Mill River Plans
I can certainly think of a lot of snide remarks about this one!
We’ re losing money, but we make up for it in volume.
First, let’s define what a Mill River Plan is. In some private clubs, members fork over $100 to be able to purchase merchandise at cost plus 10%. According to my math, that means a 9.1% attained margin. However, on the first day of the season, you have $40,000 from the initial fee from 400 members. This is the best day of the year and my suggestion is to take off for Maui (Kapalua is my favorite place–see Gary Planos) OR buy a lot of lottery tickets.
Now that you are back or are finished scratching the lotto tickets, let’s look at what is in store for you for the rest of the year. It won’t be pretty.
I’ve got an idea, let’s get together and force Nordstrom to sell us at cost plus 10%.
If you remember the earlier comments in Setting Prices about your break even point, then you probably know that your operating expenses may be somewhere between 30 and 35%. That means you are losing about 25 cents on every dollar you sell. (9.1 minus 35.0) At that rate, your last break even point (before deducting for the Kapalua vacation or lottery tickets) is $160,000 in sales. After that point, you lose money for the rest of the year. In other words, the more you sell, the less you make!
Some may argue that they also receive a retainer and lesson income. Do want that hard-earned money subsidizing a losing retail operation?
Years ago, I was called to a meeting at an upscale Los Angeles country club (name withheld to protect the guilty). The board was considering the purchase of a computer system to help the golf pro, who was considering bankruptcy. After hearing the details of the Mill River Plan, I suggested that they purchase the shop rather than buy him a computer. (How dumb was that for me to pass up a sale?) But I asked these captains of industry if they would invest in a company whose planned gross profits were a maximum of 9.1%. Hurump, hurump, hurump was the most intelligent response that I received.
The long term effects of a Mill River Plan are many and this shop proved it. For about $750,000 in sales, this shop had around $700,000 in inventory at cost (much of which was having to be stored). Turn rates were way below 1.0. What was happening was that some new inventory sold quickly, but the leftover styles, colors and sizes became impossible to unload. If the members would not purchase at the heavily discounted price, then markdowns did nothing to attract them. So the inventory just grew and grew.
Eventually, the attractiveness of this pricing loses its glitter and sales are not as good as they once were. Once someone gets used to paying $55 for a $100 shirt, then it eventually becomes blase. However, this might be a good thing based on my comments that the less you sell, the better.
Let’s look at a normal shop with a 65% cost of goods sold. The sold inventory costs $65,000 for every $100,000 in sales. For a Mill River Plan, it costs $91,000 in inventory. That’s a difference of $26,000 for each $100,000 sold. For the LA club, that meant $195,000 additional investment.
And that’s just for the goods that sold! If you add in the numbers for the inventory that is not sold, then this number gets astronomical.
The cost of holding inventory for one year, according to expert retail statistics, is about 30%. That includes insurance, property taxes, increased shrinkage, etc. This translated to $58,500 in increased costs for this club pro. Any wonder he was headed towards bankruptcy?
The good news is that this club purchased the shop and the inventory (and eventually bought the system that I would have tried to sell them–but I had left the company by then–no commission for me.)
In my seminars, I have preached against the Mill River Plan whenever the pro owns the shop. Many have tried to convince me otherwise, but several have later contacted me and said that what I said was true.
So if you find yourself in this situation, go to the board to get them to buy the club–or call me and I’ll talk to them. If your club is considering it, then scream at the top of your lungs for them to purchase the shop.
Alan Fisher is the leading expert on inventory management in the golf industry. He has conducted numerous seminars across the US and Europe for the golf industry and has authored numerous articles on maximizing retail inventory. If you would like to know more about how you can make your retail a profitable part of your business, please contact him at any of the following:
alan.fisher@mygolfretailguru.com
866.32 RB101 (866.327.2101) toll-free (US)
+1 760.724.0385 direct
+1 619.723.4653 mobile
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