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Focus on Costs

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.

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Focus on Costs

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  1. Focus on Costs

  2. 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).

  3. 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”?

  4. 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.

  5. 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.)

  6. 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.

  7. 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.

  8. 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.

  9. 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?

  10. 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%

  11. 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

  12. 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)

  13. 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?

  14. Gross Margin Dollars ($) • Larger sizes: • Unique and less frequently stocked items: • Private label items: • Number of facings:

  15. 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.

  16. 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?

  17. 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?

  18. 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?

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