Gross Profit Dollars And Percentage
Gross profit dollars and total gross profit percent (GP%) of merchandise sales play a very significant role from the moment we first franchise a store. The franchise fee, for one, is based on total GP dollars, using different percentages for different brackets of gross profit dollars. The day-to-day operation of the store and product assortment are also based on these two important factors. It is a hard task to maintain a proper balance of product mix based on different levels of GP% for the same type of product manufactured by different companies under different brand names, while also keeping in view what our guests want. An average store has to deal with different categories with different brands and variable gross profit percentages.
Stores in certain parts of the country enjoy a comfortable gross profit margin ranging from 36 to 42 percent, based on their product mix and SRPs versus the variety of products and prices offered by their competitors. 7-Elevens in other parts of the country, however, are not as fortunate to have the same margin due to the merchandising strategy adopted by their competition.
For instance, in my hometown of Henderson, Nevada, just outside of Las Vegas, some stores are lucky if they have 34 percent GP. This is because two main competitors and other small chains have designed their GP strategy on discount pricing and make up their lost GP dollars from gaming revenues, the whole of which they get to keep. 7-Eleven franchisees have to split their gaming revenues with slot route operators and space rent paid to SEI. And lately, gaming revenues have taken a big hit due to new anti-smoking laws and the bad economy.
GP dollars and percentage have taken a dip of 2 to 4 percent in many parts of the country. I had a chance to talk to many FOA presidents about this, and the reasons for it vary from one part of the country to the other, but one common cause seems to be our cost of goods. Cost of goods is negotiated solely by SEI and franchisees have to accept those terms and conditions. The franchise agreement clearly states in 15 (g) Vendor Requirements:
1. You agree to purchase your inventory and other products and services only from Bona Fide Suppliers. Except for shares in publicly traded companies, you agree not to have or maintain any ownership or voting interest from which your store purchases inventory, unless we otherwise consent in writing.
2. You agree to at all times during the term to purchase at least eighty five percent (85 percent) of your total purchases and, separately, (85 percent) of your cigarette purchases, both computed monthly at cost, from recommended vendors in compliance with the Recommended Vendor Purchase Requirement, which is further defined in Exhibit E.
Section 15 (J) of the agreement is more interesting. Here are a few selective clauses (Our Vendor Negotiating Practices and Treatment of Discounts and Allowances):
1. In negotiating our contracts with recommended vendors and manufacturers (in either case “vendor”) for products and services sold in 7-Eleven stores, we will take the following steps:
(i) We agree to make a commercially reasonable effort to obtain the lowest cost for products and services from such vendor to 7-Eleven stores on a Market basket basis by identifying all available discounts and other opportunities for price adjustments.
(iii) If cooperative advertising allowances are available from the vendor and the vendor advises us that it will not lower the cost of its products and services to 7-Eleven stores in lieu of providing such cooperative advertising allowance, then we will accept and use such cooperative allowances as designated by the vendor.
Practices and procedures to obtain lower cost of goods and allowances are controlled by SEI, as well as national footprint and different schematics to have the proper product mix in our stores. Even though all these best practices, new programs, the 85 percent purchase requirement, and proper SRPs are being followed by the majority of franchisees, gross profit dollars and percentage are still declining. This is becoming a serious issue for a significant number of stores across the country.
During the month of February 2011, due to the untimely reporting of proper documents by at least 12 vendors, billback allowances were not reflected properly in store financials. This resulted in a steep decrease in gross profit dollars. In my area alone, 100 stores out of 160 went below equity, and they now have to come up with money.
As SEI has sole control over negotiating cost of goods and other related allowances through the majority of our recommended vendors, it becomes their sole responsibility to provide us a proper GP margin and percentage, at least enough to keep stores afloat throughout the year.