Retail 101: Part One with Mike Mauti
With more than 20 years of experience in the North American supermarket industry, Mike Mauti has learned "Retail 101" firsthand.
Now he is sharing his insights with the audience of The Produce Market Guide and The Packer.
Mauti, managing partner of Toronto-based Execulytics Consulting, teaches on sales, tonnage, gross profit, total contribution, market share, customer satisfaction, negotiation and more.
This is the first part of a conversation between The Packer's Tom Karst and Mike Mauti about Retail 101 principles.
THE PACKER/PMG: Mike, talking about "Retail 101," what was the process for you when you learned all these principles?
MAUTI: I likely went through the same process that most people go through; you get thrown into the deep end and learn from your mistakes as you go. And over time, you start to create your own style that may be different from how you've been taught. Individual people will start to prioritize certain objectives a little bit differently. In general terms though when talking about the objectives of a retail organization, there will be metrics that all employees are accountable for.
My experience over the years is that prioritizing one metric over another really ebbs and flows; as one metric starts to suffer there is more pressure to improve it. The real challenge comes when those metrics compete. For example, you can drive sales, by giving up profit or you can drive profit by giving up sales. Depending on the hot button for that period or that quarter dictates where the efforts should be focused.
THE PACKER/PMG: What's different about the store-level perspective compared to a bit higher up in management? Are they both on the same page about what they want to have happen?
MAUTI: Certainly all the metrics that I talk about are top-of-mind for the operators too. They need to generate sales and they need to turn a profit. It is a little bit nuanced for an operator as they might be more concerned with contribution than they are about gross profit. Likewise, market share doesn't often get down to individual stores, but customer satisfaction is extremely important for the store. So, there are a lot of similarities with a handful of key differences.
There are also challenges for operators that are not entirely felt in the office. This can often lead to tension between operators and buyers as they attempt to accomplish their shared objectives. You may often hear a store operator say, "the buyers just don't understand what we're going through". A great example that has reared its head many times during my career is the topic of product distributions. From a head office perspective, you can't generate sales and profit with product in the warehouse. From a store perspective, large quantities of unwanted product complicate an already complex job.
When the day is done the pressures might be slightly different at the store, but they're still looking to generate sales, they need to maintain their bottom line, and they need to satisfy their customers. All three important metrics for a buyer as well.
THE PACKER/PMG: At the store-level, what's the lag time between sales and information about sales?
MAUTI: The stores have good access to real-time data. They have an ability to get nearly minute-by-minute sales updates out of their systems. Any store that has an electronic cash register can do that. And depending on how connected the stores are, particularly chain stores can see profitability in real time. This has been made possible as more retailers are using full Enterprise Resource Planning systems like SAP, Oracle, IBM or other competing ERP systems.
THE PACKER/PMG: What is the typical number of SKUs in a produce department?
MAUTI: That depends a lot on the format. If you're talking about a hard discount format, like in Aldi, Lidl, FreshCo or No Frills, they could have 300-400 SKUs. While a conventional store could have 1,000 or more. Recently, expanding product trends like organic and value added have dramatically increased the number of SKUs in a typical store. As an example, where in the past a typical produce department might have carried only ten potato SKUs in bulk, and bagged formats; now stores carry the same assortment from years ago plus minis, fingerlings, several different options for value-added and an assortment of organic potatoes. What once was ten SKUs can now be forty, and there's a lot of categories that have seen similar expansions in assortment. It is not surprising to see a full-service operator with 1,500 or more SKUs.
THE PACKER/PMG: What are the pros and cons for adding SKUs to build your sales and tonnage? When you add a SKU, does a retailer know what (sales and tonnage) they will get as a result?
MAUTI: There are a lot of sophisticated ways to try and estimate what an additional SKU will give you in sales based on competing items and gaps in the marketplace. But really the trade-off is satisfying an additional customer need, versus the cannibalization of like items. And every item carries a cost with it. There are procurement costs, replenishment costs, handling costs and shrink costs to name a few. Shrink costs specifically tend to increase in more SKU intense operations. To get a good understanding of the benefit of an additional SKU, one must weigh the negatives of all these costs versus the benefit of satisfying an additional customer need. This cost/benefit analysis can be difficult because you might think you're satisfying a new customer need, when what you're really doing is transferring a need from one product to another. In the meantime, you're adding all the costs I mentioned.
Cored pineapple may be a good example of satisfying a new customer need. Many people do not want to go through the trouble of coring a pineapple, but they would quite happily purchase a pineapple that has already been cored. At the other end of the spectrum, adding another bagged salad SKU might just cannibalize what's already available rather than driving incremental sales.
THE PACKER/PMG: Talk about sales as a benchmark for tracking performance at the retail level.
MAUTI: Sales provide the funds to pay for everything that you do in your organization, including paying your staff, paying for product purchases, paying overhead expenses, and obviously, providing a net return for the owners of your organization. If you don't have customers paying you in exchange for your products, then you don't have a business. It's just as simple as that.
THE PACKER/PMG: As it relates to how suppliers can help retailers build sales, you mention the importance of providing high-quality products, being a sustainable source of supply, having costs that are in line with the market, and providing advertising opportunities for promotion. Can you elaborate?
MAUTI: Those are all points that suppliers need to have in the back of their mind when they sell product to their customers. This is true for any business - your customers are relying on you to help them improve their business. Produce suppliers need to understand that if they're not providing high quality product to their customers, they're not going to be helping their customers grow sales and they might not be a supplier for very long. You can say the same thing about all the recommendations I am providing to suppliers. But you could flip that around and say this is also what a retailer needs to do in order to drive sales. A produce shopper generally only buys high-quality products. There's the odd time where an uninformed consumer will go into a store and not recognize that they're buying poor-quality product or accidentally put poor quality product in their cart. But this is not a strong strategy for a retailer to hang their hat on.
I also talked about providing a sustainable source of supply. Some customers will go shopping with a list of what they want to buy that day. Now, of course, a lot of customers will deviate from that list. And if they see something that really catches their eye, they'll add it into their cart, but a lot of customers will start with a list, either in their head or on paper. If you've got a product that is inconsistently available, it might not ever get onto that list.
The same is true about costs. Suppliers need to give the retailer product costs that are in line with the market. But by the same token, the retailer needs to offer retail prices that are in line with their local marketplace. Customers don't necessarily know the price of every single item. But many know when their basket is higher than it should be. If they expect to spend $100 in a grocery store, and then suddenly they spend $125 for what appears to be a similar type of assortment, they will quickly understand, and many will switch grocery stores.
Retailers also need to be competitive in the market with advertising and offering products throughout the season. One of the things I always tried to do as a buyer was to advertise products when I knew none of my competitors would. For example, I often advertised watermelon at Thanksgiving. It’s not something that many people did back then. The volume is lower than during the key summer months, but still high for that time period. Suppliers can improve their standing with retailers and retailers with their customers if they offered seasonal favorites at times when their competitors are not thinking about it.
THE PACKER/PMG: Typically, who initiates that type of promotion - is it the supplier or retailer?
MAUTI: I would say whoever has the most experience. If you have an experienced buyer, who is on the lookout for a leg up on their competitors, they'll be actively seeking promotional opportunities from their suppliers. But it's the suppliers who possess the detailed knowledge. They're the ones who know for example, that watermelons will be available over Thanksgiving. The buyer might remember from last year, but the supplier has that intimate knowledge of product availability, costs and volumes. In promotional planning, both parties bring important insight to the table, so it works best in a partnership to have fluid conversations between the two.
The whole reason I created The Retail 101 seminar was because there was a feeling amongst the industry that quality relationships between buyers and sellers have gone missing. The collaboration between supplier and retailer is not as high as it used to be. A lot of information that would be passed between the two doesn't get passed to suppliers as frequently or as completely as it used to say 20 years ago. I'm not necessarily talking about specific programs or opportunities, but more about the casual conversations that reveal important aspects of the role each party plays in satisfying the ultimate consumer such as detailed conversations about important retailer objectives.
THE PACKER/PMG: What does a retailer look for when it comes to advertising opportunities?
MAUTI: There are several different objectives that retailers are looking to satisfy through advertising. The most basic answer is they're looking to entice their competitors' customers into their store by offering a product they want to buy at a good price. Take strawberries for example, assuming $1.99 is the magic price to draw customers into your store, as a retail buyer you would be looking for an awful lot of volume at a cost that is conducive to your advertising program. In my day, we always wanted our most aggressive costs for our front-page flyer items. Typically, you would go to the supplier community and look for strawberries at an aggressive FOB price, then add freight and other incidental costs, plus if you are in Canada, as I was, you would calculate the exchange rate. If that resulted in our target cost, we would continue with the ad. With strawberries being a prime product to drive massive amounts of tonnage with a hot ad price; we could be in the market looking for approximately ten times our normal volumes. Not always an easy task that brought with it many rewards.
There's an interesting statistic that suggests even your best customers will only give you approximately 60% of their wallet. That means even the customers that are most loyal to you are still going to shop your competitors - a lot. Likewise, shoppers loyal to your competitors are also in your store. If you can capture that group of people from your competitors who are in your store shopping your ad, then you can use other tools in your merchandising tool chest to turn that occasional customer into something more than occasional. And it all starts with advertising and getting them into your store.
Another advertising objective would be to grow customer basket size or drive the sales of specific products. Certainly, people have their favorite fruits. But a lot of fruit is interchangeable with a lot of other fruits. If I'm shopping, and I see strawberries are $1.99, strawberries are going to get in my cart. If I see peaches at 99 cents, peaches are going in my cart, maybe in addition to strawberries. If the quality is right, and it's at the price that entices me to act, I'm going to pick it up, but often, I need the push of an advertisement to get it in my cart.
THE PACKER/PMG: How do you evaluate sales versus tonnage?
MAUTI: The first thing to look at is why tonnage is important. And it's easy to forget about tonnage and think only about sales. There is an old saying in retail, 'you don't put tonnage in the bank, you put sales in the bank'. But if you rely too much on that way of thinking, you could be driving one short-term metric (sales), to the detriment of a long-term metric (tonnage). Tonnage is the volume of product you're putting into the customers carts. In many ways you can almost use tonnage as a proxy for customer satisfaction. If your customers are buying a lot of your product you can assume they're happy and that they will continue to buy a lot of your product. If your sales are going up and your tonnage is going down you can assume that your customers are not very happy because they are buying less. And if they're not happy with you, they could potentially be happier at a different grocery store.
A lot of times tonnage and sales are opposing metrics. When sales decline, you need to react. Sometimes that reaction includes increasing prices. The result can be inflation driven sales increases at the expense of tonnage. Again, in times of declining tonnage you need to react, so you do the opposite, you drop prices to increase tonnage, the resulting deflation can cause a sales decline. It can become a real tug-of-war. Skilled buyers know how to manage that balancing act, backing off when they need to drive sales and putting the pedal to the metal when they want drive tonnage. That comes with experience and a group of suppliers who understand your needs.
COMING SOON: PART TWO: MAUTI TALKS GROSS MARGIN AND CONTRIBUTION