About a year ago I wrote an article about gross margins that had been prompted by a retailer who asked me how it is figured. There is a huge difference between your gross margin and what you “mark-up” from the wholesale price to the retail price. In fact, the term “mark-up” is so useless to retailers that merchants in the retail paradise of New York City disregard its meaning and use “mark-up” interchangeably with “gross margin.” They just don’t believe that any retailer would be so naive as to use “mark-up” in its literal sense.
After attending thousands of industry events, I can attest such naiveté is common. For those who need an explanation, gross margin is a percentage of the sell price. For example: If an item sells for $10, gross margin would indicate a cost of $6.
The same item costing $6 marked-up 40 points would sell for only $8.40 (.40 x $6 = $2.40 added to cost). Actual gross margin using this method is 28 points. Imagine the anguish of any retailer whose expenses came in at 30 percent of sales and thinks his profit is 10 percent? There are charts available from suppliers or your accountant with the formula to figure gross margin. For starters, it’s 1.67 x cost for a 40 point gross margin, 2.0 x cost for a 50 point margin and 2.5 x cost (my preference) for 60 points.
At a recent convention, a dealer was overheard saying. “I just add three dollars to every product.” I thought I was hearing things. Fifty years ago retailers who worked on “dollars” sometimes survived, but not in this current competitive marketplace. Adding three dollars will work if you pay less than four dollars a yard for everything, but at an average cost of $10, you would soon be “caput.”
This came to mind when I had the good fortune of being invited to a QFloors user’s meeting not long ago. The Park City, Utah-based company specializes in computer software for flooring retailers and I was delighted to learn how computerization of your business can teach the fundamentals of retailing. Gross margin figured on a computer is the real gross margin. Now please understand that anything more difficult than opening an attachment is well beyond my skill set. Obviously, I’m no computer whiz, but when Barth Getto, CEO of World of Floors, manipulated me into an online demonstration, I was surprised at how easy the system was to understand. Others have tried and failed to nudge me into the world of high tech.
Their systems are programmed to make retailers more savvy. The explanation was simple. The QFloors people come from a retail background. Steve Ogden, the the vp and founder of Ogden’s Carpet Outlets, is now affiliated with Floor to Ceiling Stores, which has grown to 14 stores. His brother Chad Ogden is QFloor’s president and CEO. While attending their demos, many of the finer points of running a retail store came up. There were also suggestions from successful retailers on various methods of operation. The great value to those on hand was the opportunity to judge which particular method might work best for their operation.
After a day of classes, the featured speaker was my colleague and fellow NFT columnist Sam Allman. Drawing on his considerable wealth of knowledge he addressed a few retailing basics. One interesting issue brought up by Sam was cash flow, a subject that even some sophisticated merchants often fail to understand. I have run across several of my retailing friends who must not trust banks. They stockpile flooring that has not seen the light of day for years. Do they draw interest on this idle inventory? Others must believe they are a bank given their level of receivables.
Sam made the point that cash flow was the most common reason flooring retailers fail-even among profitable dealers. Any failure to understand the relationship between receivables, customer deposits, inventory and cash discounts to cash flow can lead to a cash-starved business. The business in making money, but the dealer can’t pay the bills. “Cash is king!” as Sam put it. Computers will keep this situation in balance as well as dozens of other measures. During his presentation he reeled off 13 critical measurements that a successful owner or manager should gauge. In the words of Big Bob, “If it can’t be measured, it can’t be managed!” Computers are a must in the current marketplace.
The following day, users offered their input on the QFloors software and made suggestion about features they thought to be crucial as well as those that could be added or deleted. There was a suggestion that Sam’s cash flow chart should be added so a user can see exactly where he stands. That could prove very useful considering that many retailers are lucky if they produce a balance sheet once a year-far too late in some cases for corrective action. Computerized companies can produce a trial balance and even a P & L at any moment. Other goodies like bar-coding and scanners were discussed. Some of the more advanced retailers mused about small retailers who allow themselves to fall into a position where they have receivables from their customers. The point was made that if you leave a department store with merchandise you didn’t pay for you face arrest. Why is our business any different? That, of course, leads to a discussion of how poorly we use in-store credit as a selling tool. That is a subject for another day.
I expected the conference in Utah to be a forum on how flooring retailers can use computers more effectively. I also expected that QFloors’ management would be seeking feedback about their customers’ concerns and needs. On those counts, the meeting did not disappoint. But what I also attended was as close to a retailing 101 class as I’ve seen in the industry.