retail math study guide

Retail Math Self-Study Guide

Walgreens Family of Companies 1 of 15 3/12/2015

This material contains information for use by Walgreen Co., Walgreen Family of Companies, and other authorized users. Although the content of this material is appropriate for the

purpose of training, trademarks, product names, company names, images, logos, etc. used in this material may not be appropriate in all circumstances for all Walgreen Family of Com-

panies and other authorized users.

Introduction

Welcome! This Self-Study Guide will give you an overview of how to apply Retail Math

and financial principles to the work you do every day. The topics within this guide were

identified by your peers, and by your leaders, to help you do your jobs better and in

turn help your categories, divisions and our company increase profit.

Key Learning Goal

At the end of this Retail Math Self-Study Guide, you will have a clearer understanding of

how key financial principles affect your business decisions and how to leverage them

within the context of your work.

Your goal is to make money, and real-life application of what you learn here will give

you the tools to do that!



Making Strategic Decisions

Envisioning the future . . . . . . .

To achieve the vision above we will focus on the four merchandising

pillars:

Being experts in customer, industry, product and competition.

Strategic supplier partnerships.

Developing advanced category strategies.

Best in class execution.

Collaboration

No matter where you are in the

company, having a clear

understanding of the financials

that are behind each strategic

decision is valuable and makes

what we do as a retail

organization relevant.

Customers

Shareholders

Stores

Retail

Products

Partners

influence

elements of

strategic

decisions. Finance

Partners

provide

expertise &

financial

advice.

Merc

handis-

ing o

wns

stra

tegic

decisio

ns

affecti

ng

cate

gory

.



To collaborate effectively you must speak the same

language! Integrate the business terms below into your

everyday thinking and decisions.

(There is a glossary of other financial concepts at the end of this Self

-Study Guide.)

Making Strategic Decisions (continued)



Margin Rate

Margin Rate

This graphic illustrates how Margin

Rate is impacted by the mix of the

three sales types. The decisions

that you make (e.g., the levers you

pull) in your own category impact

the bottom line of Margin Rate.

The levers you pull: To express simply, the decisions you make within your category drive Sales and

Gross Profit (GP). You have access to different levers that impact Rate, which in turn impacts Sales

and GP. The strategic ways you manipulate your Mix are what make the difference in Rate, so

understanding the balance among these concepts and what other factors can influence them is

critical.

Our overall goal is to increase Gross Profit (GP) through decisions you make regarding key areas

(product mix and promo mix) and to understand holistically how your decisions affect GP and

Sales.

Diagram

This diagram below illustrates how changes in Retail and Cost (yellow boxes) changes the Margin

Rate (purple circles).

Margin Rate = GP$/Sales $



Application

There are various ways to leverage the concepts illustrated on the diagram in order to achieve an

acceptable Rate. You can:

Improve Mix by increasing the amount of sales that flow through higher margin buckets.

Increase Rate by going after individual buckets and increasing rates within those buckets.

Increase vendor support (lowering costs through better negotiation with vendor).

Price point changes (choose to discount, but at a higher price).

Attack specific margins within those buckets; either bring your cost down with vendor support or

(sell at a higher price).

In the diagram on the previous page, you are specifically addressing Rate, not the (amount) that

flows through each bucket.

Margin Rate (continued)



Product Mix is one of the levers that you can pull to manipulate the rate of the overall basket. It

refers to the combination of products within a category that have different margins per item. You

need to balance sales and profit as you strategize.

Application Examples such as low margin cigarettes and high margin owned brand products are elements of

product mix that need to be considered.

Product Mix

Product Mix Diagram

The diagram below illustrates how sub categories can be changed to produce different profit

dollars.



National Brands (NB) versus Owned Brands (OB) within Product Mix

How you strategize National Brands and Owned Brands is one of the levers you pull. Often times,

owned brand products have higher margin and are an important factor within the mix. They have

a positive impact on product mix and average margin of the basket.

Product Mix (continued)



Promo Mix

Promo Mix is strategized by working through calculations of weighted margin rate and highlighting

each promo vehicle's contribution to overall profitability. As you can tell from the diagram below,

you are comparing the impact of the different promotion vehicles in regards to the profit that was

Controllable and Variable Elements in

Promo Mix

There are various ways to work within Promo

Mix that have an impact on promotional

margin. For example:

Controllable elements include when and

where you want to target.

Uncontrollable elements include volume,

depth and frequency of sales.

Funding to Support Ads: You can

negotiate with vendors to receive

promotional funding to help support

promotional margin. “Funding” comes

through as cost-adjusted dollars and you

see it directly reflected in GP because it

directly off-sets cost.



Upcoming fiscal year will

require a shift in

strategy in order to drive

more

profitable sales.

Promo Mix (continued)

Promo Optimization

It’s important to focus on the concept of Promo Optimization. There is an opportunity for

Walgreens to advertise more effectively, focusing on the right products at the right time. This will

help us achieve our overall goal of driving better Gross Profit (i.e., increase regular sales, and

increase margin on promo sales).

National Brand and Owned Brand Points

When considering National Brands versus

Owned Brands and the impact on

promotional rate remember that National

brand points are often paid for by vendors

(through funding for ads) and Owned

Brand points are funded internally.



Thought-Provoking Questions

Read through the thought-provoking questions below. Write down your answers on a separate

sheet of paper. Meet with your manager and discuss the questions and your answers. Discuss

topics of interest with your peers. This will give you a more thorough understanding of the content.

Summary

The chart to the right illustrates simply

that when you make decisions

regarding controllable elements within

your area of work, there are likely

impacts to other areas of the business.

For example, if sales stay the same, and

cost is decreased, profit will increase.

And if scandowns are increased, profit

will increase. The overall health and

profitability of our company depends on

strategizing in your own area of work

while collaborating and keeping in mind

the potential impacts to other areas of

our business.

Summary (Product Mix and Promo Mix)



Waste/Shrink

Waste and Shrink are two types of losses that impact our product profitability. Operationally in the

stores, Waste and Shrink are two separate and distinct measurements. Both update on-hand

quantities, but for different reasons. Compare the information in the table below regarding the

differences between Waste and Shrink (i.e., method, frequency performed, what it is used for,

related store processes and other notes).

A common dilemma:

“The system says we

have the product, but

for some reason it does

not exist in physical

inventory.”

Shrink accuracy is only

as good as the quality

o f t h e c o u n t s

performed!

Shrink Adjusted and Waste Adjusted Gross Profit

We downwardly adjust our profit figures depending on how much shrink and waste exists. A

simplified formula is below showing the products sold (scan gross profit $) less the products lost

(shrink) or wasted (waste). The final figures account for either Shrink Adjusted Gross Profit or Waste

Adjusted Gross Profit dollar figures or as a percentage of Sales.



Net Margin

Net Margin provides insight into the controllable profit of a product; controllable being defined as

any credit or cost associated to carry a specific item that otherwise wouldn’t exist.

When you focus on Net Margin it allows you to see what the controllable profit of a product is and

influences decisions on how to move forward with each item within our category and with our

overall business. The key decision is this: How can we control costs better to get to a better net

margin that benefits the company?

Determine Net

Margin

Th i s d ia gra m

illustrates a simple

f o r m u l a t o

describe how Net

M a r g i n i s

determined.

Determining Net Margin including Distribution Center costs:



Net Margin (continued)

Net Margin and EBIT Compared

EBIT is the abbreviation for Earnings Before Interest and Taxes. It is important to understand the

difference between Net Margin and EBIT. They aren't the same and one isn't better than the other.

Both are relevant; they are different measures of profitability.

For Merchandising: It is more helpful to look at net margin because it allows you to see

controllable costs.

For Corporate and looking at the overall picture (i.e., investors): It is more helpful to look at EBIT

to see what earnings are available to the firm before interest and taxes.



Summary

Let’s take a look at how the overall business is presented from a financial perspective. In this study

guide the concepts of Sales and Gross Profit (GP) were discussed. Then you learned how to factor

in the other layers, like SG&A, and the costs that are involved, as well as understanding that there is

a cost to merchandise and sell to consumers. The company does not take all of the profit!

There are some levers you can pull in order to drive EBIT. These include increasing sales, increasing

rate (which increases GP) or decreasing SG&A. SG&A decisions are the ones that have immediate

benefit to GP because there are immediate results. It takes more time to plan and feel the affect

of strategies related to driving more sales or increasing rate. However, they are both important

strategies to the business.

Summary and Key Takeaways

Key Takeaways



Reference Guide

Category/Industry Trends Items that are in style, hot, trending up, runway colors, a popular phase, styles

of famous people, as seen on TV, popular movies, and related paraphernalia

customers buy of other hot items, sport events.

Competitive Environment Relates to the comparative prices in the area of certain items or companies

that sell the same items that our stores sell. It also refers to other factors such as

distance, convenience, quality, customer service comparatives, etc.

Cost The amount our company pays for an item; the price set by the wholesaler or

distributor to charge our company.

Depth of Discount How small or large is the percentage of the discount to the total cost of the

item.

Frequency of Discounts How often are discounts given to the customer in certain categories; how often

do customers see and come to expect discounts; and how often to we decide

to lower prices.

Loyalty Points earned by customers that join our program, customers earn more points

if they purchase our brand.

Markdown Final price reduction or clearance price of an item or post-special price. For

example, boxed Christmas cards price during the first week of January.

Promo Price reduction of an item on sale.

Retail Price The original dollar amount on the tag; the non-sale amount customers pay for

Scandown Vendor financial support of certain ads, or certain placement of items within

the stores.

Timing of Ads How often ads are published and/or when ads are published.

Volume of Sales The count of items we sell within a certain area or time frame. For example,

volume of sale is represented by the number of Twix bars sold that are located

in the end stand by the register.

retail math study guide

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