Saturday, February 06, 2016

Investing (optical) illusion: Why a logarithmic graph is better than linear.

Warren Buffett in 1984 said that the Sequoia Fund which invest in stocks (public equity) were Superinvestors having outperformed the S&P 500 index uptil 1984. After that date they have also outperformed the S&P 500 index in the long-term, but the difference has gotten smaller not larger. During the past 5 years (Dec 31st 2010- Dec 31st 2015) relative results have been bad: Sequoia earned 11,9% while the S&P 500 gained 12,6% per year. (Style drift might be a factor?)

If you invested money with Sequoia on January 1st 2011 you might get the impression you beat the S&P if you based your evaluation on the linear chart Sequoia updates every year. The day you invested. December 31st 2010:

Change after 5 years: Graph on December 31st 2015

You could be forgiven for finding it "obvious" that Sequoia has done much better than the S&P 500 in the 5 years between the 2 charts. This is an illusion, that is why professional fund managers prefer logarithmic charts over linear charts.

This one of the reasons early success for some years is so valuable for fund managers when marketing their fund to investors. A friend of mine has a great track-record, having increased $100 into more than $1200 since 2008. If he decided to open his fund to outside investors, he could underperform the index by 3% a year for 20 years and in a linear graph his fund would still look like a success.

Consider the >optical< difference between the same set of results presented in a linear and logarithmic scale. The results are exactly same, in both cases investors who invest money after year 10 earn more in the red fund than the blue fund!

Comments, questions or E-mails welcome:

Thursday, February 04, 2016

Global oil supply and demand pushed oil to under $30 a barrel in January

Looks like supply and demand will meet this year, pushing up prices to $60 per barrel (the breakeven cost for expensive producers who have now shut down) by June 2016 as predicted by T. Boone Pickens.

The "rig count" is down all over the world not only in the US, but global demand should be higher than ever this year or in 2017. I don't see how "lower for longer" 15 years? makes sense.

Comments, questions or E-mails welcome:

Monday, January 25, 2016

Arcadis on sale: Intrinsic Value calculation AEX:ARCAD NL0006237562 based on Bejamin Graham Number

You can buy a partial ownership ( a stock) of Arcadis today for €15,20. The intrinsic value of the company is €19 based on a simple Benjamin Graham Number calculation I did today (see math below). 

The second graph was my previous valuation based on based on 2013 results.

2003, 2005, 2009, 2012 and today were/is the moment(s) to buy Arcadis stock, although debt is a bit high compared to what Graham recommended for Defensive investors.

Here's the math/analysis:

SECTOR: [PASS] Arcadis is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Arcadis's sales of €2 639 million, based on 2014 sales, pass this test.

CURRENT RATIO: [FAIL]  The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Arcadis's current ratio €1 297m/€1 006m of 1.3 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for Arcadis is €598 million, while the net current assets are €291 millionArcadis fails this test.

LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Arcadis's EPS growth over that period of 145% passes the EPS growth test.

Earnings Yield: [PASS]  The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Accell's E/P of 8% (using the current Earnings) passes this test.

Graham Number value: [PASS]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Aracdis has a Graham number of (15 x €1,3 EPS x 1,5 x €12 Book Value) = €18,75. Today's price is: €15,20

Dividend: Arcadis pays a dividend of €0,60, whichs results in a 4% dividend yield.

Conclusion: You can buy a Euro of value for 80 cents.

Comments, questions or E-mails welcome:

Thursday, January 14, 2016

Accell Group currently selling at roughly Graham value. Price = Intrinsic Value

NOTE:  Accell's short term results over the past few years have been negatively influenced by the take-over of Raleigh bikes. That resulted in the dip in Graham value.

Graham Defensive analysis based on The Intelligent Investor book Chapter 14:

SECTOR: [PASS] Accell is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Acell's sales of €882 million, based on 2014 sales, pass this test.

CURRENT RATIO: [FAIL]  The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Accell's current ratio €431m/€246m of 1.8 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for Accell is €71 million, while the net current assets are €185 million. Accell passes this test.

LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Accell's EPS growth over that period of 46% passes the EPS growth test.

Earnings Yield: [PASS]  The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Accell's E/P of 7% (using the current Earnings) passes this test.

Graham Number value: [FAIL]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Accell has a Graham number of (22,5 x €1,1 EPS x €12 Book Value) = €17,4. Today's price is: €19,25

Dividend: Accell pays a dividend of roughly €0,60, which is 4%

Conclusion January 2015: Accell is neither cheap nor expensive. Buy at under €17,4 sell over €21.

Previously in June 2013 I wrote : Accell. Buy €1 of (Graham) value for around 64 cents. This was the graph.

This was the conclusion:
Margin of Safety: A €18,5 Graham value for sale at a €11,9 Mr. Market price. You can buy €1 euro of value for 64 cents. 

If you had bought at €11,9 and sold for €20 in June 2015 you would have had a 68% return plus dividend in 2 years.

Comments, questions or E-mails welcome:

Friday, January 01, 2016

Mrs. B: "I don't know education, books, percentages." Sell cheap & tell the truth.

She knew how to count money, 2+2, without a computer. See: Same as Ingvar Kamprad of IKEA: "What the hell are percentages anyway?"

Comments, questions or E-mails welcome:

Monday, December 21, 2015

Making more money $ in retail, by not maintaining margins %.

Counting cash, because you cannot take percentages to the bank.

Training manual for C&A Merchandise Management Accounting to support more profitable decision making. For theory see

The production costs of this manual have been kept to a minimum to save expenses. 
Comments, questions on this document or notifications of errors, etc. can be sent to Ansgar John Brenninkmeijer. , Mobile +31629547689

"This new training manual explains how C&A since 1906 has used a concept of € of BCP Fund on the space used (per square meter and/or per piece in stock) rather than BCP percentage to make assortment and space trade-offs. It is hopefully both a tribute to the clear commercial thinking of our predecessors as well as an aid to you to help remember the basics of best value, low gross margin percentage, high net profit retail.
Retail is not one dimensional. Low OMU% styles are only more profitable than high OMU% styles depending on a mix of factors. The challenge is to find the “sweet spots” between selling price, cost price, turnover speed and density so as to maximize BCP Fund/square meter, while offering a complete, attractive assortment for the best value (highest quality/price ratio) in the market.
The math and computer reports discussed here are meant as helpful tools, but a report is not – and never will be – a substitute for getting out into our stores and learning what’s going on. The most import styles are the future bestsellers that aren’t in our assortment yet. In other words the reports can tell you what you have sold and what the Profit per Piece in stock is, but they can never tell you how much you could have sold with an even better assortment."
Note on Management Accounting
Management accounting is finding the right numbers to support more profitable decision making. It is not as exact as financial accounting: it’s better to be approximately right than precisely wrong.
       (Re-)Introduce managers to “Counting cash“ merchandising methodology
       Testing training material (game, exercises, manual) and gather feedback
       Ask trainees to apply in their own environment and share their feedback with us.

Initial questions which we will attempt to answer                    3
Best Value store simulation “The Game”                               4
C&A’s History: Chapter 1                                                    5
Profit per Piece in stock, instead of BCP%                            9
         -Operating Leverage                                                 11
         -Factors influencing Profit per Piece                            12
Meters are the Alpha and Omega                                         15
Round 3 examples from your own team                               16
Profit per Piece in reports                                                   17
Walmart case                                                                   18
“Profit without Percentages” illustration                                 21
Choosing the right framework                                             22
Executive Summary                                                           23
Homework                                                                      24
Glossary and abbreviations                                                 25

Initial questions which we will attempt to answer.
1. How do you calculate a style’s profitability?
-When is a silk dress with 10 000 pieces in stock more profitable than a similar polyester dress with 20 000 pieces in stock? If you can only choose 1 to re-order, what figure(s) would you use to decide?

2. What are possible alternatives for a minimum BCP% target when planning?

3. When did C&A go from Good to Great? Who had the insight that “you could cut your profit mark-up percentage dramatically and even with the much lower margin, the far greater volume of sales would still boost the bottom-line profit?”



Play the Best Value store simulation game.
Results Round 1
CCP (Cost of Goods Sold)
BCP (Gross Margin)


Real Estate
General Expenses
Total expenses                  

Conventional retail conclusion based on Round 1: “In Round 2 we must manage the merchandise mix to maintain the average BCP% margin above 41%”

Round 2       
Cash flow assortment:

BCP% and GMROI%*:

Westbury jeans €60x33,3% x2 =
Jinglers jeans €10 x 65% x 4=
Shorts          €22 x  35%  x 2 =
T-shirt           € 2  x 80% x 5=
YSS dress     €80 x  25% x 2 =
Canda dress  €10x 72,5%x 4=
-€ 75
-€ 75

*GMROI%: A side note on Gross Margin Return on Inventory Investment% which is often used by other retailers to evaluate their assortment. GMROI% = BCP% x TOS and does not take Selling Price into account, therefore GMROI% often leads to incorrect conclusions. For example consider two styles selling at the same speed, if one is bought for €1 and sold for €2 it has the same GMROI% as something bought for €2 and sold for €4, even though the second is obviously generates twice the Profit per Piece and has even more effect on Net Profit (due to Operating Leverage 1 + 1 = 4x). At C&A we mistakenly used GMROI% (Fundspeed) for a number of years, it is no longer a Key Performance Indicator (KPI).

C&A’s History: Chapter 1                                    Written in 2006.
It started in 1906. It might seem a little strange to start a company chronicle in 1906, when C&A had been going for 65 years – officially ripe for retirement. Seen from the historical perspective of the firm, it makes a lot of sense. 1906 saw a major innovation take place in the business which has had great impact on people’s thinking within all C&A companies even to this very day. In 1906 a visionary spark of entrepreneurship occurred at C&A in Amsterdam, which is why we start this chronicle in 1906 rather than 1841, when the brothers Clemens & August founded the company.
Working together
About 40 years after the opening of the first store, around 1900, the company’s activities were focused on the northern provinces of the Netherlands, with stores in Sneek and Leeuwaarden. The customers were well-to-do farmers whom the travelling salesmen still visited at home, though this practice was dying out. The goods sold were coats and high quality fabrics, as well as a small selection of men’s clothes. As a rule, the company aimed to won the stores it traded from. At that time, shareholders’ equity was tight and most of the capital was financed by mortgage loans. Costs therefore had to kept to a minimum so that the business could expand. 
In 1878 Clemens and August retired and handed the baton to their sons Hermann, Gerard and August jr, who were already partners in the business. The three did not believe that they and their younger brothers, who were also due to join the business, let alone their children, would be able to earn a living from the two stores in Leeuwaarden and Sneek. Even so, it never crossed their minds to split up the business and carry on independently. As young children they had been taught by their fathers that their business was built on co-operation. Working together as the two founders had done reduced the risks of being dependent on a cyclical market. Being suppliers to farmers, they were ever vulnerable to the strong fluctuations in the agricultural cycle; it was a risk they exposed to more than most.
In the light of all this, the partners in business – by now seven in all – decided in 1893 to tap into a new market and open a store in Amsterdam, where the Voss and Lampe families had been operating successfully for years.
Unconventional Idea
In 1893 the company rented a property in Amsterdam at Nieuwendijk 193. As well as the usual fabrics and haberdashery, the offer also included ladies’ coats. Another new feature was that customers had to pay cash and were not allowed goods on credit. This decision was prompted by the habit that people in Amsterdam had of leaving accounts unpaid for far too long.
Three years later, in 1896, a second store was opened in Amsterdam. Joseph, Clemens’ youngest son and now also a partner, had managed to get his hands on a property on the upmarket Leidsestraat (nr. 39). As well as fabrics, this store sold high quality ladies’ suits and coats. In those days coats, bridal wear and ladies’ suits were the top quality items in the tailoring business. Joseph wanted to sell these types of clothes, so he brought in a head dressmaker from Vienna to manage the workshop. However she had problems adjusting and left again quite soon. Fortunately her successor settled in better and the clothes produced at the workshop on Leidsestraat, affordable only to the fortunate few in the upper echelons of society, sold very well. There was no ready-to-wear clothing for the masses; the entire industry catered to the top segment of the clothing market. For example, in around 1900 a coat on Leidsestraat or Nieuwendijk cost many times the weekly wages of an ordinary laborer and was entirely beyond the means of domestic servants, who often worked for just board and lodging.

The decision the cousins took in 1906 is a testimony to their entrepreneurial spirit, business acumen and courage. They certainly didn’t need to do it. C&A had been doing well over the past few years, in both Friesland and Amsterdam. In fact according to the chronicler Hermann Gerhard, 1898 had been the company’s best year ever. Sneek, Leeuwarden and Amsterdam (Nieuwendijk) had a turnover of around 100,000 guilders each, and the Leidsestraat store a turnover of 50,000 guilders. Especially in the slow-moving society of the time, the obvious thing to do would have been to keep steadily to the tried and tested path, like their competitors, instead of throwing caution to the wind and venturing into unchartered waters by implementing this fundamental policy change.Leafing through the tax register of Amsterdam – in those days it was considered a privilege to be in it – it occurred to Joseph that every store in Amsterdam, including C&A, was targeting just 4 percent of the population. The remaining 96 percent could not afford to buy from them. If you could include those 96 percent in your target group, you could cut your profit mark-up dramatically. Even with a much lower margin, the far greater volume of sales would still boost bottom-line profit! Joseph saw unprecedented growth opportunities beckoning on the horizon. Joseph reasoned that the only way to win the custom of that part of the population, that 96 percent, was to base your prices on the average weekly wage of the man in the street, which at the time was 6 guilders (2,75 Euros). So it happened that C&A started offering coats of a reasonable quality for no more than 6 guilders.
A factor that may have played a part in this revolutionary decision was the Boer War in South Africa. This had a severe impact on Amsterdam’s diamond industry – a major economic driver for the city – from 1899 onwards. There were many strikes, in shipbuilding too, and the standard of living declined. Most women made their own clothes and were forced to wear wraps as they could not afford coats. For delivery men, who delivered merchandise to the wealthier classes, the thought of ever buying a coat for their wives was out of the question.
The Breakthrough
Up until the First World War, virtually no clothing was manufactured in the Netherlands; any clothes that were made, were made in small workshops in people’s private homes. Berlin was the main clothing producer at the time. Joseph asked his cousin Clemens, Jr., who ran the store on the Nieuwendijk, to go and talk to some of their trusted suppliers in Berlin. It took quite a deal of effort and all of his powers of persuasion to convince them to use much cheaper fabrics and adapt the other requisites to suit. Eventually when the suppliers recognized the huge opportunities that were in it for them, Clemens, Jr. got his way and the cheap coats went on the production line. The only risks the manufacturers bore were those relating to the buying of the fabrics. The so-called Zwischenmeister, working on a cut, make, trim basis, were responsible for the actual manufacture of the coats. It was a system surprisingly similar to that in general use today.
Making the most of each other’s talents
Those who knew him described Joseph as an introverted man with an incredibly sharp mind, but little talent for communication, a fact which he too acknowledged. This makes the policy change of 1906 even more remarkable as an example of co-operation between colleagues who are willing to tap into each other’s very different strengths. Ever since its foundation, this has been one of the pillars of the company’s success.

A few weeks before the opening of the new-formula store on Nieuwendijk some trial series of coats were produced, mostly in black, like the Model-T Ford a few years later; the customers can have any color, as long as it’s black.
C&A announced its plans in large advertisements. It was a knock-out success. From day one the coats flew out of the store. Fortunately delivery times were short, just a few weeks. During the first few days there was such a surge of demand that staff at the store seemed likely to be overwhelmed. Joseph decided to take action, so he sent a telegram to his cousin Georg in Leeuwarden: “Please send sales assistants.” Georg didn’t pull any punches in his reply: “If one opens a store, one should be properly prepared.” But in the end some sales assistants were sent from Leeuwarden to help out in Amsterdam for a while. It’s easy to imagine how overwhelming it must have been for them. Sometime later, they had the opportunity to buy up a surplus stock of coats at bargain prices, and this new formula shifted up another gear. Clemens, Jr. took the train to Berlin on Sunday evening, spent the week buying batches of coats and then took the train back to Amsterdam the next Friday evening. On Saturday morning, always the biggest selling day, the coats immediately went on sale.
C&A’s competitors were stunned, and their only comeback was the smug comment that C&A sold coats for servants. Joseph’s response was typical, “Let them serve the customers who arrive by coach, and we’ll clothe the masses who come on foot or by tram.”
As a final step in this unique move Joseph closed the store on Leidsestraat in 1906, although he continued to live in the building until 1913. It was a large house, and was used to provide board and lodging for young family members in training. His wife Olga cooked for the trainees, the third generation, and made sure they felt at home, something that Joseph himself attached less importance to.
In Leeuwaarden, they continued to do business the tried and tested way. There Georg, whose family lived in Mettingen, kept a watchful eye on the younger generation, with the help of his legendary right-hand man Mr. Niehüser. Not just the family trainees but almost the entire staff were given lodgings by the company in those days. Both in the store and outside, they came under the rule of the lady managers, strict spinsters who were responsible for sales and staff. The repositioning of the C&A formula in Amsterdam was the first step towards future years of exceptional successes. That is why this chronicle of the first hundred years starts in 1906, rather than 1841. The principles upheld by Clemens and August and their eldest sons were not abandoned by this turnaround. These principles of absolute integrity and trustworthiness feature prominently in the next section (not included here) which looks at the personalities and motivations of the founders.
 Stories about Joseph
The story goes that Joseph used to ask now and then, “When was it that I came to Nieuwendijk?” He would have someone fetch this Net Profit (Winst) chart, which showed very clearly the date on which C&A first started selling cheap coats. It is also said he could barely hide his scorn when someone at meeting proposed it might be an idea to try offering ten-guilder coats too.

And talking of motivation, if anyone presented poor results Joseph would turn his back on them and start reading the paper. On the other hand, he enjoyed taking the young trainees on long mountain hikes in the summer months, when business was traditionally slow. 

Counting cash flow in 2014:
C&A’s founders, Clemens and August, like other retailers, believed that BCP% was the simplest but most important measurement of profitability. Joseph, on the other hand, ignored the first cardinal rule of traditional merchandise management: “You must manage the merchandise mix to maintain the average BCP% margin above the store’s average operating expenses %.” This can be expressed as follows:
Old % rule -> Net Profit = Sales x (BCP% - Last year’s Operating Expenses%)
Operating expenses in 1905 were 45% of sales. Joseph sold all his new coats at a BCP of 17% and his expenses went up (more sales assistants). Common sense dictated that he would now be making a loss (17% BCP%- 45% Expenses < 0). Innovation is often based on finding a mistake in common sense. Joseph realized that Operating Expenses (Rent, Overhead, Salary, etc) are not a fixed percentage of sales and he calculated in cents instead. (In Dutch “Rekenen in Centen, in Plaats van Procenten.”)
New Counting cash -> Net Profit = BCP Fund in Euros – Operating Expenses in Euros
In trials the new coats generated more cash flow, Profit per Piece = (Selling Price - Buying Price) x TOS, than the old 50% BCP coats and as a result total BCP Fund in Euros went up. The new rule of thumb at C&A became: “If you’re making more money (BCP Fund), you’re making more money regardless of BCP%”
This manual explains the system further.

Profit per Piece in stock, instead of BCP%
From 1841 to 1906 C&A strived to: “Sell more clothing at higher margins.”Increase your BCP% (gross margin ratio), the higher, the better.” That is what textbooks and consultants still say today. Here is an example of conventional thinking from a conventional textbook (COGS is Cost Of Goods Sold, at C&A Charged Cost Price):
After 1906 C&A switched to increasing the Profit in Euros without worrying about increasing the gross margin (BCP) percentage.  Below we consider how that worked with Joseph’s new coats.
1906 The start of low margin percentages
BCP Fund per Coat sold = Selling Price – Charged Cost Price
This seemed crazy to Joseph’s cousin Georg…
…but the new coats with a BCP Fund of €1 sold 12x faster, so the Profit per Piece in stock was higher.
Profit per Piece in stock = (Selling Price – CCP) x TurnOverSpeed
The new coats replaced all the old ones, so the total BCP Fund was now 1,6 times higher than before (New Profit per Piece divided by Old €12/€7,5 = 1,6). The store’s bottom line profit tripled as a result of Operational Leverage. Many store expenses are fixed, so the more coats you sell, the lower the expense per coat sold. As a rule of thumb, if you double the BCP Fund, Net Profits quadruple (1+1=4x).
Operating Leverage
1 BCP Fund + 1 BCP Fund
1 BCP Fund + 1 BCP Fund 4 x Net Profit

Factors influencing Profit per Piece
Selling Price – CCP can also be expressed as Selling Price x BCP% so:
Profit per Piece = Selling Price x BCP% x TOS
To increase Profit per Piece you don’t need to increase Selling Price and BCP% and TOS all at the same time. The important thing is the result; when one or two of the factors is lower than average, if the third is sufficiently high, the Profit per Piece will be higher than average. The key is to find the right combinations to hit a “sweet spot”.
Influence of Selling Price:
If sold at the same TOS speed and BCP%, silk is the most profitable here.
Profit per Piece = BCP Fund per piece x TOS                                                            
Low price articles often have to sell quicker to achieve the same Profit per Piece.
A high price point article with a low BCP%, that has the same BCP Fund in Euros per piece sold as a lower priced article, will generate the same Profit per Piece if sold at the same speed.

Profit per Piece = Selling Price x BCP% x TOS
Polyester Profit per Piece = €10 x 50% x 1
=   Silk Profit per Piece  =  €20 x 25% x 1

The influence of TurnOverSpeed:
Recall Joseph’s coats. How many times higher is the TOS for the new coats with a lower Price and lower BCP% if they generate the same Profit per Piece as the old coats?
€15 x 50%  x  1 =
€6 x 17%  x   …. ?

TurnOverSpeed can be expressed in different ways.  
TOS per year = Sales Qty in year/Avg. Stock Qty
Ratio% sold per week = Sales Qty in week/Avg. Stock Qty
Weeks Cover is Avg. Stock Qty/Sales Qty per week. Weeks Cover is 1/Ratio%
Profit per Piece in stock per week = SP x BCP% x Ratio%
Or you can use:  (SP x BCP%)/Weeks Cover, the result is the same.

The influence of BCP%:
A customer looking for a high quality article will not mind a high price point, if it is Best Value (the price is better than that being charged by any competitor for a similar quality).  A high TurnOverSpeed can also be a benefit for a customer, it enables C&A to refresh the collection quickly with the latest fashions and makes the stores more livelier and thus more attractive. Of the three factors influencing Profit per Piece, only a high BCP% makes the offer less attractive for the customer than it could be and SHE might decide to buy at competitors if they are able to offer better value because our margins got too high. Higher is not always better.
There is a difference between short and long term effects. Short term OMU% hikes may increase BCP Fund, but in the long term, sales and profit will slowly decrease if customers can find better value elsewhere.
Beware the Percentage Death Spiral
Which competitors offer good value for money? At low pricepoints:…………………………………
At high pricepoints (high quality/price ratio):…………………………
Meters are the Alpha and Omega
In 1906 C&A sold a limited number of styles of coats and few other articles.  In the next decades more and more different types of clothing and accessories were added to the assortment.  To make space management trade-offs between bigger articles like coats and smaller articles like boxer shorts, it is misleading to use Profit per Piece. The average Profit per Piece for coats should be higher than that for boxer shorts because a single coat occupies more space in the stores than a single pair of boxer shorts.
Smaller articles use less space and can have a lower Profit per Piece.
Space used by:        6 Boxer Shorts                  or 3 Pullovers          or  1 Coat
The number of articles which are presented per square meter is referred to at C&A as “Density/m2”. If you multiply the Profit per Piece in stock by the number of pieces per square meter, the result is the BCP Fund in Euros per square meter:
BCP Fund/m² = Profit per Piece x Density/m²
The BCP Fund in Euros on space used is key, the BCP% itself is irrelevant for merchandising decisions:  “The meters are the Alpha and the Omega.”
At C&A we’re not concerned about what percentage of the pie we get to keep, all we care about is whether our own piece of the pie is getting bigger. The key is not to be greedy in the short term.

Best Value game Round 3

Which articles are your teams responsible for?

Question: Which single style in your assortment that you can remember, do you think has the highest Profit per Piece, which has the lowest at the moment?

Highest Profit per Piece in stock (guesstimate):
Commodity _________Description__________
Price €_______  x  DMU%_______  x Ratio% _____ = Profit per Piece €______
Or ( Price €_____ x DMU%_______ )/Weeks Cover = Profit per Piece €______

Lowest Profit per Piece in stock (guestimate):
Commodity _________Description__________
Price €_______  x  DMU%_______  x Speed _____ = Profit per Piece €______
Or ( Price €_____ x DMU%_______ )/Weeks Cover = Profit per Piece €______
Do the articles have the same density, if not which do you think generates the most BCP Fund/m²?

Top Flop Profit per Piece Report
Profit per Piece per week is the average amount of BCP Fund each piece in stock generates per week. Until now we have calculated it as SP x BCP% x TOS, in the right column of the Top Flop report the same value is calculated as Fund Value/Stock Qty Avg
The first selection is by total Fund Value, lower down the Top 10 Profit per Piece of the last 7 days is shown.
The report can be found at:
       P:\buying\replies\ULMPA\4_TopFlop (the usual location)
It is also possible to add Profit per Piece to the more detailed reports at which level merchandising decisions are made. Retail is detail.
Profit per
Piece in stock
Fund value
Sales Qty
Qty Avg
Value Avg
Price Euro
120 -8101
 €             73,819
 €           0.21
 €             56,719
 €           1.20
120 - 8431 AW
 €             55,859
 €           0.89

Style USID 120-8101 generates more BCP Fund than 120-2903, but with 7x more pieces in stock (Stock Qty Avg). As a result the Pofit per Piece and BCP Fund/m² is  6x lower !
120-8101                     120-2903
120 - 8431 AW
Profit per
Selling Price
Price CCP
per Piece
 €                 9.90
 €          5.62
 €           4.28
 €               12.00
 €          5.62
 €           6.38
 €…….. ?

Walmart case

At Walmart,  founder Sam Walton set a 30% margin across the board instead of the traditional 40% for variety stores. This was an idea he copied from K-Mart. Walton wouldn’t have included the following anecdote in his autobiography, if he did not think it was good business.
Phil Green, an early Wal-Mart store manager, describes one of his favorite promotions: ‘Mr. Sam (Walton) usually let me do whatever I wanted on those promotions because he figured I wasn't going to screw it up, but I had one that scared them up in Bentonville (Walmart Headquarters) too. This guy from Murray of Ohio called one day and said he had 200 Murray 8 horsepower riding lawnmowers available at the end of the season, and he could let us have them for $175,-. Did we want any?
And I said, “Yeah, I'll take two hundred." And he said, “Two hundred (for one store)?!”
We'd been selling them for $447, I think. So when they came in we unpacked every one of them and lined them all up out in front of the store, twenty-five in a row, eight rows deep. Ran a chain through them and put a big sign up that said: '8 h.p. Murray Tractors, $199', sold every one of them in 2 days. I guess I was always a promoter, and being an early Wal-Mart manager was as good a place to promote as there ever was. ‘
This was the planned Profit & Loss for Phil's store.
Net Sales
Cost of goods sold
Gross profit (BCP)
Operating Expenses
Net profit

Question 1: A. What is the gross profit (BCP)% on this promotion of lawnmowers? ___% B. Were the lawnmowers a promotional loss leader for the store? Yes/No
Question 2: What would the BCP(%), Operating Expenses % and Net Profit (%) be with the promotion ?
Profit & Loss statement for Phil's store including 200 extra lawnmowers:
Net Sales
Cost of goods sold
Gross profit (BCP Fund)
Operating Expenses
Net profit

What other effects could the promotion have?

Counting cash calculations: The BCP Fund per lawnmower is $199 selling price - $ 175 buying price = $24 per lawnmower.  Total Contribution for the lawnmower promotion is BCP Fund per piece x Number of pieces sold = $24 x 200 sold = $ 4.800. This $ 4.800 was earned in 2 days. The fact that the lawnmower’s BCP% was 13% is irrelevant.
Profit & Loss statement for Phil's store including the promotion:
Net Sales
Cost of goods sold
Gross profit (BCP Fund)
Operating Expenses
Net profit

Once again the lesson is:  Count the money, the percentages will take care of themselves. Or as Joseph put it in Dutch: “Reken in centen, in plaats van procenten.”
CONCLUSION: The answer is NO, the lawnmowers are not a loss leader, they are a cash cow. If he can sell other things in the same way, he should, much like ALDI sells computers, tablets and now even smartphones. 

Choosing the right framework
A young priest asked his bishop, “May I smoke while praying?” The answer was an emphatic “No!”
Later, when he sees an older priest puffing on a cigarette while praying, the younger priest scolded him, “You shouldn’t be smoking while praying! I asked the bishop, and he said I couldn’t do it!”
That’s odd,” the old priest replied. “I asked the bishop if I could pray while I’m smoking, and he told me that it was okay to pray at any time!”

As this joke shows, the way you frame a problem profoundly influences the solutions you get. The same problem, when seen from a different angle can lead to a directly opposite conclusion!
Skillfully framing problems is paramount for better problem solving and decision making.

C&A counting cash flow framework
Ten polyester dresses are sold next to ten silk dresses.  Both styles are re-ordered automatically.
Polyester dresses
Silk dresses
Total BCP Fund per week            €7,50
Total BCP Fund per week          €30,00

Which dresses are making more money?
Conventional framework by comparing percentages
A store spends 25% of sales on salaries and 28% of sales on rent and other expenses.  Total operating expenses are 53% of sales.
Ten polyester dresses are sold next to ten silk dresses.  Both styles are re-ordered automatically.
Polyester dresses
Silk dresses
BCP%                                        75%
BCP%                                        33%
TurnOver Speed                            5,2
TurnOver Speed                            5,2
Which dresses are being sold more profitably?
Fill in: The …………. dresses are more profitable. Their Profit per Piece is €….. compared to €…….. Profit per piece in stock per week for the ……….dresses.
The C&A Rule of Thumb (since 1906):
ü  “If you’re making more money (BCP Fund), you’re making more money regardless of BCP%”
Replaced the conventional rule of thumb
û   “You must manage the merchandise mix meticulously to maintain the BCP% margin above last year’s average store operating expenses %.”

EEB Summary:
Understanding Counting Cash: BCP Fund in Euros per m² instead of BCP% Version: 19/5/2015
Normal retail systems revolve around maintaining a certain BCP%. After 1906 C&A benefited greatly from focusing directly on increasing BCP Fund and thus net profit. We can, once again, measure and increase BCP Fund per piece in stock or m² from style to store level. This is a system that is not taught in schools.
Rule of thumb: When you’re making more money (BCP Fund in Euros), you’re making more money (Net Profit). BCP percentages are irrelevant. You can’t take percentages to the bank”.
What we know: By selling with lower OMU%s than competitors, C&A can offer better value and sell more and make more money in both the short and long term (higher net profit %s). This is made possible by operational leverage (higher sales and higher BCP Fund per m²), whereby fixed Operating Expenses as a % of sales would be significantly lower than at competitors. CCP has to be lowered to an absolute minimum, which higher volumes should help enable.
It is C&A’s explicit goal, in every market where it operates, to offer best value by selling at lower margins (OMU%s) than most other clothing retailers. Our intuition might make us envy other’s higher OMU%’s, we should instead envy and aim for our best competitor’s BCP Fund per m², which is what drives bottom line results.
Low OMU% styles can be more profitable than high OMU% styles. We use the formula shown below to determine which styles in the current assortment are the most profitable. The result is BCP/Fund per m² which is a measure of Gross Margin Return on Space (GMROS). Price point is very important. A best value P4-P5 article with a lower OMU% AND a lower TOS than a P1-P2 article can be more profitable.
2015 suggestion: Return to value, stretch the price architecture. Make ASP, OMU% and BCP% guidelines a bit less strict, creating leeway to increase Fund.  Re-implement the C&A system of Fund/m2 planning.
How to use BCP Fund in a correct manner:
ü  There is no percentage in the Net Profit equation.  “Count the money $ instead of comparing margins %”, “Reken in centen, in plaats van procenten”
ü  SP – CCP = BCP Fund per single piece
ü  BCP Fund per single piece x Pieces Sold = Style’s BCP Fund Contribution to Profit
ü  Sum of BCP Fund from all Styles – Operating Expenses = Net Profit
ü  Relative Contribution = BCP Fund per space used (either per m² or piece in stock)
ü  BCP Fund/Pieces in stock = (SP – CCP) x TOS
ü  Comparing articles with different densities: BCP Fund/m2 = (SP – CCP) x TOS x Density of pieces per m
ü  The 4 legged chair. Maximize BCP Fund per m² with optimal balances between SP, CCP, TOS and Density.
ü  Opportunity Cost: The gap between a style and the average Fund on this space (m²)
Incorrect Math taught at schools:
û  Gross Margin % thinking:  Higher Gross Margin % always leads to higher Net Profit.
û  Breakeven Gross Margin % = Operating Expenses/Sales  is wrong since it assumes Operating Expenses are a fixed % of sales
û  Direct Product Profitability (German Stuckkosten): arbitrary, unreliable, extremely complex and costly

Homework (Case Study):

Harvard “Sellars’ Market” weekly contribution:

Questions regarding the methodology:
       Is “Counting Cash, because you cannot take percentages to the bank.” something we are doing now? If so how?
       Can you print the Top Flop Profit per Piece report for your own team? What do you learn from it?
Which article has the highest Profit per Piece? Which the lowest? Remember TOS can be expressed as Ratio % sold. This is Qty Sold per week/Stock Qty Avg.
Highest: Selling Price ………. X DMU% ………… x Ratio Sold ……….. = Profit per Piece €……..
Lowest: Selling Price ………. X DMU% ………… x Ratio Sold ……….. = Profit per Piece €………
       What are the constraints obstacles? How could you implement it in your team?
       What is the difference between “Profit per Piece” and Fundspeed Value?
        In the stores space is the bottleneck (Profit per Piece x Density = BCP Fund/m2), what is it online?
Questions regarding the manual:
       Please rate the “Counting cash” manual on a scale of 1 to 10:
       What parts did you not understand? Which questions remain unanswered?
       What parts are redundant and can be left out?
       Are there any assumptions being made that might be difficult in practice?
Glossary and Abbreviations

BCP = Buyers Calculated Profit
Gross margin, gross profit and maintained markup

BCP %= Fund/SV = (SV – CCV)/SV
Gross margin or gross margin %

BCP FUND = SV-CCP = Buyers Calculated Profit= BCP
Gross margin dollars
BCP Fund per piece sold = SP - CCP
Unit margin
SCP = Supplier Cost Price

CCP = Charged Cost Price

COGS = Cost of Goods Sold

CCV = Charged Cost Value = CCP* Quantity

OSP = Original Selling Price (includes VAT)

OSV= Original Selling Value = OSP* Quantity

OMU = Original Mark-Up= OSV-CCV
Initial Markup IMU

MKD= Mark-down = value taken off OSV to make the price more attractive

MKD include price change on stock, discount at cash desk, Charity, Mark-down to 0

Staff discount are selling expenses and not included in MKD

Supplier return are affected to LCP differences and not MKD


ASP = Average Selling Price paid by customers

TOS = TurnOverSpeed
Weeks Cover

Ratio % sold per week

SV= Sales value = Turnover(TO) = ASP* Quantity = OSV-MKD.  Includes VAT

Net Sales are equal to Sales less VAT

Comments, questions or E-mails welcome: