One of the frustrations I see for food producers and processors most often is the gross margin retailers are making on their items. It is understandable to be frustrated when you go in the store and see your product with a 45% gross margin when your profit is less than 5%.
That is a big gap and a challenge for many suppliers.
It might be easier to accept if you understand the figures that require the 45% gross profit. There is an explanation and when all the money is counted, most retailers are only generating a bottom line of 2-3%. Yes they do huge volume so the 2-3% can add up to a lot of dollars, but there is a slim line between profit and loss.
This is not a former retailer defending them. Personally I find things easier to accept when I understand them. The reality is that you or I will not change the gross margin they expect to make in categories. Although we should always work to get the best cost and the right retail they will not change their margin targets for us.
When you see the gross margin being added to your products stop for a moment to consider the cost structure they support.
It starts in the department you are listed in. If it is a fresh department there is more labour, refrigeration and (depending on the store) expensive fixtures and lights to display your products. They also put signage up to help consumers buy and change prices regularly in the store. All of this adds up to a cost that they absorb within this gross profit and they call this department contribution.
Next they have to pay for the store. This includes store management, the building, the utilities, the taxes and all of the staff that are not associated to a specific department like cashiers, community rooms and security.
Finally they have to pay for the office, the warehouse and other support functions. You could argue their office space is too fancy or that they have too many people. You might be right, but again I am not sure they will listen to you or me on that one.
When you add up the costs of running the department, the store and the rest of the business they are left with 2-3%.
If you want the details about how they set retails based on department gross margin, the importance of managing contribution and how they end up at their bottom line join us for our Recipe for Success presented by FCC on Wednesday October 14 at 2pm Atlantic (1pm eastern).
Last week we shared how mark up and gross margin are calculated. They are important to understand and can make a big difference in your business.
If you missed our SKUFood Recipe for Success presented by FCC last week you can view the replay here.
October Recipes for Success, presented by FCC
It is exhilarating to produce products and figure out how to get them to market successfully. It can be a challenge to focus on the numbers but that is how you generate the best return for all of your hard work. When you understand the numbers that you control and that are out of control, you have a much better opportunity to deliver the best results.
October 14- Retail pricing, gross margin and contribution margin are all metrics retailers focus on. Each of these calculations impact producers and processors. It is important to understand your customer’s expectations and how you fit in their plans. Suppliers cannot set retails or margins but when you understand them, you can predict the impact on your products. We will explore these numbers in different departments across the store.
October 21- Unfortunately, we have trained consumers in food and beverage to look for items on temporary price reduction (TPR). Your customers expect you to offer discounts to support their TPR programs. Suppliers must build this into their marketing and sales plan to compete in today’s retail environment. When you understand how much to discount your price and what the results will be, you can build a much more effective plan. We will also illustrate how much you have to sell to make it all back.
October 28- There are many costs associated with producing great food and beverage products. You need to understand every cost right through until your product goes into the consumer’s shopping cart. We will explore some of the costs you incur after production such as brokers and distributors. There are many options and you should consider them all before you find the right solution for your products that will maximize sales and profits.
We hope you enjoy Thanksgiving weekend and that your sales leading up to this key selling time were prosperous.
At SKUFood we understand it is important to give back. We have the ability to share insights and information you can use in your food business right away. If we were able to get in the same room for an event you would hear me say, “Success in the food industry is not just about making great products to sell; it is about selling the great products you make.” Communicating with your customers in these challenging times is an example of this.
If you want to talk about the numbers or need some advice just send me an email at Peter@SKUFood.com or give me a call at (902) 489-2900.