The buyer will have a target margin to achieve for each range, based on target for the company target, and the individual range history.
But it is not the mix of the range offer, but the onsale mix that is important, the volume of sales on each line will alter the margin mix.
Once the final selected range is presented, packaging needs to be specified and prices considered, because any protective packaging needed for product that will be shipped to the consumer will be an on cost and eat into the margin.
Another factor in the margin calculation is supplier’s contributions, which will be negotiated in return for listings and space allocated, or page or banner advertising.
The merchandiser will produce a sales estimate for each line, which will also be used to decide the opening buy on the line.
Once all this is in place, the Buyer will produce a forecast for margin or cash profit. This is a calculation of the cash and percentage margin achieved per item sold, multiplied by the estimated sales volume. So the performance of actual margin against budgeted margin will depend on the accuracy of the merchandisers’ opening estimate.
As it is a sales weighted forecast, the actual margin achieved may not be the same as the estimated margin, but the Buyer will have to demonstrate an acceptable estimated margin before the range is formally approved.
The buyer will probably carry out some cost price negotiation with suppliers to achieve the target margin, and possibly increase some selling prices.
If there are direct imports the calculations on those lines can be affected by currency exchange rates, shipping costs, and import duty, which may have changed since the buyers visits to the source and commitment to buy
Balancing margin mix
As we have discussed, different products selected yield different margins, and it is the mix of products and their margins, weighted by sales, that determine the profits earned.
This is a really interesting part of the job. The Buyer needs to maximise the margin mix and therefore the profitability. This is achieved by selling high quantities of high margin lines. The worst case is if lower margin lines take a big share of the sales mix. However actual cash margin might be improved.
(These examples ignore any sales tax that may have to be considered)
The best margins will be achieved on Direct Imports, which should compensate for the stock risk taken. For example the buyer may “land” an imported product at 3.30 USD and sell for 9.99 USD
(“Land” means the price after taking into account shipping costs, duty, and distribution to warehouse.)
Products bought domestically are more likely to yield a factor of 2, i.e. they buy at 5 USD and sell at 9.99 USD.
On Heavily promoted or discounted lines the product may cost as much as 7USD and be sold for 9.99 USD. Bear in mind any sales tax collected has to be taken into account as well.
Influencing the margin mix
The retailer can attempt to actively influence the margin mix by promoting the higher margin lines, displaying them prominently, advertising them, using them in the company’s own promotions, or in PR activities.