Your best margin store is rarely your best store

The moment a business has more than one location, the question asks itself: which one is doing best? And the answer usually arrives just as fast, because gross margin per store is one of the first figures any system will hand you.

That figure is almost always misleading.

Not because it is calculated wrong. Because you are putting two things side by side that do not sit in the same circumstances, and then pretending the difference says something about the people.

What a margin per store does not know

A store in a prime location pays a multiple of the rent a store in a side street pays. That rent usually sits outside the gross margin, but it completely determines how that location has to run to be profitable.

A store with heavy footfall gets a different kind of customer than a store people drive to on purpose. The first sells impulse items at a different margin than the second, which more often lands the big purchase. Same chain, same prices, two completely different margins. That is not a performance gap, that is product mix.

A store that has just been refitted runs differently from one that has not been touched in five years. A team with a lot of seniority costs more but often sells better. A location that discounted heavily in a bad year drags that into the next year's numbers.

Line up the raw margins and you get a ranking that mostly measures what circumstances each store is in. Steer on a ranking like that and you reward or punish the wrong people.

What you do correct for

You should not correct until everything is equal, because then you are measuring nothing. You correct until the difference that is left really is about the store.

In practice that comes down to a handful of things. Margin per visitor instead of margin in absolute terms, so the size of the location stops mattering. Margin within the same product groups, so product mix drops out. Margin before and after discounting, separately, because those two tell a different story. And the costs you can genuinely assign to a location in the picture as well, even though they are not part of gross margin.

Only then is the question of which one is doing best a fair question.

What usually comes out

My experience, after twenty-five years with multiple locations: the store with the highest margin is often the one that sells the least.

That sounds strange until you see the mechanism. If you run little volume, you discount little. If you discount little, your margin stays high. And if your margin stays high, you look like the top of the class on a dashboard, while that location may simply have too little movement in it.

The other way round, the store that turns a lot of volume and therefore has to discount a lot is often the strongest of the group in absolute gross profit. It sits at the bottom of the margin list and at the top of the list that actually matters.

That is why I never let a margin figure stand on its own. Margin without volume next to it is half a number.

The link most people get wrong

There is another stubborn misunderstanding in here, and I run into it with almost every owner. The belief that margin and purchasing go hand in hand. More buying means more stock, and stock sooner or later has to go out at a discount, so buying more costs you margin.

At a retailer where we could check that across several years, it did not hold. When purchasing behavior changed and more was bought in, gross margin did fall, but far more slowly than purchase cost rose. Net, more gross profit was left over.

That turns the conclusion completely around. Buying less out of caution was costing that business money instead of saving it. But you only see that when you lay purchasing, revenue and margin side by side across several years at article level. It is not in the annual accounts.

How to do it in practice

You need three things and none of them is exotic. Sales per article per location per day. Purchasing per article at the real purchase price, not the catalog price. And your discounts registered separately instead of netted into the selling price.

That last one is where it usually goes wrong. Plenty of point of sale systems bury a discount in the selling price, which means you can no longer tell afterwards whether a low margin came from purchasing or from discounting. Those are two completely different problems and you want to be able to pull them apart.

If you cannot, that is the first thing you repair. Not the dashboard.

The claim

A ranking of locations by gross margin mostly tells you which store has the easiest circumstances. Steer on a list like that and you reward the wrong team while tackling the wrong problem.