Grocery stores are posting record sales during the pandemic. But the surge in demand hasn’t necessarily translated into increased profitability. Why? Because these sales come with increased operating expenses, from higher labor costs to delivery logistics. It’s a reminder that, even in boom times, grocery store profit margins are thin — around 2% — and only getting thinner.
We recently published an infographic on disappearing grocery store profit margins. It discusses the many reasons why this is happening — some circumstantial, others more permanent.
For one, it’s an expensive business with tons of overhead, large store footprints and high built-in costs for things like lighting and refrigeration. A shrink rate above 3% — nearly double the rate of other retailers — is also baked in to the bottom line.
But the pandemic is accelerating other margin-reducing trends. Increased competition from online retailers like Amazon and big-box stores like Walmart is eating into traditional grocery store sales. Fees paid to third-party delivery platforms like Instacart are undermining the potential value of the booming delivery sales channel, which grew by 40% in 2020. And even in-store shopping has been beset by out-of-stocks at a time when pandemic-strained supply chains are creaking, worsening a problem that was costing the industry $75 billion in 2017.
But there are several high-level strategies grocers can deploy to win back some of those disappearing margins. And the key to unlocking success may be differentiation.
Take Advantage of Private Labels
In an undifferentiated marketplace, where most grocers offer the same products, a strong store brand can be a game-changer. Bringing manufacturing in-house can help grocers establish more distinct product lines that customers will seek out — particularly at a time when consumers may be looking to shake out of their routine buying patterns.
One analysis by Oracle found more than 80% of worldwide shoppers purchased store-owned brands during the pandemic, which may have been more available than their branded counterparts.
Curate the Whole-Store Experience
Specialization goes beyond offering exclusive products: stores should also aim to differentiate based on in-store amenities and curating the beyond-center-store experience (particularly as the pandemic recedes). This might mean expanding offerings of local products in the market area or at the butcher counter, or creating a hub for grab-and-go meal kits, the market for which is expected to top $11 billion by 2022.
Go Big on BOPIS
Customers are buying groceries in more ways than ever before. But grocery delivery is cost-prohibitive and logistically fraught for many smaller operators, who must instead rely on third-party services.
The silver lining: the popularity of higher-margin grocery pickup grew throughout 2020, which means there’s a major opportunity for grocers to go all-in on BOPIS. It’s a double win, because not only is in-store pickup a higher-margin transaction, but it also creates an upsell opportunity — 85% of BOPIS shoppers have made an additional purchase when heading in-store to collect an online order.
Grocers with multiple locations bent on getting into delivery can use so-called dark stores — essentially fulfillment warehouses, no customers allowed — to alleviate some of the challenges of managing in-store shopping alongside delivery.
Even as the post-pandemic food retail landscape continues to shift, razor-thin grocery profit margins aren’t going anywhere. That said, grocery can still be a very profitable business with the right strategies in place.
Heidi Sax is product marketing manager at CB4, a retail AI company making the in-store experience easier and more rewarding for store teams and their shoppers.