The Best Are Getting Better: The Traits of the Profit Leaders
By Bob Graybill / July 2017Insights
Independent grocers are well known for their resilience, innovation and differentiation. As a group, they tend to hold their own against national chains and regional powerhouses. However, deflation in key categories, price wars led by some of the nation’s biggest chains and accelerated market entry by Europe’s leading discounters were just a few of the many factors that made 2016 a very challenging year for the independent supermarket community. The FMS/NGA Independent Grocer Financial Survey 2017 found that same-store sales declined, while margins and expenses were flat, resulting in net profits falling below the 1-percent mark in 2016, following a strong 2015.
However, every year, a group of retailers manages to outperform the average by a wide margin. Known as the profit leaders, retailers making up the top 25th percentile in net profit performance reported net profits nearly five times higher than the average. What do they do differently? And how can we learn from these powerful retailers to successfully map out future growth?
The study found that the profit leaders outperformed the rest of the independents in nearly every area. Their commitment to keep long-term debts low combined with reinvesting profits into their companies is paying off in above-average sales, margin and profit growth.
Profit leaders grew same-store sales -0.26% prior to being adjusted for deflation — well ahead of the average of -1.62%. Their slightly bigger stores (averaging 33,000 sq. ft. in selling space) averaged a higher number of weekly transactions (10,012) at a higher transaction size of $29.45 vs. $24.71, with a greater likelihood of using credit/debit as payment. They are more likely to have a loyalty program and have a greater contribution by fresh departments.
Profit leaders have a higher number of employees on a per store basis (but also average a slightly larger store) and had lower staff turnover of 15.1% for full-time employees and 43.6% for part-timers. They averaged slightly lower salaries and benefits cost, with higher sales per labor hour, especially in fresh, including meat, produce and deli.
Profit leaders averaged higher margins, particularly in fresh, with the total store margin averaging +1.61 percentage points higher than all respondents.
Profit leaders ran leaner operations and controlled expenses in many areas, including the four biggest cost centers of labor & benefits, rent/CAM, utilities and supplies.
The net profit among the profit leaders was +3.72 percentage points above the average.
Profit leaders focused on shrink control, particularly in fresh. Many have shrink management programs and have the ability to measure shrink at the item level, which resulted in 2.1% shrink vs.3.2% overall. They focused on being in-stock and have higher-than-average inventory turns for all departments.
Profit leaders reinvest in their businesses with a higher propensity for new store openings and remodels — keeping stores looking optimal. They have higher-than-average CapEx (2.1%) but lower debt-to-assets ratio at 0.8 versus 1.3 among the pack. Their long-term debt averaged 23.1% of total liabilities and equity, versus 33.2% for the rest. Short-term debt was lower as well, averaging 25.2% versus 30.8% among the pack.
Contributed by Bob Graybill, President & CEO, FMS Solutions Holdings LLC
Robert Graybill joined FMS in 2000, and has over 25 years of experience in the retail grocery industry. Currently, Mr. Graybill leads the FMS team in meeting their goal of helping retailers to succeed through benchmarking, best practices, and decision support.