Tuesday, August 4, 2009

Lower Sales, Higher Profit?

How have we managed to improve our spa operating profit so dramatically during a downturn?

1. We've protected our gross margin. While we've increased incentives we've refrained from hysterical and unrestrained discounting, or what we call "Dropping the D Bomb." Our gross profit margin is 55%, just as it was last year. I'd like to see it get to 60%, but the fact that we are holding steady on the Middle Line is absolutely crucial to profit.

We reduced compensation this year as well, about 7% across the board, including commissions, which has also enabled us to keep the Middle Line healthy. Think of your gross profit as the war chest you build to pay out all your overhead expenses.

This is one area where you have control and discretion, but all the decisions are big ones. And you can't achieve this performance without private branding in your mix. Your gross profit on retail is sales minus cost of goods sold minus retail commission paid.

If you're like most spas, you get a 40% gross profit margin after COGS and a 10% commission. (Hey, I don't make the rules. Complain to the vendors who maintain the 50% gross margin "tradition.") That means our spa drives 15 points of gross profit more than you do on your retail sales.

2. We've cut operating expenses across every line item in our budget, being careful to preserve client amenities and the "little" luxuries that clients really notice. This is not something you do once; you do it over and over, even after everyone insists there's nothing more you can save.

True confessions: nothing could be further from my personal style than penny-pinching, but I have learned to love it, embracing my inner "Beverly" (my mom, the Depression Baby, who elevates it to a fine art.)

Instead of the question, "What difference is it going to make if we spend an extra ten bucks on this?" I have a completely different frame of reference. "Why should I waste any money?" is my new mantra.

And oh, have I wasted money.

How much? The latest report, at the halfway point of 2009, showed our overhead expenses lower by $160,000 than the same time in 2008. Overhead!

As we like to say around Preston Wynne Spa, "no one died; no one bled." The cuts were made, we adjusted, and we went on. For example, my operations director now has a modest office adjacent to the operations floor, rather than in a separate building. Talk about eliminating waste. Wasted steps, wasted morale--problems get solved faster when you know the boss is right there and ready to listen.

Don't get me wrong. We have also identified areas of "diminishing returns" for spending cuts. For example, we've cut our concierge team a little too far, placing too great a burden on aforementioned operations director, who wasn't able to complete our important monthly check-in meetings with staff because she was "lashed to the mast" at the front desk.

So we're putting some resources back...that's the other thing people forget about cuts. They're reversible.