Issue link: https://www.e-digitaleditions.com/i/602622
38 FEDA News & Views M ost distributors continue to lament the pervasive, and possi- bly increasing, pressures on gross margin percentages. Seemingly, price is outweighing almost every other factor in the competitive arsenal. At the same time, gross margin is one of the "big two" in increasing profits for distributors (the other being operating expenses). This creates an imperative for distributors to generate extra gross margin dollars whenever they can to offset the dollars lost from price competition. A continually under-utilized margin opportunity involves raising prices on the slower-selling portion of the product mix. Many distributors may argue "been there, done that." Despite those protests, a major profit opportunity remains large- ly untapped. This report will examine the potential for enhanced gross margin associated with slower-selling items. It will do so from two perspectives: the gross margin potential (an analysis of Money Matters Pricing the Forgettable Last Five Percent By Dr. Albert D. Bates President, Profit Planning Group bigal@profitplanninggroup.com how increasing prices on slow-selling products can influence the total firm gross margin percentage) and finding the margin opportunities (a discussion of the types of items on which margins can be enhanced even with on-going price pressures). The Gross Margin Potential Within every line of trade in distribu- tion, including FEDA, there are wide vari- ations in the gross margin percentage across different SKUs. In a typical vari- able pricing (or matrix pricing) scheme, fast-selling items have low gross margin percentages while slow-selling items command higher ones. At the fast-selling end of the prod- uct line, the A items, there is virtually no opportunity to increase prices suc- cessfully. These items are purchased fre- quently so customers are very knowl- edgeable of pricing. To use an unpleasant term, these items are commodities. At the other end of the product spectrum, the D items represent a genuine margin- improvement opportunity. However, too often the profit potential is overlooked or even disparaged. Frequently, the sobriquet "D stands for dog" prevails. After all, the D items are usually only about 5 percent of total company sales. Seemingly, there is noth- ing to capitalize on here. In fact, if any- thing, the firm would like to eliminate the D items because they are such slow movers. The reality is that the D items repre- sent a substantial opportunity. This can be understood by reviewing the results of the PROFIT report published by FEDA. According to that report, the typical FEDA member generates $20,000,000 in sales and operates on an overall gross margin percentage of 22.5 percent of sales. This results in $4,500,000 of gross margin dollars. The D items, comprising the last 5 percent of sales, only accounts Exhibit 1 The Common Characteristics of Blind Items Characteristic Implication • Low Sales Level Bought rarely, unlikely to remember the last price paid • Not Heavily Promoted Information about price not readily available • Bought Only When Needed Availability more important than price • Low Price On a small item, no real concern about price • Repair Parts Buy something small, avoid replacing something large • Unusual Hard to find, availability is key • Non-Seasonal No need to discount "in season" • Unbranded Difficult to obtain specific price information