IKEA's founder, Ingvar Kamprad, spent more than a decade arguing back and forth with his own planning department about the following question. Kamprad explains: "My staff are always concerned with what they call the gross profit %.... Our planners constantly go on that we must keep our "total gross margin" to a certain percentage. I say to these retail "experts" 'What the hell is 'percentage' anyhow?' A high gross margin % target is a stumbling block that leads to pricing ourselves out of the market."
What Kamprad described is one of the pitfalls of conventional retail planning. Theoretically, the only alternative is to allocate operating expenses to different assortment options in order to determine which is profitable. Systems for doing this include Activity Based Costing (ABC) or DPP and ECR.
ALDI's Dieter Brandes called ECR ridiculously complicated bordering on moronic. His conclusion: "Many a company has calculated itself out of the market with incorrect equations and inappropriate cost accounting." On the other hand, when asked about simple gross margin % targets he wrote: "One can easily understand how stupid such percentage targets are." This confused me, so I decided to turn to one of my uncles.
He was C&A's CEO during a period of strong growth between 1960 and 1988. According to him, C&A's real breakthrough had been a decision in 1906 to cut the gross margin % target in half.
When I asked him: " If you don't use gross margin %, how do you allocate operating expenses to determine which assortment options are most profitable?"
His response was simply: "You don't."
Me: "You don't ?"
"No, the key is Opportunity Costs. The extra gross margin dollars you get by choosing one option over another is much more important than the relatively small differences in selling expenses."
Breakthrough: C&A's Secret Formula Rediscovered is a booklet describing how Opportunity based customer $ driven retail worked in practice and how to implement it today. Copies are free for family and colleagues at C&A and other parts of Cofra Holding. Just send me your address. (€20 for others). I have a few dozen leftover from the last print run.
Presently Dr. Bianca Groen, drs. Björn Kijl, Ruud Verschuur and I are working on improving retail theory. We've edited Wikipedia and are writing a paper, but my main focus at the moment is helping set up a public equity investment fund.
Comments, questions or E-mails welcome: email@example.com