Ep. 44 The Retail Profit Pie
Understanding your numbers is a crucial part of succeeding as a retail business owner.
When I say “your numbers,” I’m referring to the numbers from your Profit and Loss statement. Sometimes when I talk about the P&L, it scares retailers. But it shouldn’t!
The P&L statement is one of the MOST valuable tools a brick and mortar store owner—or any small business owner—has in their tool belt! More importantly, you need to learn how to USE this tool.
It would be like giving a carpenter a miter saw, but they don’t know that the saw cuts the angles they need to make a picture frame or install crown molding correctly.
Luckily though, carpenters usually start as apprentices, so they are taught how to use this tool. In retail, we typically jump in with both feet. We skip the apprentice stage. We start selling goods, generating revenue, and we don’t look back. That results in many store owners not learning how to use their most valuable tool.
To look forward and make the right decisions for our businesses, we must educate ourselves on some of the business tools we were never taught. And that’s why I’m here!
I’m an online educator, and one thing I’ve learned is that to be an effective teacher, sometimes it’s the simplest visual that makes the most significant impact. I’ve been talking a lot about how retailers can profit or, better yet, profit more.
I love talking about running a profitable business. But before I do that, I realized it’s more important to lay the foundation about where a retailer’s money goes and why retailers are challenged more than other businesses to profit at all.
I went back to my grade school days to convey this. I grabbed some colorful markers, blank paper, and drew a big circle to represent a pie (my sister would joke right now that I always think about food!).
I’m not kidding. I actually did this before the Financial Foundations class I co-hosted with Sara Nemecek of WE Profit Foundry. After teaching the class, I realized that this “basic” drawing I made resulted in a-ha moments for some of the attendees.
Understanding the Retail Profit Pie
The circle represents all of the revenue we bring in for a year. Each piece of the pie represents the money we distribute, such as our cost of goods and our operating expenses. Operating expenses may or may not include payroll and our rent, which tends to be a B&M store owner’s biggest expense.
Well, my sister speaks some truth. I definitely do have an appetite. We joke how I eat every 2 hours, and I do. But my point here is that if I’m drawing a pie and I’m thinking about food, I WANT a piece of that pie!
And if you’re running a business, you should want a piece of that pie too. More importantly, you deserve it. You WORK HARD.
Now let’s talk about the pieces. The biggest part of that pie for retailers goes to Cost of Goods Sold (aka COGS). This is what you pay for the merchandise you sell. Whether you make your products or resell items you buy at market, all retailers have COGS.
Unfortunately, the cost of goods in most retail businesses constitute HALF or more of your pie. So immediately, half of your pie is GONE.
I know some retailers, like a florist, who has nailed her profit margin. Her COGS are 30% or less. We should all strive for this! But again, in retail overall, it’s 50% or more if the retailer isn’t paying attention to their profit margins.
As you can see on the pies, one is titled “NO, don’t do this,” and one is titled “YES, do this.”
Half or more than half of my pie is already gone, and I’m starting to get hungry.
In my “NO, don’t do this” pie example, I, as a retailer, spend 55% on COGS. I went a little higher because there’s always freight or shipping to cover too, and most retailers don’t think about this.
More than half of my pie is gone. The vendors, manufacturers, and local makers that I buy from just ate half of my pie! (If you’re a maker, by no means am I saying your cost of goods isn’t worth it. I’m just telling a story here!).
The next piece of pie is usually a retailer’s rent. Most brick and mortar store owners pay rent, and rent is usually their most significant expense. Ideally, this should be 10% of your pie, but I’ve seen some retailers pay as much as 20-30% of their revenue in rent. This chunk of pie can get big!
In my “NO, don’t do this” example, 55% went to my vendors, 15% went to my landlord. That’s 70% of my revenue gone! I only have 30% of my yummy pie left.
Now my stomach is grumbling.
But I can’t forget, I have operating expenses, office supplies, website creating and hosting, POS fees, maintenance, e-commerce and software fees, shopping bags, utilities, payroll, internet, marketing, travel, education, and much much more.
Well, I hate to say, but in my “NO, don’t do this” example, my operating expenses total 30% of my revenue. If you’re a current store owner, you know those expenses add up quickly!
Now, I’m hangry.
55% went to my vendors, 15% went to my landlord, and 30% went to pay the rest of the bills. 100% of my revenue is GONE. Everyone else is getting a piece of the pie BUT ME.
If you’re a retailer who has learned about their P&L statement, how to use it, how to improve their numbers, and how to PROFIT, this scenario may seem crazy to you. But trust me, it’s more the norm than you know.
If the “NO, don’t do this” scenario describes you, and you often wonder why you can’t profit, it’s most likely because your profit margins suck. You’re paying too much in rent, and/or you’re not being diligent about your expenses.
How to get more pie for yourself
There are many things you can do to improve your situation. Here are some ideas to help you start:
- Negotiate better rent or move to a more affordable location
- Improve your profit margins. This might mean you have to…
- Stop overbuying
- Increase your prices
- Take a really good look at your inventory management reports to determine which products or categories need to get cut, what you need to invest more in, or where you need to raise your prices
- Go through a deep dive into your operating expenses where you cut, negotiate, eliminate, replace, or do what you need to do to stop spending so much
In my “YES, do this” pie, which I call the retail profit pie, this is the breakdown for the retailer in that example:
COGS 47%
RENT 8%
OPERATING EXPENSES 27%
OWNER’S PAY 10%
PROFIT 8%
This is just an example of a retailer who’s maybe just getting started on their profit journey. Perhaps your financial situation is better, and if that’s the case, I’m over here rooting you on!
You Deserve a Piece of the Pie
We all have revenue coming in, and we track sales on a monthly, weekly, or even daily basis. Most of us anxiously wait to see if we beat last year’s number at the end of the month.
What’s equally or maybe even more important is the money that goes OUT. I know this isn’t sexy, but it’s vital, especially in retail.
I want every small shop owner to have a PIECE OF THE PIE. I really do.
If you struggle with this, we have multiple master classes in Master Shopkeepers that cover not only how to learn to read your P&L, but how and where to cut expenses, and much much more. Master Shopkeepers is a mastermind group for brick and mortar store owners, and it is currently closed, but you can sign up for the waitlist here.
Resources
- Join the waitlist for Master Shopkeepers
- Financial Foundations class with Sara Nemecek of WE Profit Foundry
Timestamps
- [03:38] Understanding the Retail Profit Pie
- [06:14] Half of my pie is GONE!
- [10:41] My stomach is grumbling…
- [11:24] Now I’m hangry 😡
- [12:40] How to get more pie for yourself
- [15:06] You deserve a piece of the pie
