How Retail Businesses Actually Make Profit: the untold secret of blossoming retail stores
After I shared my thought on how tough retail can be and the brutality of its low profit margin several persons took to the comment section and some to my inbox to share different personal and practical experiences. Some of the experiences were ridiculous. Others were sad realities. But in all I learnt so many lessons. And I wish to share some of those lessons with you.
A Practical Example of The Low Profit Margin
In fact a particular example is someone that shared how the mom as a distributor of Indomie noodles makes a profit of 40,000 naira from a truck of noodles that costs 6 million naira. Isn’t that ridiculous?
40,000 naira from an investment of 6 million naira.
Imagine that such return on investment is monthly – it is 0.67%. Yes, that is typical of retail except that this is far too to the extreme.
However, what caught my attention about this particular case is how much the woman is able to accomplish with such a supposedly low profit margin. So I decided to share my personal discovery on how retail businesses actually make profit. The truth is that there are some untold secrets in the business that only those in it understand. Unfortunately, some persons have ventured without understanding these secrets and that has made them struggle so much. In fact, some have closed their stores because they simply can’t cope.
However, once you understand these secrets of how retail businesses actually make profit you will enjoy every bit of it.
So, let’s now take a closer look at how retail businesses actually make profits.
Note: For the purpose of this post, I may be using the terms ‘distributor and retailer or retail business or retail stores to mean the same thing (in reality they are not the same).
How Retail Businesses Make Profits
There are 6 secrets I will share with you in this post of how most retail businesses make profits:
- Bulk Purchase
- Attractive Rebates
- Promo Products
- Sales Support
- Artificial Scarcity and Old Stock
Let’s explain each of them in details.
1. Turnover – How Retail Businesses Make Profits
The term ‘turnover’ generally refers to total sales made by a business in a certain period. It’s sometimes referred to as ‘gross revenue’ or ‘income. However, in retail, it refers to the volume of products that can be sold over a given period of time. Now, turnover is the very first secret of all performing retail businesses.
Starting from the Indomethacin distributor in our case study above, imagine she she is able to turnover 10 trucks in a month! The profit immediately changes. It will go from 40,000 naira to 400,000 naira. And that is decent enough. Even though it does not change the percentage profit but it changes the absolute value of the profit.
This is the secret of big brands such as Walmart, Aldi, Shoprite and the rest of them. They all sell massive quantity per day and per month and that is where their profit comes from.
2. Bulk Purchase – How Retail Businesses Make Profits
The second way retail businesses make profit is through bulk purchase. And it is actually tied to the issue of turnover also. In the world of retail, the higher the quantity bought the lesser the amount paid. This is particularly the model Aldi uses in Europe and America as we see in Aldi business model that makes it to sell far cheaper than competitors.
Shoprite does the same thing in the Africa market. Take a bottle of pepsi for example, in Shoprite you can get it for 129.99 naira. In other regular stores it sells for 150 naira. You wonder how is Shoprite able to sell that low and still make profit. The answer is in bulk purchase. With their capacity, Shoprite can buy pepsi worth 100 million naira at once and for purchasing that much, the cost can come down to as low as 120 or 125 naira. But for the other regular stores probably purchasing 50,000 to 200,000 naira worth of pepsi they might get it for say 135 naira.
So Shoprite is buying cheaper.
In terms of profit per unit, the regular store might make more (15 naira) than Shoprite (5 or 10 naira).
But considering turnover, within the same time the regular stores are selling 1,000 bottles Shoprite has sold 100,000 bottles.
Now, do the Maths and see the profit.
So, any retail business you see making healthy profit has found a way to make bulk purchase
3. Attractive Rebates – How Retail Businesses Make Profits
There is something called rebate in retail or distribution businesses and that is one of the ways they make massive profit. Now, what is rebate? A rebate is a form of buying discount given to a customer by way of reduction, return, addition or refund that is paid in retrospect.
Rebate is the number one thing any experienced distributor considers before accepting an offer from any manufacturer. I tell you this, not just by my wife example but from almost every distributor I have worked with.
The rebate offer differs from company to company, but the most popular type of rebate comes in form of percentage addition to goods bought.
For example, one of the companies my wife distributes for offers 7.5% rebate. What this means is that whatever amount of goods she purchases, the company will give her extra product worth 7.5% of the one bought. If she purchase goods worth 10 million naira, she will get extra 750,000 naira worth of goods.
So these goods will be sold and added to the normal profit she makes from the actual goods purchased.
There are other forms of rebates depending on the company. I know a tissue company whose rebate is that for every 3 trucks you purchase, you get one extra truck free.
I also have a company that gives 100 naira rebate for each carton you purchase.
Now, from the outside you don’t see this, but it is one good way retail businesses make profits that sustain their business.
The burden usually is on the manufacturer to offer attractive rebate that will make more distributors, wholesalers and retailers to sign up.
4. Promo Products – How Retail Businesses Make Profits
This is popular among all retail businesses. They look forward to different forms of promos on offer by the respective companies they deal with. Promos can come during festive period, during the launch of new products, when sales are going down or at random. The promo sometimes trickles down from the distributor down to the final consumers. But it also adds to the overall profit of retail businesses.
5. Sales Support – How Retail Businesses Make Profits
Sales support are the auxiliary provisions or support services made available by the manufacturer to make sales easier and faster for the distributor or wholesaler. They could come in form of sales representatives, merchandisers, branded company vehicles, activation programmes etc.
I remember once I was negotiating with Reckitt Benckiser on behalf of a client, they offered 7% rebate and I was contesting it. Then one guy in the team made a profound statement. “Sir, 7% is okay, with the level of sales support we provide, your client is literally doing nothing. It will just be like an investor, put in your money and go to sleep, then come back and receive 7% ROI monthly”. And honestly that is what it is if the company (manufacturer) is willing to provide all the necessary sales support.
The goal of this is to make sales easier and faster. And once a manufacturer makes all of these available, the distributor saves so much from marketing cost. Add that to the fact that turnover will be higher it means the profit quickly goes up.
6. Artificial Scarcity and Old Stock
Finally, another way retail businesses make profit is by selling their old stock at the new prices when price goes up. Actually, prices changes so quickly in the industry today, so it is possible that a carton of custard you bought 10,000 naira on Monday can become 12,000 naira on Friday.
Now, imagine you have 1,000 cartons in your warehouse when the news of the increase filters into the market. That is automatically extra 2 million naira profit for you.
In fact, some distributors and wholesalers deliberately create artificial scarcity and wait for prices to go up. Then they bring out their stocks and sell with more profits.
It is true that retail is tough. Retail is not for the feeble-minded ones. However, many retail brands are making healthy profit every quarter. But to be among those who are making it despite the supposedly small margins you need to understand the secrets of how successful retail businesses make profit.
If you can negotiate a good rebate, get the company to provide sufficient sales support and have the cash to buy in bulk your chances of high turnover automatically increases. And once you are having good turnover manufacturers will offer your promo products from time to time. And with this, your profit will never be in doubt.