When setting up a business plan for retail, managers usually start out
by setting a sales target and an average gross margin percentage which
should be achieved. Is there another more cost based way of doing
this? Are there for example retail companies that use a sort of
activity based costing/or DPP when setting their budgets/targets
without a gross margin percentage target?
I aks this because starting with a gross margin target and splitting
it down to department levels etc will lead managers to overemphasize
the importance of the gross margin percentage versus factors which are
just as important for the profitability of an article such as the
amount of space it takes up, selling rate, selling price, handling
etc. |
Clarification of Question by
ansgarjohn-ga
on
26 Nov 2003 12:08 PST
I would appreciate it if someone would comment, ask for clarification
or answer this question. It is also posed more at length in a book
(Historien um IKEA) about IKEA co-written by Ingvar Kamprad the
founder of the company. In the chapter about Hot Dogs, Ingvar explains
the danger and probolems that setting gross margin percentage targets
can cause. ie you price yourself out of the market or focus on the
wrong articles
Is Omnivorous-GA the best researcher for this problem?
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Request for Question Clarification by
omnivorous-ga
on
01 Dec 2003 12:47 PST
He might be the right researcher, if only he read Swedish. Uff-dah!
Single-measure targets for compensation rarely work. It's why firms
have increasingly moved even sales people away from volume alone for
compensation and use additional factors like customer satisfaction;
new product penetration; market share or other measures to achieve
objectives.
Kamprad is much-quoted, though it doesn't appear that his "History of
IKEA" has been translated.
However, you may be aware that Amazon.com has recently expanded its
search capability to give the ability to read several pages from books
that it has for sale:
Tacoma News-Tribune
http://www.tribnet.com/entertainment/story/4341419p-4350428c.html
There's lots written on Kamprad. An Amazon search even turns up a few
books in Swedish. Perhaps the most-relevant to this question is David
Barnes book, "Understanding Business Process." It's probably best to
find the relevant pages this way:
1. search Amazon.com for book listings using the IKEA founder's name
as the search term:
Kamprad
2. the Barnes book is on about the 3rd page of search results
In the discussion on IKEA's management, the message seems to be:
understand where your real costs are -- but recognize that the store
exists for the benefit (and enjoyment) of the customer.
There may be several ways to take this question -- can I research
alternate compensation schemes for retailers' employees? Can I
research profitability models built by retailers? Do you specifically
want to take apart IKEA's management schemes?
My apologies for not seeing your CR mentioning me earlier. I'd read
the original question and it was all Swedish to me, but failed to see
the clarification until another researcher pointed it out over the
weekend.
Best regards,
Omnivorous-GA
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Clarification of Question by
ansgarjohn-ga
on
03 Dec 2003 08:05 PST
Hi Omnivourous,
Thanks for your response. First off I work for IKEA so I dont need
more information about that company but I'll use it to illustrate my
question.
Here is an excerpt from Kamprads book History of IKEA, which is called
LEADING BY DESIGN in English. (this is translated by me from the dutch
version)
'Our pricing policy is fundamental. The obstacle we face is that we
might price ourselves out of the market. Our economists keep
emphasizing the fact that we need to keep our total gross margin above
a certain percentage. What is that in heavens name? It results in
articles which have breathtakingly low prices, which of course have a
low gross margin percentage, being put in the worst furthest corners
of our stores, which of course means that they do not sell well!
Percentages are very mysterious things. The only thing we really
should care about at IKEA is, is the money we have left in our pockets
at the end of the year.
-------------------------------------------
My questions regards business controlling or budget tools for setting
prices and deciding on assortiment cuts/additions, not employee
compensation measures.
Can I research profitability models built by retailers? Yes, but there
are in general 2 types. First comparison of stores amongst themselves
with others stores etc. I am not interested in that.
Let me explain the way of working at IKEA. First we look at last years
results, the set targets/budgets.
The main targets are sales, margins, SG%A costs and margins.
Say $200 sales, $50 gross profit (25% gross margin),$20 in SG&A (10%)
To reach the gross profit we split the targets to department level.
Then we look at the buying prices, competition, price elasticities and
expected volumes at article level. Example:
COGS Retail sls qty revenue gross profit gross margin
article A 5
article B
artcile C
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Clarification of Question by
ansgarjohn-ga
on
03 Dec 2003 08:29 PST
Then we look at the buying prices, competition, price elasticities and
expected volumes at article level. Example:
COGS Retail sls qty revenue gross profit gross margin
article A $0.5 $1 2 $2 $1 50%
article B $1 $1.09 50 $54.5 $4.5 8%
artcile C $0.1 $0.3 20 $6 $4 66%
total $62.5 $9.5 15,2%
The idea is to change the parameters so that the sales and margin%
targets are reached.
Using DPP (Activity Based Costing) you might conclude that article B
is actually one of the most profitable products but in practice we are
constrained by the obstacle of the preset gross margin % target.
Are there retail companies that budget differently for example
STARTING with a gross profit target per square meter or something
else?
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Request for Question Clarification by
omnivorous-ga
on
10 Dec 2003 09:28 PST
Ansgarjohn --
I've been working on this one and have at least one very interesting
example, though it may prove a bit controversial. (It's interesting
enough that I think it would make a GREAT newspaper column).
I'm continuing to poke into the issue and hope to have something for
you in a couple of days. If not, I'll let you know as well.
Best regards,
Omnivorous-GA
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Clarification of Question by
ansgarjohn-ga
on
14 Dec 2003 12:01 PST
Thanks for your time. I am looking forward to the answer and example.
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