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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.
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six steps to reduce the cost of merchandise |
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Buy in quantity.
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Create and sell "recipe"
arrangements.
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Control the use of unusual and exotic
low-margin flowers.
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Create buying budgets.
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Do
audits on arrangements.
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Check cost of goods on
financials each month.
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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. |
