retail math study guide
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Retail Math Self-Study Guide
Walgreens Family of Companies 1 of 15 3/12/2015
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 Com-
panies and other authorized users.
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!
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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.
Best in class execution.
Collaboration
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.
Customers
Shareholders
Stores
Retail
Products
Partners
influence
elements of
strategic
decisions. Finance
Partners
provide
expertise &
financial
advice.
Merc
handis-
ing o
wns
stra
tegic
decisio
ns
affecti
ng
cate
gory
.
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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.)
Making Strategic Decisions (continued)
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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.
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).
Margin Rate = GP$/Sales $
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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.
Margin Rate (continued)
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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
Product Mix Diagram
The diagram below illustrates how sub categories can be changed to produce different profit
dollars.
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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.
Product Mix (continued)
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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
where you want to target.
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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Upcoming fiscal year will
require a shift in
strategy in order to drive
more
profitable sales.
Promo Mix (continued)
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).
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.
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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.
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.
Summary (Product Mix and Promo Mix)
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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
o f t h e c o u n t s
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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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
Th i s d ia gra m
illustrates a simple
f o r m u l a t o
describe how Net
M a r g i n i s
determined.
Determining Net Margin including Distribution Center costs:
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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.
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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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.
Summary and Key Takeaways
Key Takeaways
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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 How often ads are published and/or when ads are published.
Volume of Sales 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.