Retail Value Chain Analysis

A great way to understand the dynamics of any industry is to look at its value chain, and understand how cost and profit are distributed along its length.

On the chart above we show an items progression from raw material, through manufacture and wholesale/distribution to retail, and finally to the consumer. At every stage in the chain there are costs, and profits, and these are embedded in the price as the item moves up the chain.

Detailed, consistent breakdowns of cost and profit for a whole chain are hard to come by, but we are gradually capturing we can to develop a series of value chain models for everything from groceries to books and CDs.

Just to give you a flavour for some of the figures. In the beef industry the farmers (raw material producers price) is around 80% of the retailers cost (keeping cost and price separate is crucial here). In bread production the total chain profit is around 17% of the final consumer price. In groceries in general total chain profit is around 14% of the retail price. Costs in the grocery value chain split down to 15% of consumer price to the retailer, 38% to the manufacturers diect costs, and 32% for the cost of raw materials.

A value chain map can soon show wheer opportunities might exist to restructure the chain, reduce costs and capture the profit by eliminating intermediaries - the classic dot-com disintermediation and direct sell.