Operating a Deli for Fun and Profit

Our society's trend toward preparing fewer meals at home, combined with the rising popularity of natural foods and health consciousness, makes this a good time for natural foods retailers to develop deli counters. A good deli is profitable in itself, and in addition will contribute to your store's overall success by attracting new customers. Another bonus is the ability to highlight products from your grocery lines. If your deli customers like the bread that their sandwiches are served on, they will also buy that bread directly from your bakery shelves. In this way, a deli can add sales to every department!

You don't necessarily have to have a lot of space or make huge capital investments in new state of the art equipment to add a deli to your grocery operation. Though your product line depth and sales volume can be limited by the size of your facility, your success depends on how you manage the resources that you have. Product quality and mix, merchandising, customer service, margin control, and payroll control have more impact on your success. It's possible to produce and sell a substantial volume of soups and salads with a hot plate, food processor, crock pot, slicer, and a four-foot display case. Of course, if you have more space, you can do more. You can bake desserts and hot entrees, make sandwiches to order, sell frozen yogurt, broaden your salad selection, serve fresh vegetablejuice, and much more. The key is to make the most of the space you have.

The New Pioneer Co-op Fresh Food Market in Iowa City, Iowa, put in its first deli in 1985. At that time the store had 3,200 square feet of retail space and a sales volume of about $20,000 weekly. Iowa City has a population of about 50,000, and New Pioneer is located close to downtown and the University of Iowa. Adding a deli was part of New Pioneer's plan to upgrade the perishables departments. The produce department had recently been reworked and expanded, and the next step was to add seafood, some fresh meats, and prepared foods. These departments were run as one, utilizing the same staff and work space. The seafood was full service and the deli self service. A small island was created by putting display coolers around a 14-foot formica countertop, leaving work space in between. The entire cost of construction and equipment was under $5,000, which included a new 6-foot seafood case.

This facility created additional sales of $1,500 weekly in deli goods at a 70 percent gross margin, and $1,500 in seafood sales at more than 30 percent. The deli product line included coffee, tea, hot soup, prepared sandwiches, salads, spreads, and deli meats. The open deli display case was 5 feet long with three shelves. A second case was added later that matched the first. By doubling the display size, sales doubled almost immediately. Labor for the entire department, which included fresh seafood, deli, meat, cheese, and dairy, ran at about 15 percent of sales.

In 1987, New Pioneer was able to expand its retail space from 3,200 to 6,000 square feet, and the success of the deli gave us the confidence to expand that part of our operations. A deli kitchen of 500 square feet was created, as well as 24 feet of full service refrigerated display cases and 5 feet of hot food display. All the equipment was previously owned; the total cost of construction and equipment was about $20,000. With this basic facility the product line was broadened to include thirty sandwiches made to order, desserts, hot entrees, more salads, spreads, and deli meats. Currently, deli sales are 12 percent of New Pioneer's total sales, or about $8,500 weekly. The deli profit margin is 65 percent, and payroll is 30 percent of deli sales. Deli sales are up 50 percent from last year, and additional growth is expected this year from the operation of the same basic facility.

New Pioneer's Deli Margin Analysis

Subdepartment% of total deli salesxMargin=Margin pts.*
Salads, spreads, desserts.35x75.0=26.0
Sandwiches.35x60.0=21.0
Entrees.20x70.0=14.0
Meats, olives, other low margin products.10x40.0=4.0
Deli total margin points:    65.0

*contrib. to margin

Cost Analysis Example: Tabouli

Cost of ingredients: $9.07
Total weight of batch = 11.7 lbs.
x .95 = adjusted sellable weight = 11.11 lbs.
Labor = 1/2 hour Labor cost = 1/2 x $6.00 (average wage) = $3.00

$9.07+$3.00=$12.07/11.11=$1.09x3=$3.27
Ingredient
cost
 labor cost total cost sellable
weight
 cost per
pound
   basic re-
tail price

Round up basic retail price to what the market will bear: $3.99

Profit on ingredients divided by retail price = margin.
Ingredient cost = $9.07
Divided by sellable weight, 11.11
Ingredient cost per pound = $.82

Retail price per pound=$3.99
less per pound cost=-$.82
   
Profit per pound: $3.17
$3.17/$3.99=79%
profit retail price profit margin

Service vs. self service

A self service deli costs much less to operate in payroll dollars compared to a full service deli. Self service delis are ideal for lower volume operations because a customer service staff does not need to be maintained during slow traffic times. There are drawbacks, however: food is less appealing in plastic containers, no one may be around to answer product questions, no salesperson is present to built rapport with customers, freshness of sandwiches made while you wait is superior to premade sandwiches, and the clear plastic containers themselves are a drawback environmentally.

A service deli costs more in payroll to operate, but this problem can be addressed in lower volume operations by having the deli staff be responsible for other tasks such as cutting cheese, packaging meats, selling fresh seafood, etc. lt also is difficult to adequately staff a service deli when business is sporadic. Nevertheless, a skilled staff can maximize sales in a service deli. The appeal of a service deli is stronger than a self serve display. It takes longer for customers to be served, but they receive personal service and can purchase products in just the quantity they want.

New Pioneer found that there was a continued demand for self serve items for speed and convenience, despite the attractice service display. To accommodate this, a 5-foot self serve display containing prepared sandwiches was put near the checkout.

Merchandising

Everything within view of the customer is merchandising: inside the deli case, in front of the deli case, on top of it, on the wall behind the counter, on any visible shelves, and on the counter top. Although food serves a functional purpose, it also is a form of recreation. Make your deli look lively and fun. From a distance, signs should be visible and products should appear abundant and inviting. All products should have attractive, consistently styled signs for identification and pricing. Menus and product information flyers should be displayed prominently.

Inside your deli case, you can use bowls as well as tablecloths and brightly colored cloth napkins to promote the "homemade" feel of the display. Bowls at the back should be elevated for better visibility and eliminating dead air space. You can garnish your case with fresh vegetables and fruit or greenery and fresh flowers. A look of abundance, freshness, and excitement will add to sales. Don't cover your bowls with plastic wrap until after business hours. If they tend to dry on top, stir products periodically.

Keep similar products together: meats, salads, desserts, and chilled entrees. This makes it easier for customers to see what you are offering in every category. Use the different colors, textures, and shapes of products within each group to make the display interesting. Use baskets and cutting boards as props to add emphasis. Set up a fresh display daily to keep your customers enthused and your products looking fresh. Ifyour garnishes have wilted and your tablecloth looks dirty, you are working against yourself.

Product line

A danger to watch for in natural food store delis is having a product mix that gives people a "weird food" impression. Many potential customers may be unfamiliar with and intimidated by natural food products. Having a lot of natural quality but mainstream food is less intimidating. Always have items like coleslaw, potato salad, fresh baked french bread, chicken salad, etc., prominent in your displays, and you'll end up selling more tofu salad than you would have without such mainstream products.

It is important to develop a predictable basic product line so that your customers know what to expect from you. It also makes things exciting to have new products and items that are seasonal or go with an advertising theme. Keep your top selling items in stock consistently, and rotate other products that are good but not popular enough to sell in volume day after day.

Pricing

Deli margins typically run from 60 percent to 75 percent overall. There is a lot of variable pricing, and your net margin depends on your product mix. On most products prepared in-store, you can expect a 70 to 80 percent margin. Meat and seafood entrees are usually lower margin, 50 to 60 percent. Sandwiches bring in a 50 to 60 percent margin. Meats and cheeses sold in service delis bring in 40 to 50 percent profit margins. Baked goods tend to be high margin but also high labor items. Beverages are high margin and low labor.

In order to figure out your applied margin, you need to track sales by category and figure a contribution to margin from each category. The key is to sell a large proportion of products in the high margin categories. It is well worth the effort in marketing products prepared in-house.

To figure your production costs in your pricing, use the following formulas:

  Total labor time
 xAverage hourly wage
 =Total labor cost of product
Now add:  
  Total labor cost
 +Total ingredient cost
 =Actual product cost
Then divide:  
  Actual product cost
 /Adjusted weight or number of servings
 =Actual product cost per selling unit
Now multiply:  
  Actual product cost per selling unit
 x3
 =Basic retail cost per unit

By adding labor costs and multiplying by three, most products priced in this manner have a 70-80 percent margin on ingredients. If you don't add the labor costs of production, your retail prices based on ingredient cost could bring in a lower amount of profit than the cost of labor to produce the product.

There are many opportunities for shrinkage in margin to occur, e.g., overcooking, spilling, or overstocking products. For this reason, you must look for opportunities to gain margin points by rounding prices upward whenever possible. You can expect a 2-3 percent shrink from routine human error. You can compensate for this by figuring that you'll only sell 95 percent of every product. (Allow the additional padding for specials and samples.)

Example: total weight X .95 = sellable weight.

Loss leaders are just as important in delis as they are in the grocery department. Everybody wants a good deal. Pick low labor loss leaders and promote them heavily. If you're cutting your margin, you should get a lot of price mileage out of it.

Payroll control

You can expect a service deli to have about a 30 percent payroll cost. Self service delis run at half that percentage. To budget your schedule, project your weekly sales and multiply by .30 (or whatever payroll percent is applicable). Divide this figure by your average wage to get a total number of hours. Allot a number of hours per day based on sales volume and assigned tasks. By doing this on a weekly or biweekly basis, you can project sales increases and decreases and schedule more or less staffing as needed.

A deli really puts you on the map! People tend to shop at their favorite deli more often than they shop for groceries. You will have more traffic and pickup additional sales in every department. Well run perishables departments validate the co-op as a serious grocery store. Customers feel that if you are good at produce, meat, and dairy, you have credibility. If you are also good at prepared foods, people feel that your store is not only well run, it is a fun place to go. And who want to miss out on fun? If you can put a deli in your store, sales will grow!

See other articles from this issue: #024 September - October - 1989