lowering the cost of goods

How to set and achieve a goal of limiting and monitoring the amount of materials in arrangements.
  by Kenneth R. Royer, AAF

     There is an oversupply of flowers worldwide. As a result, some flowers can be purchased at very low prices, at wholesale, throughout most of the year.

     Unfortunately, most florists do not benefit from those low prices. It is not that anything is blocking their access; it’s that they have not positioned themselves to take advantage of the low prices.

utilizing oversupply
     When gluts appear on the market, it is beneficial for brokers and wholesalers to move large quantities of that product at very low prices to a few large buyers. This helps eliminate the surplus from the market and maintain the normal prices charged to small buyers who will not increase their purchases, even when special prices are available. If those florists will change their buying practices, they, too, can get lower prices.

creative buying
     “Sell what you buy” is a big philosophical change for most florists. It means buying fresh flowers in oversupply without having orders for them and then devising methods to sell them.

     To initiate this speculative strategy, you first must explain to wholesalers or brokers your interest in special buys, to gain their cooperation. Keep in mind that 1) there is not one price for every customer in a wholesale house and 2) salespeople have some discretion in the prices they offer. To be credible as a buyer of special-priced offerings, you must purchase larger quantities than normal, and your desire for special buys should be ongoing.

     “Sell what you buy” means profitability will share at least equal consideration with design and creativity when selecting and purchasing flowers. I believe that creating a unique arrangement using the most profitable flowers is true creativity and doing so can be extremely rewarding, financially, for florists.
 
  six steps to reduce the cost of merchandise  
 
  • Buy in quantity.

  • Create and sell "recipe" arrangements.

  • Control the use of unusual and exotic low-margin flowers.

  • Create buying budgets.

  • Do audits on arrangements.

  • Check cost of goods on financials each month.

 

custom design control
     Varying Markups I have never met a florist who uses the same markup on each kind of flower; therefore, the profit is different on each kind of flower, with basic flowers tending to be more profitable than unusual and exotic ones. Because designers prefer to work with new and exotic flowers, allowing them unlimited use of them is like playing “Russian roulette” with the cost of goods, even if the price list is followed correctly.
 

...creating a unique arrangement using the most profitable flowers is true creativity and doing so can be extremely rewarding, financially, for florists.

     Value Perception Giving designers complete freedom
in flower selection—and container selection—can have a
negative effect on customers’ value perception, as well as
profitability. My experience has been that most customers
expect a $75 arrangement to be proportionally larger than
a $40 one, but there is a tendency for designers to reduce
the number of insertions (work) by using the costlier exotic
flowers and an expensive container for the $75 order, with
little increase in the dimensions of the arrangement.
Customers who don’t recognize or fully appreciate the value of the exotic flowers and expensive container are, not surprisingly, disappointed with the finished products.

     Containers Because of the markups applied, florists’ most profitable product is cut flowers. The profit margin on containers is lower than on flowers; therefore, using expensive containers usually reduces the profit on arrangements.

     Also, customers prefer the value to be placed in the
flowers, and when given a side-by-side choice, they will
consistently select arrangements that focus on flowers
and de-emphasize the containers. As a result, on
custom arrangements, I suggest limiting the price of the
container to 20 percent or less of the order price.
 

Ken’s law:

The higher the container price is as a percentage of the total price of the arrangement, the less profitable the arrangement will be.

the price list
     Retail Prices Most florists work from a retail price list of individual flowers that is based on an estimated average wholesale cost of flowers, and it usually remains unchanged for long periods. Custom arrangements are calculated using that price list. The problem is that most wholesale flower prices rise and fall frequently; therefore, the desired margin may or may not be achieved, and the actual cost of goods may vary greatly from week to week.

     Wholesale Costs Another option is to use the actual daily wholesale cost of the individual flowers to calculate the content of arrangements. Designers making custom arrangements would total the wholesale costs to reach the cost-of-goods goal for various priced arrangements. This method is timely, but it is also difficult and confusing because it is constantly changing. Neither method will provide precise cost-of-goods control.

recipe arrangements
     My favorite approach to managing cost of goods is to create a group of featured (recipe) arrangements for each week that will possess the correct cost of goods based on the actual wholesale cost of flowers for that week. For many shops, four or five varied designs would suffice. The featured arrangements can include a healthy portion of the special quantity buys for that week.

     Using this approach, it is often possible to create very good value perception and obtain a 25 percent cost of goods. This approach also provides substantial labor

     savings. Of course, the key to making it successful is to proactively sell the preplanned arrangements.

arrangement audits
     Whatever markup is used, every florist needs to continuously audit arrangements—perhaps not each one but randomly selected ones—on a daily basis. A cost-of-goods audit involves counting everything in an arrangement and arriving at a total cost of the materials in the arrangement, including all the flowers, greens, floral foam and container.

     If you do not know the desired cost of goods to meet your financial goals, have your accountant help you figure it out. Once you know your cost-of-goods target, determining how much to use in materials is easy. For example, if your targeted cost of goods is 30 percent, the total cost of the material in a $40 arrangement would be $12.

     When I was managing a single store early in my career, I assigned orders to designers myself, and when I saw an arrangement that appeared to be overvalued or undervalued, I would conduct an audit on it. At times, when the value in an arrangement was correct but the arrangement didn’t pass my “visual value test,” I would think about how actual and perceived value could be better aligned.

     The audit process lets designers know that cost of goods is a serious matter, and awareness that it is being watched enhances compliance.

buying budgets
     If a florist looks at weekly sales of cut flowers, it is rather easy to create a buying budget that will bring some control to the buying process. For example, if the sale of cut flowers and arrangements for a week is projected to be $7,000 and the cost-of-goods goal is 30 percent, the budget for the purchase of flowers and greens would be something less than $2,100.

     If a design charge is applied, some adjustment would be needed for it, as well as for containers and supplies, but don’t make it too complicated. As soon as you put a budget into effect, it will focus your thinking about purchases as a percentage of projected sales.

giftware
     Many florists carry a selection of giftware items and enjoy trips to gift shows once or twice a year to purchase them. The profitability of those gifts is debated frequently.

     The truth of the matter is that selling fresh cut flowers does not require a large amount of space, and some retail florists with large stores often fill their excess space with gift items. If that is the case, giftware sales help pay the rent, and full shelves are better than empty shelves.

     It is also true, however, that the most profitable sales for florists are fresh flowers. Giftware, which usually has a 50 percent margin, is less profitable and will increase a shop’s overall cost-of-goods percentage.

     My suggestion is to limit display space in a flower shop to the size needed to display fresh flowers and plants. Then limit giftware to containers that can be filled with fresh flowers or plants on which overall margins and turnover would be much better.

keeping score
     Reaching cost-of-goods goals is one of the largest challenges in the retail flower business. It needs to be top of mind on a daily basis, and adjustments need to be made to stay on target. The cost-of-goods percentage on the monthly financial statement provides the information you need to make those adjustments. You may need your accountant to help you set up a monitoring process, but once established, it is easy to do month to month.

     Finally, be especially sure your accountant knows how to handle outgoing wire orders. If they are included in your sales total, the cost-of-goods figure on the statement will be useless.

Next month: The Wire Service Conundrum

For more information on this subject, access Mr. Royer’s book, Retailing Flowers Profitably, at www.usretailflowers.com. Click on “About Us,” then click on the book icon.

If you would like to comment on this article or respond to Mr. Royer, send an e-mail to ken.royer@royers.com or editors@floristsreview.com.

 To read the five previous articles in this series, click here.

 


Kenneth R. Royer, AAF, is a lifetime florist who expanded the business started by his mother in 1937 into what is now, arguably, the largest traditional florist business in the United States—U.S. Retail Flowers, Inc.—which is operated today by his three sons.

Throughout his career, Mr. Royer has served the industry in numerous ways—holding positions with the Society of American Florists (SAF), the American Floral Marketing Council (AFMC) and the American Floral Endowment (AFE); conducting seminars; writing articles; and authoring a book, Retailing Flowers Profitably.

Mr. Royer also is the recipient of many awards, including SAF’s Golden Bouquet Award (now named the Paul Ecke Jr. Award) and lifetime achievement awards from FTD and Teleflora.


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