|
To illustrate the role of pricing
and unit cost, we take three department stores with drastically
different pricing and purchasing approaches. JC Penney is a very
large American general merchandise and catalog retailers, which
has recently acquired several nationwide drug store chains. Value
City is a regional general merchandise off-price retailer, with
a chain of franchised shoes outlets. PriceSmart is a membership
shopping warehouse chain operating in Western United States and
Latin America, with new stores opening in China. Table T-13.5
presents income statements of three firms and RMA averages for
the department stores industry.
|
Table T-13.5 |
|
Comparison of costs and margins of three department
store chains in 1998 |
|
. |
JC Penney |
Value City |
PriceSmart |
RMA |
|
Sales |
29,656 |
1,161 |
109 |
. |
|
COGS |
-21,761 |
-733 |
-85 |
. |
|
Gross Margin |
7,895 |
428 |
24 |
. |
|
Selling/administrative expense |
-6,530 |
-416 |
-32 |
. |
|
Other expenses net |
-593 |
19 |
4 |
. |
|
Profit before tax |
772 |
31 |
-4 |
. |
|
. |
JC Penney |
Value City |
PriceSmart |
RMA |
|
Sales |
100.0 |
100.0 |
100.0 |
100.0 |
|
% COGS |
-73.4 |
-63.1 |
-78.0 |
-67.5 |
|
% Gross margin |
26.6 |
36.9 |
22.0 |
32.5 |
|
% Selling/adm. expenses |
-22.0 |
-35.8 |
-29.4 |
-28.7 |
|
% Other expenses net |
-2.0 |
1.6 |
3.7 |
-0.8 |
|
% Profit before tax |
2.6 |
2.7 |
-3.7 |
3.0 |
Table T-13.5 shows that PriceSmart has the highest cost of
goods sold and the lowest gross margin. PriceSmart has the lowest
gross margin (22%) because its very aggressive low price strategy
necessary to penetrate new markets generating average annual
revenue growth of over 20% for the past two years. PriceSmart's
unit purchase prices are actually the lowest of the three, but
relative to low selling prices cost of good sold appear very
high. To offset its low prices, PriceSmart collects membership
fees and interest on outstanding balances resulting in other
income included in the positive other expenses of 3.7% of sales.
Value City states in its annual report that it offers "exceptional
value by offering a broad selection of branded merchandise at
prices substantially below conventional retail prices",
which has produced an average annual sales growth of 8.6% for
the past four years. Value City accomplishes this by being a
"leading purchaser of buy-outs and manufacturers' closeouts".
But the low purchasing costs are not fully passed on to consumers
as ValueCity retains a healthy gross margin of 36.9%.
J.C. Penney's family value oriented pricing on private and
national brand merchandise leaves a relatively small margin of
26.6% compared with 32.5% for the industry. This defensive pricing
strategy is barely sufficient to retain customers as sales have
grown in 1998 by only 0.1%, and growth is achieved through acquisitions
or going abroad. Economies of scale are sufficiently large to
keep relative size of operating costs low and net profits almost
as high as industry average. |
