COVID-19 has delivered us into a significant recession. Consumers have resisted opening their wallets except for necessities. In this environment liquidity becomes paramount, even more so than profitability. One can sustain a year without profits, but without positive cash flow, the company will fail.
These economic conditions illustrate the importance of working with a good stocking distributor to improve both your profits and maintain a positive cash flow. Retailers can get squeezed between needing liquidity and maintaining pricing parity with one’s competitors.
Buying direct from the vendor or importer allows you to realize a lower cost price and therefore a higher gross margin. The tradeoff, however, is that you must purchase larger quantities and forego some liquidity and flexibility.
Since fishing and sporting retailers can purchase their inventory direct from manufacturers or importers, jobbers (aka distributors or wholesalers), through buying groups or any combination of all such sources the question thus becomes under what circumstances is it in the retailer’s best interest to choose one source versus another. As you might presume, the answer is “it depends”— depending upon the size of the dealer, their merchandise mix, time of year, lead time requirements, current stock position et al.
When to Buy Direct and When to Buy From a Distributor
All of this begs the question when to buy direct versus using a wholesaler? In the real world, you can buy from both direct vendors and distributors. In a word, buy from whomever and wherever the gross margin return on investment (GMROI) is the highest.
The components of net profit dollars on product sales are gross sales, margin percentage and average inventory (inventory turn rate). GMROI measures the amount of gross profit dollars generated per dollar invested in inventory and the formula is: annual gross margin dollars divided by average inventory at cost.
For example, if your sales are $2,000,000 and your gross margin is 35% and your turn rate is 3, then:
- Gross margin dollars = $750,000 ($2,000,000 * .35)
- Cost of goods sold = $1,250,000 ($2,000,000 – 750,000)
- Average inventory = $416,667 ($1,250,000 /3 turns)
- GMROI = 1.80 ($750,000/416,667)
- 1.80 = $1.80 is generated for every inventory dollar invested
A $1.80 return per dollar invested in inventory is good. Higher sales and/or gross margin percent or lower average inventory, all yield higher GMROI (profits). Thus, the decision of where to buy comes down to a margin versus dollar investment decision. If you pick up margin dollars through direct purchases, you may lose the advantage because of lower inventory turns.
Distributors can be a great resource for retailers. For the smaller independent stores, the distributor provides a constant stream of inventory and in quantities compatible with the dealer’s needs. For chains, they can provide manpower and tracking systems to place initial and restocking orders thereby accelerating turns and reducing operating expenses.
Not all distributors are equal in their performance, degree of customer service and level of product selection. Be sure you are dealing with a distributor who provides suitable selections, quick delivery and one who will work with you on promotions, stock rotation and promotional pricing.
Remember you can buy either direct or through a wholesaler depending upon your needs, time of year and circumstances. Do the GMROI math when debating direct versus jobber purchases.
Be mindful of the tradeoff between higher margins and lower turns. Working closely with a good wholesaler who can deliver both to you if you are creative and negotiate well. Regardless of whether you buy from a distributor or direct, make the vendor a business partner sharing both margins, expenses and efforts.
In this pandemic environment, challenge your current methodology; use all resources and enjoy a strong bottom line and a full bank account.