Stock Options Part Three

Returns. They cost everyone money and in general are no good. Except that they can provide a safety net. Not much of one, but if you do the math correctly, enough.

First: it is NEVER a good idea to trade significant margin for returnability. When I say significant I mean a variety of numbers depending on the financial circumstances of each store. In general, for a reasonably well run store, returnability is worth at most 3.5 points of margin and often as little as 2 or fewer points once the costs incurred from returning the product is considered.

As a quick example, lets take a store that has $450 to apply to new inventory, completely unproven product that the store want to take a chance on (for us, a lot of manga titles fall into this category). Assuming an average retail value of $15 per title, that’s $9 each w/a 40% discount from a wholesaler, allowing the store to purchase 50 different items (presumably all different titles). That same investment nets 60 different items if purchased at a 50% discount from Diamond or Cold Cut. Assuming an 80% sell through (decent but not particularly good), the store sells 40 titles if purchased from the wholesaler for a total of $600 ($150 profit). 80% of the titles purchased at the higher discount equals 48 titles sold for a profit of $270. Returns will even that up only marginally. It’s no contest. Even with more titles sitting unsold on the rack, the ten points of margin are worth nearly twice the profit.

Where returnability becomes worthwhile is when the difference is more in the neighborhood of 2 or 3 points, say when reordering from Diamond a title that has a max discount of 45%, minus 3% reorder penalty. Now you’re dealing with 40% discount from the wholesaler and 42% from Diamond.

Same $450 dollars, same $150 profit from the wholesaler. Now Diamond with a 42% discount only gets the store 51.72 titles compared to 50 (we’re dealing in decimals from here on out). With 80% sell through that’s 41.38 titles sold and a profit of $170.69. Still better than the wholesaler. Here’s where returns make a difference.

The first thing to know is that you can’t just return anything that doesn’t sell. Most wholesalers reserve the right to refuse returns that exceed 10% of all orders, essentially making just 10% of each order actually returnable. Plus, there’s shipping and manpower costs to deal with, generally equal to about 4-5% of the retail value of the returned merchandise (higher the less the return shipments are consolidated). The final catch is that the credit is only equal to 50% of the retail value of the returns, rather than the 60% the store originally paid. Basically you rented the items from the wholesaler for 10% retail.

Back to our example, we’ve sold 40 of the 50 titles ordered from the wholesaler. 10% of the order equals 5 titles, or $37.50 credit once returned. Once shipping and manpower costs have come out of that (assuming these returns were combined with returns from other orders), the credit is roughly $34. With a profit of $150 off the sales and a return credit of $34 the store does come out ahead of the $170.69 profit with the 42% discount. Many would say that simply selling the leftover stock ordered from Diamond at a deep discount would be better and they may be right, though that still forces the store to find someone to buy the product even at that discount. Plus, if such tactics are necessary on a regular basis, it can create unfortunate habits among customers who will wait to see if an unpopular title might end up in the bargain bin.

There are many drawbacks to using wholesalers, and the non-returnability of the direct market is that way for a reason. But if used wisely, particularly on titles that are anything but sure-fire, wholesaler returnability can be utilized effectively to help a store’s bottom line.

Ultimately, this all boils down to having as many avenues to get hold of product as possible (including, as Jason pointed out in the comments, the publishers themselves). If there is one lesson to take away it is that putting all of your orders in one basket for the sake of a single point of margin and at the potential cost of one or more turns of inventory is never worth it. Margin is important but inventory turn is bread and butter.

There’s more math to back that up, but my brain needs time to heal.

1 Comments:

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