It was a lot of years ago when I first started reminding you not to focus just on your gross margin percentage, but your gross margin dollars as well. Then, in 2009, with the recession in full swing, I got all excited about Gross Margin Return on Inventory Investment (GMRII) after Cary Allington at Action Watch pointed me to the concept.
I discussed it in some presentations and wrote about it. Here’s one of my articles on the subject. It’s held up pretty well.
I liked the GMRII concept because my reading of history is that debt caused recessions (if recession is an adequate word to explain what we’re going through) last a long time. This one, I concluded, was not going to be different from all the others. It seems, unfortunately, that so far I’m right about that.
So I began to recommend a business model that I thought appropriate to this environment. Regular readers know it anticipated that sales increases would be harder to come by, but that I thought (still think) bottom line profitability and brand positioning could be improved through more thoughtful management of inventory and distribution and more focused expense control.
To way over summarize and simplify, I said this approach would let you reduce your working capital investment and raise your gross margin while reducing marketing expenses because your more cautious distribution strategy would create some product and brand differentiation.
Wow, that is really over simplified and I don’t claim it’s appropriate for everybody. It seems to be especially inappropriate for public companies, which need regular and significant revenue increases to make Wall Street happy. It’s not that it wouldn’t work for them, but they kind of aren’t allowed to try it in exactly the way I suggest due to outside stakeholder pressure. At some level, Skullcandy is trying it anyway and I’ve been impressed by their efforts.
It’s a good strategy for two fundamental reasons. The first is because so many of our products are difficult to distinguish from those of the competition. Now, if you’re a big company with a strong balance sheet full of clever marketing people, be my guest. Create that brand value through a strong emphasis on marketing. But for a smaller company, my hypothesis is that mostly that isn’t a choice.
The second, and what got me writing this, is the economic condition of many of our traditional customers.
I read a blog by a guy named Mike Shedlock, affectionately, I hope, known as Mish. Here’s the link to it. The other day, he posted the chart below that had been provided by a Mr. Tim Wallace. I don’t know who Tim is, but I’ve been impressed enough by what Mish has shared over the time I’ve been reading him to believe this is probably credible. It’s also consistent with other data I’ve seen.
You can see that since April 2008 in the U.S., the population in the age group we consider our primary target market has risen by 3.6%. That should be good for us. The labor force in that group, however, declined by 4.2%, and its employment fell by 5.9%. That’s bad.
You can be the best manager with the best brand in the world, but you’ll still be impacted by this. But if you are a strong manager with a solid brand and have a strong balance sheet (I like strong balance sheets) you’ve got an opportunity because some of your competitors are going to find themselves significantly screwed.
And if you’re a smaller brand, consider the strategy I’ve outlined above because it will strengthen your balance sheet and your brand positioning. That’s what you’ve always needed to do, but now it’s more important than ever.
