Raising prices used to be the go-to strategy for retailers looking to widen their grocery store profit margins, but this practice is no longer sustainable in today’s retail landscape.
With players like Walmart, Aldi, and Lidl constantly offering bargain basement deals, other grocery stores risk losing their customers if they can’t match the prices of their competitors. Companies are realizing that to compete, they need to turn a profit in more creative ways.
In this article, we shed light on how you can use technology to do just that. Examine the points below and see how you can use them to increase your grocery store profit margins.
1. Right Product, Right Place, Right Time
The average grocery store has a whopping 40,000-50,000 SKUs. Many of the products on your floor are time-sensitive. Produce and deli goods are highly perishable, while seasonal items like Valentine’s Day chocolates need to move within a small window in order to be profitable. When they’re not in the right place at the right time, these items can be real drain on margins.
You might think this is a natural cost of being in the grocery business — and that your in-store execution problems are just part of the reality of brick-and-mortar. But today’s cutting-edge machine learning tools can crunch your POS-data to better understand local demand and capitalize on that understanding.
At CB4, we help retail teams understand when sales for a particular item at a specific location are failing to meet anticipated high demand. We take our insights one step farther, by sending alerts to store managers to correct whatever is hindering sales.
Maybe a vendor is failing to stock your beverage case with a new flavor of sparkling water. Perhaps it’s one week before Fourth of July and a brand of hot dog buns was misplaced in the stockroom, and hasn’t been replenished on the floor since. Maybe there’s a markdown of raspberry crumble cake, but the price sticker doesn’t match the promotional signage.
These are all issues that CB4 has uncovered and corrected for our grocery store partners. They are also the issues that, in aggregate across your chain, chip away at your gross profits. By helping store teams recognize and correct these issues, CB4 helps grocers deliver the right products at the right time and keeps your customers coming back for more. If you’re ready to get started, learn more about our secret sauce.
2. Tighten Up Your Supplier Policies
Inefficiencies in your supply chain are costing you sales and profits, particularly when they lead to product delays and unavailability. With grocery stores losing $75 billion because of out-of-stocks, it’s imperative that you work on tightening up your supply chain.
One way to do this is by implementing on-time, in-full (aka OTIF) policies for your suppliers. OTIF policies compel your vendors to fulfill orders efficiently, so you can get your products on the sales floor when your customers need them.
Both Walmart and Kroger have taken measures to prevent late or incomplete deliveries through OTIF policies. Kroger charges vendors $500 per day for delivers made past a two-day time-frame, while Walmart fines suppliers 3% the value of each shipment that comes in late or incomplete.
Consider doing something similar with your suppliers, and for best results, use technology to streamline your processes. In Walmart’s case, the retail giant leverages big data to determine which products to stock, and then it shares those insights with its suppliers.
According to the WSJ, Walmart has been sharing key data points with vendors, including “which precise products are on shelves at any given time and why products are out of stock.” Walmart also discloses which products it plans to carry in each store and makes that information available to suppliers.
Having the ability to collect — and share — all that information keeps Walmart and its suppliers on the same page, allowing vendors to anticipate demand and fulfill orders efficiently.
3. Improve Your Private Label Strategy
It’s a known fact that private label goods are a lot more profitable, with grocery store profit margins being around 25-30% higher compared to branded products. The challenge, with any private label strategy, though, is to sell high-quality products at low prices.
It’s no easy feat, but it’s doable with the right manufacturing process. As CB Insights points out, grocers can win the private label game by keeping their manufacturing lean and in-house.
Take Kroger, which brings in over $20 billion a year through its own brands. Part of what makes Kroger successful at private labels is its investment in its own manufacturing facilities. The company has more than 40 plants to process a variety of its private label items.
Data and analytics also play a key role. Grocery Dive reports that Kroger has its own analytics firm and “collects a lot of data on its customers, helping it figure out which new items to develop and how to hone existing lines.” Other brands are turning to external partners to help. For example, CPG manufacturers like Mars are turning to Alibaba’s AI tool to help brands uncover hidden demand patterns that inform product development to tap into local consumer demand.
Kroger’s success highlights the importance of systems and technology when it comes to private labels. Having its own manufacturing plants enables Kroger to create quality goods at highly competitive prices, while its data and analytics can surface valuable customer insights to support product development and strategic pricing.
If you’re a grocer with a private label operation in place the only thing stopping you from duplicating Kroger’s success is mastery of your own data. External partnerships can help. One of the most successful examples of data-driven product development is the partnership between Alibaba and CPG companies.
4. Consider Meal Kits
In 2018, the industry saw a flurry of meal kit acquisitions and partnerships with grocers: Kroger purchased Home Chef, Albertsons bought Plated, and Gobble teamed up with Walmart.
These shouldn’t come as a surprise. From the perspective of increasing grocery store profit margins, selling meal kits makes a lot of sense. In addition to having access to ingredients, supermarkets already have an existing distribution network and a customer base to market to. By leveraging these assets, grocers can get more out of their existing customer base and widen their margins.
That being said, a meal kit program doesn’t come without challenges. This space is extremely competitive, and grocers must deliver delicious meals at affordable prices — and do it in ways that are convenient for shoppers.
Making all that happen requires technology to support services such as mobile ordering, subscription management, and automatic fulfillment. Leading meal kit providers (i.e, Blue Apron, Plated, Hello Fresh, etc.) for example, give subscribers the ability to stay on top of their meals on multiple channels, making it simple to select meals and schedule deliveries or pick-ups.
These capabilities are table stakes for meal kit providers, so if you’re looking to offer the service to your customers, see to it that you (or your meal kit partner) have the technology to support such features.
5. Prioritize BOPIS over Delivery
While free shipping and same-day delivery are certainly gaining steam, buy online, pick up in-store (BOPIS) seems to be a more popular option for consumers. During the 2018 holiday season, Adobe found that BOPIS orders have increased by 46% from the year before and according to Nielsen, Millennials prefer click-and-collect over home delivery.
BOPIS can also drive grocery store profit margins through added sales. A study by ChargeItSpot found that the majority of US consumers who opt for in-store pickup end up making additional purchases while they’re in the store.
Clearly, BOPIS is a boon for retailers, but it’s important to note that your click-and-collect offering will only be as good as the technology that supports it. Successfully implementing BOPIS requires a tight integration across your different retail channels.
At the very least, you need to ensure that your retail management system can sync your stores’ inventory with your ecommerce and mobile website, so shoppers can get real-time information on product availability.
The success of your BOPIS efforts also hinges on order fulfillment efficiency. Tight processes and adequate staff training are necessary to ensure that in-store pickup orders are processed on time.
The best in class retailers recognize this, and some are even turning to technology to improve BOPIS efficiency.
Consider what Walmart is doing. In 2018, Walmart started piloting a robotics system called Alphabot to streamline how grocery orders are fulfilled. According to a blog post from the company, Alphabot does this “by automatically bringing items from storage to associates who will consolidate the items in the order.”
Walmart has found a clever way to scale its grocery BOPIS operations while improving labor inefficiencies — all of which helps protect its grocery store profit margins. Consider following the company’s lead when improving your BOPIS initiatives. You may not be able to deploy robots to assist with BOPIS orders, but you could look into other back-end technologies that can streamline your procedures.
6. Rethink Your Loss Leaders
Using loss leaders — i.e., items sold at a loss to drive foot traffic — is a common tactic that nearly every food retailer implements to improve grocery store profit margins. Traditional loss leaders include items like milk and eggs. It’s a classic and proven practice, but simply using old staples as loss leaders is becoming ineffective, as shoppers’ preferences around health and wellness continue to evolve.
Take milk, for example. FoodNavigator-USA reports that in 2018, cow’s milk sales declined by 6% while plant-based alternatives went up by 9%.
Consumers are clearly moving more towards healthier options when it comes to staples like milk and eggs, which means grocers need to keep up and evolve their loss leader strategies to include healthy alternatives.
As RW3 puts it, “while there’s still a market for the staples, if you’re looking to attract a new crowd—especially among younger people—offering great discounts on the foods people are trying to find may make you the go-to retailer for shoppers.”
It’s important to bring up the role of technology in a grocer’s loss leader strategy. By using big data and retail analytics to analyze trends, you can determine which products to use as loss leaders.
That same data can also inform your pricing strategy. Analyzing POS transactions, basket sizes and shopper-price perceptions will enable you to determine the most optimal price points for your loss leaders.
This is critical, particularly as consumers have more pricing transparency thanks to shopping comparison apps and price matching deals. As a grocer, using technology to analyze data and adjust prices based on trends and consumer price sensitivity will allow you to stay competitive.
Shoppers of today don’t just want the right products at great prices — they expect those items to be fulfilled efficiently through the right channels.
It’s a tall order, but food retailers can meet those demands and improve grocery store profit margins by leveraging technology to identify opportunities and implement the right initiatives.
Ready to get started? Learn how CB4 helps grocers and other retailers meet local demand and ensure the products customers want most are in stock and ready-to-shop.
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