Retail Math Self-Study Guide Introduction Welcome! This Self-Study Guide will give you an overview of how to apply Retail Math and financial principles to the work you do every day. The topics within this guide were identified by your peers, and by your leaders, to help you do your jobs better and in turn help your categories, divisions and our company increase profit.
Key Learning Goal At the end of this Retail Math Self-Study Guide, you will have a clearer understanding of how key financial principles affect your business decisions and how to leverage them within the context of your work. Your goal is to make money, and real-life application of what you learn here will give you the tools to do that!
This material contains information for use by Walgreen Co., Walgreen Family of Companies, and other authorized users. Although the content of this material is appropriate for the purpose of training, trademarks, product names, company names, images, logos, etc. used in this material may not be appropriate in all circumstances for all Walgreen Family of Companies and other authorized users.
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Retail Math Self-Study Guide Making Strategic Decisions Envisioning the future . . . . . . .
To achieve the vision above we will focus on the four merchandising pillars: Being experts in customer, industry, product and competition. Strategic supplier partnerships. Developing advanced category strategies.
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Retail Products Partners influence elements of strategic decisions.
No matter where you are in the company, having a clear understanding of the financials that are behind each strategic decision is valuable and makes what we do as a retail organization relevant.
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Collaboration
Stores
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Retail Math Self-Study Guide Making Strategic Decisions (continued) To collaborate effectively you must speak the same language! Integrate the business terms below into your everyday thinking and decisions. (There is a glossary of other financial concepts at the end of this Self -Study Guide.)
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Retail Math Self-Study Guide Margin Rate Margin Rate This graphic illustrates how Margin Rate is impacted by the mix of the three sales types. The decisions that you make (e.g., the levers you pull) in your own category impact the bottom line of Margin Rate.
Margin Rate = GP$/Sales $
The levers you pull: To express simply, the decisions you make within your category drive Sales and Gross Profit (GP). You have access to different levers that impact Rate, which in turn impacts Sales and GP. The strategic ways you manipulate your Mix are what make the difference in Rate, so understanding the balance among these concepts and what other factors can influence them is critical. Our overall goal is to increase Gross Profit (GP) through decisions you make regarding key areas (product mix and promo mix) and to understand holistically how your decisions affect GP and Sales. Diagram This diagram below illustrates how changes in Retail and Cost (yellow boxes) changes the Margin Rate (purple circles).
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Retail Math Self-Study Guide Margin Rate (continued) Application There are various ways to leverage the concepts illustrated on the diagram in order to achieve an acceptable Rate. You can:
Improve Mix by increasing the amount of sales that flow through higher margin buckets. Increase Rate by going after individual buckets and increasing rates within those buckets. Increase vendor support (lowering costs through better negotiation with vendor). Price point changes (choose to discount, but at a higher price). Attack specific margins within those buckets; either bring your cost down with vendor support or (sell at a higher price).
In the diagram on the previous page, you are specifically addressing Rate, not the (amount) that flows through each bucket.
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Retail Math Self-Study Guide Product Mix
Product Mix is one of the levers that you can pull to manipulate the rate of the overall basket. It refers to the combination of products within a category that have different margins per item. You need to balance sales and profit as you strategize.
Application Examples such as low margin cigarettes and high margin owned brand products are elements of product mix that need to be considered.
Product Mix Diagram The diagram below illustrates how sub categories can be changed to produce different profit dollars.
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Retail Math Self-Study Guide Product Mix (continued) National Brands (NB) versus Owned Brands (OB) within Product Mix How you strategize National Brands and Owned Brands is one of the levers you pull. Often times, owned brand products have higher margin and are an important factor within the mix. They have a positive impact on product mix and average margin of the basket.
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Retail Math Self-Study Guide Promo Mix
Promo Mix is strategized by working through calculations of weighted margin rate and highlighting each promo vehicle's contribution to overall profitability. As you can tell from the diagram below, you are comparing the impact of the different promotion vehicles in regards to the profit that was
Controllable and Variable Elements in Promo Mix There are various ways to work within Promo Mix that have an impact on promotional margin. For example:
Controllable elements include when and w h e re you w an t to t a r ge t . Uncontrollable elements include volume, depth and frequency of sales.
Funding to Support Ads: You can negotiate with vendors to receive promotional funding to help support promotional margin. “Funding” comes through as cost-adjusted dollars and you see it directly reflected in GP because it directly off-sets cost.
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Retail Math Self-Study Guide Promo Mix (continued) National Brand and Owned Brand Points When considering National Brands versus Owned Brands and the impact on promotional rate remember that National brand points are often paid for by vendors (through funding for ads) and Owned Brand points are funded internally.
Promo Optimization It’s important to focus on the concept of Promo Optimization. There is an opportunity for Walgreens to advertise more effectively, focusing on the right products at the right time. This will help us achieve our overall goal of driving better Gross Profit (i.e., increase regular sales, and increase margin on promo sales).
Upcoming fiscal year will require a shift in strategy in order to drive more profitable sales.
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Retail Math Self-Study Guide Summary (Product Mix and Promo Mix) Summary The chart to the right illustrates simply that when you make decisions regarding controllable elements within your area of work, there are likely impacts to other areas of the business. For example, if sales stay the same, and cost is decreased, profit will increase. And if scandowns are increased, profit will increase. The overall health and profitability of our company depends on strategizing in your own area of work while collaborating and keeping in mind the potential impacts to other areas of our business.
Thought-Provoking Questions Read through the thought-provoking questions below. Write down your answers on a separate sheet of paper. Meet with your manager and discuss the questions and your answers. Discuss topics of interest with your peers. This will give you a more thorough understanding of the content.
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Retail Math Self-Study Guide Waste/Shrink Waste and Shrink are two types of losses that impact our product profitability. Operationally in the stores, Waste and Shrink are two separate and distinct measurements. Both update on-hand quantities, but for different reasons. Compare the information in the table below regarding the differences between Waste and Shrink (i.e., method, frequency performed, what it is used for, related store processes and other notes).
A common dilemma: “The system says we have the product, but for some reason it does not exist in physical inventory.� Shrink accuracy is only as good as the quality of the counts performed!
Shrink Adjusted and Waste Adjusted Gross Profit We downwardly adjust our profit figures depending on how much shrink and waste exists. A simplified formula is below showing the products sold (scan gross profit $) less the products lost (shrink) or wasted (waste). The final figures account for either Shrink Adjusted Gross Profit or Waste Adjusted Gross Profit dollar figures or as a percentage of Sales.
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Retail Math Self-Study Guide Net Margin Net Margin provides insight into the controllable profit of a product; controllable being defined as any credit or cost associated to carry a specific item that otherwise wouldn’t exist. When you focus on Net Margin it allows you to see what the controllable profit of a product is and influences decisions on how to move forward with each item within our category and with our overall business. The key decision is this: How can we control costs better to get to a better net margin that benefits the company?
Determine Net Margin This diagram illustrates a simple formula to describe how Net M a r g i n i s determined.
Determining Net Margin including Distribution Center costs:
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Retail Math Self-Study Guide Net Margin (continued) Net Margin and EBIT Compared EBIT is the abbreviation for Earnings Before Interest and Taxes. It is important to understand the difference between Net Margin and EBIT. They aren't the same and one isn't better than the other. Both are relevant; they are different measures of profitability. 
For Merchandising: It is more helpful to look at net margin because it allows you to see controllable costs.
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For Corporate and looking at the overall picture (i.e., investors): It is more helpful to look at EBIT to see what earnings are available to the firm before interest and taxes.
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Retail Math Self-Study Guide Summary and Key Takeaways Summary Let’s take a look at how the overall business is presented from a financial perspective. In this study guide the concepts of Sales and Gross Profit (GP) were discussed. Then you learned how to factor in the other layers, like SG&A, and the costs that are involved, as well as understanding that there is a cost to merchandise and sell to consumers. The company does not take all of the profit! There are some levers you can pull in order to drive EBIT. These include increasing sales, increasing rate (which increases GP) or decreasing SG&A. SG&A decisions are the ones that have immediate benefit to GP because there are immediate results. It takes more time to plan and feel the affect of strategies related to driving more sales or increasing rate. However, they are both important strategies to the business.
Key Takeaways
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Retail Math Self-Study Guide
Reference Guide Category/Industry Trends Items that are in style, hot, trending up, runway colors, a popular phase, styles of famous people, as seen on TV, popular movies, and related paraphernalia customers buy of other hot items, sport events.
Competitive Environment Relates to the comparative prices in the area of certain items or companies that sell the same items that our stores sell. It also refers to other factors such as distance, convenience, quality, customer service comparatives, etc.
Cost
The amount our company pays for an item; the price set by the wholesaler or distributor to charge our company.
Depth of Discount
How small or large is the percentage of the discount to the total cost of the item.
Frequency of Discounts
How often are discounts given to the customer in certain categories; how often do customers see and come to expect discounts; and how often to we decide to lower prices.
Loyalty
Points earned by customers that join our program, customers earn more points if they purchase our brand.
Markdown
Final price reduction or clearance price of an item or post-special price. For example, boxed Christmas cards price during the first week of January.
Promo
Price reduction of an item on sale.
Retail Price
The original dollar amount on the tag; the non-sale amount customers pay for
Scandown
Vendor financial support of certain ads, or certain placement of items within the stores.
Timing of Ads Volume of Sales
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How often ads are published and/or when ads are published. The count of items we sell within a certain area or time frame. For example, volume of sale is represented by the number of Twix bars sold that are located in the end stand by the register.
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