Finding the right margin

Only by properly identifying operating costs can a golf retail operation accurately set profit margins says Alan Fisher.

Last month, we looked at the impact of stock turnover rate on our profits and understood that gross profit percentages ‘don’t mean squat’ in comparison to cash. This month, pricing philosophy is the topic. I am keenly aware of what competition has done to the pricing for golf merchandise. Customers can always buy it elsewhere for a lower price, but let’s examine mathematical considerations for pricing.

Screen Shot 2015-04-07 at 15.29.19One of the first questions I ask a new client is “what are your operating expenses (OPEX) as a percentage of sales?” OPEX are all the costs associated with running a business that are not a part of cost of goods sold (which includes merchandise purchases and freight). OPEX includes rent (if applicable), payroll, phone service, Internet, interest expense, insurance and so on.

Since golf shops are quite similar to apparel retailers because of obsolescence factors (fashion or technology/equipment), they make for a reasonable OPEX comparison. Many established apparel shops will experience OPEX in a range of 40 to 44 percent. And the primary line item differences between these two types of businesses are rent and marketing expense. For some golf shops, OPEX becomes 30 to 35 percent.

Therefore, any item you sell that earns less than that OPEX percentage creates a loss and items above it earn a profit.

It is easy to anticipate profits when projected to sell at full price, but it is important to recognise what happens to profits when you mark it down. And you will mark it down.

In table 1, I have listed selling price, cost price, multiplier, initial markup percentage (IMU) and profit percentage based on 35 percent OPEX. In each instance, a net profit occurs.

But when markdowns, see table 2, come in to play, the ability to obtain a net profit is obviously diminished. (Keep in mind last month’s article talking about the time factor.)

And, of course, when a shop makes a decision to sell items at cost to finally get rid of them, the gross profit is 0% but the profit after OPEX is -35%.

So that is the mathematics of pricing and, more importantly, the effect of markdowns.

When reviewing new products, astute fashion buyers will tell suppliers to keep the cost of products unknown until the buyer speculates on the price they believe the consumer is willing to pay. If the speculative selling price is £100 and the supplier says £60, the astute buyers pass rather than attempt to select merchandise that they already suspect cannot earn a reasonable profit. If the cost is £35, the buyer will still attempt to sell at the higher price, rather than use a standard multiplier to determine selling price. That buyer has already used their expertise to speculate that customers will pay £100 and that should be the selling price.

Screen Shot 2015-04-07 at 15.29.53Admittedly, there are many products where the selling price is dictated by your competition. Basic needs, including golf balls and gloves, are likely put you in a predicament where you must match price. My own club sells these items at £1 to £2 higher (for gloves and dozens) than the local stores. That forces the golfers to decide if convenience is more important than the small amount of savings.

But if you believe price is the only part of a customer decision, then you might as well close the doors. You will lose to the big box boys on price. But there is more to consumer decisions, otherwise, America would be one big Wal-Mart store.

A golf shop has to decide what its image is going to be concerning price, convenience, and level of service among other factors. Every item and every person in the shop should reaffirm that position. And for most golf shops, pricing cannot be the primary focus if the goal is to be profitable.

One final thought…when you evaluate your retail business, it is important to exclude your income from other sources, which could include a salary or lesson income. If your retail business is losing money standing alone, then those revenue sources are subsidising your losses.

If you have questions or comments that you would like for me to discuss in future articles, or would like me to answer personally, please contact me.

Alan Fisher is a US-based retail consultant focusing on open-to-buy, inventory analysis and profitability strategies. He works with golf shops, retail apparel and gift shops. He can be contacted at: alan@otbguy.com or call: 020 3289 4653.

Images courtesy of The London Golf Club and Silvermere GC