Distributors measure success in terms of sales volume. We compare notes on what brands were up or down, what categories improved, and which market segments are doing better than others. It’s all about the sales volume. We have been trained to be sales animals. We are wired to drive volume, increase distribution and capture market share.
The problem is, when we focus only on sales as our benchmark for success, we are measuring the wrong number.
When we make a sale, a full 70% of our sales volume goes right back to the brewery, winery or supplier in the form of purchases. For every million dollars we sell, seven hundred thousand isn’t really our sales, it’s the brewery’s sale.
Sales are for the supplier, but gross profit is for the distributor. Gross profit is our true sales number.
It is only the gross profit on the sale, the margin, that we distributors get to keep. This margin covers our operating expenses, and determines whether we have a profit each month. Our sales volume less the cost of sales (mostly purchases) equals our gross profit. Gross profit is the key.
Gross profits are the true ‘sales’ for a distributor, but this number is rarely held in the same high regard as sales. Sales are sexy. Gross profit? That’s for the accountants. We don’t talk about it or pay much attention to it, yet it is far more important than the actual sales number.
Action item: Give your GP some love. Set up goals for your sales team based on gross profit instead of sales, and see what happens. At the very least, you will educate them on how gross profit is calculated, and what they can do to improve upon the number.
Set up reporting for yourself and your management team to review gross profit on a regular basis. We look at sales daily (sometimes throughout the day) but make time to review your gross profit on a regular schedule as well. You will find areas that surprise you – brands you thought were high margin may not be, discontinued brands and ‘fire sale’ items may have a larger negative impact on margins that you believed, pricing on certain products may not have changed while the cost of those same products has been steadily increasing.
A review of your gross profit may reveal problems, but more importantly, you’ll find opportunities to correct and improve your overall profit and cash flow.
Gross profit is the true sales number for distributors. We have a long tradition of focusing most of our attention on the sales volume, but do make time for gross profit. Your income statement and cash flow will thank you.