12 Jul Start From Where You Are
“What do you mean, you don’t know what your average gross margin is?” Geoff, my partner here at New Normal Consulting, was incredulous.
“I know what we spend on inventory, and I know what we earn as a gross dollar figure, and annually there’s about a 35% gap in between these two figures, generally.” I wanted to go on and explain why it had never mattered, but I let the statement stand. I knew that Geoff would draw the rest out of me, anyway.
On cue, Geoff said: “How can you run a business that way?” Geoff almost always gets right to the point.
“Well,” I said,”Boulders’ pro shop is not the business.” I continued: “At a climbing gym, people pay us to come in and breathe our air, touch our walls, and hang out with their friends and family. If they buy something, it’s a bonus. As long as we’re not losing money – and we aren’t – the pro shop is not how we pay rent and payroll, or keep the lights on.”
“Okay,” said Geoff, drawing out the long A like he was still thinking over whether this made any sense to him, at all. In fact, I’m sure it didn’t. You can take the merchant out of the shop, but you can’t take the merchant out of the man. What I said goes against almost everything that makes Geoff who he is. He then said,”Well, let’s start from where you are. We’ll look at your product categories, first…”
“Okay,” I said, drawing out the long A like someone does when they’re embarrassed in advance of what they know will come next. “I’ll get those to you. I’m pretty sure we can get those to you. I’ll ask…”
So I asked. It turns out that we had 27 categories of goods sold in the pro shop. Among these many categories, we had both “lanterns” and “headlamps,” “literature” and “books,” and “MISC” and “Pro Shop.” One whole category was for “stickers,” which is not to be confused with “tape.” Harnesses were distributed both in “sewn goods,” and in “harnesses.” Climbing hardware could be in “hardware,” or in “protection.” And – as ugly as it was – that’s where we were…
Geoff bit his tongue, and said: “For a business of your size, I would suggest no more than ten product categories. Here’s what makes sense to me…” He supplied a list, and we dutifully changed our database to reflect Geoff’s suggestions. It wasn’t long after that we could start generating meaningful reports. Under Geoff’s direction, we spooled out a few, and gave the data back to him.
“I’ll get back with you,” Geoff said. After not too long, he did. Here’s what we found out:
First, our margins are a bit better than I thought. Though they vary by category, our average overall margin is 37%. Most retail stores target 40 to 45% maintained gross margin, so considering we don’t keep the lights on by selling stuff, this is pretty healthy.
We are also selling more goods than expected. I have sometimes called our pro shop a “gear musuem” that gathers dust, but in fact we turn all of our inventory on average 3.69 times per year. In general, at specialty retail a good target is 4 turns a year overall. Any less, it means that you’re sitting on inventory dollars for too long. Any more than this probably means that you’re missing sales by being out-of-stock.
Last, and most importantly, our GMROI is a perfectly decent 1.37. GMROI – gross margin return on inventory – allows a merchant or analyst to compare two departments against one another, when they perform very differently in terms of margin and turn. (We talk at length about margin, turn, and GMROI as well as other important concepts in our eBook: “Retail Math For Buyers.”)
Different categories stand out. We do really well in apparel, which is interesting considering we only sell our own branded SWAG. Shoes are our top category, but we need to own a lot of them to sell a lot of them. Our GMROI in footwear is the lowest of any category. Surprisingly for us, chalk and related accessories is our second largest category, one of our highest margins, with high turns.
So in a nutshell, this is where we are. Now that we know our baseline, our next steps are to see how and where we can improve upon these figures. Here we go…