the short run, but eroding volume and driving business to competitors. John was especially annoyed that piece managers had adopted the strategy of selling selected products below cost and raising prices on other items to make up the difference. He ordered a return to the basics: no drastic prices cuts, no special sales, all merchandise sold with narrow markups week in and week out. His managers, he fretted, simply didn't understand his philosophy that volume was what mattered: "Sometimes the body gets so large that the pulsations fail to reach the extremities."...For A&P executives, John's demands could be infuriating. Rather than urging higher profit margins, he often insisted the opposite. His view that A&P should focus on return on investment rather than profits as a percentage of sales was not widely shared within the company... As he saw it, excessive prices would reduce volume. Once that occurred, A&P would be forced to spread the fixed costs of its warehouses and factories across a smaller base, which would require it to raise prices even higher...
Decline after John Hartford’s death
The speed of A&P's decline was shocking. At the start of 1961, it was still the largest retailer in the world, with 4,351 stores selling an average of $1.2 million of groceries. It's profits in 1960 hit a record as a growing economy helped A&P achieve the highest sales in its history. Yet signs of rot were everywhere.
John A. Hartford had always kept an eagle eye on A&P's gross profit - the difference between the amount it paid for goods and the amount it received by selling them. In the years before the 1925 reorganization gross profit had been over 20 percent of sales. For John, a high gross profit was a warning, a signal that the company was failing to hold down operating costs... By 1941 his constant push had driven gross profit down from 22 percent to 13 percent of sales, creating huge savings for A&P's customers and bringing in throngs of shoppers. In the 1950's, after John's death, gross profit began to creep higher, year after year. Gross profit was increasing across the industry, but the rise at A&P was especially steep. In 1968, gross profit would top 20% again. Its wide margins meant that A&P was no longer delivering bargains to shoppers, and shoppers responded, as John Hartford always feared they would, by taking their patronage elsewhere.
At the store level, higher prices meant lower volume; dollar sales at the average A&P store would not exceed the 1960 level until 1969, and the company's total grocery tonnage would be lower in 1970 than it had been in 1952. Inventories were rising rapidly, a sure sign of poor management; by 1964, A&P's inventories, relative to sales, would be the highest since 1947...The company had lost its way...
Investors abandoned the company that only a few years earlier had been a glamour stock...investment analysts called for A&P to raise prices.
Tengelmann, a German grocer that was eager to expand in America, and that did not understand how far A&P had fallen bought effective control in 1979. The price set an implied value of a mere $190 million on a company that had been worth $1 billion twenty years earlier...A&P had all but destroyed itself.
IKEA The Strategy of the Ten Hotdogs by as written by founder Ingvar Kamprad
In 1995 the IKEA furniture store started selling hot dogs at five kronor each, as opposed to the usual price of ten to fifteen kronor. This investment was at once successful, and today it contributes to the growing restaurant and food sector by turning over 1.6 billion kronor in 1997, and alone answering for exports from Sweden amounting to 700 million kronor ($87 million). That makes IKEA Sweden's leading food exporter. But behind this success is a special story. The "ten hot dogs strategy" says a great deal about the way the company regards price, competition, and the needs and desires of the customer.
Everyone, including myself, who likes sausages knows what a hot dog costs at a stand. At present it is between ten and fifteen kronor. I suggested to the directors that we sell them at five kronor. They looked at me with dismay and surprise. Perhaps they thought the idea foolish, or perhaps I didn't explain it very clearly. Talking about selling hot dogs in a multibillion furniture store was not really on the agenda.
The next objection arose from my staff, who are always concerned with what they call the gross profit margin. We're selling hot dogs for almost the same amount it costs to make them. Shouldn't we raise the price and take six or seven kronor in profit? In that case, the project ought to be abandoned, I replied, as the whole idea is based on the substantial price difference, the easily understood price. The hot dog went on costing five kronor regardless of the cost of raw materials. We don't lose on the deal, nor do we make much profit, but at least we make a little on each hot dog. In the end, that is what matters.
A little while ago, we advertised a mug costing ten kronor. Come to IKEA and buy the mug, it said. I was upset—the price was much too high. It should have cost five kronor at the most, although it did look pretty nice and was of good quality. It was the price that was wrong. So it came about that I wrote down my philosophy about the ten (twenty nowadays) hot dogs. We have ten different products that live up to "hot dog" pricing. Take the mug from the above example, called "Bang." In Switzerland it costs exactly one franc at IKEA. I haven't found one on the ordinary market for less than three francs, and even in that case our mug was much better in both design and quality. Before, we sold at the most seven hundred thousand mugs per year, and now the "hot-dog mug" sells twelve and a half million.
One day I found a wonderful English beer glass for eighteen kronor at our Swedish co-op competitor—I always go and look at what my competitors are doing. It was the kind of English glass with a level measure on it, forty centiliters, heavy and really good to hold. I thought it would be a good "hot dog." I went straight to our most superb buyer and said: "Bjorn, can you get that glass out at one krona? You can order two million." He replied: "Nix - I can't, but maybe in an edition of five million." The whole thing had the support of the product head, whom, as usual, I had bypassed. The last time I met Bjorn, he had a supplier who would do the glass at 1.08 kronor. It'll work out. So in a short time we've put twenty or so "hot dogs" up for sale - the whole organization is up and going.
The reader is right to ask himself or herself why, as the retired head of the firm, I go on with this kind of thing. There are three answers: one is that I find it difficult not to; it also says in my contract that I have a veto in matters of the range; and people in the company often say, "If you're on to something, let me know." So I let them know. I'm going on with my search for new "hot dogs" - lots of associates are involved. I recently saw a multi-plug we sell for under twenty kronor, while competitors take about fifty. My belief is that this "hot dog" will sell millions. Our pricing policy is fundamental. The stumbling block is when we price ourselves out of the market. Our economists constantly go on that we must keep our "total gross profit margin" to a certain percentage. I say to the economists, "What the hell is 'percentage' anyhow?" Percentage is something mysterious.
The only thing that interests us at IKEA is what is left in our pocket when the season is over. If we had taken ten kronor for that mug, and not five, then we would, of course, have "earned" more on each mug— perhaps one and a half kronor—and had a better "gross profit margin %." But we would have sold only half a million of them instead of almost twelve million, on which we now earn one krona each. These learning experiences are easy to suppress or ignore. But after having been the subject of endless bickering for over a decade, in this respect we are beginning to wake up with a vengeance. That pleases me enormously.
Jumbo: The Caring & Amazing Dutch supermarket
Bron: "Mijn naam is Karel van Eerd en ik bewijs dat ik het wel kan. #klantegerichtondernemen 1. De visie van de oprichter van Jumbo Supermarkten." 2011, Retaildenkers, Het Boekenschap , Amsterdam
"In 1992 zag ik na de zomervakantie de omzet teruglopen. Ik wist niet wat de reden was. Niemand kon het mij vertellen. Achteraf begreep ik dat we ons uit de markt hadden geprezen. We hadden sluipenderwijs de prijzen verhoogd. Dat doen dan de mensen die verantwoording hebben over je marge.
In 1995 telt Jumbo 35 winkels. Pas in 1996 vindt de grote doorbraak plaats met de formule Jumbo nieuwe stijl. 'Ondanks onze scherpe prijspositionering lukte het maar niet om meer klanten van Albert Heijn en C1000, die in die plaatsen ook gevestigd waren naar ons toe te krijgen. Een uitgebreid markt onderzoek dat we daar toen hielden, was een belangrijke doorbraak. Er kwam een lijst met de grootste winkelergernissen naar voren; dingen waaraan de klant zich geweldig stoorde in een supermarkt. We zijn daar goed over gaan nadenken.'
'Ons antwoord was een lijst met zeven beloften aan de klant, die we dagelijks zouden gaan waarmaken; de Zeven Dagelijkse Zekerheden.' Euro's goedkoper, is er een van. Jumbo garandeert de laagste prijs, geen artikel is elders goedkoper verkrijgbaar. Een tweede zekerheid; vers is ook echt vers. Producten met de datum van vandaag of morgen zijn gratis mee te nemen. En een derde: voor al uw boodschappen. Wie een product in het schap mist, krijgt de garantie dat het binnen twee weken voorradig is. De eerste service discounter is een feit. "Het was nog nooit eerder vertoond: de laagste prijs in combinatie met een zeer breed assortiment en een perfecte service. Dat is wat we nu naar buiten brengen als de unieke Jumbo-formule. Toen we in 1996 begonnen, spraken de concurrenten van een kamikazeactie. Maar als je doet zoals wij, komen er veel mensen in je winkels. Dat drukt de kosten per product. In een Jumbo komen gemiddeld dubbel zoveel bezoekers als in een gemiddelde supermarkt.'
Bij de eerste Jumbo nieuwe stijl in Den Bosch had ik berekend dat als we 500 000 gulden per winkel zouden omzetten, de vaste kosten met de helft naar beneden zouden gaan. Om dat te bereiken moesten we de winkel reorganiseren en dus investeren. De vaste kosten omvatten heel veel rente en afschrijving, maar niettemin gingen ze toch van 10 naar 5 procent. Dat waren 5 volle procenten waaraan niemand dacht. Maar wie zou doorrekenen wel. De supermarktwereld was en is brutomarge-gestuurd. Na de overname van Super de Boer is mij dat nog duidelijker geworden. 'De omzet kan niet omhoog, dus we kijken naar de brutomarge.’ Maar omzet kan wel degelijk omhoog. Het is een spel dat je moet beheersen. Je loopt op een smalle richel, het wordt boeiender. Waar Jumbo nu staat, hebben we te danken aan die redenering. Met een breder assortiment, heb je veel meer kosten. En door je prijzen te verlagen heb je wel een veel lagere margen, procentueel. Dat betekent dat je verliest als daar geen topomzet tegenover staat. Je moet beter opletten.
Een gemiddelde winkel heeft honderd medewerkers. Om de benodigde omzet te bereiken, zijn vijf of zes mensen nodig. Zij vormen het hart van de winkel, plus een vast team van dertig man. Alles eromheen en de omzetstijging kun je opvoeren met flexibele krachten op basis van uurcontracten. Dat betekent in principe: hoe minder de vaste krachten op je omzet drukken, hoe lager je loonkosten zijn. We gingen in de eerste Jumbo nieuwe stijl in Den Bosch van 10 procent loonkosten naar 6,5 procent. Er is wel een variabele kostenpost, maar die groeit niet mee met je omzet. Een procent meer (bruto) marge behalen, lukt gewoon weg niet. Maar met de focus op omzet krijgen we in een keer hele procenten (netto marge) in de schoot toegeworpen.
Winst is niets anders dan omzet maal brutomarge min de kosten...Inmiddels maken we een geweldig omzet, veel groter dan wie dan ook. Ik wil steeds meer en meer klanten in de winkel hebben. Als je dat voor elkaar krijgt, nemen de kosten procentueel gezien af. Dan word je sterker dan een ander. Winst is niets, het is alleen het gevolg van een rekensom. Natuurlijk moeten we winst maken, dat kan niet anders. Dat is het levensbloed. De klant staat wel voorop. Omdat de klant regelmatig terugkomt en zijn goede ervaringen deelt met anderen, blijft de omzet stijgen. Door het grote en brede assortiment kunnen we de zee van winst vergroten en het eiland van verlies verkleinen. Dat helpt mee. Uiteindelijk komt daar dan winst uit. Maar dan kan je niet uit jezelf 'maken'. Winst is niets.
Let altijd op je prijzen
Het voeren van een lage prijs leidt op termijn alleen maar tot een hogere prijs. Een lage prijs is subjectief. Stel je verkoopt een fles wijn voor € 3,25. Is deze prijs nou hoog of laag? Het antwoord is niet eenvoudig. Je kent de inkoopprijs, dus je weet of je er veel of weinig aan verdient. Als je er weinig aan verdient, vind je dit een lage prijs. Maar wat vindt de consument?
Stel dat je in het category management van wijnen tienden van procenten brutowinstmarge tekort komt. Je besluit de prijs van dezelfde fles wijn te verhogen naar €3,45. In de
context van de formule is het nog steeds goedkoop. De category manager ziet zijn brutomarge stijgen en krijgt complimenten dat hij zijn tent goed beheert. Een volgende keer denkt hij: ik ga er €3,75 voor vragen. Er gebeurt nog steeds niets, ook niet met de omzet van die wijn. Hij kan de prijs nog een keer verhogen tot € 3,95. Maar hij zal zich wel twee keer bedenken voordat hij over de grens van vier euro gaat, want dat is echt iets anders in de beleving van de consument.
Een bedrijf dat zijn prijzen niet heel duidelijk vaststelt, wordt uiteindelijk door zijn eigen mensen uit de markt geprijsd. Alleen maar omdat ze het goed willen doen voor hun eigen bedrijf. Dat is heel vaak gebeurd. Je verdient er dan wel lekker aan, maar de omzet gaat op een gegeven moment naar beneden. Bovendien neemt het effect van acties en aanbiedingen af. Opeens beseft het bedrijf dat zijn prijsniveau te hoog is.
Als hij dan naar beneden moet, dan moet hij het grof doen en niet geleidelijk. De fles wijn die voor € 3,95 werd verkocht, moet dan voor €2,95 langs de kassa. En dat doet pijn, hoor. Heel veel mensen durven dat niet. Wij hebben dat wel gedaan en kozen voor EDLP (everyday low prices). Ook wij waren door onze eigen mensen uit de markt geprijsd. Met de nieuwe formule zal ons dat niet meer gebeuren. Kijk eens naar de concurrenten. Er zijn altijd nog wel een paar die nog veel duurder zijn. En daarom voeren wij de laagste prijs in de markt en hebben wij prijsmeters om dat te controleren.
The death of Kmart and variety store chains:
“Sam Walton founder of Walmart sees the phenomenon as only a man with a vision to build an empire could see it: forcing regional variety-store chains to either enter discounting themselves or leave town. He offers no apology for the destruction his stores wrought.
``Whenever we put a Wal-Mart store into a town, customers would just flock to us from the variety stores. It didn`t take those stores long to figure out that if they were going to stay in business against his Wal-Mart, they had better start discounting themselves.
``Now most of these guys already had distribution centers and systems in place, while we had to build one from scratch. So on paper we really didn`t stand a chance. What happened was that they didn`t really commit to discounting. They held on to their old variety-store concepts too long. They were so accustomed to getting their 45 percent markup, they never let go. It was hard for them to take a blouse they`d been selling for $8 and sell it for $5 and only make 30 percent. With our low costs, our low expense structures and our low prices, we were ending an era in the heartland. We shut the door on variety-store thinking.``
Kmart: The Polyester Palace using the wrong KPI’s
‘Kmart turned more and more to private-label goods, items made for Kmart and sold as a Kmart house brand. Private-label goods can carry a fatter profit margin %, because retailers typically pay the maker much less for them than for similar name brands. The problem though, was that many of Kmart's private labels were not very good. A lot of the clothing was shoddy, even ugly. By the mid-70’s Kmart was being nicknamed the Polyester Palace.’
http://www.dbusiness.com/DBusiness/July-August-2010/Polyester-Palace/
Kmart Corp., once the No. 2 retailer in the country, lost its edge some 30 years before it entered into bankruptcy in early 2002. Here, for the first time, is the untold story of what contributed to Kmart’s bankruptcy, as told by former executives whose public nondisclosure agreements have recently expired.
…The Carlsons, Marsico, and other former Kmart executives say the iconic discount retailer imploded over time because of its own internal dysfunction. ...“The wound was self-inflicted — not by a lone gunman but, rather, by a combination of steps resulting in giving away the store and the store contents, and wrecking a major retail force that changed the way the public was sold goods,” James Carlson says of Kmart’s demise.
..Up until Carlson brought in computer technology, most Kmart sales — everything from candy to detergent to coffeemakers, some 60 percent of all items sold in the stores — were rung up on a single key on the cash register.
Merchandise managers who supplied the stores with goods were also compensated using an arcane system that turned out to be counterproductive. Their incentives were based on a formula called “theoretical gross,” Dave Carlson says.
“For example, the candy buyer decides to add a Hershey bar into the assortment of candies for 40 cents, and marks it up to sell for 50 cents,” he explains. “Theoretically, every time one of those bars is sold, it means an increase of 20 percent gross margin. So the buyer ships trainloads of these bars into the distribution centers and every one that goes in there has a theoretical gross of 10 cents, or 20 percent. Now multiply that Hershey bar by, say, 50 other chocolate bars sold the same way, and the buyer is credited with generating a huge amount of gross profit.”
As the scanning system began to come online, Carlson looked closely at the vast amount of candy going through Kmart. “The first controversial report I did using scanning data was on what prices were actually being charged [for candy] at the register,” he says.
“What that report showed was that there were several lines of candy that were selling below cost. So instead of getting 50 cents, we were getting 39 cents because of competitive pressures that made stores lower their prices,” Carlson says. “Instead of tens of millions of (dollars in) gross profit generated by candy, it was actually costing the company to move candy. The divisional manager said to me, ‘You cannot issue that report.’ She said it was obviously flawed. It was the first time Kmart had a statement of what was actually happening in the stores.”
... James and Dave Carlson, David Marsico, and other former executives say Kmart’s eventual downfall was management’s failure to adopt the fundamental principles of discount retailing — rate of sales per square foot and return on investment.
“From the very beginning, Wal-Mart focused on sales per square foot. Sales per square foot for Wal-Mart were 40 or 50 percent higher than Kmart,” Dave Carlson says. “The ideal discount model is that you sell things timely, at relatively low percentage margins, but for enough dollars that, through volume, you pay the fixed and variable costs of a store. Kmart’s culture emphasized percentages rather than sales per square foot.”
Kmart’s inventory of toasters, 10 brands in every store, was a case in point...
Toaster sales from the scanning data showed the top two sellers among the toasters offered at a typical Kmart store accounted for 90 percent of the sales.
“I went to the merchant who was responsible for toasters and pointed out that the bottom three of the 10 toasters we offered contributed less than 1 percent of the sales, but were taking up 30 percent of the (shelf) space,” Carlson says. “His answer was that because they contribute 45 percent gross profit, we have to keep them. So the focus, again, was on gross profit percent as opposed to gross profit dollars.”
The scanners were equally unkind to the 80 to 100 different deodorants sold in packages of 12 or 24 pieces. The data showed most of the shelf space was taken up by the slowest-selling packages, while the best sellers were frequently out of stock.
“I said to the guy in charge of deodorants, ‘We don’t have enough shelf space allocated to the high-volume items,’” Carlson recalls. “He said, ‘Yes, but if I give those items more space, we won’t have space for the others.’”
Carlson says during his time at Kmart, he could guarantee that the top-five-selling deodorants would be out of stock by 8 p.m. on Sunday because there wasn’t enough shelf space allocated to cover the volume of their sales over the weekend.
Carlson credits Antonini for initiating two programs that might have dramatically changed how Kmart did business, if the chairman and the executive group had given them enough time to work.
The first was unveiled after Antonini and his inner circle of executives returned from a brainstorming session in Florida with a declaration of changes to be made in the assortment of goods Kmart carried. The 50,000 items in the retailer’s assortment would be cut by 10,000 pieces while, at the same time, another 10,000 items would be replaced by more trendy offerings.
“I was very excited about this, knowing that if you get rid of slow-movers you would do more volume per square foot and free up space for better sellers,” Carlson says.
...The end for Carlson at Kmart came shortly after Antonini discarded a program he commissioned in 1993 that would have improved the company’s efficiencies and bolstered its merchandise assortment.
It was a multimillion-dollar project called the VCR program, short for Valued Chain Re-engineering. Several management committees, working with consultants from Accenture, were formed to look at business processes within Kmart and identify chains linking the best in retailing performance.
For example, carrying a collection of merchandise that meets the needs of targeted customers was one chain. Another was keeping merchandise in stock, and a third was providing customers with accurate price information.
“A company that does those three things well has a very good start at being a pretty good retailer,” Carlson says. “With Accenture’s help, we decided on five of these valued chains to implement to better serve customers. We began addressing some of these fundamental, essential ingredients to retailing — discarding stale merchandise, freshening products, and giving more shelf space to best-sellers.”
Unfortunately, the changes went into effect just in time for the company to record a bad 1993 Christmas quarter, which ended in January. As a result, the re-engineering effort was scaled back. “That was kind of, in my view, the beginning of the end,” Carlson says. “From that point on, there was nothing.” The program was shut down a short time later, and Carlson saw the writing on the wall. He quit in 1995.
The Number 1 Threat to Retailers: The Gross Margin % Death Spiral: unsound margin-raising instead of counting money.
C&A UK
A&P : The largest retailer in the world.
IKEA The Strategy of the Ten Hotdogs by as written by founder Ingvar Kamprad
Super de Boer and Jumbo: The Caring & Amazing Dutch supermarket
The death of Kmart and variety store chains:
In practice, the following mistake was made at C&A during the late 1990s: Planners said BCP Fund / m2 is fine as an expression of Gross Margin income, but a certain predetermined minimum BCP% is needed to cover Operating Expenses. The BCP target percentage was set about 5% higher for C&A England than C&A Germany because sales per m2 in England were lower than in Germany. Operating Expenses expressed as a percentage of sales were higher in England than in Germany. As a result the target BCP% was set relatively high and customers could get better value for money at Marks & Spencer than at C&A. The increasingly high BCP% target set for C&A England was an unnecessary constraint for Product Managers (buyers) and merchandisers who should have been focusing solely on increasing Contribution (BCP Fund / m2) with articles with either high or low BCP%’s.
In short: If sales decrease in a bad year for any reason, a conventional store will often increase its BCP % target ‘to maintain profits’ and/or ‘breakeven’ the next year. The next year higher prices lead to lower sales and the company calculates a new so-called ‘break-even margin’ and raises its prices once again. Eventually the store goes bankrupt.
(Ironically, in the last closing weeks, during a wildly successful “Goodbye, good buy” fire sale, many C&A UK stores were profitable for the first time in years, shortly before the lights went out…)
Many other chains have also gone into a gross margin percentage death spiral. It happened with Kmart and A&P in the USA and recently with Super de Boer Supermarkets in the Netherlands. If these stores had focused on the articles that Contributed the most to the bottom line instead of those with the highest BCP %’s, they might not have done so badly.
The founder of IKEA, Ingvar Kamprad, described the problem as follows:
Our pricing policy is fundamental. The stumbling block is when we price ourselves out of the market. Our retail “experts” constantly go on that we must keep our ‘total gross profit margin’ to a certain percentage. I say to the economists, ‘What the hell is ‘percentage’ anyhow?’
Kamprad sees this phenomenon occurring at IKEA as the Number 1 threat to the company. As he wrote on the last page of The IKEA Concept Description:
I can depict at least seven major threats to the continued success of the IKEA concept in the future. I would like to share these with you so that you recognize them when one or several appear in your working place, organization or neighboring organization. False steps may be insignificant in the beginning, but prove to be fatal later on. Be aware of these trip-wires:
Number 1. Mark-ups in pricing, resulting in an out-of-the- market situation, due to wrong pricing strategies, too high costs, and/or unsound margin-raising instead of counting money.
The Great A&P: The largest retailer in the world.
The preference for volume over margin was a matter on which the Hartford brothers (who owned A&P) did not see eye to eye. George hewed to a traditional understanding of retail profitability, preferring to maintain a generous markup on each item sold. John, though, downplayed return on sales as a measure of profitability. He preferred to watch the company's return on investment. Historically, A&P's pretax return on investment had exceeded 25 percent in most years, and John set that as the norm. The way to boost return on investment, he thought, was to make better use of capital by pushing more merchandise through A&P's stores and warehouses...Just as Henry Ford standardized auto production, the brothers pushed to standardize stores and later bakeries to minimize the amount of capital investment per dollar of sales... John inspired his executives with a secret goal: A&P would more than double its sales over a five year period, becoming in 1929 the first retailer in history to reach $1 billion in sales. ...
The two brothers' strengths were in unique alignment. John Hartford's high-volume, low price strategy, executed with George Hartford scrutinizing every financial detail, represented a radically new model for retailers...Never before had major retailers embraced the seemingly counterproductive goal of reducing their margins on the goods they sold. Rather than trying to increase profits per dollar of sales - the conventional strategy of the day - A&P was deliberately seeking to REDUCE profits per dollar sold in hopes of creating more sales. From 1915 through 1925, A&P's profit had averaged more than 3 percent of sales. Henceforth, Mr. John decreed, profits should never go above the 2,5% level. If the company's profit margin widened, it would not be a good sign but a bad one, an indication A&P was forsaking the cost discipline that would lead to domination of the grocery market.
...As John Hartford had foreseen, lower prices brought customers streaming into the stores: the grocery volume of the average store doubled from 1925 to 1928. Expenses as a percent of sales plummeted, and the number of unprofitable stores fell by half. The after-tax rate of return on investment topped 26 percent in 1928, the highest rate A&P would ever register. The Hartfords had transformed their company into a profit machine...
A&P's profits soared in 1930; although sales per store fell with the onset of the Great Depression, profits per store hit a record $1,954. John Hartford interpreted this jump in profits as negative, not positive. Piece managers were setting prices too high, boosting profits in the short run, but eroding volume and driving business to competitors. John was especially annoyed that piece managers had adopted the strategy of selling selected products below cost and raising prices on other items to make up the difference. He ordered a return to the basics: no drastic prices cuts, no special sales, all merchandise sold with narrow markups week in and week out. His managers, he fretted, simply didn't understand his philosophy that volume was what mattered: "Sometimes the body gets so large that the pulsations fail to reach the extremities."...For A&P executives, John's demands could be infuriating. Rather than urging higher profit margins, he often insisted the opposite. His view that A&P should focus on return on investment rather than profits as a percentage of sales was not widely shared within the company... As he saw it, excessive prices would reduce volume. Once that occurred, A&P would be forced to spread the fixed costs of its warehouses and factories across a smaller base, which would require it to raise prices even higher...
Decline after John Hartford’s death
The speed of A&P's decline was shocking. At the start of 1961, it was still the largest retailer in the world, with 4,351 stores selling an average of $1.2 million of groceries. It's profits in 1960 hit a record as a growing economy helped A&P achieve the highest sales in its history. Yet signs of rot were everywhere.
John A. Hartford had always kept an eagle eye on A&P's gross profit - the difference between the amount it paid for goods and the amount it received by selling them. In the years before the 1925 reorganization gross profit had been over 20 percent of sales. For John, a high gross profit was a warning, a signal that the company was failing to hold down operating costs... By 1941 his constant push had driven gross profit down from 22 percent to 13 percent of sales, creating huge savings for A&P's customers and bringing in throngs of shoppers. In the 1950's, after John's death, gross profit began to creep higher, year after year. Gross profit was increasing across the industry, but the rise at A&P was especially steep. In 1968, gross profit would top 20% again. Its wide margins meant that A&P was no longer delivering bargains to shoppers, and shoppers responded, as John Hartford always feared they would, by taking their patronage elsewhere.
At the store level, higher prices meant lower volume; dollar sales at the average A&P store would not exceed the 1960 level until 1969, and the company's total grocery tonnage would be lower in 1970 than it had been in 1952. Inventories were rising rapidly, a sure sign of poor management; by 1964, A&P's inventories, relative to sales, would be the highest since 1947...The company had lost its way...
Investors abandoned the company that only a few years earlier had been a glamour stock...investment analysts called for A&P to raise prices.
Tengelmann, a German grocer that was eager to expand in America, and that did not understand how far A&P had fallen bought effective control in 1979. The price set an implied value of a mere $190 million on a company that had been worth $1 billion twenty years earlier...A&P had all but destroyed itself.
IKEA The Strategy of the Ten Hotdogs by as written by founder Ingvar Kamprad
In 1995 the IKEA furniture store started selling hot dogs at five kronor each, as opposed to the usual price of ten to fifteen kronor. This investment was at once successful, and today it contributes to the growing restaurant and food sector by turning over 1.6 billion kronor in 1997, and alone answering for exports from Sweden amounting to 700 million kronor ($87 million). That makes IKEA Sweden's leading food exporter. But behind this success is a special story. The "ten hot dogs strategy" says a great deal about the way the company regards price, competition, and the needs and desires of the customer.
Everyone, including myself, who likes sausages knows what a hot dog costs at a stand. At present it is between ten and fifteen kronor. I suggested to the directors that we sell them at five kronor. They looked at me with dismay and surprise. Perhaps they thought the idea foolish, or perhaps I didn't explain it very clearly. Talking about selling hot dogs in a multibillion furniture store was not really on the agenda.
The next objection arose from my staff, who are always concerned with what they call the gross profit margin. We're selling hot dogs for almost the same amount it costs to make them. Shouldn't we raise the price and take six or seven kronor in profit? In that case, the project ought to be abandoned, I replied, as the whole idea is based on the substantial price difference, the easily understood price. The hot dog went on costing five kronor regardless of the cost of raw materials. We don't lose on the deal, nor do we make much profit, but at least we make a little on each hot dog. In the end, that is what matters.
A little while ago, we advertised a mug costing ten kronor. Come to IKEA and buy the mug, it said. I was upset—the price was much too high. It should have cost five kronor at the most, although it did look pretty nice and was of good quality. It was the price that was wrong. So it came about that I wrote down my philosophy about the ten (twenty nowadays) hot dogs. We have ten different products that live up to "hot dog" pricing. Take the mug from the above example, called "Bang." In Switzerland it costs exactly one franc at IKEA. I haven't found one on the ordinary market for less than three francs, and even in that case our mug was much better in both design and quality. Before, we sold at the most seven hundred thousand mugs per year, and now the "hot-dog mug" sells twelve and a half million.
One day I found a wonderful English beer glass for eighteen kronor at our Swedish co-op competitor—I always go and look at what my competitors are doing. It was the kind of English glass with a level measure on it, forty centiliters, heavy and really good to hold. I thought it would be a good "hot dog." I went straight to our most superb buyer and said: "Bjorn, can you get that glass out at one krona? You can order two million." He replied: "Nix - I can't, but maybe in an edition of five million." The whole thing had the support of the product head, whom, as usual, I had bypassed. The last time I met Bjorn, he had a supplier who would do the glass at 1.08 kronor. It'll work out. So in a short time we've put twenty or so "hot dogs" up for sale - the whole organization is up and going.
The reader is right to ask himself or herself why, as the retired head of the firm, I go on with this kind of thing. There are three answers: one is that I find it difficult not to; it also says in my contract that I have a veto in matters of the range; and people in the company often say, "If you're on to something, let me know." So I let them know. I'm going on with my search for new "hot dogs" - lots of associates are involved. I recently saw a multi-plug we sell for under twenty kronor, while competitors take about fifty. My belief is that this "hot dog" will sell millions. Our pricing policy is fundamental. The stumbling block is when we price ourselves out of the market. Our economists constantly go on that we must keep our "total gross profit margin" to a certain percentage. I say to the economists, "What the hell is 'percentage' anyhow?" Percentage is something mysterious.
The only thing that interests us at IKEA is what is left in our pocket when the season is over. If we had taken ten kronor for that mug, and not five, then we would, of course, have "earned" more on each mug— perhaps one and a half kronor—and had a better "gross profit margin %." But we would have sold only half a million of them instead of almost twelve million, on which we now earn one krona each. These learning experiences are easy to suppress or ignore. But after having been the subject of endless bickering for over a decade, in this respect we are beginning to wake up with a vengeance. That pleases me enormously.
Jumbo: The Caring & Amazing Dutch supermarket
Bron: "Mijn naam is Karel van Eerd en ik bewijs dat ik het wel kan. #klantegerichtondernemen 1. De visie van de oprichter van Jumbo Supermarkten." 2011, Retaildenkers, Het Boekenschap , Amsterdam
"In 1992 zag ik na de zomervakantie de omzet teruglopen. Ik wist niet wat de reden was. Niemand kon het mij vertellen. Achteraf begreep ik dat we ons uit de markt hadden geprezen. We hadden sluipenderwijs de prijzen verhoogd. Dat doen dan de mensen die verantwoording hebben over je marge.
In 1995 telt Jumbo 35 winkels. Pas in 1996 vindt de grote doorbraak plaats met de formule Jumbo nieuwe stijl. 'Ondanks onze scherpe prijspositionering lukte het maar niet om meer klanten van Albert Heijn en C1000, die in die plaatsen ook gevestigd waren naar ons toe te krijgen. Een uitgebreid markt onderzoek dat we daar toen hielden, was een belangrijke doorbraak. Er kwam een lijst met de grootste winkelergernissen naar voren; dingen waaraan de klant zich geweldig stoorde in een supermarkt. We zijn daar goed over gaan nadenken.'
'Ons antwoord was een lijst met zeven beloften aan de klant, die we dagelijks zouden gaan waarmaken; de Zeven Dagelijkse Zekerheden.' Euro's goedkoper, is er een van. Jumbo garandeert de laagste prijs, geen artikel is elders goedkoper verkrijgbaar. Een tweede zekerheid; vers is ook echt vers. Producten met de datum van vandaag of morgen zijn gratis mee te nemen. En een derde: voor al uw boodschappen. Wie een product in het schap mist, krijgt de garantie dat het binnen twee weken voorradig is. De eerste service discounter is een feit. "Het was nog nooit eerder vertoond: de laagste prijs in combinatie met een zeer breed assortiment en een perfecte service. Dat is wat we nu naar buiten brengen als de unieke Jumbo-formule. Toen we in 1996 begonnen, spraken de concurrenten van een kamikazeactie. Maar als je doet zoals wij, komen er veel mensen in je winkels. Dat drukt de kosten per product. In een Jumbo komen gemiddeld dubbel zoveel bezoekers als in een gemiddelde supermarkt.'
Bij de eerste Jumbo nieuwe stijl in Den Bosch had ik berekend dat als we 500 000 gulden per winkel zouden omzetten, de vaste kosten met de helft naar beneden zouden gaan. Om dat te bereiken moesten we de winkel reorganiseren en dus investeren. De vaste kosten omvatten heel veel rente en afschrijving, maar niettemin gingen ze toch van 10 naar 5 procent. Dat waren 5 volle procenten waaraan niemand dacht. Maar wie zou doorrekenen wel. De supermarktwereld was en is brutomarge-gestuurd. Na de overname van Super de Boer is mij dat nog duidelijker geworden. 'De omzet kan niet omhoog, dus we kijken naar de brutomarge.’ Maar omzet kan wel degelijk omhoog. Het is een spel dat je moet beheersen. Je loopt op een smalle richel, het wordt boeiender. Waar Jumbo nu staat, hebben we te danken aan die redenering. Met een breder assortiment, heb je veel meer kosten. En door je prijzen te verlagen heb je wel een veel lagere margen, procentueel. Dat betekent dat je verliest als daar geen topomzet tegenover staat. Je moet beter opletten.
Een gemiddelde winkel heeft honderd medewerkers. Om de benodigde omzet te bereiken, zijn vijf of zes mensen nodig. Zij vormen het hart van de winkel, plus een vast team van dertig man. Alles eromheen en de omzetstijging kun je opvoeren met flexibele krachten op basis van uurcontracten. Dat betekent in principe: hoe minder de vaste krachten op je omzet drukken, hoe lager je loonkosten zijn. We gingen in de eerste Jumbo nieuwe stijl in Den Bosch van 10 procent loonkosten naar 6,5 procent. Er is wel een variabele kostenpost, maar die groeit niet mee met je omzet. Een procent meer (bruto) marge behalen, lukt gewoon weg niet. Maar met de focus op omzet krijgen we in een keer hele procenten (netto marge) in de schoot toegeworpen.
Winst is niets anders dan omzet maal brutomarge min de kosten...Inmiddels maken we een geweldig omzet, veel groter dan wie dan ook. Ik wil steeds meer en meer klanten in de winkel hebben. Als je dat voor elkaar krijgt, nemen de kosten procentueel gezien af. Dan word je sterker dan een ander. Winst is niets, het is alleen het gevolg van een rekensom. Natuurlijk moeten we winst maken, dat kan niet anders. Dat is het levensbloed. De klant staat wel voorop. Omdat de klant regelmatig terugkomt en zijn goede ervaringen deelt met anderen, blijft de omzet stijgen. Door het grote en brede assortiment kunnen we de zee van winst vergroten en het eiland van verlies verkleinen. Dat helpt mee. Uiteindelijk komt daar dan winst uit. Maar dan kan je niet uit jezelf 'maken'. Winst is niets.
Let altijd op je prijzen
Het voeren van een lage prijs leidt op termijn alleen maar tot een hogere prijs. Een lage prijs is subjectief. Stel je verkoopt een fles wijn voor € 3,25. Is deze prijs nou hoog of laag? Het antwoord is niet eenvoudig. Je kent de inkoopprijs, dus je weet of je er veel of weinig aan verdient. Als je er weinig aan verdient, vind je dit een lage prijs. Maar wat vindt de consument?
Stel dat je in het category management van wijnen tienden van procenten brutowinstmarge tekort komt. Je besluit de prijs van dezelfde fles wijn te verhogen naar €3,45. In de
context van de formule is het nog steeds goedkoop. De category manager ziet zijn brutomarge stijgen en krijgt complimenten dat hij zijn tent goed beheert. Een volgende keer denkt hij: ik ga er €3,75 voor vragen. Er gebeurt nog steeds niets, ook niet met de omzet van die wijn. Hij kan de prijs nog een keer verhogen tot € 3,95. Maar hij zal zich wel twee keer bedenken voordat hij over de grens van vier euro gaat, want dat is echt iets anders in de beleving van de consument.
Een bedrijf dat zijn prijzen niet heel duidelijk vaststelt, wordt uiteindelijk door zijn eigen mensen uit de markt geprijsd. Alleen maar omdat ze het goed willen doen voor hun eigen bedrijf. Dat is heel vaak gebeurd. Je verdient er dan wel lekker aan, maar de omzet gaat op een gegeven moment naar beneden. Bovendien neemt het effect van acties en aanbiedingen af. Opeens beseft het bedrijf dat zijn prijsniveau te hoog is.
Als hij dan naar beneden moet, dan moet hij het grof doen en niet geleidelijk. De fles wijn die voor € 3,95 werd verkocht, moet dan voor €2,95 langs de kassa. En dat doet pijn, hoor. Heel veel mensen durven dat niet. Wij hebben dat wel gedaan en kozen voor EDLP (everyday low prices). Ook wij waren door onze eigen mensen uit de markt geprijsd. Met de nieuwe formule zal ons dat niet meer gebeuren. Kijk eens naar de concurrenten. Er zijn altijd nog wel een paar die nog veel duurder zijn. En daarom voeren wij de laagste prijs in de markt en hebben wij prijsmeters om dat te controleren.
The death of Kmart and variety store chains:
“Sam Walton founder of Walmart sees the phenomenon as only a man with a vision to build an empire could see it: forcing regional variety-store chains to either enter discounting themselves or leave town. He offers no apology for the destruction his stores wrought.
``Whenever we put a Wal-Mart store into a town, customers would just flock to us from the variety stores. It didn`t take those stores long to figure out that if they were going to stay in business against his Wal-Mart, they had better start discounting themselves.
``Now most of these guys already had distribution centers and systems in place, while we had to build one from scratch. So on paper we really didn`t stand a chance. What happened was that they didn`t really commit to discounting. They held on to their old variety-store concepts too long. They were so accustomed to getting their 45 percent markup, they never let go. It was hard for them to take a blouse they`d been selling for $8 and sell it for $5 and only make 30 percent. With our low costs, our low expense structures and our low prices, we were ending an era in the heartland. We shut the door on variety-store thinking.``
Kmart: The Polyester Palace using the wrong KPI’s
‘Kmart turned more and more to private-label goods, items made for Kmart and sold as a Kmart house brand. Private-label goods can carry a fatter profit margin %, because retailers typically pay the maker much less for them than for similar name brands. The problem though, was that many of Kmart's private labels were not very good. A lot of the clothing was shoddy, even ugly. By the mid-70’s Kmart was being nicknamed the Polyester Palace.’
http://www.dbusiness.com/DBusiness/July-August-2010/Polyester-Palace/
Kmart Corp., once the No. 2 retailer in the country, lost its edge some 30 years before it entered into bankruptcy in early 2002. Here, for the first time, is the untold story of what contributed to Kmart’s bankruptcy, as told by former executives whose public nondisclosure agreements have recently expired.
…The Carlsons, Marsico, and other former Kmart executives say the iconic discount retailer imploded over time because of its own internal dysfunction. ...“The wound was self-inflicted — not by a lone gunman but, rather, by a combination of steps resulting in giving away the store and the store contents, and wrecking a major retail force that changed the way the public was sold goods,” James Carlson says of Kmart’s demise.
..Up until Carlson brought in computer technology, most Kmart sales — everything from candy to detergent to coffeemakers, some 60 percent of all items sold in the stores — were rung up on a single key on the cash register.
Merchandise managers who supplied the stores with goods were also compensated using an arcane system that turned out to be counterproductive. Their incentives were based on a formula called “theoretical gross,” Dave Carlson says.
“For example, the candy buyer decides to add a Hershey bar into the assortment of candies for 40 cents, and marks it up to sell for 50 cents,” he explains. “Theoretically, every time one of those bars is sold, it means an increase of 20 percent gross margin. So the buyer ships trainloads of these bars into the distribution centers and every one that goes in there has a theoretical gross of 10 cents, or 20 percent. Now multiply that Hershey bar by, say, 50 other chocolate bars sold the same way, and the buyer is credited with generating a huge amount of gross profit.”
As the scanning system began to come online, Carlson looked closely at the vast amount of candy going through Kmart. “The first controversial report I did using scanning data was on what prices were actually being charged [for candy] at the register,” he says.
“What that report showed was that there were several lines of candy that were selling below cost. So instead of getting 50 cents, we were getting 39 cents because of competitive pressures that made stores lower their prices,” Carlson says. “Instead of tens of millions of (dollars in) gross profit generated by candy, it was actually costing the company to move candy. The divisional manager said to me, ‘You cannot issue that report.’ She said it was obviously flawed. It was the first time Kmart had a statement of what was actually happening in the stores.”
... James and Dave Carlson, David Marsico, and other former executives say Kmart’s eventual downfall was management’s failure to adopt the fundamental principles of discount retailing — rate of sales per square foot and return on investment.
“From the very beginning, Wal-Mart focused on sales per square foot. Sales per square foot for Wal-Mart were 40 or 50 percent higher than Kmart,” Dave Carlson says. “The ideal discount model is that you sell things timely, at relatively low percentage margins, but for enough dollars that, through volume, you pay the fixed and variable costs of a store. Kmart’s culture emphasized percentages rather than sales per square foot.”
Kmart’s inventory of toasters, 10 brands in every store, was a case in point...
Toaster sales from the scanning data showed the top two sellers among the toasters offered at a typical Kmart store accounted for 90 percent of the sales.
“I went to the merchant who was responsible for toasters and pointed out that the bottom three of the 10 toasters we offered contributed less than 1 percent of the sales, but were taking up 30 percent of the (shelf) space,” Carlson says. “His answer was that because they contribute 45 percent gross profit, we have to keep them. So the focus, again, was on gross profit percent as opposed to gross profit dollars.”
The scanners were equally unkind to the 80 to 100 different deodorants sold in packages of 12 or 24 pieces. The data showed most of the shelf space was taken up by the slowest-selling packages, while the best sellers were frequently out of stock.
“I said to the guy in charge of deodorants, ‘We don’t have enough shelf space allocated to the high-volume items,’” Carlson recalls. “He said, ‘Yes, but if I give those items more space, we won’t have space for the others.’”
Carlson says during his time at Kmart, he could guarantee that the top-five-selling deodorants would be out of stock by 8 p.m. on Sunday because there wasn’t enough shelf space allocated to cover the volume of their sales over the weekend.
Carlson credits Antonini for initiating two programs that might have dramatically changed how Kmart did business, if the chairman and the executive group had given them enough time to work.
The first was unveiled after Antonini and his inner circle of executives returned from a brainstorming session in Florida with a declaration of changes to be made in the assortment of goods Kmart carried. The 50,000 items in the retailer’s assortment would be cut by 10,000 pieces while, at the same time, another 10,000 items would be replaced by more trendy offerings.
“I was very excited about this, knowing that if you get rid of slow-movers you would do more volume per square foot and free up space for better sellers,” Carlson says.
...The end for Carlson at Kmart came shortly after Antonini discarded a program he commissioned in 1993 that would have improved the company’s efficiencies and bolstered its merchandise assortment.
It was a multimillion-dollar project called the VCR program, short for Valued Chain Re-engineering. Several management committees, working with consultants from Accenture, were formed to look at business processes within Kmart and identify chains linking the best in retailing performance.
For example, carrying a collection of merchandise that meets the needs of targeted customers was one chain. Another was keeping merchandise in stock, and a third was providing customers with accurate price information.
“A company that does those three things well has a very good start at being a pretty good retailer,” Carlson says. “With Accenture’s help, we decided on five of these valued chains to implement to better serve customers. We began addressing some of these fundamental, essential ingredients to retailing — discarding stale merchandise, freshening products, and giving more shelf space to best-sellers.”
Unfortunately, the changes went into effect just in time for the company to record a bad 1993 Christmas quarter, which ended in January. As a result, the re-engineering effort was scaled back. “That was kind of, in my view, the beginning of the end,” Carlson says. “From that point on, there was nothing.” The program was shut down a short time later, and Carlson saw the writing on the wall. He quit in 1995.
How Did We Create Those Bargains?
That's the question I'm asked so often. People assume that the only way we created "those bargains" was by cutting our gross profit or even by selling below cost. The "default condition" assumed by those people is that there is only one wholesale price for a given product, and that retailers compete by shaving their profit based on that sole price. Intensive Buying assumes no hay precios fijados (there are no fixed prices).
How Did We Set Our Prices?
This is the question other retailers most often ask. Usually, they ask, "What percentage margin did
you aim for?" Which always launches me into my tirade about how you pay your bills with dollars, not percents. This seemed to be a concept that was pushed aside in the traditional supermarket environs.
Your buyers always want to make their workload easier by applying uniform percentages for any given product category. (Grocers think in terms of gross profit percentage, which is your profit divided by your retail.) Grocery buyers love to apply a uniform percentage gross profit to everything, but that is
bad practice. We happened to run a gross profit of about 23 percent after all distribution costs and what is euphemistically called "shrinkage." But that was an after-the-fact result. We never aimed specifically to hit 23 percent. Our approach, when the buyers followed it, was to find out what the going price was for a given SKU and then undercut the market. At the same time, they were to consider how many
dollars we made on each sale. Thus, at the time, I was willing to make only 13 percent on a $20 bottle of champagne, because that was a $2.60 profit. For a $2.00 item, however, I wanted to make a much greater percentage.
Actually, we persistently got rid of anything that sold for less than a dollar. We stopped selling
individual cans of soda and beer, for example, as I didn't want that kind of trade in the store. When
I left Trader Joe's, our average sale was around $30, and that was pretty close to the median, too.
The fact that we wound up with 23% was irrelevant. What was relevant was that each SKU was a profit center after considering all the costs of handling it. Thus, the spoilage (or stale-age) of bakery products and cheeses must be considered."
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Three tests for great assortment items:
a. A high value per cubic inch. ("Profit per x" = $ per cubic inch)
b. A high rate of consumption.
c. It had to be handled easily.
Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com
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