Gross profit margin is the percentage of your periodic revenue that you convert to gross profit. Gross profit is simply revenue minus costs of goods sold (COGS). Declining gross profit margin is a significant problem for a for any business dealing with China imports and supply chain and shipping constraints. This includes closeout brokers, inventory liquidators, and other companies that buy excess inventory. The opportunity to make big profits on closeouts is currently not available due to the reduced amount of excess inventory and overstock merchandise in the market. Understanding factors that contribute to margin decreases puts you in a better position to react positively.
One of the simplest factors that can lead to declining margin is higher costs of goods sold. Over time, your suppliers naturally want to increase their own revenue and margins. Their own costs to produce or supply may go up. This leads to importers spending more to buy goods and fill containers, and closeouts being liquidated at a percentage of cost end up costing more money. Inventory liquidators and businesses that buy excess inventory are accustomed to paying low prices for goods, but things are changing because it costs too much to import goods and bring in containers. These factors may lead to them negotiating or simply charging you higher rates on goods. If higher COGS negatively affects your gross profit margin, you may have to negotiate harder or look for alternative providers. For example, closeout brokers that specialized in selling obsolete inventory of housewares may want to switch product categories to other areas where there is more excess inventory. Housewares performed well during the pandemic and the supply is currently low; however, seasonal goods that came too late for the holidays are in abundant supply and can be bought on liquidation for low prices. These are the kind of opportunities inventory liquidators and closeout brokers should be looking for.
Lowering your prices to generate sales can also reduce gross profit margin. Some companies routinely offer discounts and promotions to attract buyers. While you may get a sale, large price cuts minimize the gross profit you get on it. Over time, maintaining a strong brand image allows you to maintain stable price points, or even increase prices. If you constantly discount, you run the risk that customers get comfortable with the lower price and won't pay top rates. This is okay for closeout wholesalers and closeout distributors who specialize in selling discounted excess inventory. Closeouts will always give the consumer a great opportunity to buy goods at lower prices than normal. Todays market is geared toward everyday discount whether you have a brick and mortar store, closeout websites, or even if you buy excess inventory to sell at the flea market. In an industry with many competitors forcing prices down, reducing the cost of good sold through the acquisition of cheaper supplies or cutting labor costs may be necessary
Along with higher supplier pricing, ancillary costs contribute to higher COGS. If your business moves to more environmentally friendly packaging, for instance, you can either pass the costs on to customers or take a hit on gross profit margin. Distribution or transportation costs can also increase your COGS. Again, figuring out ways to minimize gains in these product-related areas or passing on the costs to customers are possible protective measures. If you have excess inventory sitting in your 3PL warehouse you might want to consider shutting down the warehouse or moving to a small facility. 3PL warehouses charge fees for storage, box handling, labeling, pallets, etc. If you have closeouts for sale it is better to get rid of your old inventory than let it take up valuable warehouse space. Many Amazon sellers are shutting down their accounts due to high 3PL storage fees and long term storage fees they cannot afford.
New competitors or increased rivalry from competitors also impact your gross profit margin. The more attractive customer offerings become to the market, the more difficult it is to get customers to pay desirable prices for your solutions. An indirect result is that when your sales transactions decline, you reduce your purchases from suppliers. In this scenario, you may not get the some economic advantages of buying bulk lots from suppliers. Bulk lots for sale are also referred to as closeouts, excess inventory, obsolete products, slow moving inventory and overstock inventory. These are closeout opportunities that are available due to companies shutting down warehouses, package changes, need to make room in the warehouse for new products coming in, bankruptcies and more.
In industries where change is the order of the day, the development of new technology and products in the field impacts the bottom line. For example, the introduction of smartphones disrupted the market for flip phones and numerous other tech products. In these instances, the cost of developing products embracing new technology must be weighed against potential returns.
Budget overruns or unexpected costs incurred in excess of budgeted estimates can result in a negative profit margin. Even if target revenues are met and cost of goods sold kept within projected estimates, a negative profit margin can still occur if expenses incurred during the current period go beyond gross profit. For example, XYZ Company's books show the following balances: $100,000 sales, $70,000 cost of goods sold and $40,000 expenses. Deducting $70,000 cost of goods sold from $100,000 sales resulted in a gross profit of $30,000. But expenses exceeded gross profit and resulted to a net loss of $10,000 or profit margin of -0.10 (-$10,000 divided by $100,000). These examples apply to companies selling closeouts and overstock in every category including overstock housewares and excess stock of Amazon FBA products.
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin. But a one-size-fits-all approach isn’t the best way to set goals for your business profitability. When selling closeouts, margins will fluctuate depending on the size of the inventory, category, and current demand. But generally speaking when a business is liquidating inventory there is a desire to get rid of it so buyers can get a good deal. This helps margins and should give a minimum or 10% to 12% profit margin. Closeouts on some categories are less, like electronics and gadgets, but given the right inventory liquidation these can still be profitable for most surplus warehouses or merchandise liquidators.
Some companies are inherently high-margin or low-margin ventures. For instance, grocery stores and retailers are low-margin. They have high expenses, as they need to purchase excess inventory, employ corporate employees and labor workers, facilitate shipping and distribution and rent bigger facilities as their sales grow. But low-margin goods, like food and some consumer products, are usually easier to sell. A highly competitive market can also create thin margins. When the margins become negative, it is time to review your inventory and get rid of slow moving products and dead stock. When inactive inventory sits too long in the warehouse it begins to take up warehouse space that may be needed for new products.
By contrast, businesses like consulting firms and software-as-a-service (SaaS) companies generally have high gross margins. These businesses have fewer operating costs, no surplus inventory, and require less startup capital to launch. Companies that sell high-dollar products, like jewelry stores, can also fall into this category. If you have too much inventory and need to shut down your 3PL warehouse or have an inventory liquidation sale, you can find inventory buyers by doing a simple Google search. Terms that may be helpful are closeout brokers, closeouts, excess inventory buyers, getting rid of inventory and inventory liquidators.
Business age and size play a role in profit margins as well. New businesses often have higher profit margins than large or established closeout firms. Generally, there are fewer sales, fewer people on payroll and therefore, lower overhead costs. As operations expand, margins usually shrink.
A geographic area can also alter margins for businesses in the same industry. For example, a tech company in San Francisco will have wildly different rent and payroll costs than a tech company in Dallas. Closeout wholesalers and closeout distributors can typically operate from anywhere, so it might make sense to have a larger distribution warehouse in a small city, rather than a small warehouse in a large city. Closeout buyers are all about getting the best deals on merchandise and warehouse costs are a part of this. Finally, a good profit margin depends on your growth goals. If you plan to take on investors soon, need to finance a large equipment purchase this quarter, or want to expand your services, you’ll need to increase your margins.
Merchandise USA is an inventory liquidator in business since 1984 and we specialize in closeouts, excess inventory, obsolete stock and buying inventory from 3PL warehouses.