Grow sales or grow gross profit? That seems to be the million dollar question in the grocery industry. Experience tells us if we try to grow sales at all costs, then gross profit percent suffers, while increasing your gross profit percent often comes at the expense of sales! This is especially true in produce, where many items are very price sensitive. The question we should be asking is: “How do you find the sweet spot between sales and gross profit?” A great way to answer this question is by tracking the department contribution to store profit. Contribution finds the balance between sales and gross profit percent by telling you how many profit dollars a department generates for every dollar of store sales. The simple formula is Contribution % = Gross Profit % x Department % of Store Sales. Let’s compare two scenarios to see which would be more advantageous for the store:
Scenario A Scenario B
Store Sales: $100,000 $100,000
Dept. % 10% 12%
Gross Profit % 40% 35%
Scenario A (10% x 40%) gives a contribution rate of 4%, while Scenario B (12% x 35%) gives a contribution rate of 4.2%. Basically, this means that Scenario A would deliver a contribution of 4.0% of store sales or $4,000 of gross profit while, Scenario B would deliver 4.2% of store sales, or $4,200 of gross profit--$200 more than Scenario A. This is a reminder of the danger of focusing only on gross profit percent. Referring back to our hypothetical examples, a store owner who only focuses on gross profit %, might be very happy with Scenario A and have $200 less in his pocket! Watch for a future post, where we will identify some strategies you can employ to generate incremental sales and gross dollars.