Traits of the Profit Leaders
By Bob Graybill / August 2016Insights, News
Fiscal year 2015 was a turnaround year for many independent grocery retailers. A myriad of external factors, ranging from the economy and competition to the regulatory burden, made for a tough marketplace. The FMS/NGA Independent Operator Financial Study 2016 found that weekly transactions per store per week were flat, putting more pressure on growing the basket in order to grow total sales. While a tough challenge, independents did just that. Up from 1.5 percent in 2014, independent grocers grew sales 2.1 percent in 2015.
With same-store sales up, better margins and only a slight increase in expenses due to increased labor and benefits costs, the 2015 net profit result for independent retailers was much improved. While no means a record-setting year, independent grocery stores reversed a two-year decline in net profits and averaged 1.44 percent.
Each year, a group of retailers outperforms the rest of the field by a wide margin. The research refers to this group as the “profit leaders” and studies if and how they approach food retailing differently.
In 2015, the profit leaders included independents that exceeded 3.0 percent in net profits before taxes. This leader group averaged 4.09 percent in net profits during fiscal year 2015. When compared to the 1.44 percent average across all independents, this means that the profit leaders outperformed the entire independent grocer community by more than 2.5 percentage points.
So what do these profit leaders do differently?
» They grew same-store sales at a rate of 3.0 percent — well ahead of the overall independent average of 2.1 percent and well ahead of 2015 annualized inflation of 1.2 percent. Fresh departments are bigger contributors to sales, in particular meat, produce and deli.
» Their average transaction size is higher — indicating they have found ways to successfully drive the basket through a combination of higher margins and more items in the basket. Many of the profit leaders have loyalty programs in place to support these efforts.
» The profit leaders also maintained better margins. In addition to produce, meat and, to some extent, deli being larger contributors to sales, the profit leaders also show higher-than-average gross margins for each of these departments. Higher sales at a higher margin in areas that already have a strong margin potential is certainly one of the keys to success for the profit leaders. In addition to higher margins in fresh, the profit leaders apply higher margins in most other areas of the store.
» The profit leaders upheld the gap in expenses, at more than three percentage points when excluding labor and benefits. They have a focus on running lean operations and keeping long-term debt low, while reinvesting in their operations during good and bad economic times.
» Profit leaders’ focus on reinvesting in the business is shown through a higher level of new store openings and remodels — keeping stores looking optimal.
» Profit leaders focus on retailing fundamentals, including keeping inventory turns high and implementing programs that measure and curb perishable and theft-related shrink as much as possible. While shrink management programs are not yet widely implemented by independent grocery retailers, profit leaders are more likely to focus on curbing shrink which is paying off in lower than average shrink, at 2.6 percent. They are more likely to have shrink management programs in place and have the ability to measure shrink at the item level.
Clearly, profit leaders’ 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.
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Bob Graybill, President and 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.