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.
ChatGPT explains conventional gm% wisdom below. Ingvar Kamprad said the conventional wisdom didn't add up. The German Deckungsbeitrag (contribution margin dollars) and Opportunity Cost framework doesn't even use sales or calculate a gross margin percentage. The Breakthrough booklet explains how that works in practice.
"Question: Do stores that use contribution margin dollars also set a minimum average gross margin percentage target?
ChatGPT: Yes, many stores that use contribution margin analysis also set a minimum average gross margin percentage target. While contribution margin analysis provides a detailed view of profitability at the individual product or category level, gross margin percentage is still an important metric for evaluating overall store performance and ensuring profitability.
Setting a minimum average gross margin percentage target can help retailers maintain profitability and ensure that their pricing strategy is aligned with their overall business goals. However, it is important to note that the minimum gross margin percentage target can vary depending on the industry, product category, and other factors.
For example, some retailers in highly competitive industries may set a lower minimum gross margin percentage target in order to remain competitive on price, while other retailers in more niche markets may set a higher minimum gross margin percentage target in order to maintain profitability despite lower sales volume.
In summary, while contribution margin analysis is an important tool for evaluating individual product profitability, setting a minimum gross margin percentage target can help retailers maintain overall profitability and ensure their pricing strategy is aligned with their business goals."
The Breakthrough booklet explains how setting a minimum gross margin percentage target, is an unnecessary stumbling block to higher sales and net profits and can actually drive a company like C&A UK into bankruptcy.
After publishing in 2023 some feedback from Simon Kolin:
Hi John
I have now read through your book in detail. And I have learned something new! Thank you for sharing this knowledge.
Here are some thoughts/comments/suggestions from my side:
It's intriguing how opportunity cost is a key factor in both retailing and (quant) stock trading. In our quant trading system, the heuristic dealing with opportunity cost is one of the two major factors contributing to performance. If you don't take the opportunity cost into consideration, CAGR is limited to some 16% (on average). The opportunity cost heuristic was really hard to work out/find. But once figured out, it's really simple to apply.
I am wondering: What kind of method/approach do you use to deal with opportunity cost in your fund? Bear with me if you or Hendrik talked about this on the 19th, and I missed it. Anyway, I imagine you use some kind of continuous ranking of stocks, on the basis of which you rebalance/remix the portfolio periodically?
Have you done any testing on what fund performance would be when the opportunity cost is not considered? Or on variations in performance for different possible methods for opportunity cost alleviation?
In the book you mention a computer algo for intelligent markdowns (using a DB of historic markdowns and subsequent TOS-changes); pages 34 and 35. Does such an algo exist today as a non-proprietary product, that anyone that so wishes can simply purchase? If not, would it be a business opportunity to develop and market something like that?
Finally, a suggestion for a possible improvement for future editions of the book:
For readers (like me) not familiar with retailing jargon or denominations, I think that an initial section with definitions would be helpful. In which one could also establish the relationships to the standard accounting terms that most people will be familiar with. For example:
BCP corresponds to Gross Profit (GP)
BCP% corresponds to Gross Margin (GM)
LCP corresponds to Cost of Goods Sold (COGS)
...and so forth...
Hope this is useful.
Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com
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