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More Profits Through Smaller Sales

I was in a convenience store in an economically depressed part of Houston recently.  It was well run store  – a wide variety of products stocked on the shelves, clean, and attentive customer service.  But you could tell from the outside of the store, the surrounding neighborhood, and the customers that walked through the door that the area was experiencing hard times.

A few miles away I passed a Sam’s club with its emphasis on bulk buying.  As you know, most of the discount stores promote the idea that you can save money by buying in large quantities.  A gallon of laundry detergent will cost you less per ounce than a smaller bottle.  A 48 pack of toilet paper will cost you less per roll than a four pack.

Bigger is better value.  It’s true and it makes economic sense.  But to get the economic value you have to be able to invest your money in the up front cost of the package.  You only recognize the economic value of your investment over time.  The cheaper cost per roll of a 48 pack of toilet paper only works if you can afford to buy the whole package.  What happens if the consumer can’t come up with the cash to make the investment?

It got me to thinking of one of the projects that we did in Africa.  The retailer that we were working with was developing c-store/fuel sites.  As is typical with most oil companies, they were copying the international design of the store – 2500 to 5000 square feet of store with food service and shelves full of convenience items such as snacks, groceries, and HBA products.  The problem was that they were not getting any walk in traffic – customers who lived in the high-density area near by but weren’t fuel customers.

As any good retailer does, we went out and surveyed our competition.  However, our difference was that we knew that our competition was not other fuel sites but the small mom and pop stores that existed in the neighborhoods around the store.  These shops could be located on the front porch of a house or in an old shipping container on the side of the road.  They weren’t flash or fancy but they were local.

The thing that struck me immediately was that 1) they had about 1000 pieces on their shelves (individual items – not SKUs) and 2) the entire retail inventory of their shop must have been about $250.  Lots of items with a small price point.

That was the key to their retail strategy.  Their customers only had a limited amount of cash available (and believe me, all transactions were in cash) so they could only afford to make small purchases at any given time.  Rather than buy a 20 oz bottle of detergent they would buy twenty 1 ounce sachets of detergent over time.  The same was true for candies, cigarettes (sold by the stick which is illegal in the US), and almost all HBA products.  Beverage companies had either provided reduced sized packages or a lower price point hoping to establish customer loyalty.

More importantly, while our gross profit margin on the items in our store averaged around 27% the local shop’s margin was more like 60%.  Selling smaller quantities at a higher margin to more customers.  It was a hyper localized marketing strategy.  We went back to our client and encouraged them to reduce the package size and price points on many of their items. Sales, and gross profit dollars, went up significantly.

Today, in the US, we need to reconsider pack sizes.  We’ve seen a reduction of some packaging on immediate consumables such as drinks and snacks but these reductions are usually done to reflect calorie content (100 calories per package seems to be the magic number).  I suggest we look at smaller packages for grocery and HBA items – especially in those stores that cater to the less affluent.  The sale of a 5 ounce package at 45% is better than not selling 20 ounces at 30%.