Complete guide to concepts and methodologies of the +PROFIT program
GMP is a simple concept, rooted in the age-old buy-and-sell operations of traditional traders: how much I paid and how much I sold for! Example: I bought (and paid) a product for $1.00 and sold it for $1.50. I earned $0.50 per unit, or 33% of the selling price. What about taxes? These are ignored at this stage, to be appropriated later as expenses in an account called TC: Tax Costs (on Commercialization).
The SUM of the gross value of all products we SOLD minus the TOTAL PAID for them will be our financial GROSS PROFIT; that figure divided by total GROSS SALES gives the percentage of our PROFITABILITY ON SALES.
This method applies to products individually, as well as to the entire store or by departments, categories, families, store sections, etc.
This is one of the FUNDAMENTAL concepts of the entire +PROFIT program, as will become clear throughout this document.
In general, we have a partial bias toward the products we sell: we place too much value on their sales performance! But we need a dual view: one EYE on Sales and another EYE on Profitability...
Pareto taught us that in any process with countless variables, a small portion of them will influence the final outcome far more than the others. As a general rule, he stated that "20% of causes will produce 80% of effects."
If we apply this theorem to our Sales and our Profitability, we can build a BIDIMENSIONAL MATRIX, that is, a product classification that SIMULTANEOUSLY identifies the importance of the products sold across both variables!
Instead of three classifications (A, B and C: 50%, 30% and 20%) per variable, by combining both we get nine possible positions: AA, AB and AC; BA, BB and BC; CA, CB and CC. In this scenario, four of these positions would represent 80% of SALES and PROFIT, SIMULTANEOUSLY: AA, AB, BA and BB. That is, they would be the PRIORITY PRODUCTS, both in Sales and in Profitability, SIMULTANEOUSLY!
Adopting the GMP concept will enable several extremely important by-products for +PROFIT MANAGEMENT. One of them is PURIX, simple and very useful.
When a product has a GMP% of, say, 30%, it means that for every $1,000 sold of that product, 70% was paid to its supplier. By the same logic, if another product's GMP% is 15%, it means we kept $150 (GMP $) out of every $1,000 sold, and $850 went to the supplier.
Therefore, there is a relationship between the AMOUNT SOLD, the product's GMP, and the AMOUNT TO BE PURCHASED to keep it at an adequate inventory level, without surpluses or shortages.
Assuming that the opening inventory is normal, for a product with a historical GMP of 30%, the recommended purchase should be 70% of its PROJECTED SALES. Therefore, if you purchase only 60% of ACTUAL SALES (to date), the product will be at STOCKOUT RISK! Conversely, if you purchase 80% of ACTUAL SALES (to date), the business will be OVERSTOCKING!
The AVERAGE DAILY SALES indicator is important for detecting sales increases or decreases in the current period compared to a previous one. If a significant change has occurred, there should be a convincing explanation for it.
Excluding seasonal variations, what factors could cause such a change? Stockouts, pricing policy changes, merchandising changes, or sales promotions in the previous (or current) period, etc. Understanding these causes will help prevent further sales losses and support actions to increase them. This is vital for monitoring sales performance, especially for PRIORITY PRODUCTS.
The purchase planning sheet is an extremely important tool for SALES and PURCHASING planning in supermarkets. It typically covers a one-month period, day by day, with a SALES forecast for each day expressed as a percentage based on the historical typical weekly sales percentages from prior months.
In addition to this monthly SALES forecast, once the prior month's purchases close (overstocked, normal, or at stockout risk), a PURCHASES percentage is assigned for the coming month. The sheet then calculates the projected PURCHASES for each day, taking SALES projections into account.
Based on the ACTUAL progress of DAILY SALES, the sheet's algorithm projects the month's final SALES and, as a result, recalculates daily the REMAINING PURCHASE BUDGET for the days ahead, taking into account what has already been purchased and the PURCHASES percentage set at the beginning of the month.
BUYING WELL is one of the secrets to success for many supermarket owners. But how do we know if we are buying well? At a minimum, we need an indicator that shows how the purchase price of a product evolves (including discounts, payment terms, bonuses, freight, etc.) over time.
And of course, we need a BENCHMARK to IDENTIFY which products/suppliers are above it. For reference, we should analyze, by categories, families, etc., how the AVERAGE COST of acquisition has trended recently. This should be done, however, comparing similar products and obviously from suppliers in geographically close regions.
As we saw earlier, not all products are equal, either in their Sales performance or in their Profitability. For example, a particular brand of Whole Milk, with strong presence in our market area, may represent around 4% to 5% of the store's Sales, but only 2% to 3% of its Profitability (GMP $).
This disparity obviously stems from the Pricing Margin we apply to products with strong consumer appeal. Milk is one such product. Note: do not confuse Pricing Margin with Profitability Margin (GMP %): the former is an "intention" to profit, while the latter indicates the profit actually "realized".
Pricing, therefore, is an extremely important commercial task, as it will strongly impact the GMP achieved. But it is not the only factor — shrinkage, for example, also affects Gross Market Profit!
LOSSES and SHRINKAGE are a major "LEAK" in our RESULTS! The Brazilian Supermarket Association (ABRAS) reports they represent around 2% of revenue in Brazil. However, since that figure comes from large chains that already have systematic programs to reduce them, I believe that for small and mid-size supermarkets the rate ranges between 2.5% and 3%.
They therefore deserve close monitoring to keep them as low as possible. The first step is to identify WHERE the greatest risks of SHRINKAGE and LOSSES lie.
The PURIX indicator signals OVERSTOCKING when the sum of GMP% and the PURCHASE PERCENTAGE exceeds 100. Therefore, these products, categories, sectors, families, etc., become OBVIOUS CANDIDATES for CLOSER ANALYSIS. Similarly, another indicator can alert to SHRINKAGE/LOSS RISKS: the comparison between the PRICING MARGIN and the REALIZED GMP %. The GREATER THE DIFFERENCE BETWEEN THE TWO, THE HIGHER THE RISK THAT SOMETHING STRANGE IS GOING ON!!!
So far we have covered indicators in the INFORMATION SYSTEM related to PRODUCTS. In +PROFIT MANAGEMENT we emphasize that the owner's MANAGEMENT TOOLS for INCREASING SALES, IMPROVING GROSS PROFIT and RATIONALIZING EXPENSES rest on three variables (the 3 Ps): PRODUCTS, PEOPLE and PROCESSES!
PERSONNEL (wages, statutory and union charges, and other related costs) represent the highest-impact EXPENSE in the business. They therefore need to be closely monitored, always aiming for the HIGHEST POSSIBLE PRODUCTIVITY: we must always strive to do MORE with LESS.
We can, for example, map the number of employees by department: deli counter, butchery, bakery, produce, front of store, stockroom, administration, etc. By dividing the sales for a given period (month, quarter, half-year, etc.) by the number of employees, we get an indication of which departments are more productive than others.
EXPENSES as a whole consume the largest share of the GROSS PROFIT generated by our SALES. Remember that these three elements together form our RESULT. Just as we need to manage the latter two with full attention, EXPENSES also need to be monitored very carefully: they tend to grow like our fingernails (every single day...)!
It is desirable and advisable to have a BUDGET covering the company's cost and expense centers in a simple, monthly, rolling format. In it, we should have the PROJECTIONS for each cost and expense item, as well as the ACTUAL amounts. These actual entries can be recorded weekly, accumulating throughout the month, and finally compared against the PROJECTIONS.
Acknowledging that for many small and mid-size businesses developing and implementing a truly FUNCTIONAL BUDGET will not be easy, we should at least adopt an entry sheet for PAID EXPENSES.
In the CHART OF ACCOUNTS, items that constitute EXPENSES/COSTS should be flagged. That is, payments for fixed assets, for example, will not be marked as expenses. Nor will TAX COSTS (TC on commercialization).
Once it is clearly established which ACCOUNTS are considered EXPENSES, your ERP should provide a daily report on payments for those accounts, at the close of each day. In other words, each morning you should have a summary of total PAID EXPENSES (for the day and cumulative), as well as SALES (for the day and cumulative).
A P&L is a profit and loss statement for a given period — monthly, quarterly, half-yearly, or annual. It reveals the operating result, or even the final result (after income tax) depending on the calculation method.
When produced over shorter periods, it is extremely useful for assessing how the business is doing and its prospects, allowing the owner to make timely course corrections to maximize results.
I am calling this proposed method a "Market Trader P&L" because it is a simplified version of the traditional accounting statement, with the advantage of being available as frequently as WEEKLY, depending on the store's ERP.
In the conventional P&L, the fundamental variables are SALES (Gross and Net), GROSS PROFIT, calculated from opening and closing inventories with tax credits and debits recorded on purchases and sales, and finally the EXPENSES, summarized or itemized, recorded according to the chart of accounts.
The most pressing question for any supermarket owner is: is my operation profitable? By how much? Of course, your accounting will show this in the P&L, trial balances, and annual balance sheet. But by the very nature of accounting operations, their reconciliations and adjustments, this information — though more accurate — takes time to arrive.
Experience shows that the CASH BALANCE can be a fairly close approximation for answering that initial question. A warning: abnormal withdrawals or extra cash injections can create distortions.
For these extraordinary outflows or inflows, there is an NOTES field in both the MONTHLY AVERAGE BALANCE sheet and the ANNUAL BALANCE sheet for recording them.
When we talk about INDICATORS for supermarket customer profiling, it's not just about counting "how many buy", but understanding who they are, how they buy, and what that means for the business.
In summary: Frequency + Value + Mix + Loyalty already provide a strong picture of the customer profile.
If the store has an organized customer database (even a simple one), these indicators can be turned into charts that show clear trends.