Retailing has traditionally focused on range, display and location. We have learned how to manage costs assiduously.
Retailing has traditionally focused on range, display and location. We have learned how to manage costs assiduously. We have developed ever more sophisticated solutions for managing and monitoring stock.
Amid this professionalism, one variable has been ignored: pricing and the levers to optimise net achieved cash margin.
I remember in my early retail days at British Shoe being surprised that we made 54% gross margin in every fascia and similar margins in women’s and children’s shoes.
Some had fashion risk, some did not. Some sold quickly, some slowly. It seemed odd but this was not reflected in margin.
It was explained that my observation was not surprising, as we marked all our selling prices up by 2.4 times prime cost. How else would you do it?
Later, in the fashion businesses, I asked why we marked down at the end of the season and not through the year.
Why always 50% or 70%? I was treated as the foolish financial director.
A fashion retailer with £1bn of sales might forego 8% or 9% of revenue by markdowns - £80m is a big number. Yet we would rejoice when we saved £1,000. We chased gnats while the dinosaurs ran free.
If price is wrong by 10% on 10% of lines that is £10m. If markdown percentage is reduced by 1% that is another £10m. If your own-brand percentage is over 40%, what a prize. If you allocate over 50% of intake to stores… the prize from local markdown is huge.
Two variables that add nearly 20% to profits and economic value are priorities. It must take 20% of senior management’s time and 20% of the brain power of the boffins in-house but more time is spent on almost everything else. Why?
I guess we think retailers are traders. If they cannot price the product, what can they do? If they cannot judge what is necessary to move a slow seller, why are they not local government officers?
The answer is the complexity of the task in a 20,000-sku business and a lack of proven tools. Senior management fear anarchy if they relax simple rules.
“Intake margin must always be 54% … if it is, we stock it, if it is not we do not. Mess with that and you are on the road to ruin.” This was one chief executive I worked with - briefly.
I recently found a fellow believer, who is richer than when he was as an atheist. A Brazilian supermarketeer who has taken the plunge, saving more than 2% of gross margin.
Software called Profimetrics from Itim was being used. I liked the story and asked if I could invest. It makes sense to me. Retail is in a box. Volumes are static. All the key parameters are well managed. Costs have been micro-managed. Overseas sourcing is at high levels and we are threatened by any weakness in sterling.
More professionalism in pricing and in the allocation of promotional and clearance markdown is the last frontier: a 2% prize is the difference between happiness and misery.
- John Lovering, chairman, Maplin and Itim