Siti Rahmawati Advisory memo Decision Call · USD 200
Your best-selling product loses money on every order
60 minute call, 9 March. Reviewed and signed off by Siti Rahmawati on 11 March.
You asked whether to take the supermarket listing. Before answering that, the same calculation has to be run on the business you already have, and it says the 500 ml bottle, which is 61 percent of your volume, contributes minus 34 pence a unit once you include the things everyone leaves out.
A supermarket listing multiplies your unit economics, and yours are negative on your highest volume line. Taking it would turn a manageable problem into a contractual one. The 500 ml loses 34p a unit on a full cost basis; the 250 ml makes 61p. Nothing about the listing decision is safe until that is fixed, and it is fixable three different ways.
The question
What was asked, and what was reviewed
As you put it: "They want 4,000 units a month at 38 percent margin. Can we do it?"
| Reviewed | Source |
|---|---|
| The supermarket terms sheet | Supplied |
| Product costings, both sizes | Supplied, your spreadsheet |
| 12 months of purchase invoices | Supplied |
| Production time by batch | Supplied, and this is where the gap was |
| Packaging and carriage invoices | Supplied |
| Wastage records | None kept. Estimated on the call |
The number
The 500 ml, rebuilt
| Cost line | Your costing | Full cost | Difference |
|---|---|---|---|
| Ingredients | 68p | 68p | Agreed |
| Bottle, cap, label | 41p | 41p | Agreed |
| Outer packaging | Not included | 9p | +9p |
| Direct labour | Not included | 52p | +52p |
| Wastage at 7 percent | Not included | 12p | +12p |
| Carriage in | Not included | 7p | +7p |
| Total cost | GBP 1.09 | GBP 1.89 | +80p |
| Wholesale price | GBP 1.55 | GBP 1.55 | |
| Contribution | +46p | -34p |
Direct labour is the big one. The 500 ml takes 2.4 times the hands-on time of the 250 ml because of the second ferment and the hand-capping, and no labour appears anywhere in the current costing for either size.
The listing
What it would do at the current cost
| At 4,000 units a month | Effect |
|---|---|
| Contribution | Minus GBP 1,360 a month |
| Plus listing fee, amortised | Minus a further GBP 420 a month |
| Plus promotional participation, 2 periods a year | Estimated minus GBP 3,200 a year |
| Plus the production capacity it consumes | Displaces roughly 900 units of profitable direct sales |
| Net effect, first year | Materially negative, and contractually hard to exit |
Their 38 percent is calculated on their retail price, not on your cost, which is normal and is not a trick. It simply means their margin requirement and your margin are unrelated numbers.
Options
Three ways to fix the 500 ml
Raise the wholesale price to GBP 2.20
Gives 31p contribution. Your two existing wholesale accounts would probably accept it; you have not raised in two years and your retail price supports it. Test it on them before the supermarket conversation, not after.
Remove the second ferment
Takes 52p of labour to roughly 22p. It also changes the product, and the second ferment is what your regulars describe when they explain why they buy it. A commercial gain and a product loss, and only you can weigh that.
Move to a 750 ml at GBP 2.95
Labour per unit barely rises, ingredients scale, contribution goes to about 84p. New bottle, new label, roughly GBP 3,400 of setup and eight weeks. It is the strongest answer on the numbers and the slowest to reach.
Next
What to do
- Tell the supermarket you are interested and cannot commit to a price until Q3. This is a normal answer and does not lose the opportunity.
- Start recording wastage this week. The 7 percent is your estimate from the call and the whole calculation is sensitive to it.
- Put labour into the costing for every product, permanently. A costing without labour is not a costing.
- Raise the 500 ml wholesale price with both existing accounts and see what happens. Low risk, fast information.
- Decide about the 750 ml in the next month, because if you want it for the listing it needs to start now.