Today’s grocers have reached a crossroad. The cost of core products – like fruits, vegetables, dairy and meat – continue to rise, but consumer discretionary incomes aren’t keeping pace.
How much of a price increase should grocers pass along to consumers? Raising prices too high and for long periods of time could be risky – especially with big-box retailers determined to undercut traditional grocers and steal more market share.
Standing still isn’t an option either. The USDA forecasts that retail food prices will jump between 2.5-3.5 percent this year. In February alone, prices climbed by 0.4 percent – the largest jump in more than two years. If grocers fail to take any action, their margins and profitability will take a hit.
So what’s the next move for grocers? The answer lies in the supply chain.
#1: Purchase Smarter
All too often, grocery supply chains are littered with opportunities to consolidate spending and cut costs. And despite the best efforts to beat supplier margins into the ground – grocers are still leaving significant money on the table.
The most effective way to get to the next level -- and achieve more meaningful and lasting savings -- is to focus on company-wide spend visibility.
But for many grocers, the spending picture is cloudy at best. For example, grocery parent companies that have multiple store brands may have different contracts and prices for the same product and with the same supplier. In other instances, grocers use two different suppliers for similar products – like plastic shopping bags and plastic deli bags. Some regional stores don’t even buy all of their products together, despite the fact that they sell the exact same items in-store.
These purchasing variances can cost grocers millions of dollars every quarter. To solve the problem, procurement and supply management teams need better visibility into their total spending.
From there, it’s easy to identify opportunities to consolidate spending and ensure consistent pricing and product quality across the supply base. The result is greater purchasing power, which can lower cost, on average, by two to 10 times.
#2: Keep Stores Running – At Lower Costs
One of the fastest and most effective ways to offset rising product costs is to re-evaluate – or take to bid if you haven’t already – indirect services. On average, facility management and services account for 7-10 percent of the cost of goods sold.
Grocers can save on indirect services with some of the same procurement practices mentioned earlier. For instance, if you’re using a different supplier for snow removal and parking lot maintenance – there’s a good chance you’re leaving money on the table.
The worst mistake grocers can make, though, is not sourcing indirect categories at all, or failing to perform timely category reviews. Through e-sourcing technology, grocers can easily find quality suppliers willing to bid for their business on just about every service – from construction and maintenance to human resources and landscaping. And more often than not, when the service is taken to auction, the grocer finds a better offer in the marketplace, or the incumbent supplier comes to the table with better terms.
#3 Optimize Your Transportation Mix
Shipping and logistics costs can quickly eat away at a product’s profit margin, totaling 20-30 percent of the entire cost per item. In some cases, this can skyrocket to 50 percent. And in the grocery industry –- where many products have a short shelf life -- the expectations for faster, more responsive delivery cycles can quickly get out of control.
But driving down transportation costs is easier said than done. Transportation sourcing isn’t only expensive, but it’s tremendously complex and challenging.
Price is only one consideration. Other factors – like on-time delivery rates, capacity, mode, cold vs. dry storage and service fees -- can all significantly impact how much it costs to get your products from the supplier to store shelves.
The secret to an effective and efficient transportation program is being able to easily create and test hypothetical scenarios, and project the expected results before the plan is put into action. For instance, what’s the impact of giving a little on price for better shipping terms and less risk? Or what’s the difference between choosing rail over air? Having the flexibility to implement different scenarios is crucial to any optimized logistics program. Doing so, however, requires giving procurement the ability to make apples-to-apples comparisons of the true costs, benefits and risks of each transportation scenario that’s being considered.
At the end of the day, product costs will always be volatile. Today they are high and climbing – but five years from now, who knows? For the best, most sophisticated supply chains, it hardly matters.
Chris Horacek is VP at BravoSolution, a supply management company that helps grocers improve financial performance through strategic sourcing. For more information on sourcing best practices, check out BravoSolution’s latest report: Four Ways to Improve Retail Supply Chain Performance Through Cost Savings