These times are challenging for any business. As the global economy fluctuates and consumers lose confidence, many find that maintaining the bottom line is a real concern.
For those responsible for strategy and marketing, being able to predict where the bottom line is heading in the next fiscal is invaluable. Here are 5 warning signs that may signal a downturn in your company's profit margin:
#1 Increase in slow-moving inventory
If you notice a decline in the amount of inventory moving through your warehouse, take steps to protect your bottom line. This trend is particularly damaging if dated product is not selling.
Many retailers have limitations on the minimum shelf life for products they purchase. Baby food, for example, must have a minimum six-month shelf life, or Canadian grocery stores will not buy it.
Whether it has a sell by date or not, your inventory must continue to move through your warehouse in a timely manner or risk having it land on a SLOB list – aka slow moving obsolescence. Ideally, aim to turn the inventory in your warehouse 10 to 12 times per year to maintain efficiencies.
#2 Decline in advertising share of voice
When a brand dominates a category with a strong media spend, consumer awareness of the brand is high and purchase intent increases.
However, if share of voice decreases, either because the brand’s advertising spend declines, or a competitor increases its marketing dollars, there may be a decrease in your bottom line in the future.
#3 Fluctuations in commodity prices or currency value
If you are a Canadian manufacturer and the Canadian dollar suddenly increases relative to other currencies, you might be looking at a loss next fiscal. A strong dollar often means businesses in other countries are not willing to pay the price for our manufactured goods, and your sales will suffer.
Commodity prices are another consideration. They are directly impacted by foreign and domestic politics, economics and the weather.
Unfortunately, commodity price increases can’t always be passed along to the retailer or through to the consumer. But if your competitors decide to take the hit, you may be forced to do the same.
You may also have competitors not impacted by the commodity price increase. Consider a pasta manufacturer affected by the price of wheat. If the price of their pasta increases, consumers might start eating more rice or potatoes.
Although commodity changes are hard to predict, keep an eye on trends to protect the bottom line.
#4 Reduced shelf presence
If an overall category changes, reduced shelf presence for certain products is a likely result.
Take coffee. New coffee machines that use coffee “pods,” instead of ground beans, are a popular recent invention. Instead of making a pot of coffee, consumers are making individual cups with their new machines.
Today, the coffee aisle in grocery stores includes both big tins of coffee (the so-called “old” way of making coffee) and new coffee “pods.” Overall retailer coffee sales have not changed.
However, things have changed for the coffee manufacturer. They are not selling as many tins of coffee. And unless they anticipated the switch to “pods,” they are not selling much coffee either.
#5 New technology
The technology industry is in a constant state of flux. As manufacturers introduce new technologies, older technology rapidly becomes obsolete.
Consider the huge demand generated every time Apple releases a new iPhone. In 6 months to a year, the next version hits store shelves and demand for the previous version suddenly drops to almost nothing.
Businesses that manufacture technological devices, such as cell phones, laptops and tablets, must constantly reinvent their products and carefully monitor inventory numbers. Although enough inventory of a certain product is needed to meet customer needs, overstocking the warehouse is a mistake. When the next new thing is introduced, it will be challenging to move the old one.
An unpredictable and somewhat fragile global economy makes properly managing your company's bottom line both challenging, and vitally important. Knowing the warning signs of a possible decrease in profit margin will help you manage inventory correctly, market your company or products properly, and weather the storm of a rapidly transitioning marketplace.