Friday, April 22, 2011

The Case Against Category Management – Exercise #3


In exercises 1 & 2, I suggested you create a spreadsheet consisting of an inventory list and sales transactions from your POS, sorted and subtotaled by UPC and re-sorted by turn rates. In exercise 3, I would like you to re-sort you turn rates from highest to lowest. Format the turn rates to at least four decimal places because a lot of the slow movers will have close to the same turn rates.

You may be surprised to learn after a page or so, the turn rates will drop off sharply. The items with the highest turn rates represent the products that have the potential for making the greatest profits, or for causing the most damage.

If you’re like most retailers, receiving your invoices on paper or even electronically, you may find it difficult to relate your invoices with items that sit on your shelves. The reason being, if valid UPC codes appear on the invoices at all, they may be the UPC for the parent (carton/box), and with the exception of cigarettes, you may sell cartons and boxes of very few of those items.

Next, you must find out what you’re paying for the items you’re selling. This will take some time. That’s why I suggest you start with you highest turn-rate items first, because these are the ones that need to be fixed first. I’m assuming without the tools necessary for doing this properly, it will be a completely manual operation.

You should have the total sales of the items by UPC from the previous exercises. Calculate the retail prices of individual items and enter the last cost you paid in a column next to it; next, divide the cost of the item by the retail price and subtract that figure from the number ‘1’. This will be the profit percentage you are actually making on the sale. e. g. (1 – ($.74/$1.09)) = 32.11%.

As you get new deliveries, have you managers keep up with the price changes, especially on the high-turn items. Review this sheet daily to find out if you are selling items below cost. You can update the turn rates periodically, but update the profit percentages on fast moving inventory with the arrival of each new shipment.  

I keep hammering on ‘inflation’, because for the foreseeable future, I believe inflation will break many small retailers. I’ve met and talked to a lot of operators over the years, and especially in the convenience store industry most of you are not paying attention to the rising cost of merchandise with relation to the retail price. This is serious, because the 20 to 30 percent of items that are currently making up the profits in your stores may stop being profitable before you have a chance to do something about it. With the profits being as low as they are now, it won’t take much of a cost increase to neutralize what profits you have.

You should make a habit of adjusting prices in many retail categories at least monthly. This is going to be tough to do with label guns.  You may need extra staff to keep up with the price changes. One answer might be to stop pricing the individual items on the shelves and let your POS price them at the checkout counters. I have noticed many stores don’t put labels on the products anymore. I think we may all have to adopt this practice in order to remain profitable. Very few customers look at the price anyway. They already assume your prices are high, else they would be buying more from your stores. I’ll talk more about that later.

In the next exercise, I’ll give you some ideas that will really turn the heat up on your profits.  

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