As we know, a buyer worth their salt does not purchase an item and then add on a markup. A good buyer looks at the item and from their experience they know what it will sell for within quite a narrow band. They then ask the cost and if it provides a required margin, they buy. If it doesn’t, they don’t buy. And this is how it should be.
However things can change and sometimes quite suddenly. Currency fluctuations can move substantially from the time the item was purchased versus when it arrives and commodity prices vary too.
Let us take a scenario. A buyer purchases a range of garments to retail at $A99. The planned landed cost is $A25. The Australian dollar devalues over a two month period and the landed cost moves to $A32. The accountant maintains that based on the likely replacement costs and also to maintain margin the retail price should be adjusted upwards. The buyer says that he/she bought the items because they knew they could sell them at $99 and to revise the price to $129 will mean that they won’t sell and will need to be marked down anyway.
So who is right and who is wrong?
Another real life example. You are a jeweller. The price of gold drops by 25 per cent. Do you revise all your selling prices downwards more or less accordingly? The accountant says over his dead body but the buyer insists that items will not sell so far above the new commodity price.
These are difficult questions and unfortunately there are no right or wrong answers.
In both examples it is worth looking at the competition. If your competitors adjust their prices up or down on similar merchandise, you may need to react accordingly much to the distaste of the accountant. We are merchants and we need to cut and thrust and move with the market. However this approach is reactionary. If everyone waits to see what the competition does, everyone will end up in a state of paralysis and so you have to do what is right for your business. Sure, look at the competition but don’t follow blindly.
It is also worthwhile to look at a number of other factors. Are you over or under stocked? Have you got a cash flow issue? Will you replace the goods when they sell? How long will it take you to replace the goods? What is the prognosis on external factors for future currency fluctuations or commodity price changes?
Of course a lot of these questions are unable to be answered. There is simply nobody who can predict these things.
Ultimately it is not margins or accountants that dictate the answers. It is the merchants. They have to do what feels right. You don’t want to sit on stock that doesn’t move. My gut tells me that you should get out of the stock as quickly as possible at whatever the market will bear. Us humble shopkeepers are not economists. We are paid to trade. To make a buck and move on. We don’t want to invest in stock or divest based on external factors over which we have no control and little knowledge. We need to go with the flow and be nimble. Because if we are sluggish it will come back to bite us just where we don’t want to be bitten.