1 - DePa

our net profitability principle
(Figure 1). Here gross margins of products are
calculated after the cost of the good sold and
al1 deals and allowances have been taken into
consideration. In this case, the profit of the
branded product is $.53, representing a gross
margin of 17.796, compared to $.60 or 30% gross
margin for the private label version of that
product.
A gross margin comparison is a limited
method of pinpointing what products will
contribute to net profit performance and may
mislead retailers and manufacturen in thei
search for ways to maximize the net profit of
a category. We argue that manufacturen an
retailers have not gone far enough in their
scrutiny of costs. By examining costs associated
with distribution center processing, DC
inventory, store delivery, store inventory, and
damage, both manufacturer and retailer will have
a much more accurate assessment of a product's
net profitability, In some cases, the costs
associated with distribution may even be
significant enough to alter a manufacturer or
retailer's decision that was based solely on DPP
and category management data.
For example, using the same products
analyzed in Figure 1, if we account for the DC and
store handling, inventory, processing, delivery, and
damages unique to each product, we arrive at a
net profit of $.448 for the branded product and
6.465 for the private label (Figure 2). While thefe
is significant variance in each product's net profit
as a percent of sales, their penny profit is virtually
identical. Given the new data regarding