Improving Your Gross Profit
BY PAUL LOBANA, NCASEF VICE CHAIRMAN, PRESIDENT, SOUTHERN CALIFORNIA FOA
With the minimum wage increasing in cities and states across the country, it is becoming very difficult for many of our stores to remain profitable. While the NBLC has been presented data on the factors affecting our bottom line, SEI hasn’t done much to help us increase sales and profits. So franchisees are starting to take the matter into their hands.
Franchisees are doing many things at the store level to boost gross profit, like changing the prices of certain products. One product in particular that is showing positive results with price increases is tobacco. Cigarettes generate one-third of our sales, yet our cigarette gross profit is down 12 percent. However, it has been proven that we can increase our overall gross profit by raising the price of each pack of cigarettes by 75 cents or $1. Of course our cigarette sales will decrease a bit, but the profitability of the store will increase.
If you choose to go this route, you must sit down with, or call or email, your cigarette reps to make sure you are not losing incentives or allowances for your store. Each store will be different in the amount of upcharge allowed for our custom retails, so you must contact your Philip Morris representatives to find out the maximum custom cigarette retails for your store. This has been done in many stores in my Market and some individual franchisees have adapted this strategy, and they have seen very good results. Obviously, the cigarette manufacturers don’t like this, but this is the business we are in and franchisees need to make money. Increasing the price of a pack of cigarettes will increase your gross profit substantially.
You can also increase the price of other products in your store, but be wary that customers might react negatively to the price hikes of certain items. Customers are very sensitive to the price of beer, for instance. If we increase the price of beer, they won’t come back to our store. However, if you change the price of cigarettes, your smoking customers may not like it but they will still pay it because they’re used to price increases on tobacco.