At SKUFood we are all about helping suppliers create great working relationships with retailers and distributors. Part of building trust is speaking the same language. We will continue to define food and beverage industry terms in 2023. Cents per unit profit is the amount of money a retailer or distributor generates, when one unit of the product is sold.
Unfortunately, cents per unit profit does not get enough focus from retailers. They are much more likely to price products to deliver the category margin than they are to really maximize the cents per unit profit.
Retailers and distributors are focused on gross margin percentages
Retailers and distributors are managing thousands of SKUS and gross margin percentage is their solution to set retail prices that will cover their operating costs. They have gross margin targets that are set during the budgeting process. Retailers start with a sales forecast and then apply margins by department, to ensure they will cover all costs and deliver a profit.
Merchandising teams spend a lot of time on retail pricing. They have to keep their stores competitive and meet or exceed gross margin targets. This is not an easy task, trust me! There were periods (most retailers operate on 4 x 13 week periods) where our departments missed our gross margin and it is not enjoyable. We might have over invested in an ad, or perhaps one of our competitors reduced a retail price on an item we had to match. If we did not react and make more profit on other items, we would miss our gross margin budget. Gross margin percentage is the management tool, but it was explained early on during my time at Loblaw, ‘we take dollars to the bank.’
Premium and higher margin products generate more cents per unit
Sometimes it is lost on your customers, the retailers, that premium products and higher margin items deliver more profit. They focus on the percentage not the dollars. It is safer to do this, but it does not always maximize the dollars they take to the bank. Sometimes they need to be reminded.
If a premium item has a retail price of $7.99 and delivers a 30% gross margin the retailer generates $2.40 per unit every time they sell the product. If another item in the category has a retail price of 5.99 and delivers the same 30% margin, they generate $1.80 for every unit they sell.
If you are selling a premium priced product, that delivers the category margin, you should remind your customer every time they sell your product, they take more dollars to the bank. This should lead to more opportunities and sales growth.
Retailers are reluctant to reduce margin percentage and drive dollars
If we take the same example and your customer reduces the retail to 7.79 for the premium product, the gross margin percentage declines to 28% and the retailer generates $2.20 per unit. It takes the same shelf space, the same labour to merchandise the products and the same resources at the front end to sell both products, but the retailer makes $0.42 more on the item priced at 7.79.
The reality is, most retailers will be very reluctant to reduce the retail, even though they would take more dollars to the bank. This can be frustrating. The challenge for the retailer is they are measured on gross margin percentage and that is what they manage to.
At the end of the period, when they are analyzing results the category margin percentage is the focus. My experience was even if we delivered the gross margin dollars in our budget, but our percentage was off, it was not a pleasant conversation. The assumption was that we left dollars on the table.
How suppliers can get retailers to focus on cents per unit profit
I do believe this starts from the first time you present an item to a retailer. You need to plant the seed that the item sells at a premium in the category and they make more every time they sell it. You need to reinforce this every chance you get so it becomes entrenched in your category manager’s mind. Think of the work you do to build your brand with consumers. When category managers think about your product, you need them to be thinking “we make more $$ on that item”.
Remind them in a positive way. Don’t approach it from the perspective they don’t understand or that they are missing the point. The reality is they are judged on gross margin percentage.
When you invest with in-store programs, look at the retails of other items in the category. You might not know the cost, but you can assume the retailer is making the category margin. Compare the cents per unit profit on the lower priced item at regular retail, to the cents per unit profit on your item when it is reduced.
If we return to the previous example, look at the math with a .50 in-store special on the premium item. We can still deliver more cents per unit profit at 7.49 than the 5.99 product at the 30% category margin. Depending on your relationship with your customer you might be able to have this conversation with them. Obviously, they like it when you support the in-store special, but it might sink in that if they reduced the retail to 7.49 they might sell more and deliver more dollars to the bank. If they were willing to reduce the retail to 7.49 and you did the .50 in store you might really sell more!
These things do not always happen the first time it is brought up. Sometimes you need to let them think of it as their idea. This can be frustrating but eventually, you might get what you want.
If you have any questions about cents per unit profit, you can always send me an email peter@skufood.com or call me at (902) 489-2900.
Peter
FCC Food and Beverage highlights processor margins
Recently FCC released the food and beverage industry report. It is great to have all of this information for suppliers in our industry. A valuable component of the report is the information related to processor margins. This is a great benchmark ro suppliers to use.
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