Amidst rising interest rates and a daunting fundraising landscape, indie beauty brands—and those aiming for an exit—must prioritize cash flow and profitability. Brands should not only improving top-line revenue growth, but also focus on their gross margins. Kiva Dickinson, founder and managing partner at Selva Ventures, underscored the significance of robust gross margins in a recent LinkedIn post.
Understanding Gross Margin:
Gross margin is the difference between product sales revenue and the cost of goods sold (COGS). It provides a snapshot of a company's core profitability, excluding other external expenses.
Why Brands Should Be Focused on Gross Margin:
A strong gross margin paves the way for profitability. When a brand's marketing expenses surpass its gross margin, achieving profitability—and sustained cash flow—becomes impossible.
The beauty industry, on average, touts a gross margin of 65%. Brands should ideally target figures exceeding this industry benchmark. Notably, L’Oreal boasts a 72% gross margin. Meanwhile, Aesop—acquired by L’Oréal in a landmark $2.53bn deal (4.6x 2022 revenue)—flaunts an impressive 87.1% gross margin. Such metrics not only anchor a brand's viability but also amplify its valuation.
How to Boost Your Gross Margin With Better Planning:
- Adopt Agile Planning: Planning more frequently and agilely can help you adapt to changing consumer demand faster and reduce the likelinhood of overstocking and under-stocking. Adopting a planning software is crucial in agile planning by reducing a lot of manual excel work. With better inventory forecast, you can lower excessive carrying cost and improve margin.
- Refine Supplier Costs: The cost of manufacturing finished goods and components largely depends on negotiating optimal price breaks to secure the best unit cost. For effective negotiations and to obtain substantial volume discounts, maintaining a clear long-term vision of supply plans is crucial. A frequently used strategy is to have a good annual supply forecsat and commit to a better annual purchase agreements with suppliers.
- Optimize Shipping Costs:Unexpected shipping surcharges, like paying two or three times the amount for air shipments, can be a significant setback. To prevent such scenarios, set appropriate safety stock levels. Implementing a robust planning tool can also help anticipate and mitigate the unforeseen demand volatility that might necessitate expedited shipments.
Interested to Learn More About Better Inventory Planning?
If you’re interested in improving your operational cost, Shypyard provides comprehensive demand planning and inventory visibility. Click “Get Started” at the top to chat with the team.
Check out the original Linnkdeln discussion here.