A student in one of my classes asked me to clarify why profitability depends on markup, investment, turnover and supply lines.

The turnover question is a very important point most retailers do not understand. The way to make money in this business is through return on investment, not on markup alone.

Say you are selling reliably one case per week of Chateau XYZ for $150 and replacing it for $100. You are making $50 per case and reinvesting the $100 in next week’s case. In a year, you will have made $50 x 52 weeks = $2600 profit for a $100 investment, a 2600% return on investment.

Now the distributor offers you the chance to save 10% if you buy 10 cases at a time. Most retailers jup at the chance to make an extra $10 per case. Now you are paying $900 initially and making $60 each week, so your yearly profit is $3120, but your investment was $900, so your ROI is $3120/$900 or 347% instead of 2600%. You could have spent the other $800 on other products and made a lot more, or made almost the same money for a fraction of the investment. Not to mention the cost of storing those ten cases.

Now suppose the supplier will sell you one bottle every time you need it, for a broken case charge of $1. Now you pay $8.33 + $1.00 = $9.33 ($112 per case) and profit $38 per case x 52 weeks,so your ROI is $1976 / $9.33 = 21171%! You spent less than $10 that year to earn almost two grand. And no storage costs at all.

NOW, suppose you drop your price 10% and the result is that you sell two cases per week. Ignoring the side benefits of having people flock to your store, you have cut your revenue per case from $150 to $135 and your profit per case from $38 to $23. So now you are making $23 x 52 weeks x 2 cases per week = $2392 instead of $1976, so your ROI increases to 25629% on your lousy ten bucks. You make more by charging less.

This idealized example depends entirely on the re-supply lines. I live right down the street from a restaurant with exactly this deal going. I will deliver that next bottle any time day or night. This is the advantage of local wineries.