Retail 101: Part Two 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, the managing partner of Toronto-based Execulytics Consulting, teaches on sales, tonnage, gross profit, total contribution, market share, customer satisfaction, negotiation and more.
This is part two of a conversation between The Packer’s Tom Karst and Mike Mauti about Retail 101 principles.
THE PACKER/PMG: How would you explain the concept of gross profit to a lay person?
MAUTI: The most basic description for gross profit is sales, less cost of goods. For example, if you have a product that sells for $3 and has a $2 cost, your gross profit is $1, which is just three minus two. To determine gross profit margin, you take the amount of profit divided by sales revenue. In this case it would be $1 divided by $3, amounting to a gross profit margin of 33.33%.
THE PACKER/PMG: Margins vary between retailers, so not everybody’s after the same number necessarily, correct?
MAUTI: That is correct, there are retailers who cater to a customer’s need to pay a low price and there are retailers who cater to a customer’s need for high service. And often, on a macro basis, the store that caters to a customer’s need for low prices will have a lower margin. Plus, a high service grocery store usually also has a larger assortment, carrying more value-added products and organic products. Larger assortments bring with them higher costs requiring higher margins if they are going to achieve an acceptable contribution.
THE PACKER/PMG: How do stores look at the term “contribution” and how important is that element to their success?
MAUTI: Contribution is one of the most important metrics for an operator. Typically, a store would have a contribution margin target. Contribution is the profit that remains after the primary selling expenses of labor, shrink and supplies are paid for. A store manages these inputs to hit that contribution margin target. As an example, if a store has a 20% contribution margin target and they achieve a 35% gross profit margin, they will manage labor, shrink and supplies within a 15% window, which is just the difference between the two. To accomplish that might have an 8% labor spend, a 5% shrink spend plus 2% for supplies. They’ll move those levers as necessary in order to hit those targets. “Supplies” includes things like containers for your salad bar, bags, elastics for celery and romaine and cleaning supplies amongst other necessary items. But the big levers are labor and shrink. If the store notices they are falling behind on their contribution target, they might pull the labor lever a little bit, meaning they might cut back on a few shifts in order to maintain their contribution. But like everything in life, every action has a reaction, if you cut back on your labor, you can almost guarantee that in-store conditions are going to suffer. In this case, you run the risk of hurting a different objective, like sales. For a store operator, it can be a real balancing act.
THE PACKER/PMG: It’s sometimes a tug of war between two things that you want to get done?
MAUTI: Exactly, it’s an interesting business because there are so many levers and many of them are competing. Whether we’re talking labor versus conditions, assortment versus shrink, sales versus profit or price versus tonnage, you often focus on one, then start to see the other suffer. The good operators know when to apply pressure on each lever enabling the entire store to run smoothly.
This is similar really, to what we discussed last time regarding the genesis of the Retail 101 seminar. There are many levers in the produce business that are pulled on at many stops across the value chain, including at the store, at the office and at suppliers. In order to properly manage these levers, there needs to be a partnership between retailers and suppliers. As technology and the pace of change at retail have advanced, much of the information that used to get transferred between the two groups is no longer a part of the conversation. This makes it difficult to build the collaborative partnerships required for success in managing those levers.
THE PACKER/PMG: Sometimes you’ll hear from the supply side folks that retailers aren’t flexible to move extra volume during a shipping season. Is that a fair criticism?
MAUTI: I would say it is a fair assessment. There is, after all, the other side of the coin. While suppliers aren’t often given the opportunity to understand retail, likewise, retailers aren’t often informed about the needs of suppliers. Although it’s easy to just brush that off and say, “well, the buyer is king and whatever the buyer says goes,” but if you look at the value chain as a continuum of value-added processes that moves product from the producer to the end consumer, both sets of needs should be accounted for to get the best possible outcome for the customer. For example, if an apple grower has an over-supply of apples that could arrive to the end customer at a very aggressive, advantageous way, the retailer should be interested in that. But as the relationship between the two has become more impersonal over time, you often run into the situation where that apple opportunity isn’t always understood and consequently not acted upon.
THE PACKER/PMG: What about shrink? Is it getting better over time, or has it always stayed about the same? What is your sense about shrink?
MAUTI: In my experience, it’s pretty much stayed the same. There have been recent advancements improving produce shelf life helping to reduce shrink in some products but there has also been growth in very short shelf life products mainly in the value-added arena that is driving shrink up. Plus, there is an increasing demand for expanded assortments, including products from around the world that don’t have the same high turns that traditional staples have, again leading to higher shrink. I do think the impacts have cancelled each other out resulting in little movement one way or the other. In the seminar, I mentioned that a benchmark for shrink is about 5%. That differs depending on the type of format. A hard discounter would have a lot less assortment allowing for much faster turns. For this reason, shrink should be less in a discount business compared to a full-service retailer. If a store has a large assortment, with a large value-added set, they’ll probably have a relatively higher shrink.
THE PACKER/PMG: You say shrink can be related to assortment size and make-up. Do red flags get raised if the operator is struggling with shrink? Say if you’re a retail executive, how would you notice one of your stores has a problem with shrink? What’s the plan of action to address?
MAUTI: Yes, flags do get raised when a store has higher shrink than stores within the same banner, a retail executive would see this information on a shrink report. Generally, you would go to the store and review their operation. Since stores within a banner are operating with similar assortments you can rule that out as the root cause in this case. More times than not, it will be the operation itself. It could be the store layout, lack of refrigerated counter space or a lack of backroom space. But a lot of times the root cause can be found in a store’s ordering patterns. Often people who are less confident in their ability to project sales want to have lots of product around them to protect against out of stocks. This ordering method results in a very heavy cooler, meaning too much product. And of course, a heavy cooler means there’s a lot of days on hand in the store. That product might be on hand for three or four days before it’s sold. And that’s a best-case scenario, combine a heavy cooler with a missed projection and product could be on hand for a week or longer. This systemic problem contributes to high shrink. An expert (like a Produce Specialist) can look at a store’s ordering practices and quickly correct the problem. As mentioned, ordering isn’t the only issue contributing to high shrink. Stores with inadequate refrigerated space can experience shrink on fresh berries and other short shelf life products. Plus, bad rotation practices, bad culling practices, bad trimming practices, are all contributors to shrink at the store.
THE PACKER/PMG: Does organic have a higher shrink than conventional?
MAUTI: Usually, and that’s primarily because products that turn slower typically have higher shrink. Slow turns aren’t the only cause of shrink with organics, front-end shrink is another root cause. Sometimes you’ll see experienced cashiers working so quickly that they don’t recognize when a product is organic. Many times, these cashiers will have memorized the PLU codes of fast-moving conventional items and will use them from memory. The poster child for this issue is bananas. The PLU code for organic bananas is 94011, if a cashier knows 4011 as the banana code, they could ring through organic bananas at the conventional price of say 59 cents a pound instead of the correct organic price of say 99 cents a pound. That 40-cent difference ends up on the shrink line for an operator.
THE PACKER/PMG: That probably happens a good little bit.
MAUTI: Yes, it’s quite frequent. It’s hard to combat because it’s not the inexperienced cashiers who are making those errors; it’s the experienced ones who remember all the codes.
THE PACKER/PMG: So to combat the problem, do stores utilize a special sticker on organic product and provide education?
MAUTI: Exactly. Training, and as you said a larger visual cue than the small PLU sticker. Where I came from, we used big purple bands around the organic product. The industry has attempted to minimize the problem by packaging organics. It’s one of the reasons why you see more packaged organic products than bulk organic products.
THE PACKER/PMG: I know we just talked about the big sales of the July 4th holiday. Do operators plan for bumps like that in terms of how they’re looking at their budget?
MAUTI: Yes, there are sophisticated systems that most medium to large retailers use in order to help them with their labor planning. In simple terms, stores are required to input their expected sales for a particular time period and the system will provide recommended labor requirements to satisfy the anticipated demand.
THE PACKER/PMG: As a retailer, do you look at one item in produce that people shop for a lot and so keep it at a low price point, a price leader to draw shoppers?
MAUTI: There certainly is that line of thinking, particularly with regards to staple products like potatoes, bananas, tomatoes and lettuce. The thinking is these core products get on to customer shopping lists week in and week out and retailers want to be competitive on them. In fact, an important strategy, more often in place with the discounters, is to declare that they won’t be undersold on these key commodities. To ensure they remain true to this strategy they may even send store staff into their local competition to make sure they are competitive. Stores may use this tactic for key seasonal items too. For example, they may want to ensure they are competitive with pumpkins during Halloween. Just like the key commodities, stores may send staff members to their competitors to ensure they are competitively priced on pumpkins. Another similar strategy is for a retailer to match their competitors advertised prices. In this scenario, a customer only needs to show a lower advertised price and the store will match it right there on the spot. Both strategies are designed to enhance a retailer’s price leadership and draw customers.
THE PACKER/PMG: Is the area developed to fresh produce in the supermarket holding steady? Would you say it’s increasing? Do you see any trends out there?
MAUTI: I do believe there is still a long-term trend towards larger fresh departments including produce and scaling back on the center of store departments. However, you might see that the footprint for bulk produce isn’t increasing, but you’ll see expansion in value added sets, such as an area for produce butchers, salad bar sections, juice bars or other value-added services driving additional sales in the produce department. These types of services require more square footage than for a typical bulk produce department.
THE PACKER/PMG: When allocating space in a store do you think of it in terms of percent of square footage or in terms of percent of sales?
MAUTI: Both, actually. First, we would project anticipated sales and break that down into a sales per square foot metric. The truth is, there are so many different formats out there, particularly in a large retailer, each with different sales per square foot requirements. My experience is with a retailer that offered numerous formats and even operated different formats within those formats. When creating store designs, the types of departments in the store made a big difference, so too did the specific services within those departments. For example, when making design decisions for the produce department, we needed to answer questions like ‘Does this store require a salad bar?’ If it did, then it needed a little bit more square footage. For the meat department, a common question was ‘Does this store require a meat service case?’ Other questions across the entire store were: ‘Does the store sell clothes, and does it require change rooms?’, ‘Is there going to be a Medical Center?’, ‘Is there a full pharmacy within the health and beauty aids department?’ Answering yes to any of these questions meant space needed to be assigned for it, dictating the total square footage that would be allocated to each department. On the flip side, as space can be a limited resource, the available space could dictate which services will be included in each department. For example, if the box, which is our way of saying total footprint, is a little bit smaller, you likely can’t do everything you want with it and you might have to compromise by foregoing the dressing rooms, medical center or other extraneous services in the store. And sometimes that also means you just can’t fit in the salad bar.
THE PACKER/PMG: Is produce percent of store sales a standard number, such as 10, 12%?
MAUTI: It’s better to talk about it in terms of penetration to food sales. Lines are blurred in the retail business nowadays and there are a lot of stores that sell food plus a whole lot more. Putting a number on produce penetration would look very different to a mass merchant than it would for a neighborhood grocery store. To peg a number for produce penetration to total food though, 12% is a good benchmark. But like everything else, there is significant variability from store to store.
THE PACKER/PMG: How do retailers deliver on customer satisfaction?
MAUTI: Now that right there is the million-dollar question, those that can figure it out generally enjoy success. In practice, retailers are on a constant quest to deliver on the most pressing customer concerns. And they learn what they are most concerned about by asking them to complete customer satisfaction surveys. These surveys seek to gain insights on consumer perceptions of store cleanliness, pricing, assortment, quality of the fresh departments, plus a multitude of other aspects. These same surveys can also probe customer opinions of individual departments. A common, very simple customer satisfaction survey and the one I review in detail during the Retail 101 seminar is called the net promoter score. This survey used by many retailers asks just one question. ‘On a scale of one to ten, how likely are you to recommend this store to family and friends?’ Research has shown this is the only question you need to ask. Score high and the store can anticipate success, score low and the opposite is likely to be true.
THE PACKER/PMG: Sounds simple enough, but how will a store know what to fix if they score low?
MAUTI: The store will not know specifically what customers liked and didn’t like based solely on the net promoter score but there are basic fundamentals that a low scoring store can fix. For example, in many situations, the produce department is a bit of a bellwether for the rest of the store. If a store is scoring low on the net promoter scale, a lot of times just improving produce conditions can be the fix. Aside from that, many retail companies will augment the net promoter score question with a deeper dive into all the perceptions mentioned previously.
THE PACKER/PMG: As you look ahead, where should stores worry about erosion of their customer satisfaction and market share? Is it to the online guys or is it to dollar stores? Where’s the most worry directed toward at this point?
MAUTI: My view is the biggest threat is coming from the transition to online sales. Currently the only area of growth in the industry is coming from online. This will impact companies that are unable to keep pace and could spell trouble for a lot of independents. I’m seeing that the companies keeping pace are really embracing online but they’re doing it in a way that doesn’t alienate their existing customers. These companies are using an extensive omni-channel strategy, mixing online with instore very fluidly. I’ve seen stats that predict by next year 5% of all grocery purchases will be online and that by 2030 online will represent 20% of all grocery purchases. Even if you look at these far-reaching predictions, there’s still an overwhelming majority of business happening in the store. So while online is the biggest threat, retailers that focus too heavily on online could risk alienating their existing customer base, driving them to their competitors. The big challenge for independent retailers or smaller regional chains is to offer convenient services for a new generation of customers while still catering to their bread and butter customers. This is an area that larger retailers excel at.
Beyond the challenges associated with online what we’ve seen over the last, probably thirty years, is this blurring of the lines for grocery shoppers. There are many different stores that are selling products today that they never would have twenty or thirty years ago. And It’s not just alternative channels like convenience stores, dollar stores and drug stores getting into produce, it’s also the grocery stores that are encroaching on non-food products. It wasn’t that long ago that you could not get your drugs at a grocery store. But today, there’s very little that you can’t purchase at a grocery store. So alternative channels are a threat to traditional grocery companies. Even within the traditional grocery channel though, there are new and formidable competitors that are putting the squeeze on the incumbents. Extreme discount is growing across North America, not only adding more grocery square footage in a saturated marketplace but doing it with an offering that is difficult to compete against. So incumbent grocery companies find themselves in a situation where they are taking it from all angles; extreme discount grocers growing, dollar stores growing, Amazon encroaching on their business, and then all these other big retailers who are getting better at omni-channel and driving customer satisfaction, I could see how their heads would be spinning.
I’ve experienced these types of competitive pressures from new market entrants many times in my past life. Interestingly, we approached these situations in two different ways. We either mimicked the strengths of the new formidable competitor or we became entrenched, building upon and attempting to excel at our own strengths. Looking back at those experiences it’s not surprising that our successful defense strategies always focused on our strengths and not on trying to mimic our competitor’s strengths. To me the lesson in those experiences is that while it’s important to continuously innovate and not let new market entrants make you obsolete, it’s as important if not more so to keep focusing on what made you successful in the first place. If superior produce quality is your competitive advantage, chances are your customers won’t accept a decline in quality just because you are now delivering it to their homes.
STAY TUNED for Part Three for Produce Retail 101 with Mike Mauti