Archive for category Profit Margins
Goodness me it seems that this has been a very long and arduous year! Anyway this is our last blog for 2010 and completes the previous one! Feedback welcome.
So, how do you improve stock control in your store?
The amount of shrinkage in your store will be in direct proportion to the controls you have in place. The more controls, checks and balances you have over your stock – the lower your shrinkage will be.
There are many areas of our business in which we can “lose” stock. These include:
- Return of goods
- Price changes
- Food preparation
- In-store use
- Point of sale
In our last blog we covered points 1-5, now we review points 6-9 and state some of the concerns for these points – and then offer one or two suggestions on how to deal with it.
As with all the points listed above once again in this area there are so many ways we lose stock in our displays. I will only raise one or two for now.
Firstly there is the old adage of FIFO – first in first out. We have to bring “older” stock to the front of the display before we merchandise the new stock. Ever watched a house wife shopping for milk in the local supermarket? Guess which milk she puts in her trolley – the milk right at the back of the fridge. She knows that the freshest milk is to be found at the back of the fridge.
How do we lose money if we do not implement this rule? Out of sell by date – if it is out of date we have to write it off which is a loss. On some perishable items we are able to claim back from our supplier. But with sweets and chocolates for example – you have to write it off. It is a direct loss to the business. And don’t tell me your staff rotate stock – do a check yourself.
Take any of the count lines.
Start at the front – are the sell by dates earlier than the ones at the bottom or back of the pile?
It is time consuming for your shelf packer to pick up the existing stock and then merchandise the new stock underneath on the shelves. If there are no checks – your staff will take short cuts.
Another area for concern on the displays is our price labels. I have no idea why a Kwik Spar with many more line items than us – can get this right on their shelves – and we can’t? I am doing some store visits tomorrow in the Sandton area with new dealers – and this is one of the checks that they will be asked to do.
- How many products had no price labels?
- How many had incorrect price labels?
- Do this check yourself in your own store today!
This costs your business each and every day.
Firstly where there are no price labels, customers will be less likely to buy the product. They do not want to buy something that has no price attached to it. So it’s a lost sale.
If the price is incorrect when the customer gets to the till point – they pay the price that has been displayed. You lose again – your margin has just been eroded.
It gets even more scary if the product and price have not been entered on the system! The cashier will make a decision on what to charge based on other like products – which may be way out of line!
Our displays are our business in many more ways that one! – We need to get each detail of this piece right in order to ensure we do not lose any monies or sales from this vital point.
Not all of us prepare food on our premises but those of us that do will know just how hard it is to keep track of our food items. At best most of us prepare pies. So I will stick to this simple example for the most part.
The challenge here is firstly to accept that there is going to be some wastage when preparing food. How much are you prepared to lose daily? And then keep track of this as wastage! You are still losing money – but you have it under control.
Measure what is going in (how many pies are baked) and then cross check with what goes out…..How many are sold! At best – there should be no shortages at all!
Take stock per shift and cross correlate these with sales per shift. Work out what is OK to be lost to wastage and work within that rule for you. I buy in and prepare 20 pies per shift – then you need to ensure that you sell 20 pies per shift!
It gets harder when we prepare from raw product. How many slices do you get out of an average tomato? At the end of the day how many products did you sell with tomato’s – and how many are left whole in the store at the end of the day? The rest is wastage at best – but if the staff are nibbling – it is shrinkage. Both are a loss to the business.
From bitter experience – bacon is a big one for losses! Check it out on a per shift basis.
Most of you will take one look at this heading and say – yes I know we use products off the shelves for our own in-store use. But it is small and does not warrant too much energy on our part checking it.
The fact remains – you bought 10 bundles of 2 ply toilet paper each containing 48 rolls. You receive this as stock onto your system.
You need to take it into stock on two fronts.
- In-store usage
- For resale to the customer
- Allocate this based on actual sales and usage – which you can only get if you account for it appropriately.
Now you run out of toilet paper in the public toilets. If you take one from the shelf – do you ring it through on the point of sale as a sale item? If not – it leads to shrinkage.
There is a great concern if you are taking stock items off the shelf for store use and NOT ringing these up as a sales item. Your staff see that – and know that if they take one or two rolls home – nobody would be any the wiser.
Another example: If you sell fresh fruit for example in your store. You need to replenish your fruit salad offering – so your staff take another 2 banana’s, 2-3 apples etc – all for use to replenish that fruit salad for resale to your customers. It is not rung up as a sale – nor is it transferred to the food offering for resale!
You are under on the resale – and over on the fresh food offering. But having no controls in place allows your staff to move stock at will – and then the accounting thereof gets out of control – and it all leads to further losses! On the system anyway…
Point of Sale (Till Point)
Books have been written on just this area of our business and – yet it remains a porous area of our trading environment.
Not all of our losses in this area can be attributed to theft and fraud (a subject that we have a few articles on up on our website, such as “Point of Sale Fraud”, “Inventory Record Frauds” etc; see www.cstores.co.za )
Most are just plain carelessness.
Scenario one: a customer comes to the till point puts his goods on the counter and takes a sip of Coke while doing so. The cashier rings up the goods on the counter and omits to ask to scan in the Coke. The result: One Coke lost.
Scenario two: a customer comes to the counter, places their goods on the counter and these get rung up. The cashier does not see that their child is busy eating a chocolate – their head height is too low for the cashier to see this.
Another scenario: Our cashiers are often responsible in the mornings for the returns of newspapers and milk. It is often their busiest part of the morning rush hour – so the rep does the count of what is being returned – and she just signs it on your behalf. Customer comes first – and they must not be kept waiting after all. There was no check done at all – and in particular newspapers and returns remain a key concern as invariably sales to purchases never match!
Simple scenarios but all too common. In each case – the amount lost is not big monies. But if you add them up across all these areas in their totality over a month – you have a shrinkage problem.
My suggestion is to keep your eyes peeled and demonstrate to your cashiers what to be on the look out for each and every day. Easier said than done, I know!
Almost 2011! To those of you that are travelling over this festive season – my wish for you and your family is that are you arrive home safely having had a wonderful break. To those of you trading in perhaps your busiest period of the year – I hope the tills keep ringing merrily along out there! Happy trading..
Speak to you in 2011
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.
|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
GP% or, Gross Margin% is the difference between cost and selling price expressed as a percentage of the selling price
What checks do you have in place to check that the price, as reflected on the system, is in fact the correct price? I’m talking in particular about the cost price of a product.
What do I mean?
Ok so here is the scenario; A delivery of fruit juices arrives at the back door. It is received and the paper work is sent to the back office. The products get placed directly onto the shelves for sale to our customers.
The person at the back office puts the invoice on the pile of work to be attended to tomorrow morning. When he gets to input the data, he looks at quantity and enters this onto the system against that item. All well and good if the cost price of these items has not changed. But what if they have changed since the last order? How would you know that it has changed?
Well you don’t do you? You rely on the work ethic (…….say what?), the integrity and willingness of that employee to pick it up for you. And if they are in a hurry or are behind in their work schedule, they will not pick it up. Trust me – I have seen this happen countless times!
Some of the more sophisticated software around today has a mechanism at the back end which ensures that the back office person has to capture the complete information on the invoice – that is the cost for each item, VAT and totals. OK, so now the system tells him that the cost price has changed – really great news for us.
BUT, what happens if the person decides not to input the change straight away? Some systems allow them to do this. In theory he is supposed to come back later (a week, next day…or never) to “fix” it all up. Each time he runs a day end report it will tell him that he needs to attend to this data, but he can override it and let the end of day report run as is.
Of course it can become quite a mess down the line but if nothing else you have sold X number of fruit juices at potentially a loss! AND not all of us have a system that insists on the full invoice being duplicated on the back office.
So here is my question again – How do you know that the price is right? What checks can you do daily to ensure these lapses in administration do not take place?
1. Go to the back office at least once a day and pick up an invoice or a goods received voucher and go onto the system to check the information has been captured correctly.
2. Walk your store – and manually check on prices. Recently on one site I noticed a new brand of cigarettes and the packaging indicated to me that it was a low end product – but it was priced higher than any other brand on the shelves! And yes the wrong cost price had been captured!
3. Check the cost price and the retail price of that item on the system against the invoice
4. If there has been a price increase you might want to phone that supplier?
5. Do this randomly – do not always pick up an invoice from the same supplier
6. Do not rely solely on the system to tell you the price of goods – these numbers have been inputted manually!!
AND promotional items?? There is supposed to be a change in the cost price – do you check that the supplier has invoiced at the lower rate? And you probably have being selling them at the lower rate because it has been advertised as such! Check and double check all the time!
Once again stock will balance! But profit will be out of the window..
Take care out there