Wednesday, May 11, 2011

The Case Against Category Management –Exercise #4 -4

From exercise #4 -2, leave the top producing category alone for the time being. First concentrate on the second group, because this is the most promising area where hidden profits can be found. I chose ‘Milk Products’ because its average turns fall between 25 and 40 a month. Something or some things in that group are pulling the entire group down. Note: We are NOT concerned with profits in this step- only turns. Depending on the store, you may choose to group your classifications differently. As you begin to tune-up items in your groups, you should end up with two groups: One marked “Winners” and the other labeled “Losers”.

For this part of the exercise, refer to Taking a look at the charts we can see the milk products this store sells. There are eighteen rows of items representing as many products. Looking at the top chart, notice that 28% of the ‘Milk Products’ classification is dominated by the five products: Dairy Fresh Vitamin D Milk (1 gallon), Dairy Fresh Chocolate Milk (1 Pint), Dairy Fresh 2% Milk (1 Gallon), Dairy Fresh Vitamin D Milk (1 pint), and Yahoo Chocolate Drink. Put another way, 28 percent of the items account for 72 percent of the sales in the ‘Milk Products’ classification… slightly above the 25 percent I mentioned earlier.

Also take notice in the bottom chart where we can compare how turns relate to sales. The same products also dominate turns: 73% of the turns are dominated by the same 28% of the products. You will find this situation in almost every category you analyze. Vast improvement can be made in the bottom 72% of the products starting from the bottom up, by either fixing them or tossing them out. Note: Investors often rate a retailer by a turns vs. stock ratio. Eliminating slow-moving stock increases the valuation of a company.

The slowest item in both charts, Muscle Milk Light, accounts for only 0.34% of the sales and 0.28% of the turns, takes up a substantial amount of cooler space, and is turning only three times per month in this store. Doing a quick search of the database I found thirty-nine tenders since June, 2010 containing this product. Side note: There seems to be one repeat customer who always buys this product and one quart of oil – nothing more. He must have temporarily corrected his oil problem, because he used four quarts in June of last year and didn’t start up again until this past February.  I would suggest lowering the price of the item by 10-15 percent to see if its turns will increase, but I would also keep my eye on similar products producing higher profits that may be affected through cannibalization.  As it stands, this product is not producing enough profit to warrant a great deal of space in the cooler.

Sometimes making a slight adjustment in price can have a profound effect on an item’s performance. Every product has its ‘sweet spot’, the price it starts making you money, and it changes all the time.

The reason for an item being in your store is to generate income over and above the cost of stocking it, isn’t it? Dairy Fresh Buttermilk turns only twice each week. Why does the supplier bring six? For this product, I would try raising the price by 10-20 percent and observe its turns.

A good system should immediately red-flag an item when its turns change. Maybe it’s been camouflaged, cannibalized, or out of season… maybe you’re out.

Sometimes you can raise the price, reduce the turns and make a larger profit; or lower the price, increase the turns and do the same. In our book, “Turning Convenience Stores Into Cash Generating Monsters,” Jim and I give a perfect example of how reducing the price of an item and lowering its margin by a nickel, doubled its turns while producing a 66 percent overall gain in profits. 


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