Focus on Costs

Starting Points

• Set up your spreadsheet so that all multiple stores within the same chain are in adjacent columns

• Be sure you have a measure of size suitable for unit cost calculations.

• Calculate a column using ‘count’ so that you can identify the strongest brands—most stores carrying (begin with SKUs in this brand).

First Assumptions

• What are the gross margins for the strongest or “Type A” brands? Higher or lower than average?

• Conversely, why would a retailer choose to stock the third or fourth ranked “price brands”?

Appearance of “deals” in the category

• Use the minimum function to identify the lowest price on the items within the strongest brands—was this being sold on deal, or at a special price?

• A fair assumption is that the retail price is very close to the item’s invoice price, and the retailer is offering it a the low price due to trade and other promotional allowances or discounts.

Applying a initial margin estimate

• Using the Marsh Supermarket data, find the average gross margin for your category.

• Marsh is a large chain with it’s own warehouse system, it purchases direct, like a Kroger or other chain.

• Would Wal*Mart’s gross margin be higher or lower than a traditional grocery store chain? (Apply this estimate to all the minimum prices to produce an initial cost estimate.)

Estimating unit costs

• How much variation would retail buyers accept across a supplier’s SKUs within the same brand?

• Divide all the minimum prices within a supplier’s line by the sizes to determine the range of unit prices within the brand/line from a supplier.

Multiply these low unit prices by sizes for the various SKUs

• Find the lowest unit price and apply it across the supplier’s entire line

• How do the gross margin dollars compare across the SKUs? Do larger sizes provide a more gross margin dollars? If not, reevaluate.

Type “B” Brands

• What do the second tier or irregularly stocked, lower priced brands offer the retail buyer? How are they justified?

• Apply a unit cost to items in these brands’ SKUs that provides a superior gross margin than the “Type A” brands.

Put yourself in the role of a buyer

• Do the gross margin dollars found across a supplier’s line meet our assumptions—justify why the buyer added them to the assortment?

• Do the larger sizes provide higher gross margin dollars?

• Do “second tier” brands offer better gross margins than “Type A” brands?

• What’s an appropriate cost to apply to private label items?

Percent Gross Margins

• Use your final cost estimates to produce percent gross margins for each SKU at each retailer.

• Do the relative gross margins appear to be reasonable across the SKUs within the retailer’s line?– Duplicated SKUs have lower GM%– Unique SKUs have higher GM%

Variables from the store audit data:

• Depth: the number of SKUs at a retailer

• Facings (per SKU)

• Gross margin, dollar and percent per SKU

• Distribution intensity: Count for number of stores carrying the SKU

• Standard deviation on price

Using the Facings

• Inventory Estimate– Assume total packout—shelves are

completely filled.– #facings x SKU cost x constant (shelf depth)

• Share of Shelfspace:– Percent of facings per supplier/total facings

for the retailer (Done with SPSS)

Number of Facings

• What does the number of facings tell you about “service levels” and stock-outs?

• What is your expectation with item movement (unit sales), or penetration?

• What is your expectation with an item’s price, and gross margin?

Gross Margin Dollars ($)

• Larger sizes:

• Unique and less frequently stocked items:

• Private label items:

• Number of facings:

Assortment Depth

• Stores with deeper assortments will have _________ inventory costs.

• Stores with deeper assortments will have _________ revenues.

• Stores with deeper assortments will have _________ gross margin %s.

Strong Brands will have:

• Higher/lower distribution intensity?

• Higher/lower number of facings per SKU?

• Higher/lower shares of shelfspace?

• Higher/lower retailer gross margins?

DSD versus Distribution Center

• DSD items will have a higher/lower delivery cost per item?

• Items coming through a retailer’s distribution center have a higher/lower inventory cost?

• The role of the retail buyer (selfishly) is to make greater/lesser use of the retailer’s distribution center?

Private Labels versus National Brands

• Retailers risks are higher/lower with private labels?

• Inventory costs with private label items due to the EOQ model?

• Cost of switching stores (CSS) and Costs of switching brands (CSB), what’s the assumption with destocking a national brand?