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Increasing Margin (or A Tale of Two Bookstores) BEA 2005 NEW YORK, NEW YORK June, 2005

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ABACUS ABACUS is an initiative to create a benchmark for the measurement of independent bookstore operations. The numbers generated by the ABACUS study were used to create… Prologue

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THE 2% SOLUTION Discussed an achievable means of moving from negative profitability (loss) to positive profitability (a gain) Isolated the prime movers affecting profitability Suggested that progress comes one small step at a time Prologue

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THE 2% SOLUTION Sales Margin Compensation Occupancy Today we’re focusing on Margin Identifies four prime factors on which to concentrate: Prologue

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The 2% Solution - Combining All Three Strategies Prologue

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Gross Margin and Cost of Goods What is Gross Margin? Gross margin (or gross profit %) = sales minus cost of goods sold What is Cost of Goods? Components of cost of goods sold: -Purchases -Freight in -Early payment discounts taken -Inventory Shrinkage Prologue

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A Tale of Two Bookstores Store B has a gross margin more than 2% higher than store A Achieved through: Lower cost of purchases Lower freight cost Reducing inventory shrinkage Taking early payment (cash) discounts Prologue

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Strategies for increasing gross margin 1.Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts 2.Reduce freight costs 3.Take cash discounts 4.Reduce inventory shrinkage

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Strategies for increasing gross margin 1.Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts 2.Reduce freight costs 3.Take cash discounts 4.Reduce inventory shrinkage

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Replacing 10% of book sales with sales of other, higher margin merchandise significantly increases margin Sales Books 43% 1,500,000 100% 43% Other Mdse. 0%0 Total Increase in gross margin = $10,500, or 0.70% Bookstore A 100% of sales are books with an average margin of 43%. Bookstore B 90% of sales are in books with an average margin of 43%. 10% of sales are in other merchandise with an average margin of 50% Purchase Discount Cost Retail Avg. Margin 855,000 % of Sales 0 43% 1,350,000 90% 43% 10%75,000 Purchase Discount Cost Retail Avg. Margin 769,500 % of Sales 150,000 50% 855,0001,500,000 50% 43%844,5001,500,00043.7% Reduce cost of purchases…Bring in higher margin merchandise (1 of 6)

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Examples of higher margin merchandise: Remainders Sidelines and gift items Calendars Used books Differences between trade book inventory and higher margin inventory: Higher discounts, non-returnable Usually net priced—you set the retail price Need to plan for sell-through and markdowns in pricing Freight can be a killer Need to carefully budget buying and allocate space Requires more display planning and maintenance than books Reduce cost of purchases…Bring in higher margin merchandise Things to Remember (2 of 6)

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To maintain a 50% margin on non-book merchandise, you need to price it correctly 100% mark-up (Double the cost) 110% mark-up (Double the cost +10%) 125% mark-up ( Double the cost +25%) 1. Merchandise purchases at cost$75,000 2. Mark-up100%110%125% 3. Retail value of inventory$150,000$157,500$168,750 4. Sell through90% 5. Full price sales$135,000$141,750$151,875 6. Gross profit$60,000$66,750$76,875 7. Margin44.44%47.01%50.62% Of course, you have to price merchandise at what the market will bear, and this scenario doesn’t account for the remaining inventory… Reduce cost of purchases…Bring in higher margin merchandise (3 of 6)

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By marking down remaining inventory (to move it out the door), you can increase margin even more 110% mark-up, no mark-downs 110% mark-up, mark-downs at cost 110% mark-up, mark-downs above cost 1. Merchandise purchases at cost$75,000 2. Mark-up110% 3. Retail value of inventory$157,500 4. Sell through90% 5. Full price sales$141,750 6. Gross profit on full price sales$66,750 7. Margin (so far)47.01% 8. Remaining inventory at cost$7,500 9. Markdown sales$0$7,500$10,000 10. Total sales$141,750$149,250$151,750 11. Final gross profit$66,750$74,250$76,750 12. Final margin47.01% 49.75%50.58% Reduce cost of purchases…Bring in higher margin merchandise (4 of 6)

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To maintain your margin, build freight into the selling price Freight costs NOT included in mark up Freight costs included in mark-up 1. Merchandise purchases at cost$75,000 2. Freight @ 5% of merchandise cost$3,750 3. Total cost including freight$78,750 4. Mark-up100% 5. "Retail value" of inventory$150,000$157,500 6. Sell through100% 7. Sales$150,000$157,500 8. Gross profit$71,250$78,750 9. Margin47.50%50.00% Reduce cost of purchasesReduce cost of purchases…Bring in higher margin merchandise (5 of 6)

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Increasing Gross Margin and Gross Profit How much have we saved so far? (6 of 6) Reduce cost of purchases…Bring in higher margin merchandise

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Strategies for increasing gross margin 1.Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts 2.Reduce freight costs 3.Take cash discounts 4.Reduce inventory shrinkage Reduce cost of purchases

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Strategies 1.Buy more direct from publishers (when appropriate) 2.Plan ordering to maximize discounts 3.Take advantage of stock offers 4.Order electronically to receive (or not lose) EDI discounts Reduce cost of purchases…Increase purchasing discounts (1 of 20)

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Buy More Directly from Publishers Converting 10% of your wholesaler purchases to publisher purchases can significantly increase gross margin Reduce cost of purchases…Increase purchasing discounts (2 of 20)

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Buy More Directly from Publishers Order from the wholesaler only what you need right away Pay attention to wholesaler discount breaks Plan ahead when ordering from publishers to reduce your reliance on wholesalers Decrease publisher lead times by using electronic ordering Reduce cost of purchasesReduce cost of purchases…Increase purchasing discounts Cut wholesaler purchases by splitting ordering between wholesalers and publishers (3 of 20)

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Some Pros and Cons of Buying Direct Pros Higher discount Generally more favorable payment terms Generally more generous co-op terms Easier to access co-op Cons Less frequent shipments More shipments and more paperwork (which means more payroll) Much higher error/damage rate More time spent following up on problems (even more payroll) Reduce cost of purchases…Increase purchasing discounts (4 of 20)

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Plan Ordering to Maximize Discounts Adding 0.25% to average discount results in a significant difference in gross margin Reduce cost of purchases…Increase purchasing discounts (5 of 20)

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Plan Ordering to Maximize Discounts In a flat discount environment, just-in-time inventory principles should be applied But, for orders from smaller publishers that have “tiered” discount schedules, it can pay to plan ordering to maximize discount Reduce cost of purchases…Increase purchasing discounts (6 of 20)

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Plan Ordering to Maximize Discounts Maximize discounts from wholesalers by rounding order quantities up and down Maximize discounts from publishers by: 1.Decreasing ordering frequency 2.Using slower-turning or seasonal titles to boost discount on periodic or seasonal orders Reduce cost of purchases…Increase purchasing discounts (7 of 20)

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Rounding Orders Wholesaler discount schedulePrinciples to Apply: Number of copies:1. Round quantities up or down to the nearest discount break point 1 = 40%2. Reduce twos to ones where possible 5 = 41% 10 = 42% Bookstore ABookstore B 100 = 43% Order not maximized for discountOrder maximized for discount RETAIL PRICEQTYDISCOUNT EXTENDED RETAIL $ EXTENDED COST $QTYDISCOUNT EXTENDED RETAIL $ EXTENDED COST $ $14.00841%112.0066.081042%140.0081.20 $26.00440%104.0061.36541%130.0076.70 $7.991842%143.8283.421042%79.9046.34 $27.95240%55.9033.54140%27.9516.77 $13.95240%27.9016.74140%13.958.37 $28.95440%115.8069.48541%144.7585.40 $15.951242%191.40111.011042%159.5092.51 $12.959042%1,165.50675.9910043%1,295.00738.15 TOTALS140$1,916$1,118142$1,991$1,145 Average discount =41.68%Average discount =42.47% Bookseller of Kabul London Bridges Reading Lolita in Tehran I Am Charlotte Simmons Short History of Nearly Everything Kite Runner Plot Against America Angels & Demons TITLE Maximize discount from wholesalers by rounding order quantities up or down Reduce cost of purchases…Increase purchasing discounts (8 of 20)

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Decrease Frequency Maximize discount from publishers by decreasing order frequency Reduce cost of purchases…Increase purchasing discounts (9 of 20)

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Buy Slower-Turning Titles Intelligently Identify titles that you only want to stock periodically -Slow-turning titles that don’t sell often enough to always keep in stock -Seasonal titles that you only want to stock at certain times Create a “holding file” to keep orders for slow-turning or seasonal titles, or flag the titles in your computer to create a list on demand When you have enough quantity (combined with your regular order) to reach the desired discount, place a periodic or seasonal order Maximize discounts from publishers by using slow-turning or seasonal titles to boost discount on periodic or seasonal orders Reduce cost of purchases…Increase purchasing discounts (10 of 20)

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Use slower-turning/seasonal titles to boost discount on periodic/seasonal orders Reduce cost of purchases…Increase purchasing discounts Buy Slower-Turning Titles Intelligently (11 of 20)

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Buy Slower-Turning Titles Intelligently Ordering not planned for discount Reduce cost of purchases…Increase purchasing discounts (12 of 20)

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Buy Slower-Turning Titles Intelligently Publisher discount schedule Number of units:1=40% 25=47% Regular monthly orders Periodic/seasonal ordersTotal orders Number of orders placed each year8412 Average order quantity103018 Average order value at retail$180$540$300 Total purchases for the year: Retail$1,440$2,160$3,600 Cost$864$1,145$2,009 Average discount40.00%47.00%44.20% Ordering planned for discount… Placing just four periodic/seasonal orders a year increases average discount Reduce cost of purchases…Increase purchasing discounts (13 of 20)

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Take Advantage of Stock Offers Using stock offers on 10% of publisher purchases makes a difference to gross margin Reduce cost of purchases…Increase purchasing discounts (14 of 20)

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Take Advantage of Stock Offers Buy only what you would normally buy, but place your usual order using the stock offer Increase the size of your usual order to get an added benefit from the extra discount Accumulate orders for slower-turning or seasonal titles, and place an order when a stock offer becomes available Reduce cost of purchases…Increase purchasing discounts (15 of 20) Strategies

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Take Advantage of Stock Offers Reduce cost of purchases…Increase purchasing discounts The effect of stock offers on average discount (16 of 20)

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Evaluate all variables when planning ordering If you hold orders, what is the cost in lost sales? If you take advantage of stock offers, how does that affect your inventory turns and accounts payable? What are the additional payroll costs of adding complexity to your ordering cycle? What are the opportunity costs (time spent planning buying that could be spent on something else)? Reduce cost of purchases…Increase purchasing discounts (17 of 20)

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Electronic Ordering Discounts Receiving EDI discounts on 10% of publisher purchases impacts gross margin Reduce cost of purchases…Increase purchasing discounts (18 of 20)

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Electronic Ordering Discounts Extra discount The publisher receives your order sooner You know the order has been received You save on time, fax and paper costs, etc. Less chance for human error Advantages of ordering electronically Reduce cost of purchases…Increase purchasing discounts (19 of 20)

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Increasing Gross Margin and Gross Profit How much have we saved so far? Reduce cost of purchases…Increase purchasing discounts (20 of 20)

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Strategies for increasing gross margin 1.Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts 2.Reduce freight costs 3.Take cash discounts 4.Reduce inventory shrinkage

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What is free Freight? Freight is never free. Somewhere, someone is paying for shipping. It has long been the contention of the independent bookselling community that freight should be paid by the people who control the means by which products are shipped. In other words, the publishers and wholesalers. But it sounds nice… so we’ll use the term “Free freight.” Reduce freight costs (1 of 7)

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Increase Free Freight Shipments Reduce freight costs Moving 10% more purchases to free freight makes a significant difference to gross margin (2 of 7)

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Freight Costs and Margin With average freight costs of 5% of net, you need an average discount of 43% just to maintain a 40% margin Reduce freight costs (3 of 7)

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Meeting Free Freight Minimums Hold orders until they qualify for free freight Reduce freight costs (4 of 7)

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Freight Costs and Small Shipments With freight costs of $5 per shipment, you need $100 worth of books and a 45% discount just to maintain a 40% margin Reduce freight costs (5 of 7)

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Vendor of Record Programs Benefits of vendor of record programs Consolidated shipments Less paperwork Faster, more reliable shipping Usually less damages and errors than with shipments from publishers Disadvantages of Vendor of Record Programs You often have to pay the wholesaler sooner than the publisher Wholesaler discounts are often lower than publisher discounts Sometimes the wholesaler doesn’t carry the book you want Reduce freight costs (6 of 7)

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Increasing Gross Margin and Gross Profit How much have we saved so far? Reduce freight costs (7 of 7)

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Strategies for increasing gross margin 1.Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts 2.Reduce freight costs 3.Take cash discounts 4.Reduce inventory shrinkage

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The Value of Cash Discounts Take cash discounts Paying in time to receive cash discounts significantly increases gross margin (1 of 5)

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Cash Discount and “Effective Discount” Compare effective discount with publisher discount to decide if you are better off ordering through a wholesaler Take cash discounts (2 of 5)

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The value of cash discounts versus the cost of borrowing Take cash discounts (3 of 5)

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Publisher vs. Wholesaler Terms Wholesaler B, with free freight and a 2% cash discount, is a better deal than Publisher B, even though Publisher B’s base discount is three points higher. Take cash discounts (4 of 5)

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Publisher vs. Wholesaler Terms Take cash discounts Factoring in the value of payment terms (5 of 5)

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Strategies for increasing gross margin 1.Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts 2.Reduce freight costs 3.Take cash discounts 4.Reduce inventory shrinkage

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Reduce inventory shrinkage (1 of 2)

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Reduce inventory shrinkage Train staff in security procedures Change store layout to deter theft Take steps to reduce employee theft Prosecute thieves Use security systems (cameras, security gates) Reduce inventory shrinkage (2 of 2)

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Increasing Gross Margin and Gross Profit (or A Tale of Two Bookstores) So how much did we save overall?

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Other Ways to Increase Gross Margin Reduce freight-out by cutting returns Buy non-returnable Examine pricing and discounting policies Reduce sales of low margin merchandise Follow up on credits not received from publishers

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Increasing Margin (or A Tale of Two Bookstores) Thanks for Listening!

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