Managing Margins
By Ron Chepesiuk
Published: September 1, 2013
Facing unprecedented competition and pricing pressures, independent pet retailers must be sure that they are using the right margin strategy to keep their businesses profitable.

 

 

It is no mystery that turning a profit is the goal of every pet retailer. Yet given the persistent economic pressures on the disposable income of shoppers, at no time has it been more difficult for a pet store to achieve that goal. That is because it has become increasingly challenging for independent retailers to get the full margin for their goods.


“Given the economic crisis that we’ve gone through, the customer has become more price conscious than ever before,” explains Jim Dion, president of Dionco, a Chicago-based training and consulting firm. “When a customer walks into a pet store today, they expect deals, and those deals impact margins.”


Added to the mix has been the advent of online shopping, which “has definitely made it more difficult for brick-and-mortar retailers to maintain full margins for their products,” explains Susan Weiss, president and founder of Naples, Fla.-based Ark Naturals, a manufacturer of health, remedy and lifestyle solutions for pets.


Bill Trufant, president of B&B Pet Stop in Mobile, Ala., agrees that the dynamics currently at play are having a negative impact on pet store margins. “We constantly have to face new competition, new products and even new types of customers,” he says. “Meanwhile, higher-dollar items tend to be [price] shopped more. Therefore, in order for pet retailers to avoid looking like thieves, they have to be willing to take smaller margins and hopefully sell more.”
While most retailers know that a product’s margin refers to the difference between the price retailers pay for an item and the price at which they sell that item to the customer, it is essential to understand how the margins on various products interrelate and ultimately affect a store’s bottom line. “Retailers need to know the margins for their products because that will help them determine how to price items and to understand which ones are selling,” explains Daniel Troiano, co-CEO  of LittleGifts,  a Secaucus, N.J.-based manufacturer of pet-themed giftware and pet protection and recovery products.


Several factors can impact a retail margin, but the most important ones are cost and sales volume. Many retailers try to rely on a large markup to maintain a decent profit margin, but some goods may be too expensive to do this. Other retailers constantly chase the lowest cost, but Art Simon, co-founder of Molly Mutt, LLC, a Berkeley, Calif.-based manufacturer of dog bed duvets, crates, covers and tote bags, explains that this strategy may be flawed.

 

“Determining acquisition costs is important, but the strategy where you always chase the lowest cost, even if it means buying more than your store needs, might not be the most productive use of inventory and retail space,” he says.
Keeping a high sales volume can, no doubt, reduce overhead and improve margins. Yet, it doesn’t really matter what the gross margin of an item or a category is if the products aren’t selling. Still, filling a store with low-margin, fast-selling items may not be the answer either. “The pet store has to balance space, allocation, margins and turns if it is to achieve sustainable and productive profit margin,” Simon explains.


Other factors affect retail margins as well. “The uniqueness of products, especially when it comes to livestock, can impact on the retail margin,” says Trufant.  “If you have something that no other store around you has, don’t give it away. This is where a pet retailer can make up for low dog and cat food margins. We look to concentrate on promoting lines for products that can’t be found in the mass market because they tend to not be shopped nearly as hard.”


Given the importance of managing retail margins, is there a specific model that pet products retailers can use to get it right? Trufant does not believe so. Managing retail margins is not an exact science, he says. “I try to shoot for the ever-elusive keystone margin of 100 percent. I feel I’m winning if any of the items I sell hit that target or better.
“Customers don’t really know the price of a fish net or an air stone or even a random plush dog toy. So there are generally some items that can be priced a little higher than keystone to make that extra margin.”   

 


 

Of course, retailers can raise prices, but there are some products that should be avoided in this


strategy, since consumers buy them every week. Pet food is a perfect example.

 


 

As a retail consultant, Dion has a simple formula to determine retail margins. Take all of the expenses accrued from the previous year and divide that number by the standard margin in the retail industry. So if a pet store’s expenses for the year are $100,000, and the standard margin in the industry is 40 percent, the retailer will need $250,000 in sales to break even.


Pet retailers that have trouble making the numbers work can lower their costs or buy larger quantities. However, Dion cautions that the practice is always dangerous because pet retailers eventually have to pay for them and they can get stuck with overstocked items. 


Of course, retailers can also raise prices, but there are some products that should be avoided in this strategy, since consumers buy them every week. Pet food is a perfect example.

A number of metrics can help retailers analyze and enhance their margins. GMROI (gross margin return on investment) is a metric that many retailers use, and it can be a great tool for evaluating the productivity of a product.

 

The metric can also calculate the sales of an item while keeping track of the inventory level. GMROI can be calculated for an entire store’s inventory or a category of foods—pet food, for example—or even a single item.


“Retailers who calculate their GMROI year after year and commit to enhancing and improving it yearly can really see the productivity of their inventory increase,” Simon explains.


According to Dion, accessories, such as chew toys, offer a great opportunity to enhance margins because consumers purchase those items less frequently and are not price sensitive with them. “Some accessories can have as high as a 60 to 70 percent margin,” he says.


Remember, though, that a lot of factors other than margins can impact profits. So enhancing the bottom line should always begin with product selection and how a pet retailer allocates space, merchandises product and controls inventory.


“Pet retailers have the power to excite the consumer with great products,” says Simon. “At the same time, the decisions they make on how to allocate space and spend dollars on inventory to maximize sales and the productivity of their stores will improve and enhance their margins.”