There are many costs that come with running a retail business. We refer to these as the hidden costs in retailing. For those not experienced with retailing, the expenditure involved in getting a product from a manufacturer or producer, onto retail shelves and into the consumers home are both complex and often not obvious.
Gross and Net Profit
Gross and Net profit are the primary financial metrics suppliers focus on. These are the most discussed and therefore visible financial metrics at the negotiation table and in commercial discussions.
Gross and Net Margin
The Gross Margin (GM) is often the starting point for retailers and a key driver within their business, while Net Margin (NM) is typically the summary of all supplier investments into retailers.
Operating costs are what retailers manage and deduct from their Net Margin to deliver their Net Profit position. These costs are often hidden to suppliers, though are critical to consider when looking at the revenue and profit margins of a retailer. These costs eat into large chunks of overall revenue and in turn profit.
Cost of Goods Sold (COGS)
Typically, the main costs to any retailer are Cost of Goods Sold (COGS), Wages and Rent. While COGS is typically the greatest cost value to a retailer, they need staff to manage their operations (Wages). For Bricks and Mortar retailers (I.e. Physical stores) rent is the other major cost as retailers need to display and store their products.
In the current high inflation market wage pressures and rental increases are placing added pressure on retailers to manage their costs. If these costs are not aggressively managed by retailers the result is foreclosure of stores and reductions in staff numbers.
Other operating costs retailers must manage every day include inventory levels, product depreciation and write offs, distribution centre operation, head office, advertising, promotions, security, accounting, bank fees, insurances, license, or franchise fees and many more. Once accounted for, these expenses bring the profit margin down to a Net Profit (NP) position.
Understanding the costs incurred by your retail customers is a critical step in understand their challenges to identify opportunities for you to work more closely with them. Examples of commercial discussions because of possessing a detailed understanding of a retailer costs include:
- Merchandising support for product layout implementations. This can reduce retailer wages and presents you with the chance to influence your brands presence in store.
- Stock replenishment resources and robust forecasts. This can reduce a retailers supply chain wages, as well as assisting with cost controls on inventory levels (remember this is their biggest cost). Working collaboratively on inventory management also ensures you manage your inventory pipeline, product quality, and freshness.
- Optimising case, layer and pallet counts for your product range to drive supply chain and merchandising efficiencies for your customer while optimising your own manufacturing costs.
As suppliers you have a responsibility to consider and factor retailer costs into your thinking in a way that also benefits you and deliver a benefit to the retailer to give your business a competitive edge.