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DISTINGUISHING MARGIN VS. PROFIT

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And why it matters as you consider adding and dropping store brand products, and measuring what really matters in your competitive fight. 

What margin do you expect from your store brand?”

I’ve been asked a thousand times, but I’ve never had a one-size-fits-all answer. And you shouldn’t, either. 

First, not all store brands are created equal. They vary by quality, tier, go-to-market strategy, targeted demographic, pricing, competition, packaging and plenty more. Sure, you can come up with an average margin for all private label across a department or even an entire chain, but that doesn’t help you if you’re down in the trenches at SKU level.  

NEVER A FAN OF MARGIN

To be honest, I was never a fan of margin. Rather than anything else, I always started by making sure the new store brand item cost me less — and could retail for less — than the targeted national brand. Then I established that the item could have a margin greater than both the national brand and the category average. 

But here’s where things get a little dicey. I’ve always felt that benchmarking an item on its profit and volume is a much better way to score an item’s performance than “margin.” I sat through too many presentations where I was told “…and I got a better cost and maintained my margin.” That’s great, but I’d have to ask, “What did it do to your sales and, ultimately, your profit?” When all is said and done, count your net dollars. That’s what you take to the bank, not “margin!” 

Once you have determined the profitability at item level, see how that rolls up to the category level. What’s the category SKU count (national brands and store brands)? What’s your competition’s estimated margins in the category? (We once had a competitor who sold a whole category at cost — no margin whatever. Go figure.) How does the category match up to the expected budgeted margin? At this point, a buyer will need some guidance from senior management on what he or she will be needing to contribute to the total mix. 

‘When all is said and done, count your net dollars. That’s what you take to the bank, not ‘margin!’

Now comes the fun part. Ask all the same questions about the category, but get separate answers for the national brands only. First off, let’s assume your national brands’ costs and retail are higher than your store brands’, but lower than your competition’s. And now let’s say that management blends national brands and store brands for all the categories, using volume to get to the final number. Then, and only then, will you be able to tell if the item/category is pulling its weight and contributing to sales and profits.  

Most buyers should have established margin, profit and sales goals that management has assigned to them. Taking these benchmarks and working with your pricing department will quickly show you which items, brands and categories are performing — or not. 

And what if they’re not performing? Sometimes there will be little you can do in a competitive situation. Try having a heart-to-heart meeting with the manufacturer, asking them why others are selling their products for such cheap prices. Doing this can be not only helpful, but eye-opening. 

Don’t give up easily, or fall for the manufacturer’s “I don’t set their retails” line. No, they don’t set shelf prices but they do control cost, advertising money, slotting allowances and a whole list of other funds. Discussions can get really interesting on the manufacturer’s SKU counts and new items at stores you compete with. This will depend on who your retail competitor is, what their volume is and how they affect the manufacturer’s P&L. Try telling the manufacturer that you know how your own stores perform across a wide number of categories. And ask how your company’s performance compares with their other customers (your competitors). You may or may not like the answer, but once you have it, it will allow you to determine your next step on improving your results. 

So far, we’ve focused on margins, profit and new items. But let’s move on to what happens when your store brand item may have reached the end of its profitable life. To guide yourself, consider the data you put in place when the item was added to your store brand line. And before you make the cut, consider that you, your company and the manufacturer have put a lot into the product. How will this affect the shopper who buys your brand? Do your homework, and then act — one way or the other. 

Let me just mention here that the old “one-in, one-out” philosophy is often short-sighted and doesn’t help the category’s sales, margin or profit. A brief check-in or meeting with senior management may be wise. For example, let’s say your data shows the SKU you want to cut is no longer adding to the category. And let’s say the category is growing and in need of more space to add incremental sales and profits. This is a great time to ask for more space. But if you find the opposite — where category sales and profits are down — you must also point this out for the good of all. If nothing else, it will enhance your reputation as a team player. 

NO SIMPLE ANSWER

As you can see, there’s never a simple answer about margins, or adding new items and deleting others. Buying is hard work. It takes time, experience and the ability to understand data. It’s also critical to understand your customers’ needs and manufacturers’ abilities. As I said earlier, not all store brands are created equal. It’s your responsibility to make sure that all your items pull their fair share and that your categories can be counted on to deliver sales and profits. 

Just sayin’. n

Bob Anderson is the retired vp/general merchandise manager at Walmart, where he worked for 17 years. He can be reached at bob.sue@sbcglobal.net. 

Bob Anderson

Bob Anderson

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