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Stephen Forward blog: Gross profits aids sustainability

Published:  14 February, 2011

Every now and then I stumble across independent wine retailers selling exclusive product lines on
tiny gross profit margins. I used to ask myself how on earth can they could sell at those prices and stay in business. A year or two later I would discover that these very same retailers had gone bust: the answer to my question was, of course, "they can't".

 

On a recent overseas buying trip, organised by a generic wine body for independent retailers, I discussed gross profit margins with my fellow travellers and competitors. I was surprised to learn how low their expectations were. "If we can achieve 20% we're really happy," remarked one buyer. With business naivety like this, it's no surprise indies come and go like third-division football managers.

 

Twenty per cent is just not enough to make a retail business sustainable in the long term. It's fine if you're in the volume business, but as indies we're not. An independent retailer that isn't planning to file accounts with gross profits over 30% is planning to fail, as this is the minimum figure most retailers need just to break even. Selling a product below that averages down the gross margin, potentially towards a loss.

 

Retailers unable to sell exclusive independent product lines at decent margins show poor sales skills. Indies should focus on selling value, not price. If every consumer bought solely on price we'd all be driving the least expensive car, eating in the cheapest fast food restaurants and living in the cheapest accommodation. A quick look at the UK's roads, restaurants and housing shows how many consumers will pay more if they see the value inherent in their purchase.

 

The independent retailer's job is to understand their customers' requirements and to explain the quality and value for money in the exclusive lines they are selling. If they do this successfully, gross profit margins of 40% to 50% or more are attainable, securing profitability and, therefore, the long-term viability of their business.

 

Stephen Forward is owner of independent wine merchant Essentially Wine

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