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Gross profit margin is the amount of money left after deducting the cost of goods sold. Cost of goods sold is the sum of the actual cost of goods purchased plus the cost of freight in and shrinkage.

The overall gross margin performance of a store, or the target gross margin, is determined by the methodology used in establishing the retail prices of the merchandise purchased for resale. The target is a moving target and will vary by store, but should be between 46 and 52 percent. As you can quickly see, that is a six-point spread. The spread is caused by many variables including store location, local demographics, store traffic, merchandise assortment and the owners’ pricing philosophy/knowledge. Simply doubling the cost of the products you purchase in order to reach a retail selling price will not guarantee a 50 percent gross profit margin — nor will it provide the security of reaching a net profit.

However, a blended assortment of different classifications of merchandise with an array of properly assigned gross margins to each classification has an excellent chance of reaching a viable gross margin target.

Some chef’s tools (gadgets), kitchen textiles, linens and glassware easily lend themselves in many cases to a 250 percent markup or what I like to call a 2.50 cost-to-retail differential. It must be remembered that each of these classifications, if they do exist in an assortment, play a different role.

Gadgets are a dominant assortment. Except for certain branded goods, their markup is often blind, making it possible on most items to maintain the heaviest markup in the store. They also turn rapidly and the inventory may be quickly replaced. But what must be remembered is that a strong department in this merchandise classification requires substantial store real estate (square footage), and while it produces high gross margins, it also provides lower dollars per square foot. Thirty-five to 40 percent of the entire store’s sales may come from this one classification of merchandise. This purchase is more often than not an impulse purchase and is driven by a store’s overall traffic pattern. Kitchen textiles, linens and glassware are all likely to be opportunistic assortments for the store. If glassware is purchased correctly and is non-promotional, it may bear a 300 percent markup. The freight-in costs on glassware may be as high as 20 percent of the cost value of the goods, making the higher markup essential. These classifications and the compactness of the assortment will take considerably less square footage than gadgets. Their higher retail value will produce higher dollars per square foot. Inventory turn will be considerably lower than gadgets.

The majority of chef’s tools (gadgets), bakeware and cleaning products should be marked up at 2.225 percent. Bakeware, like chef’s tools, should be a dominant assortment classification while cleaning products are an opportunistic assortment, or they may be classified as part of chef’s tools. A 2.225 percent markup depending on rounding will give you a gross profit margin of 55–57 percent before freight and shrinkage.

The dominant assortments of cookware and cutlery and the opportunistic assortment of kitchen electrics should all be priced at MAP (minimum advertised price). The key reason for this is because it is unlikely that an independent housewares retailer will be playing the high/low retail pricing strategy game practiced by most national chains. By maintaining MAP all the time, the perceived value of the overall pricing in the store will be viewed as fair by most shoppers, since what is likely to be price-shopped is always priced competitively.

Oftentimes a manufacturer will provide you with an MSRP (manufacturer’s suggested retail price). Sometimes it makes sense to use this price, but if the product is not a highly visible one, an additional markup above the MSRP may be prudent. This is especially true if the MSRP offers only a 50 percent gross profit margin.

When applying markup percentages to the wholesale cost of a product, look at the results and round up or down to achieve what sounds like a valid pricing scheme. For instance, if a product cost $2.65 and a 2.225 percent multiple is used, the result is $5.89. It is certainly realistic to set the retail on that item at $5.99 and generate an extra few cents gross profit margin on the item. The extra 10 cents may seem insignificant, but multiplied by a few hundred SKUs (stock keeping units), it can be very meaningful. If the result of the formula calculation is $10.19, then $9.99 is probably the appropriate retail price.

Whatever the result of a calculation, do not become a “margin hound.” Selling 12 SKUs at a gross margin of $7.00 is far better than selling five of them with a margin of $10.00 in the same time frame. When the product is properly priced, more volume will always result in a better overall gross margin dollar performance.

There are two other components to consider when establishing the selling retail price. One is freight, and the other is shrinkage. Sometimes you must substantially increase the price of an item because of freight costs, but not always. What’s important about freight is the average cost of getting goods to the store.

Remember, freight is not paid on every order — some products are sold on a prepaid freight program. Freight should be 3–3.5 percent of the total cost of goods purchased. If the cost of freight rises above 4 percent, it’s time to start analogizing your freight cost to find out why it is that high. Costs that reach 5 percent or higher mean a real problem exists that needs to be rectified. If the store is a member of a buying group, the buying group probably has a freight program and you need to be sure it is being used. The discounts on a cooperative freight program can be worth hundreds, even thousands of dollars in the course of a single year.

Shrinkage, the second component of purchased goods costs, comes from breakage, shoplifting and employee theft. Keep this number at 1 percent or less. At 1.5 percent, a major problem exists and needs to be addressed.

Here are some guidelines to follow to make sure company margin targets are being met.
• Remember to change retail prices when increases are incurred from the vendor and/or revised price lists are received. Don’t wait until the next time the product is ordered. Go after the added margin your current inventory will offer by changing pricing, particularly if the product is MAP priced.

• Monitor classification gross margin targets throughout the year. If a pricing error has been made by line item or on a line, the error should stand out on your gross margin reports by classification. Get into the detail and find out what is causing the problem right away.

• Always review gross margin performance at the end of each year. If gross margins are too low, look at the gross margin performance of each classification to determine if there is room to increase prices and still remain competitive in your market.

Retail pricing and maintaining “THE RIGHT GROSS MARGIN” is an intrinsic component of operating the store and insuring its success.
Robert F. Coviello is the founder and president of HTI Buying Group, an organization of independent houseware specialty store retailers and industry vendors. He is also president of Housewares Tabletop International, a consulting firm that provides innovative solutions to strategic challenges facing companies in today’s dynamic housewares and tabletop industry. Bob has more than 35 years of experience in the industry and is an acknowledged industry expert in the housewares field.