Rebates as a form of discounting

By PETER COX April 08, 2016 Industry news

Retailers and retail groups ask for and receive rebates from suppliers, for many reasons. Usually it is a volume rebate, whereby the retailer or distributor buys up big and the more they buy the greater the rebate.

Sometimes a manufacturer will give a rebate as an enticement for a retailer to shift their loyalty.

In America, the whole supplier and retailer relationship has changed in the last 25 years, with retailers like Walmart for example, armed with massive scale, demanding better and better prices from manufacturers.

At some point however suppliers will have to decide if they can still produce the item and continue to sell it through traditional channels for a profit – or whether they should or could simply start selling direct to end users themselves…

 

UNDERSTANDING THE EFFECT OF REBATES

Back to rebates – what is the effect on the manufacturer of giving say a 10% rebate to a distributor?

Once a rebate is given to one retailer it won’t take long for other retailers to start expecting and/or demanding the same.

Here is a case study of the effect of giving a 10% rebate:

This reduction in profit comes straight off the bottom line and as such directly affects the shareholders and/or owners by reducing their equity in the balance sheet.

Obviously, this is the worst case scenario. How much does the manufacturer need to sell to be making the same amount of Gross Profit – i.e. $7,500?

To work out the sales target we do a simple break even calculation:

Gross Profit Target ($7,500) ÷ Gross Profit % as a decimal

 

How to work out the Gross Profit % after a 10% reduction?

Gross Profit per item x 100 ÷ Sales price per item = Gross Profit %

$2.50 x 100 ÷ $45.00 = 5.55%

Gross Profit ÷ Gross Profit % = Sales target              

$7,500 ÷ 5.55% = $135,000

Sales target ÷ Price per unit = Unit target

$135,000 ÷ $45.00 = 3,000 units

Unit target – Base quantity ÷ Base quantity = Sales increase required 

3,000 – 1,000 ÷1,000 x 100 = 200%

 

Is a 200% increase in sales volume for this product possible?

Can the retailer promise the manufacturer that they will increase their purchases by 200%?

In many cases I would say “NO”.

 

THE EFFECT OF A MARK DOWN ON GP $

The following table is a useful guide to the sales volumes required to increase the amount of Gross Profit if products are discounted.

The following shows how many MORE units (as a percentage) you have to sell to earn the same Gross Dollars as at the previous Selling Price.

Times can be tough for hardware retailers but, in the long run, just demanding rebates does not help the retailer or the manufacturer.

Increasing profit for hardware stores in a highly competitive and, if I could be so bold, over-serviced retail sector, is about being more efficient through better margin and inventory management practices.

That, for me, is what financial management is all about.


Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au 

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