Not So Stupid

Posted by on August 21, 2013

A Monday Morning Memo from The Wizard of Ads

“Roy, I liked your memo about the fallacies of deep discounting,” said Joe, “But the magic words of retail aren’t ‘Profit Margin.’ The magic words of retail are ‘Inventory Turn.’ It isn’t so critical how much you make on an item. What’s critical is how often you make it.”

One of my best friends, Joe Romano is the CEO of Scull and Company, a retail consulting firm that has been guiding business owners to financial greatness since 1922. Joe is easily one of the top ten authorities in America on the subject of business finance and he was on the phone to more fully explain to me the mysteries of profit margin and inventory turn. I was all ears.

“Take Sam’s Club as an example,” said Joe. While the average retailer will sell his inventory only once each year, Sam’s Club will sell the entire inventory in each of their warehouses 12 times a year. Not a bad trick considering they’ve been building new warehouses every 12 days since 1983!”

Incredulous, I said, “Joe, are you telling me that Sam’s makes so much money that they can buy several acres of prime real estate and build a gigantic warehouse and fill it with millions of dollars worth of inventory every 12 days?” “Yes, Roy, they’re making that kind of money, but it’s due to the magic of inventory turn. Sam’s will only add a 15 percent markup on an item, but they will sell that item 12 times a year. This means that during the same year it takes the average retailer to make a one dollar markup on his investment of one dollar, Sam’s Club will invest that same dollar and make a markup of 15 cents, 12 times. That’s a dollar-eighty annual return on a one dollar investment; nearly double the return on investment experienced by the average retailer in America.”

“So I guess you’re saying that low markup strategies can work after all?” “You haven’t heard the best part,” said Joe. “Sam’s Club demands 90 days as payment terms from each of their suppliers. This means that Sam’s will sell an item 3 times at a 15 percent markup before they have to pay for the item even once. Sam’s will have 3 dollars and 45 cents in the bank before they are obligated to pay the first dollar! Considering that they are selling a multimillion dollar inventory 3 times before they have to pay for it even once, does it still surprise you that they have the money to build a new store every 12 days?”

There was a long silence on the phone while I digested what Joe had told me. After a minute or so, Joe snapped me out of my reverie with a question. “What are the magic words of retail, Roy?” “The magic words are ‘Inventory Turn,’ Joe.” Just before he had to go, my friend said, “Roy, there may still be hope for you as a consultant after all.”

Thanks, Joe, I’m keeping my fingers crossed.

Roy H. Williams

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