The flood of escalating costs has been an ongoing challenge for retailers. Though balancing the protection of category margins while still delivering value to customers is no easy feat, maximizing retail margins amid cost increases is critical to maintaining profitability. Here in Part 1, we’ll explore trusted steps to address any margin leakage.

These challenging times highlight the importance of collaboration among merchandising, pricebook, and accounting teams. It’s essential to ensure that vendor cost management, product authorization, and trade funding collection processes are efficient and effective.

There are three areas where retailers can focus to ensure they are maximizing category margins:

• Vendor Cost and Retail Management
• Maximize Trade Funding
• Unauthorized Items and Employee Sweethearting

 

Vendor Cost and Retail Management

Are your vendors charging you a higher price than what was agreed upon?

It is critical to have a well-defined process for vendors to submit cost changes. Some of these parameters would include a required lead-time and preferred medium to communicate (company new item form or Electronic Data Interchange (EDI)). Once your cost change process has been established and pricebook and vendor pricing are aligned, retailers can begin to pay from the costs set in their pricebook as opposed to what the vendor invoices. Using a cost exception report to monitor cost discrepancies helps troubleshoot where the process broke down.

Are your retails increasing with cost changes?

An internal review process between pricebook and category management is vital to ensure retails are being adjusted in tandem with cost changes. Setting margin rules in pricebook can help automate the process by automatically updating retails based on set margin targets. However, category management oversight on setting retails is critical. Allowing automated margin rules to set retails during an inflationary period – where costs are continually rising – can push products over critical price point thresholds, like $1.99 and $2.99, and leave retailers uncompetitive with a high price image. Maintaining a competitive price image requires human oversight.

 

Maximize Trade Funding

Are you maximizing vendor funding for your company?

Vendors spend with retailers in various ways as part of trade funding. These funds can come in the form of promotional discounts, slotting fees, rebates and growth incentives. Retailers need to ensure total trade spend increases each year in direct proportion to their purchases from the vendor. This is called “vendor spend rate” and is a key metric to have in hand heading into annual negotiations. Given the structure of the contract and the various payment methods, this is often not an easy number to calculate. However, if the vendor is not spending with your account at the same rate as your purchases, it will lower your category margin rate. It is a powerful metric and one worth investigating.

 

 

 

Do you have a system to ensure all trade funding is being collected?

Retailers need an effective tracking system to accurately accrue and collect trade funding. A formal review process with category management and accounting helps to ensure vendor payments are accurate and prevent aging receivables.

 

Unauthorized Items and Employee Sweethearting

Are unauthorized products and internal theft eroding your category margins?

Be cautious of unauthorized products making their way into your store. Without a process to reject unauthorized items at time of delivery – retailers can end up paying for these products. In many cases they sit in the backroom, waiting for credit or for a price reduction then sold at a margin loss.

It’s important to monitor signs of employee sweethearting and its impact on your bottom line. Having an auditing process to track price overrides, open rings, and voids can help ensure that products are being scanned at the correct retails. 

 

Maximizing category margins requires a laser-focused merchandise management process as well as an effective negotiation and trade fund tracking mechanism. And natural human oversight is essential to ensuring that your brand stays competitive in the marketplace.

Impact 21’s simple 13-step merchandise, food, and fuel management processes help our clients uncover all system and operational deficiencies and create a recommended course of action to improve processes, eliminate manual work, and more fully employ your IT systems as designed.

 

Stay tuned for Part 2, where we’ll will look at proven strategies to drive trips and deliver customer value.