Jan. 2012 Cash and carried away
The other day I went and spent a few hours with a good friend of mine that runs a grocers/newsagents cum off-licence shop in St. Albans. After I had arrived, Mike confirmed that we would be spending our time together visiting three different cash and carries in Watford in order for him to buy some key stock items to sell in his shop.
The outing was educational for me as it exposed me to an environment that I was not familiar with (the cash and carries you understand as opposed to Watford) and helped me to better understand why the supermarket giants are killing off the small business community. I thought I’d share my experience. In addition I saw a delightful little example of the power of branding that I am going to relay.
Like most people, I am pretty familiar with prices in my local supermarkets, what I much less familiar with is how the wholesale prices for goods compare to the retail prices I pay. The fact is that the cash and carry wholesale prices are not that far away from the supermarket retail prices and therein lies the challenge – how does a local grocer make enough margin/profit to make it worth trading?
Here’s an example: I drink way too much Pepsi Max for my long term good health, why mention that, well it’s a fast moving consumer good that I am very familiar with.
In Tesco prior to Christmas I was buying pop at two 2 litre bottles for £2.50. The wholesale price at the cash and carry in January was £4.89 + VAT for six bottles (£5.75 or 96p a bottle). In this example you can see that it is possible for a re-seller to make some margin but not a lot bearing in mind that the stock was price marked at £1.59 (i.e. the most a retailer can charge). The fact is that just a few weeks earlier I had been buying Pepsi Max at £1 a bottle and at that price the supermarket was selling it retail at the same price a wholesaler would sell it. If you accept that might well be the case across the majority of product lines, you can see how hard it would be for a small grocer to compete.
The next thing that was an education for me was the challenges of a small business to sell cigarettes. Mike was vociferous in his disdain for tobacco products because for every £1,000 he invests in stock, he makes about 5.5% gross margin (or £55 before costs). The fact is that there is therefore a lot of money tied up in stock that makes a minimal return and will take some time to sell. Given that cashflow is fundamental to any small business, it’s hard to justify carrying tobacco products at all.
When I questioned Mike about why he bothers, his view was that cigarettes pull in passing traffic that he might lose otherwise and that those visitors often buy other items too and he can make some margin on those goods. In other words he can’t not sell them even though they make him a pitiful return.
It’s a good thing that the supermarkets don’t deliver newspapers or have the ability to take a proper interest in their customers on an individual basis because that’s how local community/corner shops survive – they offer something valuable above pure price. My friend knows his customers well and often on a first name basis too and let’s face it none of those customers ever goes into a St. Albans supermarket to have a friendly conversation with the manager over groceries.
Now I mentioned a branding story earlier on and it’s all about antihistamine tablets. At the cash and carry, Glaxo’s Priteze tablets were being sold in 42s (6 packets x 7 tablets) for £15.15 plus VAT. A generic antihistamine produced by Aspar with exactly the same ingredients/chemical formula (believe me we read the packets) was being sold in 84s (12 packets x 7 tablets) for £8.65 plus VAT. In reality, you buy Aspar and you get twice the volume of drugs for approximately half the price. Here’s the value of branding though, Mike sells more Piriteze because his customers believe in the brand and don’t have the appetite to look at the ingredients list and compare prices. Perfect!
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The outing was educational for me as it exposed me to an environment that I was not familiar with (the cash and carries you understand as opposed to Watford) and helped me to better understand why the supermarket giants are killing off the small business community. I thought I’d share my experience. In addition I saw a delightful little example of the power of branding that I am going to relay.
Like most people, I am pretty familiar with prices in my local supermarkets, what I much less familiar with is how the wholesale prices for goods compare to the retail prices I pay. The fact is that the cash and carry wholesale prices are not that far away from the supermarket retail prices and therein lies the challenge – how does a local grocer make enough margin/profit to make it worth trading?
Here’s an example: I drink way too much Pepsi Max for my long term good health, why mention that, well it’s a fast moving consumer good that I am very familiar with.
In Tesco prior to Christmas I was buying pop at two 2 litre bottles for £2.50. The wholesale price at the cash and carry in January was £4.89 + VAT for six bottles (£5.75 or 96p a bottle). In this example you can see that it is possible for a re-seller to make some margin but not a lot bearing in mind that the stock was price marked at £1.59 (i.e. the most a retailer can charge). The fact is that just a few weeks earlier I had been buying Pepsi Max at £1 a bottle and at that price the supermarket was selling it retail at the same price a wholesaler would sell it. If you accept that might well be the case across the majority of product lines, you can see how hard it would be for a small grocer to compete.
The next thing that was an education for me was the challenges of a small business to sell cigarettes. Mike was vociferous in his disdain for tobacco products because for every £1,000 he invests in stock, he makes about 5.5% gross margin (or £55 before costs). The fact is that there is therefore a lot of money tied up in stock that makes a minimal return and will take some time to sell. Given that cashflow is fundamental to any small business, it’s hard to justify carrying tobacco products at all.
When I questioned Mike about why he bothers, his view was that cigarettes pull in passing traffic that he might lose otherwise and that those visitors often buy other items too and he can make some margin on those goods. In other words he can’t not sell them even though they make him a pitiful return.
It’s a good thing that the supermarkets don’t deliver newspapers or have the ability to take a proper interest in their customers on an individual basis because that’s how local community/corner shops survive – they offer something valuable above pure price. My friend knows his customers well and often on a first name basis too and let’s face it none of those customers ever goes into a St. Albans supermarket to have a friendly conversation with the manager over groceries.
Now I mentioned a branding story earlier on and it’s all about antihistamine tablets. At the cash and carry, Glaxo’s Priteze tablets were being sold in 42s (6 packets x 7 tablets) for £15.15 plus VAT. A generic antihistamine produced by Aspar with exactly the same ingredients/chemical formula (believe me we read the packets) was being sold in 84s (12 packets x 7 tablets) for £8.65 plus VAT. In reality, you buy Aspar and you get twice the volume of drugs for approximately half the price. Here’s the value of branding though, Mike sells more Piriteze because his customers believe in the brand and don’t have the appetite to look at the ingredients list and compare prices. Perfect!
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