Let’s face it, this may not be as sexy as releasing a new format, not as political as chasing down run away health care costs, and it just doesn’t resonate as fun.
For most companies, the cost of goods and services (COGS) is the single largest line item on their P&L. Historically the Retail industry has cost of goods across all segments of between 55% and 81%. In the supermarket segment cost of goods has a historical average of 72.0% and Drug Stores are right behind. The convenience stores segment cost of goods is a staggering 81%!
The single-largest opportunity to improve net income is by addressing the largest line on the P&L which is the cost of goods and services. The good news is that every dollar reduction in COGS falls directly to the bottom line. The finance department may argue that there are supplier related switching and timing costs incurred in order to get to the true savings, but the majority of these savings end up on the bottom line if you are attaining plan in other areas.
So let’s measure the impact this could have on a retail company. The math can easily be applied to any retail vertical. An Aberdeen report stated that a 5% reduction in cost of goods would have the same impact to a retailer as a 30% increase in top line sales.
Let’s do some simple math: a five billion dollar ($5B) supermarket company has an approximate cost of goods of $3.6B. Assuming a net income of one percent (1%) this retailer would have earnings of $50M. Let’s assume that they assigned fifteen percent (15%) of their total spend next generation e-procurement tools. This would be approximately $540M. Assuming a savings of 10% which is well documented within the industry, savings would equal $54M which would equate to a net earnings improvement of $54M or greater than 100%.
Yes this is simple math. There are dependencies related to percent of above the gross margin line and below the gross margin and a lot of sin falls into the expense category which is why net profit sucks in the first place. There is also the issue of the rest of the company performing to their plan guidelines so that these real reductions don’t just mask other problem areas. Timely award and timely contract implementation are also important
There is an old saying that figures lie and liars figure. At the end of the day you just can’t hide from the numbers. If you don’t trust the math, let us prove it to you.
We look forward to and appreciate your comments.