July 30, 2020
Gross margin is important no matter the year, no matter the trends. But the arrival of the COVID-19 pandemic has put a spotlight on which companies can compete and survive, and which ones won’t. “When the tide recedes, it shows the rocks,” says Bob Burke of Natural Products Consulting. “When you have fundamental problems with your business, they’re amplified during a crisis.”
That’s why Burke says now is the time for brands to take a temperature check of their gross margins. Here are eight spots to consider first.
1. Buying efficiencies. Burke urges brands to negotiate with their ingredient suppliers and co-packers on better prices as their purchases and runs get larger.
2. Ingredient choices. There may be opportunities to reformulate using cheaper ingredients, without compromising a product’s integrity. For example, brands that use some organic ingredients in small amounts but can’t achieve organic certification may find that a natural or verified non-GMO alternative is just as good at a lower price. Or, premium ingredients from overseas may be switched with stateside options if taste isn’t impacted.
3. Package sizing. Downsizing an offering lowers the retail price and boosts appeal for shoppers. “You may be able to make a smaller bag of your product and charge less to have a more competitive price point,” Burke says.
4. SKU rationalization. Discontinue items that aren’t selling well. “This came to the fore during COVID-19 because a lot of retailers and distributors prioritized keeping the shelves full with just their best sellers,” Burke adds.
5. Sales mix. Focus on varieties of product that may be cheaper to produce but call for the same price at retail as more costly options. For example, a frozen vegetarian meal may be cheaper to produce than a meat-based meal, even if the whole line is priced equally on the shelf.
6. Channel mix. For example, a company may do about 75% of its business through a distributor, 20% direct-to-retail and 5% direct-to-consumer on its website. “If they’re able to shift that to be 60% at distributor, 30% direct-to-retail and 10% direct-to-consumer, that brings up their average price and therefore improves their gross margins,” Burke explains.
7. Packaging. “When it comes to consumer provisioning and pantry loading, there’s an opportunity to sell larger pack sizes,” Burke says. “These can be sold at a higher margin because larger sizes are more efficient to make and package.” Keep an eye on stay-at-home mandates, which could trigger another bulk buy at retail.
8. Direct-to-consumer. Though selling direct-to-consumer via a brand’s website requires investments in digital marketing, the cost may be worth it in the long-run. “The world is changing in real time before our eyes and home delivery, direct-to-consumer, curbside and other trends will stick around on the retail front,” Burke predicts. “Everyone should be looking into e-commerce, whether it’s their own site, Amazon or platforms like Thrive Market.”
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