Measuring profitability in our stores

One of the most common questions I have been asked over the past 15 years or so – is; “What should my GP%* be for my store?” It is a question that I get asked at least ten times a week and is the number one Q&A item on my Facebook page.

Measuring GP% is of course very important. It is the indicator of profitability that most of us in the forecourt business look at on our POS system at day end, everyday. It will vary day to day depending on the mix of line items sold. And, it remains at best a theoretical figure as it does not take into account stock loss and admin errors.

GP%, however, is hardly a complete measure of a store’s profitability. What concerns me is that I can count on one hand the number of times I have been asked a more important question; “What should my stock turn be each month?”

Good retailers know that this is as important as GP%! Just look at the growth of all the Chinese shops springing up all over our towns and suburbs. What do you think they look to for their success: GP% or, stock turn?

I’ll explain why stock turn keeps them going and makes them successful, later.

At the most basic level we buy in stock – add on a margin – and sell it on to our customers. If we can sell that stock before we have to pay for it – we’re in the pound seats and very profitable indeed! The sooner we can sell our stock the better off we are.

Real profitability is the combination of Gross Profit % and stock turn. And stock turn for most retailers is the stronger partner in the profit equation.

There’s a complete lack of understanding among of this among so many retailers. This is reflected in the complaint I get so often from them about selling airtime, magazines and milk. “The margins are so low it is not worthwhile!” they complain. Is this indeed the case?

Let’s take a more detailed look at stock turn. Essentially it is the number of times stock can be turned into cash over a year. We calculate stock turn by dividing the year’s sales by the value of the average stockholding – usually determined at stocktake.

Here is a very simple theoretical example that highlights the relationship between GP% and stock turn

  Product A Product B
Two products selling for R10 carry the following GP% 30% 15%
And earn the following Rand Gross Profit; R 3.00 R1.50c
Number of units sold in a year; 20 400
Contributes the following Rand Gross Profit per annum; R 60 R 600

The % return on total stock purchases (GP% X units sold) 600%     &sbsp; 6,000%

If the cost of stocking the product was the same and the shelf space they took was the same it shows that items that sell faster will often earn you much more money despite having a much lower GP%.

Obviously we would not stock either product in this example as they do not sell enough for our stores to stock with limited space on our floors. But it makes the point.

Here is another theoretical example using Cigarettes and Magazines that brings stock holding and stock turn into the equation. Cigarettes are often considered the lifeblood of the convenience store business and they do make a huge contribution – which is so easily lost through shrinkage. We’ve given cigarettes an unlikely high GP% just to strengthen the comparison.

  Cigarettes Magazines
Average sale per week R12 250 R1 750
Annual sales (x 52 weeks) R637 000 R91 000
Weekly stock holdings R24 500 R1 162
Stock turn (R637 000 / R24 500) = 26 (R91 000 / R1 162) = 78
Average Gross Profit 27 % 15 %
Return on stock investment (26 x 27) = 702 % (78 x 15) = 1170 %

Bread also has a low margin but we know it turns over fast and stocks are kept low as most of us get three deliveries per week – so contrary to the complaints it is profitable to sell bread. Pies do even better – they have a higher margin – AND probably turn over even faster than bread!

An important portion of stock turn is our stock holding figure for that particular line item. In an ideal world the more deliveries, the lower the stockholding. But, this does clog up resources too. We have to receive stock more often – and then enter it onto the back office system.

You need to weigh up the balance that works for you in your trading environment. Decrease your stockholding numbers but increase staff costs versus holding stock for longer with fewer staff. Somewhere in the middle is where you will want to be.

There is another leg to this and that is the amount of dead stock we carry from month to month. So to go back to the question posed to me – just what is the correct GP% for you? You might be showing a GP% of 30% on the system! That looks great…..but if you are only turning over stock once a month – that is not a great return on your money invested in stock.

If on the other hand you were showing a GP% of 25% but turning your stock twice a month – would you be more profitable? You know the answer!

In practice a stock turn of twice a month or 24 times a year is the minimum that a forecourt convenience store should aim for. The top forecourt stores, by the way, are achieving 2.2 stock turns a month.

Do you take stock regularly and measure your stock turn? If you want to increase your overall profitability start doing this regularly. It will probably require a shift for you in the way you manage your retail outlet. But it is worth doing. It will give you an objective view on which lines are earning you a real return and which are truly costing you.

With this knowledge you can start making rational decisions about what GP% you should make. It may well be that on some lines you aught to cut the price and the GP% you earn if it will increase the product’s sales. On others, you may well be better off in dropping the line altogether and looking for new ones that will give you a real Rand profit contribution.

Let’s take a look at the Chinese shops again. Why do they do so well? Yes, they have the products and brand names that people want and at price they can afford.

But there is something more about the way they operate that contributes mightily to their success. They’re often members of buying syndicates that aim to bring in a container a week of stock from China. Because of this they have to turn their stock into money within a week to make their contribution to pay for the next container.

Within a week of receiving new stock they know what is selling and what is not. So what do they do with the dead stock? They get rid of it at ridiculous prices – namely; cost to them.

Why? To make room for more of what their customers are looking for.

There are two things they are doing well.
They know what sells well – and what does not sell fast enough. (Fast enough is a week!)
They are also very good at understanding the simple retail rules – turn it over as fast as possible and get rid of what does not sell at cost to make room for the next product that does make money. They measure return on the money invested in buying stock as opposed to looking purely at gross profit % attained.

We also need to be ruthless at applying this very basic retail principle to our stores. If it does not sell – get rid of it at cost if need be. We have limited shelf space and it needs to work for us. We have money tied up in those slow sellers on our shelves that reduces our overall profitability. See getting rid of dead stock as freeing up space for more of what your customers want!

To get back to my first question – what should my GP% be for my store? It all depends on what return you want from the money invested in stock! GP%s is only one measurement tool of making your money work for you! Now focus on stock holding! And you will be reeling in the cash. Enjoy!
Good luck and take care out there

Jocelyn Daly
http://www.cstores.co.za

GP% or, Gross Margin% is the difference between cost and selling price expressed as a percentage of the selling price

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