Looking at financial information from LGCs (Local Garden Centers) and talking through the mysteries of the past year’s performance is a January pastime for us. Each year has its own “fingerprint” based on weather, economy and customer attitudes, but one thing is becoming quite clear after 5 years of recession:
Making a “decent” profit is harder for some than it is for others selling the same products in the same market. Some operators have had a very good twelve months, others have struggled and some have failed. Darwinism is at work in the LGC channel of the retail garden business!
What is a “decent” profit?
Great question! Many large corporate retailers are living on a net profit (aka ‘net margin’ on Wall St) as a percentage of sales in the 2-3% range (liquor and grocery stores) to 7% (apparel). Really, so low? Yes, what you lose in the percentages as you grow in size, “you’ll make it up in volume,” as they say.
So, a small volume company (compared to Kroger or Abercrombie) that wants to end up with a higher net margin, needs a high gross margin – correct? Not necessarily: it depends on what your operational costs, labor and occupancy costs are.
The downside of using high mark-ups to get a high gross margin across the board is that the consumer will think you are gouging them and the stuff will just sit there, slowly deteriorating. Nothing improves its quality sitting on the shelf in retail!
Can LGCs thrive on a gross margin below 50%? Absolutely, and most local hardware stores have done so for years. Success is measured by the bottom line more than the top line.
One simple word
So, naturally when I saw a client taking their gross margin (as a percentage of sales) up by over 4 points (43% to 47%) in a single year (in a year and region where spring waited until it was almost too late), I had to ask the reasons. The owner’s answer was one word: “Discipline.”
He said, “We worked by a set of numbers. We lived to a pre-determined spreadsheet of targets showing everything from average ticket to gross margin per labor hour.”
“We knew that to hit this number, we had to do that,” and “if X happened, we were ready for it with Y.”
Specifically, they aimed for a higher gross margin by buying less in at one time (mostly in plant material) and turning it more quickly by better operations, merchandising and marketing. They then had the cash to replace it more frequently with fresher and more impulsive product. They offered volume buys to turn even more product and had very little left for that depressing end-of-season give-away in the fall.
“The data was tracked closely by the POS, and our managers, buyers and team members all knew what was expected of them. We had frequent updates and problem-solving meetings, invested in training/coaching and leadership. Everyone – customers, staff and suppliers – loved it!”
The end result? With a flat customer count, fewer labor hours but the same labor dollars (ie more money for less people), sales were up by 4% over 2013 but the gross margin dollars increased by 14.5%! Ka-Ching!
Now wouldn’t that make a great New Year’s Resolution! Volunteers anyone?
How did your net profit margin fare in 2014? Let’s hear your numbers, sharing is caring!