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- Murchison-Hume was founded in 2008 in Sydney Australia by Max and Peter Kater after their son experienced allergic reactions to household cleaners.
- Max Kater was a fashion editor before starting the company.
- Revenue in Australia reached seven figures, and that's when they moved the company to the US.
- It's been five years since the company moved to US, and the product has failed to connect with the US consumer.
- In 2015
- Revenue $900K
- COGS $489K
- Overhead $888K
- Net Loss $477K
- Murchison-Hume had a CEO in place in year 2015 and blamed the loss on the CEO. The CEO left Murchison-Hume for another company.
- The product is manufactured in Chicago, then shipped to Dallas for fulfillment and distribution. The cost of the shipping from Chicago to Dallas is 50 cents per unit.
- Product is sold mainly to retailers
- Balance Sheet
- Assets $289K in inventory and $53K in cash
- Liabilities: $80K in payables
- The amount of past due payables exceeds cash in bank
- After Marcus and the owners struck a deal, they decided to move distribution to Chicago, the same place the product is manufactured. During this move, it was discovered the actual inventory in existence was $47K. The inventory was over-stated on the Balance Sheet by $242K.
- COGS was 54%, and gross profit was 46%
- Revenue $900K (100%)
- COGS $489K divided by 900K = 54%
- Gross Profit
- $900K - $489K = $411K
- $411K divided by $900K = 46%
- According to CSIMarket.com, the cleaning product industry average gross profit is 52%.
- Murchison-Hume's 2015 gross margin was not great, but it's conceivable that they could bring it up from 46% to 52% by fixing the Dallas distribution center issue and getting rid of a few SKUs.
- Because Murchison-Hume is sold to retailers, the product has two "keystone markups." Murchison-Hume needs to sell to the retailer for two times the cost, then the retailer needs to sell to the consumer for two times its cost.
- The 50 cents per unit cost added to the product from shipping it from the manufacturer in Chicago to the distribution center in Dallas, adds $2 per unit to the final cost to the consumer.
- Overhead of $888K is problematic and is what was responsible for the $477K loss, but we don't know that made up the $888K.
- In general, the three main overhead items that cannot be easily lowered are fixed facility costs due to lease commitments and utilities, management salaries and interest expense. Some businesses have large spends in marketing, but most of the time owners can scale back the marketing expenses. However, sometimes owners choose to increase their marketing spend, knowing it will result in a net loss, hoping for increased sales. This can be a blind gamble if you don't have an educated marketing team managing your marketing dollars.
- When Marcus asked Max about the inventory discrepancy, she said, "I'm not the right person to ask." This was after she and Marcus discovered the inventory issue and after Marcus gave her one week to figure out what happened to the inventory and/or where the error was in the financial statements.
- The $242K inventory adjustment is a loss on the Profit & Loss and it begs unlimited questions. Did an employee steal inventory? Did the distribution center steal or lose the inventory? Was the inventory sold and the retailer failed to pay Murchison-Hume? Was there revenue theft by an employee at Murchison-Hume? Always, always perform physical inventory counts. Do this at the most monthly and at the least quarterly.
- Again, we see owners refusing to be involved in all parts of the business. When your business is losing money, it's understandable to bring in a CEO or other experts. But you should task these experts to advise you, not to handle things without you so you don't have to pay attention to what's going on. Remember, when things are not going well for your business, all owners - even the creative types - should know all numbers, all the time. Once you become profitable, you can delegate more and rely on benchmark number reporting.
- The owners' first ask of Marcus was $1M so they could launch their personal care products. This is another example of a business owner wanting to expand or create new product lines instead of fixing what's broken. Chances are, until you understand why you are losing money and then garner the skills to make needed changes, you'll make the same mistakes in whatever new product line or business you start. Marcus told the owners this very thing, only invested $250K and did not approve any new products.
- Marcus says, "Max wants to play the role of an upscale business owner, but she doesn't want to deal with all the things it actually takes to be a business owner. Like knowing your numbers, managing inventory, working on your brand, driving costs down, improving margins and selling more."
- There were a lot of marketing lessons in this episode as well, so be sure to watch it if you are in this industry.
Please note: The assumptions and opinions here are for teaching purposes only. I in no way mean to insult or throw shadow on anyone’s character or business acumen. I understand that very limited facts are presented in the TV show, and I’m aware that there’s always more to the story.