I discovered through a Twitter conversation yesterday that a Melbourne newsagent has stopped selling newspapers. The shopper calls the business a newsagent. I am yet to confirm for myself whether this is the case for certain. regardless, if it looks and feels to a customer like a newsagent and it stops selling newspapers because it’s not worth it we need to take note.
Many retailers (not just newsagents) don’t understand the financial metrics of a retail business – and it is worth a brief explanation.
Retail is about buying things in bulk and ‘turning it over’ at the desired rate – and making a margin on that investment. (GMROI)
That is (simply) the GM% multiplied by the number of turns.
Supermarkets have GM% below 20% on average but they have high turns and Jewelers have 60%+ Margins but turn very slowly.
The same applies to a category level.
Newspapers (at GM% of 12.5% at retail) turns over almost daily (on average).
That means that you make 12.5% ROI PER DAY on your investment.
– Compare that to 6% PER ANNUM in the bank.
– Compare that to Gifts where you may make 50% per QUARTER (assume 4 turns)
To top it all, your investment in newspaper stock is – actually ZERO. (Technically you are getting a return without ANY investment.)
So you make 12.5% per day and invest zero dollars.
If that sounds like a deal you walk away from then I am not sure what will appeal to this retailer.
But there is not a supplier on EARTH that will offer you a deal like that.
The other metrics like sales/sqm etc all stack up really well too – but in a business where COS is close to 70% , your investment in stock is obviously the critical number.
Cheers
For some newsagents the opportunity cost of giving newspapers the currrent space and position instore instead of higher margin products will be too high.
This will be tested further in the coming months.
Dennis, that makes perfect sense but does not take into consideration the rental cost of space. Each square meter has to make a significant return to cover rent and if the % return calculated as you have does not provide a decent profit after rent is taken into consideration then the product is in fact a loss maker what ever the ROI shows based just on stock holdings. The Herald Sun for example earns us about $12.00 per day at a great ROI as you say …but… take into account what that space owes us, theft (lose 1 paper and it takes 8 sales to recouperate the loss) staff wages etc and it is probably only a break even product for us and it’s value is only if generating traffic. I am not going to dump papers but there is a point where it would need to be considered.
@Anthony
This is exactly how you evaluate opportunity costs. E.g. if you wanted to put gifts in that spot – or any other product, you will get a lower return.
@Brendan
The 80:20 rule applies. (Or in a newsagency 70:30). Focus on the 70% of your expenses and you will get more bang for your buck in terms of improvement. That is COS is 70% and if you can improve that by 10%, you will make additional 7% of sales as profit. In most cases this will DOUBLE your profit.
If you get a 10% reduction in rent, you will get 1%-2% of sales as additional profit; which may improve your NP% by 15%-20%.
The real problem with papers is that sale for a lot of newsagents are in free fall and a 10% reduction in rent will not correct this. I still assert that at a certain point the sales of papers over the 2-3 square meters of space they take up will not cover costs let alone turn a real profit. At this point, and it will vary from business to business, the viability of papers needs to be considered.
I don’t want to see this happen but the fact is that’s the way papers are going particularly with every man and his dog selling them, cheap subscriptions by the publishers and some even giving them away free!!! How about the publishers pay us for space and management to carry free papers if they think it is so profitable?
@Brendan
Of course there this scenario too:
Hardware doesn’t sell too many nails and decide to stop it & replace with something else.
Then they find they are not selling a lot of hammers. They replace these with something else.
…and so on.
Pretty soon they are not a hardware store anymore.
That is not to say you SHOULD be a hardware store, but if you want to be a hardware store, then you must carry the nails.
If you catch my drift 🙂
the nails and the hammer have already been replaced by the nail gun , screws and a drill .:}
Located in the right place and managed appropriately newspapers can be profitable for a retail newsagency even on low volume.
I have no plans to stop selling newspapers in my stores.
Dennis,
The gross profit margin does not reflect the actual gross profit.
To portray that there is a zero dollar investment in newspapers is facetious.
A store with a turn of 100 Daily Telegraphs per day would make just $12.50 Monday-Friday, $20 on Saturday and $25 on Sunday. To achieve this $107.50 profit per week they will have to sell $860 worth of newspapers. If they were to replace the product with, for example, giftware with a GP of 50% they would only have to sell $215 per week (just over $30 per day) to achieve the same $107.50 profit.
We’re certainly not getting rid of newspapers anytime soon. In our store they provide significant foot traffic, draw people further into the store and are not usually purchased alone. However we are not under the illusion that they provide, by themselves, a good return on investment.
Dennis, as I said there I have no intention of ceasing to sell newspapers as at the moment they do make a small profit for us more importantly drive traffic but somewhere down the track, hopefully a number of years, they will sell in lower numbers and then they will have lost their status as a strong traffic driver. At that point Jarryds comments sun up the decision we will have to make. ROI, while important, is only part of the equation.
Newspapers can be carried in half a square metre with the right stand and stock management.