Retail 101: Part Two with Mike Mauti
With more than 20 years of experience in the North American supermarket industry, Mike Mauti has learned “Retail 101” firsthand.
Now he is sharing his insights with the audience of The Produce Market Guide and The Packer.
Mauti, the managing partner of Toronto-based Execulytics Consulting, teaches on sales, tonnage, gross profit, total contribution, market share, customer satisfaction, negotiation and more.
This is part two of a conversation between The Packer’s Tom Karst and Mike Mauti about Retail 101 principles.
THE PACKER/PMG: How would you explain the concept of gross profit to a lay person?
MAUTI: The most basic description for gross profit is sales, less cost of goods. For example, if you have a product that sells for $3 and has a $2 cost, your gross profit is $1, which is just three minus two. To determine gross profit margin, you take the amount of profit divided by sales revenue. In this case it would be $1 divided by $3, amounting to a gross profit margin of 33.33%.
THE PACKER/PMG: Margins vary between retailers, so not everybody’s after the same number necessarily, correct?
MAUTI: That is correct, there are retailers who cater to a customer’s need to pay a low price and there are retailers who cater to a customer’s need for high service. And often, on a macro basis, the store that caters to a customer’s need for low prices will have a lower margin. Plus, a high service grocery store usually also has a larger assortment, carrying more value-added products and organic products. Larger assortments bring with them higher costs requiring higher margins if they are going to achieve an acceptable contribution.
THE PACKER/PMG: How do stores look at the term “contribution” and how important is that element to their success?
MAUTI: Contribution is one of the most important metrics for an operator. Typically, a store would have a contribution margin target. Contribution is the profit that remains after the primary selling expenses of labor, shrink and supplies are paid for. A store manages these inputs to hit that contribution margin target. As an example, if a store has a 20% contribution margin target and they achieve a 35% gross profit margin, they will manage labor, shrink and supplies within a 15% window, which is just the difference between the two. To accomplish that might have an 8% labor spend, a 5% shrink spend plus 2% for supplies. They’ll move those levers as necessary in order to hit those targets. “Supplies” includes things like containers for your salad bar, bags, elastics for celery and romaine and cleaning supplies amongst other necessary items. But the big levers are labor and shrink. If the store notices they are falling behind on their contribution target, they might pull the labor lever a little bit, meaning they might cut back on a few shifts in order to maintain their contribution. But like everything in life, every action has a reaction, if you cut back on your labor, you can almost guarantee that in-store conditions are going to suffer. In this case, you run the risk of hurting a different objective, like sales. For a store operator, it can be a real balancing act.
THE PACKER/PMG: It’s sometimes a tug of war between two things that you want to get done?
MAUTI: Exactly, it’s an interesting business because there are so many levers and many of them are competing. Whether we’re talking labor versus conditions, assortment versus shrink, sales versus profit or price versus tonnage, you often focus on one, then start to see the other suffer. The good operators know when to apply pressure on each lever enabling the entire store to run smoothly.
This is similar really, to what we discussed last time regarding the genesis of the Retail 101 seminar. There are many levers in the produce business that are pulled on at many stops across the value chain, including at the store, at the office and at suppliers. In order to properly manage these levers, there needs to be a partnership between retailers and suppliers. As technology and the pace of change at retail have advanced, much of the information that used to get transferred between the two groups is no longer a part of the conversation. This makes it difficult to build the collaborative partnerships required for success in managing those levers.
Read more of Mike Mauti's "Retail 101" interview here.