Retailer P&L

Why a Retailer P&L?

Besides managing your own P&Ls, it is best practice to also maintain the retailer’s for the following reason:

Track their margin

Part of the reason is to keep an eye on the retailer’s margin and profitability. Is it growing far ahead of your own margin growth at your expense? This is a plausible scenario especially for large portfolios. Let’s assume you sell 100+ SKUs spanning 8 brands. Some SKUs are more profitable than others, some more activated than others, some growing just by the mere work of the gods. Over time it may happen that even when you have sound systems in place to check whether what you are investing in makes financial sense, your profitability turns out to be lower than what you were expecting and that of the retailer ends up higher.

Demonstrate true partnership

But that’s not the only reason. A bigger purpose is to manage the relationship with the customer as a partnership. Your buyers count on you to look after their interest here since they have multiple suppliers to deal with and hence potentially dozens of P&Ls so you must live up to this expectation with honour. The account managers’ shared responsibility to manage the retailers P&L sheds light on the complex relationship between the supplier and retailer in which both sell to each other (you sell goods while the retailer sells you instore space & activation). Most retailer would have an information system maintaining this P&L but you will definitely have to maintain a P&L at your end on the same platform or on the same file as your external P&L.

Structure

Thankfully, the retailer P&L is even simpler than our P&Ls. There are some small format differences though:

·       Revenue (Topline): Revenue for the retailer comes from the units sold to the shopper at the instore price (at retail sales value) but since that includes sales tax, the real revenue of the retailer is RSV (Retail Sales Value) excl tax. For example, if the tax is 5% (which is 0.05), then you will divide your RSV by 1.05 (1+0.05). This is the retailer P&Ls topline.

·       Net Sales: Whereas in our internal P&L we subtracted all the trade spend we gave to the retailer to arrive at our net sales, in the retailers P&L we will add all the trade spend that we incurred to arrive at their net sales since these were all payments that were going to the retailer. This includes promotion retros. This is because retailers RSV includes promotional sales at the discounted price and these promotion retros merely reimburse the retailer for that activation. Hence, they are margin restoring rather than margin enhancing.

·       Cost of Goods Sold: Retailer cost of goods is the price at which it buys from us, so basically our invoice sales line from our External P&L is the retailer’s Cost of Goods Sold line.

Below is a snapshot of what the retailer P&L looks like.

Complex variations have lines here and there in P&Ls but best to focus on the above format when it comes to decision making.

Key Ratios

Analysing the retailers P&L is also identical to any of our P&Ls with the same comparators (vs LY and vs Target or forecast).  The two key ratios although slightly different here are nonetheless on a similar concept.

1.       Front End Margin %:  This is (RSV ex VAT – COGS + promotion retros) ÷ RSV (ex Tax). The higher the ratio, the better it is for the retailer. This is a very important indicator for them as it gives an indication of the “front end margin” which is the margin excluding any fixed or non-promotional retrospective investment by suppliers. This margin gives them pricing power of what they are selling as it is deemed as more guaranteed than the total margin

2.       Total Margin % or Back-end Margin %: This is Gross Profit ÷ RSV (ex Tax) and is the total profitability that they have off your products. Retailers ideally would have their total margin be the same as their front end margin so that they maintain their control of pricing power. Fixed investments for instance have to be negotiated with suppliers from time to time and its usually a more for more discussion. By having all investment in the front margin they have less dependence on you.