Wednesday, March 19, 2008

Grocery Stores Cut Costs to Keep Profits

Supermarkets have come to dominate the grocery business. The large variety of food and competitive prices provide consumers convenience and good food on a budget.

But, not all supermarkets are equal. Less efficient chains are forced to charge higher prices to survive and consumers will notice a difference in prices between competing supermarket chains. Comparison shopping can save the consumer money. Different stores and chains also differ in the variety and quality of the products they sell and consumers may find that they can get more variety and better quality with little or no change in what they pay by switching stores.

Despite the low profit margins, there is no shortage of new entrants into the market. K-Mart and Wal-Mart have added groceries to their existing lines and large volume operations, like Costco, keep expanding their food lines. Specialty food stores and organic food stores have recently been aggressively expanding and drawing more customers into their niches.

How do these grocery operations manage to survive and keep expanding? The answer is mainly by continually cutting costs. Aggressive use of technology and better use of labor help to cut costs directly as well as provide information needed to further reduce costs. When the clerk scans an item at the checkout more than the price is recorded. Information is immediately sent to a central computer database at the warehouse indicating a reduction in stock for that item. When sufficient quantities of the item has been sold, a report is automatically generated informing the warehouse to ship more to that store - this insures that the store will neither run out of fast moving items nor end up storing large quantities of slow moving items. This data, coupled with data gleaned from frequent shopper cards, is also studied to determine the best mix of foods for particular stores in the chain. That is why there is some variation in what is offered by different stores in the same chain.

Not only are the big supermarkets utilizing these lean operation techniques but newer competitors are also using them and expanding. I was recently surprised to discover an organic food market that offers a large variety of produce at very competitive prices. I am personally indifferent as to whether a product is organically grown or not. But I do like fresh fruits and vegetables and this store, in a addition to organic and other specialty packaged foods, has a large variety of high quality produce at prices that meet or beat those of other supermarkets in the area. Proving once again that the consumer is the beneficiary of all of this frenzied competition in the grocery business.

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