Meat Retailing - Figuring The Cost And Selling Price
( Originally Published Early 1900's )
It is the desire and ambition of every meat retailer to conduct his business in such a manner that he can sell meats at a reasonable price and earn a legitimate profit on the transaction. To know how to conduct the meat business most profitably is unquestionably the major problem requiring a solution. The retailer is in business to make profits, and the principles and methods which have to be observed in accomplishing this are evidently the most important need in the industry.
More Pencil—Less Cleaver
To attain these results will require less attention to skill in meat cutting and more attention to business principles. For the market proprietor it will mean less wielding of the cleaver and the meat saw, but more figuring with a pencil and an adding machine. The most successful business man in other lines of endeavor is not the one who works hardest with his hands, but the one who thinks and acts. It is the same in the retail meat business. The really big men in the industry are seldom found behind the block or the counter, but usually at a flat top desk.
So that he may avoid rocks and dangers, the captain of a ship will not sail the seas without a chart or compass. He steers a definite course in order to reach a certain destination. The mod-ern meat business man must also employ certain definite principles and methods in his business to guide him to his goal, which is primarily profit.
What Is Profit?
What is profit? Profit in business is the final sum derived from sales or service after all expenses have been deducted. If there are no facts available showing the operating cost or other necessary business facts, then the retailer operates practically in the dark. He is merely guessing, and not knowing his actual cost and selling price, this type of retailer is usually the one who is the "price cutter" and thus makes business difficult for other retailers. Profits must be made on sales. Therefore, it is of the utmost importance to know how to establish a correct selling price which will cover the retailer's operating cost and a reasonable profit.
Facts Required for Figuring Profits
To know how to establish a correct selling price requires, first, an exact knowledge of the actual cost of the product. Be-sides, it requires a thorough knowledge and record of operating expenses so that a correct selling price can be arrived at. For the real cost of an article is the actual cost plus the fixed expenses, or "overhead expenses." Therefore, in order that any-one can figure a correct selling price, one must have records of all business transactions, cost of goods, sales and operating expense. The retailer who is capable of establishing a correct selling price is naturally operating his business along the ideal line, as otherwise he could not arrive at a correct selling price.
The great majority of market owners establish selling prices according to a rule-of-thumb method, or according to the prices they see painted on a competitor's window sign. Many retailers claim they operate on a "25% margin." Questioning the meaning of the 25% margin results in the discovery that the retailer adds 25% to what the product has cost him, believing that he is making 25% gross profit. Unfortunately, in former years, public schools have taught this method of figuring cost and selling prices. However, it is considered fundamentally wrong in modern business practice.
Profit Figured on Sales
The retailer should realize one fundamental rule, namely, that percentages of profit must be based upon sales prices and not on cost prizes. The retailer adding 25% to his cost price only realizes 20% on the selling price. Assuming that an article has cost $1.00, and that 25% is added, it brings the selling price up to $1.25. Or in other words, the 25% added is only 20% of the sales price of $1.25. Another simple illustration is to take an article at a cost of $1.00. When the retailer adds 50 cents, he usually believes that he is making a margin of 50%. However, 50 cents added to $1.00 is only one-third, or 33% of $1.50, the sales price.
The retailer who buys $800.00 worth of meat weekly and adds 25% to the $800.00 receives $1,000 in return. But he is not receiving a 25% margin on the selling price. The $200.00 margin only constitutes 20% of $1,000, the sales price. If the retailer wanted to realize a 25% margin on the sales price, 33% should be added to the $800 or the total sales price of the meat should be $1,064.00. There is a difference of $64.00 by figuring the percentage on the sales price as compared to figuring it on the cost price. This additional $64.00 is sufficient difference to cause the retailer to operate either at a profit or a loss.
That selling prices should always be figured on sales and not on costs is very plainly brought out in Fernley's "Fifteen Rea-sons Why Margin Is Figured on the Selling Price":
1: Because neither margin nor profit is made until after the sale is made.
2. Because other business figures are based on their relation to sales, and all figures should be uniformly determined.
3. Because selling expenses are always figured in relation to sales.
4. Because taxes are based on sales.
5. Because sales totals are usually available at a glance.
6. Because profit is earned to reward all your capital and not only that part invested in merchandise.
7. Because it indicates correctly the margin or profit when the selling price is stated.
8. Because allowances and discounts are always made on sales.
9. Because mark-down is always figured on selling prices.
10. Because chain stores, department stores and all successful stores everywhere figure margin on selling prices.
11. Because commission payments are always based on sales.
12. Because a large part of lost profit in actual cases is traced to figuring margin on cost prices and expenses on selling prices.
13. Because it truthfully represents the "per cent" made on a sale to a customer. To base it on cost exaggerates the amount in the eyes of a retailer-33% on selling price equals 50% on cost.
14. Because you can look at the cash received and quickly figure that part which belongs to you as profit.
15. Finally, because figuring margin on selling price is the simple, easy way. Selling price is always 100%. Cost of goods and margin are parts of the selling price in proportion."
That this principle is universally recognized is further evidenced by the fact that United States government tax rates are based upon sales prices and not upon cost prices. Table No. 22 shows a very simple arrangement for determining correct selling prices if operating expenses and cost are known. The use of this table eliminates all guess work.
Establishing Cost Price
To establish a correct selling price requires the knowledge of three facts:
1. A correct cost.
2. Knowledge of operating expenses.
3. Knowledge of percentage of profit wanted.
Unless the retailer knows these three fundamental facts he is not able to make a correct sales price. To establish a correct cost on the majority of products handled by the retailer is not an easy matter.
The meat retailer in this respect has a decided disadvantage, found in very few other lines of business. When the average merchant buys a piece of goods, which has cost him $10.00 per yard or piece, he knows that this is the actual cost. In order to establish a correct selling price he adds operating expenses, plus the amount of profit desired. Assuming that the merchant has an operating expense of 20%, and wants to make 10% profit on the sale, he must add to his cost 42.86%. Or, in other words, he adds to his cost of $10.00 the sum of $4.29, making the sales price $14.29. This is a comparatively simple transaction.
It must be considered that the greatest hardship and difficulty in the retail meat business is the fact that a natural product is handled and not a manufactured one. While a retailer may handle a certain grade of cattle and tries to get carcasses of uniform grade and weight, there is always a difference either in weight, quality, conformation, or waste.
To make a cutting test on each and every one of the carcasses handled is physically impossible, especially when considered from a practical business standpoint. The only possible solution seems to be that the retailer do his best to handle only carcasses of a uniform weight and quality. No doubt, this is the reason why some of the prominent retailers are so strongly in favor of official grading of beef, lamb, mutton, veal and pork, as this may enable the retailer to buy according to a certain standard. If such standards are applied, grading offers a possible solution to one of the most difficult problems of the meat retailer.
The retailer who handles certain uniform grades and weights of product must realize that it is absolutely necessary to make periodic cutting tests, and try to arrive at average percentages to guide him safely in making selling prices. This problem be-comes still more difficult for the retailer who handles mixed carcasses or two or three different grades of meat.
Original or Prime vs. Actual Cost
On the majority of meat products sold over the retail meat counter, there are in reality two costs, one the original or PRIME cost and the other, the ACTUAL cost. It may also be said that there is a fictitious cost and a real cost. While the actual money outlay is real and fixed, the product, if figured on a "per pound" basis has changed in price. Since the retailer sells his products by pounds, he must naturally establish his cost PER POUND. The following two contrasting examples will illustrate this clearly.
A buys a 100-pound hindquarter of beef at 15 cents per lb. Total cost is $15.00. He knows that he must add 30% to his cost to make a fair profit. Therefore A sells the whole hind-quarter to a farmer at $15.00 plus 30%, or $19.50.
The transaction of A's was simple. It was a fast turn-over of a whole hindquarter.
B, a typical retailer, also buys a hindquarter of beef weighing 100 lbs. at 15 cents per lb. He also paid $15.00 for it. The $15.00 represents the original cost for the whole hind-quarter. He bought it on Friday afternoon for delivery on the following Tuesday afternoon. When delivered the original 100-lb. hindquarter weighed only 98 lbs., because there is always a shrinkage on products such as beef, which contain such a large percentage of moisture. B now gets the hind-quarter ready for the block or counter. He divides it into round and loin. He trims the loin, the rump and the round. The flank leaves him an abundance of fat which cannot be sold over the retail counter. He saws off the upper part of the shin bone and throws it in the bone box. He sells the steaks from the loin over the counter. He has to trim a piece of bone, a piece of suet here and there. The kidney suet goes partly into the fat box to be sold to the fat collector, and some suet is given away to the trade when a piece is demanded with the meat. When B sells this meat, he finds that he has about 84 lbs. of meat left to sell over the counter. To get a correct cost, he figures what he can sell the bones and fat for. He soon finds that the cost of the meat to him goes up considerably more, namely, to 17.85 cents, or practically to 18 cents per lb. While the original cost for the total does not change, the cost per pound has changed considerably.
Figuring Price "Per Lb."
In figuring "cost price per lb." there are many items to take into consideration:
2. Cutting loss
3. Trimming loss (edible)
4. Suet and fat (inedible)
These constitute the major losses to the retailer. Shrinkage on meat carcasses varies and depends greatly upon the freshness of the product. Where meats are aged, to be used for restaurant or club trade, this loss becomes a very important factor.
Cutting loss is one item usually overlooked by the great majority of retailers. Although it can hardly be seen, this loss exists and is usually estimated at 1% by the conservative retailer who takes this loss into consideration.
The trimming loss is also considerable, but it varies greatly, depending upon the way meats are sold over the retail counter. Where meats are sold "untrimmed," this loss is, of course, much smaller than in the markets where the trade demands carefully trimmed meats. The Greater New York markets, also Providence, Boston and the markets along the New England coast, trim their meats extensively, while in the near West and the West, this practice is being more and more abandoned.
The eastern markets, especially the metropolitan New York and Boston districts, are also at a disadvantage, compared to the western retailers by handling heavier beef. This beef naturally has a much larger percentage of waste fats than the beef handled in most other sections of the United States.
As the market owner in the East is also giving away considerable suet and fat to the trade, the percentage of loss is much larger there than in the western markets. Investigations and tests show that there is frequently 10% more waste fat or loss in the eastern markets than in the western stores. There are, of course, many markets outside of the above-mentioned cities which handle heavy prime meats, but generally the giving away of fats and close trimming of meats are practiced more extensively in the East than elsewhere. The chapter on "Meat Cutting Methods" has some interesting tests on this subject.
Mistaking Original Cost for Actual Cost
For verification, and as another illustration of the difference between the original or PRIME and the ACTUAL cost, the following example is given herewith. This test was made by representatives of the United States Department of Agriculture. A side of beef from a good grade steer weighing 235 lbs. was used for this test.
After dividing the side of beef into retail cuts, and deducting cutting loss, waste, bones, fats and suet unsalable over the counter, the original 235-lb. side of beef had shrunk to 201 lbs., or a total loss in weight of 34 lbs.
At 10 cents per lb., the original or PRIME cost of this 235-lb. side of beef is $23.55. There are 34 lbs. of loss for which only a very small amount of money is realized, as shown in the charts. The 34 lbs., at the wholesale price of 10 cents per lb., have cost the retailer $3.40. He realizes, however, practically nothing for certain wastes and bones.
For the total amount of waste he receives only a very small sum. Therefore, the difference in the amount he receives and the cost of $3.40 must be added to the original or PRIME cost of $23.55 to arrive at the total ACTUAL cost of this side of beef. This brings the ACTUAL cost up to $26.37. Instead of having 235 lbs. at 10 cents per lb., the retailer actually has 201 lbs. of meat salable over the counter at an ACTUAL COST PER LB. of 13.10 cents. In other words, the cost has increased 31% by these losses.
Losses Greater on Heavy Beef
On tests made in New York where meats are trimmed considerably and where large quantities of fat meats are handled, this difference becomes more apparent. On a side of beef of a good choice steer weighing 367 lbs., a test shows that only 297 lbs. of the side remains to be sold over the counter, after deducting fats, bones, etc. This side of beef which had been bought for 16 cents per lb. or a total cost of $58.72 resulted in an actual cost of $68.21. While the beef originally had cost 16 cents per lb., this loss of shrinkage and waste brought the ACTUAL cost per lb. up to 22.97 cents, or a trifle less than 23 cents per lb. This is 40% more than the retailer paid for it originally.
Practically all carcasses of calves, veal, lamb and mutton show a cutting loss which should always be taken into consideration. Exhaustive tests show that it is safe and conservative to figure at least 1% for evaporation, shrinkage and cutting losses which the retailer otherwise will never recover.
Shrinkage Loss on Smoked Products
On smoked products, shrinkage is a very important factor to consider when establishing a cost price. Hams, smoked shoulders, summer sausage, bacon, and practically all smoked products shrink considerably. Tests have been made showing that smoked hams very often will shrink 5 to 8 ozs. per week. It is safe to figure at least 1/2 oz. per day loss on such products. There is some variation in the shrinkage losses on smoked products, depending upon how freshly smoked the goods are.
A Practical Example
As an illustration, a 15-lb. ham at 32 cents per lb. originally cost $4.80. After being in the shop a week this ham in all probability will weigh 14 1/2 lbs. Instead of having cost 32 cents per lb. the retailer must realize that this ham has cost him 32 cents per lb., for he no longer has 15 lbs. of ham to sell but 14 pounds. While an item of 1/2 cent or an oz. may seem little, it must be remembered that when large quantities are handled and ounces are multiplied by hundreds, that great losses are possible.
When such losses are applied to only 10 hams at 15 lbs. each, and there is a shrinkage on each ham of 7 ozs. a week, there is a total srinkage of 70 ozs., or a loss of $1.40 on the lot. This loss becomes more prominent when applied on a percentage basis. Assuming that 150 lbs. of ham at 32 cents per lb. have cost $48.00, the loss of $1.40 represents very close to 3% on the cost price, or enough to sacrifice a large percentage of the profits.
If the meat retailer could sell the different cuts at an equal price, establishing cost and selling prices would become a very simple matter. But since there is such a great difference in the various selling prices of the different cuts, the figuring of a correct cost price makes it absolutely necessary for the meat dealer to make cutting tests periodically.
Pricing Ham Cuts
When a ham is to be sliced and sold in parts, the retailer finds that a pencil is required to find a correct cost and selling price. An actual practical example will illustrate this better.
A 14-lb., first grade, skinned smoked ham is bought. The ham is divided into:
1. Best center slices
2. End slices (trimmed)
3. Shank end
4. Outside slice
Original cost 14 lbs. at 32 cents $4.48
1st day 1 oz.
2nd day 3/4 oz.
3rd day 1/2 oz.
4th day 1/2 oz.
5th day 1/2 oz.
6th day 1/2 oz.
7th day 1/2 oz.
Total shrinkage loss 4 ozs.
Trimmings -- 4 ozs.
Total ACTUAL cost $4.64
ACTUAL cost per pound $ .3314
We have established one fundamental fact—the ACTUAL cost per lb. To arrive at a correct selling price presents again some difficulty because of the local conditions and demand. While shank ends of hams may be a slow mover in one locality, they may be in demand in another market. Therefore, it is practically impossible to lay down a fast rule or formula as to what each cut must sell for. Assuming that the retailer decides to make a total profit of 27% on the sales price, he knows that he must add 38% to the cost price.
The retailer who knows the demand for certain cuts in his market can easily work out a formula for making a correct selling price according to his conditions. Since the ham has cost $4.64, he knows that he must receive $6.40 for the entire ham in order to make 27% on the sale.
There is practically only one correct way to figure a selling price, and that is to figure the percentage of each cut and trimmings, and then add on sufficient to bring the total up to the desired result, which in this case is $6.40.
A Ham Selling Price Formula
According to demand, the retailer can now figure out a selling price formula. As an example, we have figured this ham on the following basis :
Best center slices Add 100% to ACTUAL cost
End slices, trimmed Add 7% to ACTUAL cost
Shank end At cost
Outside slice At cost This gives the following results :
5 lb. 8 oz. center slices 66.28 cents
4 lb. 8 oz. end slices 35.46 cents
3 lb. shank end 33.14 cents
8 oz. outside slice 33.14 cents
Total return wanted $6.40
Average selling price per lb 45.71 cents
To make the example mathematically correct, fractions have not been eliminated. In actual practice, the price would be minus the fractions in favor of the retailer. While this is only a typical example of establishing the cost and selling price, it will prove to the retailer the need of being a good mathematician.
Pricing Pork Chops
The same difficulty may also be encountered in selling pork chops. In few markets all chops of a pork loin are sold at one price, and the cost problem is a very simple one. A pork loin weighing 10 lbs. 8 ozs. at 10 cents per lb. costs the retailer $2.10. If he desires a profit of 25% gross on the selling price, he must add on 34% or the total selling price of the loin is $2.82. Each lb. will therefore, have to sell at 27.05 cents per lb., or in round figures 27 cents. As the great majority of retailers, how-ever, sell shoulder and loin end chops at or below cost, the retailer finds it more difficult in such cases to get the correct selling price.
When it is known what profit is desired, it should be added to the actual cost and then it must be divided into the different percentages of chops—center chops, loin end chops and shoulder chops. If on a 20 cents per lb. loin the end chops are sold at cost, or at 20 cents, the center chops will have to sell at 29.33 cents or at 30 cents per lb. on a basis of 35% added to cost. It will be noted that in this case, the center chops sell for 50% more than they originally cost.
Knowing "ACTUAL" Costs
The retailer who actually wants to know his business and can establish a correct cost and selling price, will find that in the retail meat business, there is an absolute necessity for a retailer to use a pencil and adding machine.
Analyzing carcasses, dividing them into different cuts, figuring wholesale cuts into retail cuts and converting ounces into percentages are tasks which evidently have prevented the great majority of retailers from getting at these fundamental facts. By the examples given above, it becomes very evident that in order to be successful in the retail meat business, and to know what he is doing, the retailer should know how to establish a correct cost price.
It is well to remember that the price on the bill is not always the price the goods have actually cost by the time they are ready to be sold over the counter. One should always remember that there is an original or PRIME cost and a final and ACTUAL cost in the retail meat business.