Margins: Are you focusing on the wrong thing?

At the Newsagents Federation conference in Birmingham this week, Imperial Tobacco, the UK’s market leader, suggested to retailers that they should focus less on cigarette margins, at 6.6 per cent, and more on ‘stock turn’ at 183 times a year; by which we mean the amount of times the average tobacco product needs to be restocked.

Using a simple model, general manager Amal Pramanik, showed that the 50 per cent margin offered by toothbrushes which turned over four times a year, offered a cash return of £200 a year for every £100 invested. Cigarettes, in contrast, would earn a retailer £1,200 for every £100 invested.

It is a simple illustration and holds true even when retailers add on investment in assets, such as the space occupied by the product. In order to measure how well you are doing, you need to understand what return you get when you multiply your margin by your stock turn.

Mr Pramanik’s purpose in reminding retailers of this fact is to head off increasing pressure from retailers for a rise in the margin that they get on cigarettes. However, his reminder is also useful as many retailers focus on margin and miss the impact of stock turn.

Partly this is because of the way that cash and carry wholesalers compete on margins on key stock keeping units, which tends to make the headlines. It is also difficult to apply a universal stock turn figure to an SKU because that depends on the type of outlet it heads towards (in a dentist’s, for example, you are going to make more money selling toothbrushes).

But another reason may be that many retailers are not measuring stock turn and favouring the products that generate the best cash returns.  Do you think about stock turn when deciding which products should be prominently displayed, or do you focus on margin?