Price, profitability and productivity probably weigh heaviest on the decisions made by a grocery store manager. The effectiveness and relationship of the "three Ps" can mean the difference between success, failure, or worse, struggling.
How one retail turned around flat sales
Faced with flat sales and a growing payroll, the following is an account of how our store operation turned these problems around.
The scenario was one typical of some natural food stores: staff working hard, yet never getting the job done, and no matter how many weekly specials, our customers complained about prices.
Action was taken when the recession finally penetrated "the natural foods forcefleld." Going into the second year as an expanded operation, our store sales were the same as the year before. It was the first time in the operation's six year history without sales growth.
The structure of the operation is based on growth; raises every six month, incentive plans, profit sharing, hopes for further expansion, and more. We could have made excuses for flat sales, with sales per square foot twice the industry average and a community full of competing natural food stores, but we still needed to turn things around. Without taking action we might soon have found ourselves. . . struggling. Besides, there could be few things worse than having a profit sharing program, but not making quite enough profit to share.
Against the grain of trends, customers and sales reps
Our decision went against the grain of industry trends and feedback from customers and sales reps. We reduced the variety of products offered to our customers. And not just a juice here and a pasta there. We reduced the product mix by about 30 percent in the grocery department alone.
The grocery department was the best place to start, because it was the department that most consistently ran over payroll budget Despite its payroll excesses, staff seemed overworked and the department had problems with mispricing, low inventory turns, out of stocks and appearances.
With such circumstances, some managers might look for someone to fire. Our strategy was to focus on the operation as the problem. When the store first expanded, we prescribed a philosophy to keep inventory in check by ordering only what could fit on the shelf, but our buyers succumbed to the pressure of customers and sales reps to carry more products than we had the ability to manage. The problem is one typical in a retail operation, and we found it to be the primary productivity drain.
Our inventory philosophy: less is more
As a result, we reaffirmed the less is more inventory philosophy then took it further in an effort to make customers (and even some sales reps) happy. We wanted to cut down the variety of products and shift the volume of sales to buys at better prices by buying fewer items in greater quantities. The purpose of taking our inventory philosophy further was to give the customer a reaon to choose the products we bought over the products they requested -- and what better persuasion than price?
The first step was to find an accomplice -- a distributor who could help us with our plan. In our case it meant switching our primary distributor to a distributor who was willing to handle special manufacturer deals. We also wanted the distributor's help in developing the right relationship with our manufacturers. Our hope was to negotiate around the minimum orders as much as possible, but still get the discount.
Negotiating with the manufacturers
Our pitch to manufacturers is that buying minimums can hurt our sales (thus their sales) more than it helps. For example, if we have to buy a whole pallet of chips to get a good discount, the pallet including four flavors of chips, and we ran out of one flavor, we would not be able to restock until we ran down the stock of the whole pallet. As a result, we would be out of stock on one or more flavors before reordering and lose the sales on those varieties.
The distributor can help us in reasoning with the manufacturer, because they can speak of our ordering history and record of success in negotiating around the minimums. Furthermore, with our increased volume, they may be able to get bigger discounts and benefit from the negotiations.
Our objective is to convince manufacturers that we will end up buying more of their product in the long run if they give us the better price without the large minimums. Sometimes the manufacturer is willing to work with us, and those that do definitely see the benefits. However, in most cases, a minimum is a minimum, and we meet the minimum to get a good discount.
The next step was to go through our product mix and figure out what we wanted to carry and what we could get rid of. Product decisions were based on how much we sold, whether it was a product we believed in, if we could get a good deal, and the amount of crossover products.
Product decision principles
Our product decisions are now based on four principles:
For example, we cut one line of juice entirely from our product mix, cut back on the variety of another brand, and lowered the price on two other brands by buying both in quantity. We feature two brands of juice because one is organic and one is a great price. (Ironically, the organic outsells the lower priced variety.)
The combination of these product decisions enables us to stock more of the juices we carry on the shelf, eliminating mixed case back stock and the time-consuming job of stocking from mixed cases. At the same time, we have improved juice sales as well as our price image.
The fear in cutting variety is that customers will leave in search of their favorite products. But our customers seem happy to switch brands when it means good savings without a compromise in quality.
Customers more loyal to price than brands
In offering better prices, we do not want our margin to suffer. Our goal is to improve profitability while maintaining, if not improving, our staff and pay standards. In most cases, the better prices come directly from better buying. In some situations, we cut margin to achieve specific price image goals, such as offering organic refried beans for 99 cents. Lower margins are more the exception than the norm.
Our promotion of the new pricing program is the perfect philosophy for the average natural foods consumer: less is more. Along with listing many of the products with their great new prices, we explain to the consumer what we are doing,what kind of products we are focusing on (organic and local products as much as possible) and ask for feedback.
We promise to bring back products if we get many requests and offer to special order anything a customer wants. The focus of our promotion has been in-house, through our weekly specials flyer, banners and, most important, shelfsigns. We let word of mouth do the rest.
We proceeded to work with other departments following the same philosophy. The second department tackled was body care and vitamins, reducing the product mix by about 50 percent. Once again, sales grew.
If organic price is close, more people buy it
The transition in bulk has been more subtle, focusing on eliminating non-organic crossover products with better buys and prices on organic. It has been our experience that ifwe can get the price of organic goods close to the conventional varieties, say within 10 to 40 cents, people will choose the organic variety.
We are now working on the perishables department, where, in our store, the change will be even more subtle than in bulk. The deli and cheese department will be next, while produce and meat have been working with a "less is more" philosophy all along. Considering that we started on the program last fall, it may be almost one year before the whole process is complete.
Inventory clearance fast and painless
In discontinuing products, we drop the price and move it out, particularly in the grocery department. Some of the products we discontinue are real shelf sitters, and we feel the greatest loss is from the space they take up as well as the cash they tie up.
Discontinuing items in the grocery department was fast and exciting. We set up temporary shelving in the most prominent sales space in the store, where we usually stock specials, and watched the goods fly. Keep in mind, not many of these products were real "dogs," since we discontinued whole lines of product, from oils, dressings, and juices to nut butters, cereals, and laundry soaps.
The response has exceeded our expectations. Our sales are climbing again, payroll in the grocery department has started coming in under budget (well. . . sometimes), and we just handed out profit sharing checks that increased employees hourly wage by 32 to 97 cents per hour over one quarter. (An employee's tenure in the company is the basis for the variation in hourly return.)
The best part of the whole transition is bringing natural and organic foods out of the "specialty foods" price category and into the more affordable "everyday low price" range.
Improving profitability by focusing on productivity and pricing is a philosophy any size store can benefit from. It may mean buying cases instead of single items. It may mean buying ten cases instead of one case. Whatever position you find yourself in, you can achieve result that benefit your store.