Jack TenneyExtra Point

by Jack Tenney, Publisher

March 2015

Assume for the sake of illustration that your company makes a prosaic household item packed 10 to a blister pack with a retail price of $5.99. Probably the package equals the cost of the product and yields a gross margin of 35 percent after giving mass merchandisers a 50/10/5/2 and buying groups and rack-job distributors a 40/25.

Typically such a product would be merchandised on Peg-Boards in some area of stores, perhaps with kitchen products or automotive or home decorating. The more ways your little accessory could be used the better your sales.

Now, picture what happens when your product gets picked up by Walmart, K-Mart, Target, Family Dollar, True Value, Home Depot, etc.

Guess now what would be the cherry on top.

By the way, a 50/10 discount is the same as 40/25. Reducing a dollar by either gets you to 45 cents. Years and years ago, a retailer got a 40 percent discount from a distributor. The distributor bought in bulk and enjoyed a 25 percent margin. Then the discounters redefined retail by offering goods at 10 percent off. Also the discounter wanted a keystone, or 100 percent, markup. That meant that an item selling at retail for a dollar sold for 90 cents at the discounter, who paid 45 cents. The extra 5 and 2 got tacked on over time as shipping and cash discounts, earned by mass merchandisers with centralized warehousing, thus avoiding the hassle of drop shipments.

Anyway, the cherry on top is the checkout line. Think about it. There are more than 4,000 Walmart stores in the U.S. Each store has how many checkout registers? For the sake of conservative figuring say eight checkout lines to a store. How many units of your product could hang on 32,000 hooks?

Lotta cherries, no? By the way, Costco doesn’t have low-priced impulse items at checkout. What it does have after checkout is cheap hot dogs and maybe five kiosks selling big-ticket items. What do they know?