How do you create efficiencies in a high-cost, low-margin retail environment? That was the question I was going to answer.
First, I think you have to remind yourself why you are in a high-cost, low-margin retail environment. The answer (because Susan blabbered at me until I brought in high-end product), is not enough in this case to restore confidence (no matter how true it may be).
High-margin product, while briefly beneficial, will have long-term detrimental effects on your profitability. Why?
A cup of coffee has a very high margin in the way that we typically think of margins, as a percentage of profit over revenue. I can produce a cup of coffee of very low quality, but perfectly acceptable to the majority, for 0.12 cents, and sell it, in a high-end environment for $2.50. That is a huge margin of 95%. Good on me! But what if we consider margins as dollars instead of percentages? The problem is I have only netted $2.38 after cost of goods. Which means, I have to sell:
2,100 cups of coffee to pay my rent
806 cups of coffee per full-time employee just to pay their salary, excluding any benefits
504 cups of coffee to keep the lights on in a warm (or cool) room depending on the season
126 cups of coffee to get someone to pick up the garbage the empty cups produce
And many, many more to pay myself
Life suddenly seems long measured in cups of coffee, and so would the work day be. For to sell 3,536 cups of coffee a month, I need to turn 117 cups of coffee a day, or 10 cups of coffee an hour in an 11-hour work day. Which means I need to sell 1 cup of coffee every 6 minutes of every day. That is also before factoring in the money I will need to be able to produce more cups of coffee.
Before I can produce enough revenue from selling high-margin, low-cost product to pay myself, I have burned through my available register time, my staff’s energy, and my customer base.
How then, do I solve the capacity problem? I look to my low-margin, high-cost product. You see, if I can sell a sandwich instead of a cup of coffee, I increase my revenue from each of my customers by a multiple of 4. It costs me $5.00 to make the sandwich I am selling for $10.00, so my margin, as a function of profit over revenue, is only 50%. But, I just made $5.00, more than twice what I earned in dollars from the high-margin cup of coffee.
1000 sandwiches to pay the rent
384 per full-time employee
240 to keep the lights and the heat on
60 for someone to pick up the garbage
If I burn through the same 3,536 customers and they never even buy a coffee, I gross $17,680 (against $8,415 from just coffee alone). I now have $9,260 to pay myself and reinvest back into my business, from the same amount of work because I am selling lower margin, high-cost product. My cost of goods rises, but the fixed costs of running a business do not operate as a percentage of your revenue, so dollars become really important. If you don’t believe me, the next time you have a slow month, ask your staff to take a pay cut. I am now able to take the dollars I earn from low-margin, high-cost, high-retail product and pay myself, or maybe another full-time employee, and add another register allowing me to burn through those customers at a faster rate. Investing in staff and space allows for more time with each customer to also sell them a cup of coffee, thereby increasing revenue to $26,095.
Let’s call it the Sandwich Solution. The next time you find yourself wondering why your cash flow is feeling a pinch, and you are about to go to a trade show to load up on high-margin, low-cost product as a resolution, take a coffee break and consider the consequences of reverting to a churn and burn inventory management model.
Then leave the barista a big tip.
Susan earned her bachelor’s degree in Fashion Merchandising Management from FIT and studied branding abroad at the University of Westminster. Her most recent positions include Merchandise Manager for Cohen’s Fashion Optical and Northeast Regional Trainer for Solstice Sunglasses. Susan started her own business in 2009 and sold it in 2016 to return to Connecticut and begin working for IDOC, helping other small business owners find success on their own terms. For questions or comments about this article, please contact firstname.lastname@example.org.