By Mal Higgs, project manager, ALSA Retail Insights
In an extremely competitive retail environment like the liquor industry, it is often assumed that retailers' gross profit margins are determined by 'market forces'.
It is also assumed that newspaper advertising of liquor products is seen by the trade as being the ‘market price’ for a product or category of products. As a result of these assumptions, it would be easy to then expect that the retailer’s margin would be determined by these ‘market forces’.
In reality, nothing could be further from the truth.
At the end of the day, each individual retailer has an expectation of what gross profit margin they want or need to achieve in a day or a week or a year. Most now have a computerised Point of Sale System that allows them to accurately track their sales and profit from individual SKU right through to category and even supplier if necessary. The GP percentage that each retailer is looking to achieve will depend on the type of business they want to operate. Gross Profit margins these days can range from lows of near 15 per cent to highs of well over 30 per cent.
The factors that influence these outcomes range from the quantity of full cartons of beer sold – traditionally extremely low margin when sold at competitive prices, through to an outlet that sells larger quantities of single bottles of wine, which would generally speaking be at a much higher margin. Of course, we also have the relatively ‘new’ trend of consumers ‘trading up’ and this is having a generally positive impact on margins – especially in the areas of craft beer, craft spirits and the faster growing bottle wine segments.
We are now seeing many more retailers adopting a far more strategic approach to margin management by managing their ‘mix’ of business in such a way as to improve their GP, while still remaining competitive in the market. This is, undoubtedly, the ‘skill’ of the retailer – something we often ignore in the cut and thrust of the competitive set. That ‘skill’ is vastly undervalued by many and is the real secret to a successful liquor store venture. Sales are always important, however it is the gross profit margin return that generates the dollars that will pay the overheads and then leave some profit the business owner.
ALSA has developed the Retail Insights program www.alsaretailinsights.com.au to assist in the process of professional development. This important industry leading program contains information relevant to today’s retailers on a broad range of topics. Margin Management is one of these upcoming modules and will assist the retailer in the process of constant improvement.
On top of this initiative, suppliers can play an important role in providing information to their retailer partners on the latest trends and innovations occurring in the market place. It is this partnership between retailers and suppliers that will ensure a sustainable alcohol industry in the longer term.