Profitability and productivity are two key indicators of business success. It is therefore important to have a clear understanding of these measures and the many business factors that impact them. In this blog, we take a look at profitability. What do we mean by true product gross margin? How is this measure impacted by distribution costs? Using Bevica can easily provide these answers.

What do we mean by true product gross margin?

True product gross margin refers to the actual profit generated by a product after accounting for all associated costs directly related to its production and distribution. These include the cost of goods sold (COGS), such as materials, labour, and manufacturing overheads, as well as distribution costs like transportation and warehousing. Essentially, it’s the difference between the revenue generated from selling the product, and the total costs incurred to produce and distribute it.

What do we mean by distribution costs in the alcoholic drinks industry?

In the alcoholic drinks industry, distribution costs refer to the expenses incurred in getting the product from the producer to the end consumer. These can include:

  • Transportation: Costs associated with moving the alcoholic products from the production facility to distribution centres, warehouses, and ultimately to retailers or wholesalers. This may involve road transport, shipping, or air freight depending on the distances involved and the nature of the product.
  • Warehousing: Expenses related to storing the products in warehouses (bonded or non-bonded) or distribution centres before they are shipped to retailers or wholesalers. This includes rent or lease costs for warehouse space, utilities, equipment, and labour for inventory management.
  • Packaging: Costs associated with packaging materials and processes, including bottles, labels, caps or corks, boxes, and any additional packaging for protection during transit.
  • Marketing and Promotion: Costs related to promoting the products to distributors, retailers, and consumers. This may include advertising, trade promotions, point-of-sale materials, and other marketing activities aimed at increasing sales and brand awareness.
  • Compliance and Regulatory Costs: Expenses associated with ensuring compliance with various regulations and laws governing the production, distribution, and sale of alcoholic drinks.

How do these costs affect your gross margin?

Distribution costs in the alcoholic drinks industry are a significant component of the total cost structure. When calculating the gross margin for a product, businesses need to subtract distribution costs from the total revenue generated by selling the product. Therefore, higher distribution costs lead to lower gross margins and this affects the overall profitability of the product. It is therefore essential that distribution costs are effectively managed and monitored. Having a clear picture of all costs and the impact they have on your products’ true profit margins is vital as it allows businesses to maximise profitability and maintain a strong market presence.

Knowing the true product gross margin also helps businesses hone their pricing strategies, improve their cost management processes and develop effective overall financial planning strategies. This clear understanding will ensure that the business achieves sustainable growth and competitiveness in the market.

How can Bevica help effectively manage your distribution costs?

Included in Bevica’s suite of features and functionality is the distribution costs management module. This module has a number of features which allows users to effectively manage their inventory costs and, as a result, have a clear picture of their true product gross margin.

By utilising the distribution costs management feature, users can record and accrue for the additional costs incurred as part of managing their stock. Costs accounted for include:

  • Marketing Contributions
  • RH&D (Receipt, Handling & Despatch)
  • Insurance
  • Freight charges
  • Delivery charges.

To find out more about Bevica’s Distribution Costs Management functionality and all of Bevica’s other drinks industry-specific features and functions, request a demo today.