Gross Margin Management

Gross margin basics:

Here is a definition of gross margin, from “Accounting Best Practices: Nurturing your income statement,” by Bruce Mayer, Peg Nolan, and Steve Wolfe (linked under Related Content at bottom of the present page):

The gross margin is the subtotal of sales less COGS [cost of goods sold]. It is also called the gross profit. Food co-ops record sales by department (such as produce and deli), and each department has its own target gross margin. In order to compute department margins accurately, you must ensure that your chart of accounts aligns department line items in each of three areas: sales, purchases, and inventory. So, if you want to calculate margins in 15 different departments, each with several subdepartments, you must have 15 account numbers with their subdepartments in each of those areas. 

In addition, bookkeeping practices and operational systems must support the accurate recording of entries in each of those areas to their appropriate department. Register sales have to be assigned to the correct department, invoices must be coded to the correct department, and inventory counts must be attributed to the correct department. Maintenance of margin systems and importantly, price-update systems, are imperative for achieving expected margins. 

For an introduction to departmental margins and contribution to overall margin, see the 1987 Cooperative Grocer article, “When the Price is Right,” by Rex Stewart, which is linked under Related Content at the bottom of the present page.

Managing Key Indicators and CoCoFiSt:

A useful review of basic margin management tools, “Managing Key Indicators: Guidelines for department managers,” by Mel Braverman, appeared in Cooperative Grocer in 2008 and is linked under Related Content at the bottom of the present page. Braverman and CDS Consulting Co-op also offer a Margin Management workshop.

            “Managing Key Indicators” is also the name of another resource offering more in-depth treatment of basic retail finance. It is available in an updated (2012) workbook from CGN and the National Cooperative Grocers Association, which has made “Managing Key Indicators” part of its Retail Basics 102 training program.   To purchase, visit:  http://www.cgn.coop/MANAGING KEY INDICATORS.

An extremely valuable and diverse set of tools for co-op managers and planners, CoCoFiSt (Common Cooperative Financial Statements) provides financial and operating data from participating food co-ops, enabling CoCoFiSt subscribers to see in detail how their co-op’s performance compares to outcomes at other co-ops.  CoCoFiSt services, a combination of online tools and in-person workshops, are offered through CDS Consulting Co-op (http://www.cdsconsulting.coop) and are a product of CoopMetrics, led by Walden Swanson and Kate Sumberg (http://www.coopmetrics.coop).

For an example of the kind of specialized management tools that the CoCoFiSt program supports, see a 2006 article by Mel Braverman, “Closing the Gap”; and a 2009 article by Mead Stone of River Market, “Chasing the Gap”.  Both these articles are linked below under Related Content.

Deli Margins  

Deli departments have special margin challenges.  A 2005 article by Allen Seidner, “A Smoother Road to Deli Margins,” is linked below under Related Content.

Meat department margins

For understanding meat department management and margin issues, below under Related Content is link to “Mind Your Meat,” the last of a 3-part series by Robert Duncan in Cooperative Grocer.

Weighted margin

In a listserv discussion about how to determine the “weighted” margin of different goods within a department, especially perishable department items with many different applied margins, John Eicholz of Franklin Community Co-op had these suggestions:

“The math way requires a separate line or calculation for each product group that differs in margin from the others.  Required data is cost, retail price and sales volume for each margin group.  You might have that data in your POS, which would make the reporting pretty easy.   There would be a lot of data, so keeping it current would be hard.  The math approach is essential in prepared foods, since there are multiple ingredients to each dish.  

“The other way is to wing it, using instinct and a flair for numbers to guide you.  Results using this method can vary and are hard to predict.   It is easy to forget that lowering prices on top sellers and raising them on fringe items does not balance out to neutral!  

“I think we practice the winging it approach within the departments, and we use the mathematical approach at the store level (in preparing budgets).  The way we have made it work is to keep raising overall pricing until we get the results we need, then offsetting reductions with increases in a coherent planned manner. So, we never really ‘determine the weighted applied margin’, just the achieved margin, to which we react.”

Store-wide margin and price perception

Comparisons of food co-ops with conventional grocery stores are not always reliable, yet the higher margins of natural/organic co-ops are often accompanied by customer perceptions of being high priced.  In a co-op listserv discussion (January 10, 2011), Rick Whitson commented on these issues:

“Conventional supermarket gross margins are not as high as the mid-30s to low 40s that many of our Co-ops achieve. But that really only matters in markets where conventional stores are carrying identical items to the Co-ops and doing so at lower prices. If they aren't squeezing our prices, who really cares what their margin is? For example, we are in a very competitive market for conventional grocers, with margins in the mid teens to low 20s. (I managed conventional for 17 years, so I know this to be true)--but we are significantly lower over all on identical items compared to all the conventional stores in town (Lawrence, KS).  

“Our Target Superstore and both Wal-Marts carry very few identical items, and the two HyVee stores aren't squeezing our margins because their sourcing of natural food lines currently runs through their Lomar warehouse instead of their conventional distribution center, causing their wholesale cost to inflate the retails. And the 4 Dillons stores (Kroger) just don't get it at all. 

“It is reasonable to think that all serious competitors will improve their sourcing and merchandising of natural foods as market demand continues to expand in what is clearly no longer a "niche" sector of grocery shoppers.  I don't know of a precedent where increased competition did not result in pressure on margins in ANY business.  Before this turns into an essay on pricing, (a long story, and even longer when I tell it) let me just say that we have to know what margin is needed to cover the labor expense plus all other expenses. That is the minimum margin needed to maintain operation. After that, every store has different reasons as to why its margin needs to be this or that.  

“Price for GROWTH. Know the elasticity of pricing for individual items and categories in your market. 

“More importantly--Do all the other things right that shoppers care about. --You will win people over to the Co-op difference!”

A related comment on variable pricing and margin (March 27, 2012) was contributed by Anne Hopkins of Good Foods Co-op:

“What we've found is not having strategic variable pricing, especially on certain price sensitive products, gives us too high a price image in the community.  

“We can't have our Organic Valley milk gallons be $2-3 a gallon more than anyone else in town because then that high price sticker shock plays out in customers' minds that everything in the store is expensive.  Certain items, like milk, butter, bananas, etc., have to be pretty close to other stores' prices for us to keep a decent price image.  The margin is made up on other, less price sensitive, products.”

 

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