Page 83 - DMGT553_RETAIL_STORE_MANAGEMENT

Retail Store Management

Notes make a pre-tax profit of between 2% and 8% of sales; only in rare cases do their pretax
profits exceed 10%.
Let’s assume that your pre-tax profit is 5% of sales. Now, if you can cut the cost of your
purchases so your margin increases by 2%, for example, by paying $6.00 for an item you
sell for $10.00 instead of paying $6.25, that extra $0.25 drops to your bottom line. That
means that your pre-tax profit increases from $0.50 to $0.75—a whopping 50% increase in
your profits!

If you can make a 2.5% improvement on all the cost of all merchandise you sell, and your
annual sales are $1,000,000, then your pre-tax profit would rise from $50,000 to $75,000.
Not bad! Certainly worth pushing your suppliers to give you some price breaks. Because
there are no additional expenses, that extra $0.25 drops to your bottom line and you make
$0.50 for every $10.00 of merchandise you sell.
Manufacturers suggested retail. Although this is only a guideline, it gives you a sense of
the worth of products. If you are a discounter, this also allows you to prove to your
customers how much you have cut your price.
Handling and selling costs. Products can vary dramatically in what they cost to sell. Some
products (like glassware) break easily so customers or sales people are likely to damage
a certain percentage of the stock. Certain goods have a tendency to disappear because of
shoplifting (electronics). Others are extremely heavy or awkward to move from the
warehouse to the selling floor, so the freight and handling costs may be high. Some may
be shipped from across the street while others may be coming from across the country, so
transportation costs need to be considered. Some goods may come in pre-ticketed while
others require a lot of handling and ticketing in the store, adding to your cost. Some goods
tend to have a high return rate. All these costs need to be factored into the product’s retail
price. A brittle, faddy, easily stolen article with a 60% margin may actually be less profitable
than a solid “evergreen” product with a 40% margin.

Nature of the goods. If you are dealing in fad- or fashion-oriented merchandise (which
includes everything from fashions themselves to cosmetics to toys to novelties that come
and go—remember the Pet Rock?), know what an item’s likely shelf life is. How will the
manufacturer help with markdowns? These, too, are factors you need to consider when
thinking through how to price merchandise and how much initial margin to achieve.

Correlation among departments. For instance, infant clothing should not be selling higher
than boys and girls clothing.

Demand and supply of goods. If you have the exclusive distribution of a hot item, you can
usually squeeze out additional margin. If there is a high demand but short supply, and
you find there is little price resistance for an item, you can get additional margin there as
well.

5.2.2 How to Increase Your Margin?

There are several different tactics you can use to help increase your margin while at the same
time not changing the customer’s experience in the store:

Import Merchandise
It sounds complicated at first glance. However, importing merchandise can take on several
different phases as your store grows. You may want to start off small, dealing with an importer
using his label on the products.

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