If you’re thinking about opening a grocery store or simply curious about how such a store makes decent money, it’s a good question. The statistic that grocery store profit margins are 1 percent to 3 percent is widespread. It does make folks wonder why businesspeople bother to open grocery shops when the stores have such low margins. This article explains.
Grocery stores sell a lot of items. A lot, particularly fresh produce. They get a high number of shoppers inside their doors every day. Their profit margins could be 2 percent, but the volume of sales means the profits can turn out pretty decent.
People need groceries. They need food to live, so grocery stores do have the benefit of a built-in customer base especially if they have chosen their locations strategically.
Grocery stores operate pharmacies, coffee kiosks or mini coffee shops, bakeries, supermarket sections (with electronics, clothing, decor, and other items), and other services to get more customers inside. Some offer childcare services, which encourages parents to come and shop child-free.
Smart grocery store owners use methods such as fixed asset inventory software to track their assets and inventory. That keeps a lid on expenses. For example, the software tracks the performance and use of ovens, refrigerators, and heating and cooling systems. It maximizes their use and identifies premature problems. The data also becomes integrated to help with decision-making and scalability.
Minimizing shrink is another way owners run tight ships. Shrinkage means theft and spoiled products. Owners use tactics such as self-checkout monitoring, extensive cashier training, better product display, dynamic pricing, sophisticated ordering systems, and electronic security systems to reduce shrinkage.
Private Label Goods
Grocery stores over the past 15 or so years have rolled out private label products in virtually every category. These are cheaper products under the stores’ own brands. They are cheaper to sell because stores do not have to purchase them from major brands. (That said, some stores, especially larger ones, rent shelf space to manufacturers instead of spending money on items themselves.)
Private-label products also get customers into stores because they are sold for less and are usually of similar or even better quality than name brands.
Grocery stores are OK taking a hit on common loss leaders such as rotisserie chicken. These loss leaders with their attractive prices and other features get customers into stores and spend money they might not have otherwise. Loss leaders help stores gain revenue on other items.
Milk, eggs, and frozen turkeys during holidays are common examples of loss leaders. Often, loss leaders are at the back of stores. Customers must pass by higher-revenue items to reach them.
Prepared foods, vitamins, body care products, fresh coffee, cheese, and deli meat are among the better-generating items in a grocery store.
Candy, soda, magazines, and little items for use around the house are common at checkouts. Their convenience promotes impulse buys. The items may be priced regularly, a bit higher than average, or even be on sale. The point is that the products’ location urges customers to spend money they would not have otherwise.
A 3 percent profit rate does not sound too amazing, but it is usually not the full picture. Suppose the grocery shop you want to purchase costs $4 million. You make a 20 percent down payment, investing $800,000. You borrow the rest of the money.
The store could easily generate $15 million in sales in your first year of ownership. If you compare this amount of money with your actual investment of $800,000 versus the store’s cost of $4 million, the rate of return shoots up. It looks a lot better and, in fact, exceeds 15 percent.
Many grocery stores make money by employing part-time rather than full-time employees. This approach saves on health insurance costs, among others.
However, some grocery chains do carve out a reputation for providing employee compensation and benefits. These stores tend to position themselves as upscale with higher-priced goods.
Speaking of higher-end stores, that is a niche some chains pursue. Other stores pursue different niches, for example, family-friendliness or great bargains on leftover, surplus, or incorrectly marked products. The stores use specific marketing strategies to draw certain types of customers.
Customer Data Collection
Through rewards programs, customer accounts, and similar measures, stores collect data on customers. Through these measures, they can offer personalized coupons and bargains that incentivize customers to shop at the store.
The stores also find out metrics, for example, the times customers are most likely to visit. This information lets them staff the stores smartly and strategically to save money.
The profit picture for grocery stores can be pretty good, better than what the 1 percent to 3 percent statistic would suggest. Grocery stores can make decent money through sales volume, asset and inventory management, private labels, loss leaders, and other strategies