Multi-level Margin Management

There are several levels to this debate. The first and most basic level is – what is a margin and how do I calculate it? I don’t want to waste my time writing about something every retailer should understand, but unfortunately too few do.

The second level is product or category related margins. What should the margin on potatoes be, compared to the one earned by strawberries, bananas or turnips? What is a realistic margin, what is a fair margin and what is downright obscene?

The third level looks at the overall fresh food department, which consists of meat, produce, deli, bakery and seafood and may well have consolidated margin expectations at that point as well. The meat department, for instance, includes the poultry, beef, sheep meat and pork categories and within the sheep meat category there are subcategories such as lamb, hogget and mutton and products related to the three – legs, racks and chops, to name a few.

The fourth level is the company level. What is the margin the overall business delivered last week? Was it above or below budget? What were the underlying reasons for the performance? What can we change? How can we improve the margin mix?

At every one of those levels, managers are busy analysing the product or product ranges to death, in an attempt to optimise product, category, departmental or business performance. The managers are referred to by various titles: Product Manager, Category Manager, Merchandise Manager, Divisional Manager, General Manager Fresh Foods, Managing Director. It does not matter what the individuals are called, they are all concerned with the same task – the profitable performance of whatever it is they are responsible for.

It would be fair to say though that regardless of how much energy and effort goes into the continuous process of margin setting, results analysis and margin readjustment, ultimate success will be denied unless the organisation – in our example, the supermarket company – achieves the ability to generate at the fifth level, the consumer level.

What do I mean by that? Let’s go back to the lower levels first. At product level, potatoes will always be sold at higher margins than strawberries, for example. The reason? Well, one product has a longer shelf life than the other and does not have to be sold so fast. Guess which one! The fact that the potato supplier harbours black thoughts about the supermarket’s potato buyer and feels it is unjust that his product has to support the bargain basement prices he considers the strawberries to be selling at is beside the point.

The produce department has to deliver an overall gross profit margin and this is achieved by balancing products against each other, depending upon their shelf life, consumer appeal, the time of year, the condition of the product and the choice of advertised specials in any given week. The fresh food departments have to deliver margins at certain levels in order to compensate for the lower FMCG margins. In the centre of the aisles, whole categories can at time hover at the breakeven point, when competitive pressure demands downwards price adjustments.

Unless the business banks a certain amount of dollars at an acceptable margin, shareholders, owners, institutional investors and business media commentators will have their pound of flesh whenever financial results are released. All efforts into margin management are thus applied in good faith and for a good cause – keeping the business in business.

And yet, at the fifth level – that of the consumer – do I care about the supermarket’s margin policy? No, I don’t. Will I buy more potatoes in order to support the supermarket’s margin mix in relation to berry fruit? No, I won’t. Do I think about store profitability when I scoop canned goods and nappies (figuratively speaking, I hasten to add) into my trolley?

No, I don’t. What do I care about then? Here is an example. A consumer comes home from her weekly supermarket experience and exclaimed, “Guess what! Smoked salmon pieces are only $17 for 500g at Supermarket A. At Supermarket B they are always at least $37 for the same amount. I have noticed that for the second time now. So I did my whole shop this week at Supermarket A.”

Consumer perception – that is what the fifth level is all about. All that careful work in getting the margins right and then a customer allows herself to be influenced by what she sees. Shouldn’t be allowed, should it? But how do you stop it? The truth is you can’t.

Consumers have always had a mind of their own but today’s consumer is a lot more discerning than her mother. She will shop where she damn well pleases and her buying decisions are based on personal preferences and perceived value.

We are moving from the age of market segmentation into the age of market fragmentation and many shoppers are going back to the old “butcher, baker, candlestick maker” shopping model – for candlestick maker, read greengrocer. So, isn’t it time therefore that supermarkets become more consistent at managing margins at the fifth level, the consumer level, if they don’t want their entire model to implode? I’d say so.

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