What To Do When Sales Grow, but Profits Don’t
Originally published in the Globe and Mail
Sarah Landstreet is in the business of making packaging products for the food industry, such as paper coffee cups, boxes and bags. The 32-year-old's Kitchener, Ont.-based firm, Georgette Packaging Inc., provides branded items mostly for bakeries and cafés.
Ms. Landstreet, a mechanical engineer who owned a cupcake bakery in Northern Ireland before selling the business in 2011 and returning to Canada to earn her MBA, launched Georgette in 2013. Her company also provides packaging-related consulting services, assisting businesses with design, sizing and sourcing. Its ability to provide personalized service and explain the ins and outs of the packaging business – and yield sharp-looking yet affordable products – has gained it a large following.
She says she dove into this line of business because she knows packaging is critical to creating a brand that's iconic. "I was looking for something where I had unusual insight and there is a big problem but not many people are paying attention to it," says Ms. Landstreet.
Her instincts have served her well. Georgette Packaging's sales have grown to $1.3-million as of August of this year, from approximately $172,000 in 2014. Net profits for this year, as of August, were approximately $84,000.
The company is growing in other ways, too. It's gone from having just one employee – Ms. Landstreet – to six, and in July it moved into its first office.
Like any ambitious entrepreneur, Ms. Landstreet is keen to build her business. Her chief concern is that while sales continue to climb, her gross profit has been low – 18 per cent in 2016, and 19 per cent as of August. Her goal in 2018 is to triple net profits.
But she's taking a conservative approach. The business has no debt, and she wants to fund growth with profit, rather than taking on loans or more investors. Ultimately, Ms. Landstreet thinks growth will come from hiring more sales staff, pricing products more accurately and reducing costs. By cutting costs, she hopes to have the necessary funds to hire and train new sales people.
Along with salaries, the costs of goods sold and exchange rates are the biggest expenses for her company, she says. She also spent money taking her employees to Silicon Valley's Y Combinator startup accelerator last year.
"We're trying to grow, but we're extremely lean. We don't have a lot of buffer to grow with, and it's really difficult to be super-ambitious and to have to watch your costs so closely," says Ms. Landstreet. "We need to understand the levers better, what ones we should be focusing on, and determine what percentage of cuts in them can allow us to hire, for example, another person."
We asked Brian Brennan, a senior partner at Toronto-based Max Potential and a chair at TEC Canada, for his advice on what Ms. Landstreet can do to reach her lofty goals.
Mr. Brennan says Ms. Landstreet is in a challenging position as she tries to increase profit while reducing costs. He points out that growth can be the most expensive business activity for a company because it involves so much investment in people and initiatives related to those people.
Georgette Packaging needs more volume in sales to increase the bottom line. One way to achieve that, Mr. Brennan says, is to examine the markets where the company is doing very well and employ online marketing campaigns in those areas to boost brand visibility. Ms. Landstreet already does that to an extent, using Instagram to promote the business online. Mr. Brennan suggests that she continue this strategy but also target promising new markets and saturate them with the company's story and photos of its work.
"Often things travel by word-of-mouth. If a company likes your product, they might tell someone about you, who tells someone else. This might be an opportunity to generate sales without having to hire a sales person," he says.
To cut costs and improve pricing accuracy, Mr. Brennan advises Ms. Landstreet to explore hedging on exchange rates. Can she lock in a certain rate for foreign currencies into the future? If so, this will allow her to know what her gross margins are in advance, and this will help her set pricing with confidence.
He also advises her to deal with fewer suppliers in hopes of developing closer relationships and securing more competitive pricing from them as sales volumes grow. Mr. Brennan notes that if Ms. Landstreet can persuade these suppliers to be partners in her company's growth, they might help her get there by providing price discounts.
She should constantly go back to them looking for better deals, he says. "Every time you hit a new volume plateau, try to renegotiate your deal as well as you can. It's not always a numbers game. When people believe in your vision, they are more likely to get onside with you."
And although Ms. Landstreet thinks hiring extra sales staff will help to build her business, Mr. Brennan says that it may be prudent to hold off at this stage of the business's evolution.
"She wants to avoid those big chunky costs, and a way of doing that is bringing on people part-time at whatever level of involvement she needs to get the results she wants for the company," he says.
"She's got an interesting story, the company's got lots of potential and she's very determined. A lot of people like that when they are looking for work."
Brian Brennan is a TEC Canada Chair in the Greater Toronto Area. He has over 25 years of business experience, and as a Chair he guides people and organizations to excellence. To learn more or join his group, visit Brian’s TEC Chair page.