Solving the profit puzzle

12/03/2012 04:23:00 PM
Thomas Burfield

When it comes to setting profit margins and determining profit percentage versus volume sales, a produce director is pretty much on his own.

No one can tell you which path to take, but if you guess wrong, you’ll pay the price — on several levels.

“There is not a homogeneous profit model that retailers go by,” says industry consultant Bruce Peterson, president of Fayetteville, Ark.-based Peterson Insights Inc. “There is huge variability.”

Profit margins depend on a variety of factors, including size of your company, whether it’s private or publicly held, and what you’re trying to accomplish.

“You have seen margins increasing over the past couple of years in order to cover increased expenses because sales had flattened,” Peterson says.

However, he said in early November that over the past two quarters, sales have begun to improve, so margins have started to flatten out.

 

Survey system

Jim Madala, produce director/buyer for the eight locations of Palm Springs, Calif.-based Jensen’s Finest Foods, has a system that he follows for pricing the stores’ top-selling items.

He and three produce managers survey five local competing stores each week and record their prices for 60 different items.

If his vendor’s price on an item would put Jensen’s out of reach of other retailers, he’ll lower his price to be competitive. If his vendor’s price would be a little lower than competitors, he’ll raise his price to match theirs.

Certain items, however, are price sensitive — such as bananas.

“We don’t make our markup on bananas,” he says. “It’s a price that sticks in a consumer’s mind.”

Madala’s pricing method is not a straight formula.

“I take many factors into consideration when I do my pricing in order to be fair and competitive, with repeat sales in mind,” he says.

 

No set markup

Nor is there such thing as a set-in-stone markup at Thrifty Foods, a Victoria, British Columbia-based chain of 30 stores and a division of Sobey’s Inc., says Michael Mockler, director of produce operations.

“You want to have a balance between labor and profit,” Mockler says.

That means that items that require a lot of labor, such as hand stacking, culling and rotating, will have a higher markup than a 5-pound bag.

“There’s huge shrink” with many items that require heavy labor versus those that do not, he says. “You have to cover that internally by charging for those sorts of things.”


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