How To: Increase Store Profits By Increasing Maintained Markup

josh hunter

• August 26 2009
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By Alan Roseman

Retailers are always concerned with shrinking sales figures.  The fact is that shrinking demand does not necessarily mean you must accept lower sales.  Even with lower sales, you don’t need to accept profit cuts. Let’s take a look as some simple steps that can be taken to increase profits and sales.  Remember, as a retailer, these are things that you must control.

Increase IMU (Initial Markup)

Everyone knows that retailing is easy. You just buy lots of merchandise and double the price and take all that money to the bank!  Now that you have been in it for a long time, you found out it is not that easy.  One thing that is still valid however is that to make money in retail, you must mark up the goods. The more markup the more profits if you can sell the goods!  It is now more important than ever for the product of sales and Maintained Markup (MMU) to be maximized.  While it is extremely important that action sports retailers stock an ample supply of consumer-recognized products, care must be taken to make sure that the initial markup (IMU) on those products are optimized. When the markup is too low, you are losing profits. When the markup is too high you are losing sales.  Finding the markup that is just right is the key to successful retailing through this recession.   This may be difficult to do when vendors pre-ticket merchandise with restricted IMU.  For this reason, retailers must keep their eyes out for fresh new lines that are not widely distributed as well as increase their selection of private label merchandise.  Another method of increasing IMU is to reserve a percentage of you projected monthly open-to-buy dollars for promotional goods.

The chart below shows how much additional profit could be generated with a modest 1% increase in IMU, resulting in an additional $1,000 additional profit for every $100,000 in sales.

This additional profit will offset lower sales, shrinkage, and provide additional revenue to cover the costs of operating your store.

Reduce Markdowns

Not every item sells.  Sometimes specific vendors, styles, colors, or sizes sell better than others.  What doesn’t sell must be reduced in price. Maintained Markup can be increased by properly controlling markdowns.  For example, if markdowns are running at 20% of sales, imagine the impact on profits if markdowns were only reduced to 18% of sales.  A simple 2% reduction in markdowns can increase your maintained markup by .92%, that’s an additional $920 for every $100,000 in sales.

Managing markdowns is attainable by following some very basic retail principles. You must have a strategy and game plan for markdowns.

Changes in MMU (Maintained Markup)

Combining a 1% increase in IMU and a 2% decrease in markdowns, results in a MMU increase of 2.12% or an additional $2,120 profit for every $100,000 in sales.

In addition to the change in profit, you may also see your sales volume increase as the value of every item you sell has now increased in price.

Retail is the sum of doing many little things right. An added $2,120 per $100,000 in sales may not sound like a lot, but ask yourself how much merchandise you must sell to add that much cash to your pocket. Maybe there is an additional 3% or 7% of IMU potential not being identified.  With the correct markdown strategy there could be an additional 5% or 10% markdown improvement.

Every classification or merchandise in you store has a different sensitivity to increasing IMU and reducing markdowns.  Optimization means getting the most from each classification on the bottom line.  The opportunities can be truly enormous.

There are many small changes that can add up to big profits.  The small changes can be the hardest to find.  The many changes happening offer opportunities to the stores that can identify opportunities and adapt to the new environment in many small but meaningful ways.

Alan Roseman has over 30 years of retail experience in all phases of specialty store retailing. In 2004, Alan drew from his experience in operations and data management of retail and started Strategic Results with the goals of helping independent specialty retail stores to increase sales, cash flow and profits using some of the most sophisticated and accurate merchandising tools available.

Alan Roseman
Strategic Results
(310) 545-7304
alan@strategic-results.biz
www.strategic-results.biz