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Increasing Margin (or A Tale of Two Bookstores)

Increasing Margin (or A Tale of Two Bookstores). BEA 2005 NEW YORK, NEW YORK June, 2005. Prologue. ABACUS. ABACUS is an initiative to create a benchmark for the measurement of independent bookstore operations. The numbers generated by the ABACUS study were used to create…. Prologue.

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Increasing Margin (or A Tale of Two Bookstores)

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  1. Increasing Margin(or A Tale of Two Bookstores) BEA 2005 NEW YORK, NEW YORK June, 2005

  2. Prologue ABACUS • ABACUS is an initiative to create a benchmark for the measurement of independent bookstore operations. The numbers generated by the ABACUS study were used to create…

  3. Prologue THE 2% SOLUTION • Discussed an achievable means of moving from negative profitability (loss) to positive profitability (a gain) • Isolated the prime movers affecting profitability • Suggested that progress comes one small step at a time

  4. Prologue THE 2% SOLUTION Identifies four prime factors on which to concentrate: • Sales • Margin • Compensation • Occupancy Today we’re focusing on Margin

  5. Prologue The 2% Solution - Combining All Three Strategies

  6. Prologue Gross Margin and Cost of Goods What is Gross Margin? • Gross margin (or gross profit %) = sales minus cost of goods sold What is Cost of Goods? • Components of cost of goods sold: • Purchases • Freight in • Early payment discounts taken • Inventory Shrinkage

  7. Prologue A Tale of Two Bookstores • Store B has a gross margin more than 2% higher than store AAchieved through: • Lower cost of purchases • Lower freight cost • Reducing inventory shrinkage • Taking early payment (cash) discounts

  8. Strategies for increasing gross margin Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts Reduce freight costs Take cash discounts Reduce inventory shrinkage

  9. Strategies for increasing gross margin Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts Reduce freight costs Take cash discounts Reduce inventory shrinkage

  10. Reduce cost of purchases…Bring in higher margin merchandise Replacing 10% of book sales with sales of other, higher margin merchandise significantly increases margin Bookstore B 90% of sales are in books with an average margin of 43%. 10% of sales are in other merchandise with an average margin of 50% Bookstore A 100% of sales are books with an average margin of 43%. Purchase Discount Purchase Discount % of Sales Avg. Margin % of Sales Avg. Margin Retail Sales Cost Retail Cost 43% 1,500,000 Books 43% 100% 855,000 43% 90% 769,500 1,350,000 43% Other Mdse. 10% 75,000 150,000 50% 50% 0% 0 0 Total 855,000 1,500,000 43% 844,500 1,500,000 43.7% Increase in gross margin = $10,500, or 0.70% (1 of 6)

  11. Reduce cost of purchases…Bring in higher margin merchandise Things to Remember • Differences between trade book inventory and higher margin inventory: • Higher discounts, non-returnable • Usually net priced—you set the retail price • Need to plan for sell-through and markdowns in pricing • Freight can be a killer • Need to carefully budget buying and allocate space • Requires more display planning and maintenance than books Examples of higher margin merchandise: Remainders Sidelines and gift items Calendars Used books (2 of 6)

  12. Reduce cost of purchases…Bring in higher margin merchandise To maintain a 50% margin on non-book merchandise, you need to price it correctly 100% mark-up(Double the cost) 110% mark-up(Double the cost +10%) 125% mark-up(Double the cost +25%) 1. Merchandise purchases at cost $75,000 $75,000 $75,000 2. Mark-up 100% 110% 125% 3. Retail value of inventory $150,000 $157,500 $168,750 4. Sell through 90% 90% 90% 5. Full price sales $135,000 $141,750 $151,875 6. Gross profit $60,000 $66,750 $76,875 7. Margin 44.44% 47.01% 50.62% Of course, you have to price merchandise at what the market will bear, and this scenario doesn’t account for the remaining inventory… (3 of 6)

  13. Reduce cost of purchases…Bring in higher margin merchandise By marking down remaining inventory (to move it out the door), you can increase margin even more 110% mark-up, mark-downs at cost 110% mark-up, mark-downs above cost 110% mark-up, no mark-downs 1. Merchandise purchases at cost $75,000 $75,000 $75,000 2. Mark-up 110% 110% 110% 3. Retail value of inventory $157,500 $157,500 $157,500 4. Sell through 90% 90% 90% 5. Full price sales $141,750 $141,750 $141,750 6. Gross profit on full price sales $66,750 $66,750 $66,750 7. Margin (so far) 47.01% 47.01% 47.01% 8. Remaining inventory at cost $7,500 $7,500 $7,500 9. Markdown sales $0 $7,500 $10,000 10. Total sales $141,750 $149,250 $151,750 11. Final gross profit $66,750 $74,250 $76,750 12. Final margin 47.01% 49.75% 50.58% (4 of 6)

  14. Reduce cost of purchases Reduce cost of purchases…Bring in higher margin merchandise To maintain your margin, build freight into the selling price Freight costs NOT included in mark up Freight costs included in mark-up 1. Merchandise purchases at cost $75,000 $75,000 2. Freight @ 5% of merchandise cost $3,750 $3,750 3. Total cost including freight $78,750 $78,750 4. Mark-up 100% 100% 5. "Retail value" of inventory $150,000 $157,500 6. Sell through 100% 100% 7. Sales $150,000 $157,500 8. Gross profit $71,250 $78,750 9. Margin 47.50% 50.00% (5 of 6)

  15. Reduce cost of purchases…Bring in higher margin merchandise Increasing Gross Margin and Gross Profit How much have we saved so far? (6 of 6)

  16. Reduce cost of purchases Strategies for increasing gross margin Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts Reduce freight costs Take cash discounts Reduce inventory shrinkage

  17. Reduce cost of purchases…Increase purchasing discounts Strategies • Buy more direct from publishers (when appropriate) • Plan ordering to maximize discounts • Take advantage of stock offers • Order electronically to receive (or not lose) EDI discounts (1 of 20)

  18. Reduce cost of purchases…Increase purchasing discounts Buy More Directly from Publishers Converting 10% of your wholesaler purchases to publisher purchases can significantly increase gross margin (2 of 20)

  19. Reduce cost of purchases Reduce cost of purchases…Increase purchasing discounts Buy More Directly from Publishers Cut wholesaler purchases by splitting ordering between wholesalers and publishers • Order from the wholesaler only what you need right away • Pay attention to wholesaler discount breaks • Plan ahead when ordering from publishers to reduce your reliance on wholesalers • Decrease publisher lead times by using electronic ordering (3 of 20)

  20. Reduce cost of purchases…Increase purchasing discounts Some Pros and Cons of Buying Direct • Cons • Less frequent shipments • More shipments and more paperwork (which means more payroll) • Much higher error/damage rate • More time spent following up on problems (even more payroll) Pros • Higher discount • Generally more favorable payment terms • Generally more generous co-op terms • Easier to access co-op (4 of 20)

  21. Reduce cost of purchases…Increase purchasing discounts Plan Ordering to Maximize Discounts Adding 0.25% to average discount results in a significant difference in gross margin (5 of 20)

  22. Reduce cost of purchases…Increase purchasing discounts Plan Ordering to Maximize Discounts In a flat discount environment, just-in-time inventory principles should be applied But, for orders from smaller publishers that have “tiered” discount schedules, it can pay to plan ordering to maximize discount (6 of 20)

  23. Reduce cost of purchases…Increase purchasing discounts Plan Ordering to Maximize Discounts • Maximize discounts from wholesalers by rounding order quantities up and down • Maximize discounts from publishers by: • Decreasing ordering frequency • Using slower-turning or seasonal titles to boost discount on periodic or seasonal orders (7 of 20)

  24. Reduce cost of purchases…Increase purchasing discounts Rounding Orders Maximize discount from wholesalers by rounding order quantities up or down Wholesaler discount schedule Principles to Apply: Number of copies: 1. Round quantities up or down to the nearest discount break point 1 = 40% 2. Reduce twos to ones where possible 5 = 41% Bookstore A Bookstore B 10 = 42% Order not maximized for discount Order maximized for discount 100 = 43% EXTENDED EXTENDED EXTENDED EXTENDED TITLE RETAIL PRICE QTY DISCOUNT RETAIL $ COST $ QTY DISCOUNT RETAIL $ COST $ Kite Runner $14.00 8 41% 112.00 66.08 10 42% 140.00 81.20 Plot Against America $26.00 4 40% 104.00 61.36 5 41% 130.00 76.70 Angels & Demons $7.99 18 42% 143.82 83.42 10 42% 79.90 46.34 London Bridges $27.95 2 40% 55.90 33.54 1 40% 27.95 16.77 Reading Lolita in Tehran $13.95 2 40% 27.90 16.74 1 40% 13.95 8.37 I Am Charlotte Simmons $28.95 4 40% 115.80 69.48 5 41% 144.75 85.40 Short History of Nearly Everything $15.95 12 42% 191.40 111.01 10 42% 159.50 92.51 Bookseller of Kabul $12.95 90 42% 1,165.50 675.99 100 43% 1,295.00 738.15 TOTALS 140 $1,916 $1,118 142 $1,991 $1,145 Average discount = 41.68% Average discount = 42.47% (8 of 20)

  25. Reduce cost of purchases…Increase purchasing discounts Decrease Frequency Maximize discount from publishers by decreasing order frequency (9 of 20)

  26. Reduce cost of purchases…Increase purchasing discounts Buy Slower-Turning Titles Intelligently Maximize discounts from publishers by using slow-turning or seasonal titles to boost discount on periodic or seasonal orders • Identify titles that you only want to stock periodically-Slow-turning titles that don’t sell often enough to always keep in stock • -Seasonal titles that you only want to stock at certain times • Create a “holding file” to keep orders for slow-turning or seasonal titles, or flag the titles in your computer to create a list on demand • When you have enough quantity (combined with your regular order) to reach the desired discount, place a periodic or seasonal order (10 of 20)

  27. Reduce cost of purchases…Increase purchasing discounts Use slower-turning/seasonal titles to boost discount on periodic/seasonal orders Buy Slower-Turning Titles Intelligently (11 of 20)

  28. Reduce cost of purchases…Increase purchasing discounts Buy Slower-Turning Titles Intelligently Ordering not planned for discount (12 of 20)

  29. Reduce cost of purchases…Increase purchasing discounts Buy Slower-Turning Titles Intelligently Ordering planned for discount…Placing just four periodic/seasonal orders a year increases average discount Publisher discount schedule Number of units: 1 = 40% 25 = 47% Regular monthly Periodic/seasonal orders orders Total orders Number of orders placed each year 8 4 12 Average order quantity 10 30 18 Average order value at retail $180 $540 $300 Total purchases for the year: Retail $1,440 $2,160 $3,600 Cost $864 $1,145 $2,009 Average discount 40.00% 47.00% 44.20% (13 of 20)

  30. Reduce cost of purchases…Increase purchasing discounts Take Advantage of Stock Offers Using stock offers on 10% of publisher purchases makes a difference to gross margin (14 of 20)

  31. Reduce cost of purchases…Increase purchasing discounts Take Advantage of Stock Offers Strategies Buy only what you would normally buy, but place your usual order using the stock offer Increase the size of your usual order to get an added benefit from the extra discount Accumulate orders for slower-turning or seasonal titles, and place an order when a stock offer becomes available (15 of 20)

  32. Reduce cost of purchases…Increase purchasing discounts Take Advantage of Stock Offers The effect of stock offers on average discount (16 of 20)

  33. Reduce cost of purchases…Increase purchasing discounts Evaluate all variables when planning ordering • If you hold orders, what is the cost in lost sales? • If you take advantage of stock offers, how does that affect your inventory turns and accounts payable? • What are the additional payroll costs of adding complexity to your ordering cycle? • What are the opportunity costs (time spent planning buying that could be spent on something else)? (17 of 20)

  34. Reduce cost of purchases…Increase purchasing discounts Electronic Ordering Discounts Receiving EDI discounts on 10% of publisher purchases impacts gross margin (18 of 20)

  35. Reduce cost of purchases…Increase purchasing discounts Electronic Ordering Discounts Advantages of ordering electronically • Extra discount • The publisher receives your order sooner • You know the order has been received • You save on time, fax and paper costs, etc. • Less chance for human error (19 of 20)

  36. Reduce cost of purchases…Increase purchasing discounts Increasing Gross Margin and Gross Profit How much have we saved so far? (20 of 20)

  37. Strategies for increasing gross margin Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts Reduce freight costs Take cash discounts Reduce inventory shrinkage

  38. Reduce freight costs What is free Freight? • Freight is never free. Somewhere, someone is paying for shipping. It has long been the contention of the independent bookselling community that freight should be paid by the people who control the means by which products are shipped. In other words, the publishers and wholesalers. • But it sounds nice… so we’ll use the term “Free freight.” (1 of 7)

  39. Reduce freight costs Increase Free Freight Shipments Moving 10% more purchases to free freight makes a significant difference to gross margin (2 of 7)

  40. Reduce freight costs Freight Costs and Margin With average freight costs of 5% of net, you need an average discount of 43% just to maintain a 40% margin (3 of 7)

  41. Reduce freight costs Meeting Free Freight Minimums Hold orders until they qualify for free freight (4 of 7)

  42. Reduce freight costs Freight Costs and Small Shipments With freight costs of $5 per shipment, you need $100 worth of books and a 45% discount just to maintain a 40% margin (5 of 7)

  43. Reduce freight costs Vendor of Record Programs Benefits of vendor of record programs • Consolidated shipments • Less paperwork • Faster, more reliable shipping • Usually less damages and errors than with shipments from publishers Disadvantages of Vendor of Record Programs • You often have to pay the wholesaler sooner than the publisher • Wholesaler discounts are often lower than publisher discounts • Sometimes the wholesaler doesn’t carry the book you want (6 of 7)

  44. Reduce freight costs Increasing Gross Margin and Gross Profit How much have we saved so far? (7 of 7)

  45. Strategies for increasing gross margin Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts Reduce freight costs Take cash discounts Reduce inventory shrinkage

  46. Take cash discounts The Value of Cash Discounts Paying in time to receive cash discounts significantly increases gross margin (1 of 5)

  47. Take cash discounts Cash Discount and “Effective Discount” Compare effective discount with publisher discount to decide if you are better off ordering through a wholesaler (2 of 5)

  48. Take cash discounts The value of cash discounts versus the cost of borrowing (3 of 5)

  49. Take cash discounts Publisher vs. Wholesaler Terms Wholesaler B, with free freight and a 2% cash discount, is a better deal than Publisher B, even though Publisher B’s base discount is three points higher. (4 of 5)

  50. Take cash discounts Publisher vs. Wholesaler Terms Factoring in the value of payment terms (5 of 5)

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