More About Mark Up and Bill Out

I was looking at ads today; specifically at a few of the feature ad items in the produce section. Two of the major retailers in my area had Green Grapes advertised in a feature position. Retailer A at $1.99 LB. and the other; let's call them retailer B, at $1.69 LB.

Based on current FOB's on Green Grapes of around $12.00 for a large berry, these Retailers probably landed them at their D.C. at around $14.60 - $14.85 per lug and when you add on a D.C. up charge of let's say, 12% you have a store cost of about $16.35, or $.90 LB. Based on these assumptions; retailer A is out there at around a 50% gross on a lead ad item and retailer B is out there at about 46%. No wonder suppliers scratch their heads and ask why retails don't reflect costs.

Well let's look at this a bit further.

I remember when I got my first job running a produce operation. We had a 6% D.C. up-charge and I had to manage a 30% store level gross, so our company actually achieved a 33.50% gross for the produce operation with D.C. and Store gross combined.

At my second stop some three years later, we had no D.C. up-charge, so store level gross had to 'pay for" the D.C. operation. Therefore we had to achieve a robust 43% gross, but then again that was in a very heavily populated area where per store sales and were very high and shrink was very low. Based on the area of the country the retailer was in a D.C up-charge of about 10% would be right on, so in reality the store level operation after D.C. Deductions actually achieved a 37.50 gross margin. Not really too bad at all. And not that much higher that where we were when I left my first stop.

During my third and last stint, we had a D.C. up-charge of a whopping 12%. Before I got there that retailer had made a decision to do away with all the up-charges except for the produce up-charge. They had postponed nixing the produce ups because the other departments had not reflected any margin increases when they did away with their ups. NO KIDDING. I mention this because these folks wanted me to achieve a 42% gross with a 12% up-charge. It took quite a few meetings to convince them that they were asking me to deliver a 47.50% gross margin! Based on competition and the lack of density in our marketing area, that was just crazy. We got that worked out, but I wonder how many retailers today force their produce departments to double dip on margin. By that I mean to conveniently forget about any D.C. up-charges when they develop their gross margin forecasts.

How many retailers out there that buy through a third party don't include the increased cost of goods in their budgets. I mean the whole point in utilizing a third party is to save the time, carrying costs, and overhead costs associated with managing a D.C. and inventory. If you know that your cost of goods are increased, but your overhead costs are decreased, then your margin budgets should reflect those facts, but I wonder how many retailers budgets actually do?

Just makes you wonder.