 Bill Pearson, Columnist for Garden Center magazine Do you have a response to this article? Send an e-mail to Carol Miller.
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Bill Pearson is a a strategist, analyst and lecturer who believes independent retailers have a distinct advantage in the marketplace. Do you have a garden-center question of general interest? Send it to Bill Pearson Please identify yourself, your store, its size and your approximate sales volume. We will not publish this information but would like to contact you if clarification is necessary.
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Markup, dollars per foot Create benchmarks for these important measures
What's 'proper' markup?
Question: The original markup in our store is about 52.4 percent. We know it needs to be more, but we're unsure about how to achieve this. Half of what we sell are brands that are carried by many other stores. We don't want to be seen as the most expensive.
Answer: You didn't mention what your markup percentage goal is. Before you set out to change your store's pricing philosophy, you should know what is required. The correlation between original markup, markdown, operating expenses and net profit is such that knowledge of any three allows the fourth to be calculated.
In this example, the desired original markup percentage can be determined when this information is known:
* Typical markdowns: 12 percent of sales.
* Normal operating expense: 38 percent of sales.
* Desired net profit: 11 percent of sales.
Here's the formula:
original % = (profit % + expense % + markdown %) / 1 + markdown %
Assuming this example to be similar to your specific situation, it is now possible to see that you would need to raise your original markup percentage from the current 52.4 percent to 54.5 percent, or in terms more comfortable for many, from 2.1 to 2.2 times cost.
Suggestion: No specialty independent in business more than a few months assigns identical markup to all inventory. Price points, competition and perceived value should all influence the selling price. Make your initial calculation at 54.5 percent or 2.2, then adjust up or down as conditions allow. Employed with an even hand, this technique will allow for the desired result and present your merchandise fairly to your customers.
How much should I earn per square foot?
Question: I have three home and garden stores. Please tell us what "dollars per square foot" comparable stores achieve, and how best to use this concept.
Answer: Statistics on sales per square foot are as elusive as those for turnover, markup percentage and gross margin percentage. The danger in relying on this type of information lies with the vast range of available data. There are examples of successful small stores doing $300 per foot, and failed ones doing more than $600.
This is what we do know. Small (in size) stores, by their nature, perform at a much greater level per foot than bigger stores. Where $750 of annual sales per foot is not uncommon for stores under 1,000 square feet, it is much less common for stores above 2,000 square feet.
Not surprisingly, it is also the case that higher-ticket merchandise can more easily perform at these heightened square footage levels. Another consideration is the pattern of sales throughout the year. Seasonal stores with only a few peak months hardly ever achieve high sales per foot. And the same is true for hours of operation. A 10 a.m.-6 p.m. store will usually produce less sales per foot than one staying open until 10 p.m. or later.
While you may be curious about your performance vis-à-vis other similar retailers, the more important criterion is the relationship between sales and rent. Needless to say, a lower-than-normal rent cost results in a greater net profit, just as the reverse is true. Specialty store ranges for rent and related landlord obligations are most often between 9 and 13 percent of sales. Occupancy costs much greater than 13 percent are dangerous and usually necessitate a reduction of other operating expenses to compensate.
Suggestion: If you continue to be interested in the concept of sales per foot, establish your own benchmarks. Not only can you compare performance of your three stores to each other, but you can estimate square footage devoted to various product categories and compare these against one another. Unlike the use of outside statistics, you'll be comparing apples to apples.
Help me understand markdowns and margins
Question: It's early February as we write this letter and we still have way too much sale merchandise left from last season. My partner and I disagree about the discounts we should take. The result is we sell too little during the first days of our sale. Please help us understand markdowns and margins.
Answer: The problem of clearing unwanted inventory is increasingly difficult. As department stores and chain stores become more promotionally aggressive, independents are having an even harder time. With everyday discounting of first-line inventory, it is no longer necessary for a "sale customer" to wait until the end of the season. In most major metropolitan markets, the timing of the markdown, more than its salability, determines the percentage off. If the majority of stores have gone to "50 off," there is little action at less discount.
In fall, pre-Christmas markdowns in the 20 to 30 percent range are typical. Late December and early January, it's 40 to 50 percent off. And final markdowns, usually taken after mid-January, are between 50 and 70 percent off. Discounts less than this range are often viewed by consumers as noncompetitive and, therefore, uninspiring.
Many specialty independents no longer depend solely on January to move all their sale merchandise. First, there isn't enough customer interest and second, the required 50 to 70 percent reduction is devastating to most margins. Today's best specialty retailers have adjusted to this markdown dilemma in two ways: they take higher original markups, and they start marking down earlier in the season.
Example #1
Quantity purchased: 24
Sales performance
Example #2
Quantity purchased: 24
Sales performance
Example #3
Quantity purchased: 24
Sales performance
In the first example, no markdowns were taken before the 50-percent reduction in early January, which was followed by a 70-percent reduction in early February. Maintained markup on the entire group was a dismal 40.5 percent. With 40 percent operating expenses, this is nearly break-even.
In the second example, a 30-percent markdown was taken in late November, followed by 50 percent in late December and a final clearance markdown of 70 percent in late January. Not only was the sale concluded earlier, but the maintained markup increased 6.4 to 43.1 percent.
In the third example, the percentages and performance are identical to the second, but the original markup was increased slightly from 52.4 to 54.5 percent. Again, the sale concluded earlier but this time with an almost respectable margin of 45.7 percent, up 12.8 percent from the first example.
Suggestion: Unlike big stores and chain stores that have embraced promotion and markdown as an essential component of their strategies, specialty independents cannot. Unwanted and overbought goods should be quickly disposed of at a price that's not too painful. A slightly greater original markup combined with earlier markdowns are the best overall solutions.
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