Credit from the book Beloved Brand
For many of us, we became marketers because we were attracted to the strategic, creative, and psychology aspects of business. So if finance is not a natural skill, when your finance manager hands you the brand’s profit and loss (P&L) statement, it can be rather intimidating. You should start by looking at the sales growth, gross margins and
To assess the performance of your brand, and begin knowing where to dig deeper, start by looking at four key numbers.
Understand the sales growth rate, relative to the economy or the category growthLook at the gross margin percentageDig into the contribution margin percentageDo a quick comparison between spending growth rate and the sales growth rate.
Step 1: As a leader of the brand, I start by trying to understand the growth rate.
Most brand leaders have brand growth as their number one objective. You can do a quick calculation to figure out the average growth rate but, as you dig in, you should try to find out what happened each year to give you a better feel of the brand performance. There are two calculations you can use, either average growth rate or compound annual growth rate (CAGR).
In this example, the average growth rate is 7% and CAGR % is 9.1%, but very high compared to the overall economic growth of 2-3%. My first instinct would be to look at the category growth to see if the brand is gaining or losing market share. Next, the year-by-year growth shows the growth rate has shot up to 12% over the past two years. I would make a mental note to expect to see this as an investment brand and determine whether the profit is paying off yet.
Step 2: My eye is drawn immediately to figuring out the gross margin percentage, as a first signal of brand health or to try to understand the strategy behind the brand.
Divide the absolute gross margin by the sales. You can assess the brand’s health by comparing the margin percent over time to see the trend line, with other brands in your portfolio to assess the opportunity cost, or with other competitive brands in the category.
In this example, the gross margin percentage has fallen from 43% in 2018 down to 37% in 2020, which should prompt you to go a layer deeper to look at price and cost of goods. Regarding price, dig around to see if there has been an average price decrease, then look to see if it is due to an increase in trade spend, a shift in the sales mix to lower-priced items, or even a shift to lower margin items.
Step 3: Next, look at contribution margin percentage, dividing the bottom line contribution income by the overall sales, using your brand’s cost of goods and impact on overall profit.
Some cost factors are outside the brand’s control, such as foreign exchange, raw material cost increases, duties, and transportation costs. However, you also need to look out for factors within the brand’s control. Was there a strategic decision to change to a higher cost raw material? Was there increased quality control at the manufacturing site? Did you switch to a more expensive supplier or change the location of your production?
In the example, an alarm bell goes off when I see the contribution margin percentage has fallen from 26% to 17% in three years. My first observation is the sales are up dramatically, yet both the gross margin percentages and contribution margin percentages are down. While the gross margin percentage is down, the gross margin dollars increased. However, in this case, the contribution margin dollars have gone down from $5,763 to $4,772. After two years of investment, the brand is not responding fast enough to cover that spend level.