By Paul Kenchington, The Bicycle Chain
‘Once upon a time’ was the traditional start to any fairy story, stories often designed to warn children of the dangers of life like wolves, forests and girls wearing bright clothing.
My piece is written as a warning to adults in the bike shop business who appear to be acting foolishly and, dare I say, a little childishly. It may of course be that these businesses were off sick the day teacher explained about gross profit; it could be they had parents who didn’t read them bedside stories about company failures, or it could be they are the villains wanting to eat innocent competitors in dark gothic castles.
My story begins when I made a call few years ago to a Cycle to Work provider to ask why they had removed their consumer instructions that sale prices did not apply when using scheme vouchers.
In the beginning, the trade understood giving commission to third parties on sale prices was foolish if not a recipe for disaster. The scheme spokesperson told me that many retailers were now prepared to give sale prices with ride vouchers, so it was up to the retailer to decide their preferred method. If the customer could be persuaded to pay extra to the retailer to cover the commission that was down to negotiation and it made no odds to the scheme provider.
Rock and hard places again; the tough sell backed by no support or evidence, the ‘well so and so are doing it so I will go there’ dilemma, half a loaf is better than none. Going home angry that you have been stiffed again and no one can hear you cry in the vacuum of the cycle trade space. A sub note to my tale is that I remove the commission from the gross profit, NOT the net profit, so I can tell daily how much we are making/losing on each bike sale.
For the benefit of those who missed the lesson, some basic maths to illustrate the issue. For my purpose, let’s use a £1,000 RRP bike, including VAT (£833.33 ex vat), 35% margin from your supplier and a middle of the road 12.5% commission to a scheme provider.
The bike costs £541.66 ex vat, so at full retail there is a gross profit of £291.67 at 35% margin. This is the Goldilocks sale because it’s just right given a business may cost 30% to run and a modern day net margin of 5% would give the business owner £41.66 pre-tax profit to spend or reinvest.
At this point you may want to stop reading because it will get very scary, very quickly.
If the bike is sold at retail, less the 12.5% commission, it’s £729.16 excluding VAT, so £187.5 gross profit/ 25.7% margin. At a 30% cost basis the business owner has just lost £31.24, still no tax to pay. If the bike is sold at 20% off in the ‘sale’ at £666.66 excluding VAT, it’s £125.00 gross profit / 18.75% margin. You are now seriously paying the customer to take the bike away, because you lose £75 net on this one.
If the bike is sold at 20% off in the sale, plus the 12.5% commission, we are now looking into the abyss with a sale value excluding VAT of £583.33, £41.67 gross profit and 7.1% margin. I told you it would be frightening because now the business owner has potentially lost £133.33 for an investment of £541.66.
The trade wonders why bike shops are struggling to pay their bills and decent wages.
Just a fantasy story or the IBD’s summer nightmare?
Please don’t have nightmares read nice happy bedtime stories with informative titles like ‘Make hay while the sun shines’, the old classics ‘Don’t give turkeys away at Christmas’, ‘Profit is sanity turnover vanity’ and finally ‘How to retire rich’.
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