Grocery store profit margins are notoriously small, averaging between 1.5% and 3.5%. This means small grocery stores need to seize every opportunity they can find when it comes to reducing operating costs.
But that can be easier said than done. Many grocery stores don’t know where to start, either due to a lack of visibility into store performance or a lack of time to dive into the numbers. But with rising inventory and location costs, your business can’t afford to do nothing.
We’re here to help. With over 30 years of experience collaborating with independent grocers and food markets, we’ve identified some common areas to cut grocery store operating costs without making your day-to-day more complicated or sacrificing the customer experience.
Top Expenses for Grocery Store Businesses
Before we dive into fixes, let’s lay out the top expenses that grocery stores incur on a month-by-month basis:
- Inventory: Supermarkets stock tens of thousands of items, so it’s no surprise that inventory makes up the single highest operating cost.
- Labor: Labor and staffing costs will be 7% to 25% of your total costs, depending on the size of your store.
- Rent: The average commercial rent in the U.S. is about $29 per square foot/year, meaning even a relatively small grocery store will pay tens of thousands per month.
- Utilities: Beyond keeping the lights on, grocery stores also have to carefully maintain temperature and constantly run refrigerators and freezers to preserve their perishable inventory.
- Spoilage and shrink: While no one wants to talk about it, most grocery stores experience an average 2% to 4% total loss due to shrink or spoilage, with the highest losses resulting from fruit and vegetable spoilage (around 12%).
- Maintenance and repairs: According to a recent report, grocery stores spend about $1.71 per square foot on facility repairs and maintenance. That equates to around $68,000 per year for a 40,000 square foot store.
While some of these costs are harder to control than others, the good news is that there are opportunities to reduce expenses in all of these categories.
7 Expert Tips To Reduce Your Grocery Store’s Operating Costs
As the cost of inventory, rent, and everything else increases, your first instinct might be to raise your prices to match. While some inflationary pricing is inevitable, a small grocery store simply won’t be able to compete with bigger corporate chains on price alone — and raising prices indiscriminately might just send your customers running into the arms of the enemy.
Instead, follow these tips to reduce your grocery store's operating costs.
1. Use Inventory Software To Optimize Stock Levels
Inventory will inevitably be your biggest overhead expense, making it the ideal place to start when reducing your operating costs.
If you’re not already, take full advantage of the inventory management system on your point of sale (POS). An inventory management system not only gives you better visibility by updating stock levels in real time, it also collects metrics you can use to improve merchandise planning and ordering strategy.
Here are some ways you can utilize your inventory management to reduce costs:
- Set low-stock alerts for staple items based on average sales volume and supplier lead time — this way, you can reorder items at the right time and in the right quantities to avoid stockouts or overstocking.
- Track inventory costs, item popularity, and profit margin per supplier to see if you’re getting the best deal and to help negotiate better rates.
- Identify bestsellers along with dead stock to make better decisions around your discounting strategy and product selection.
- See inventory turnover rates to know if your sales and stocking processes are keeping up with demand.
These are just a few ways that an integrated inventory management system helps you reduce inventory costs.
2. Reduce Manual Labor
Motivated and helpful employees make small groceries stand out from big chains. However, the cost of quality labor is going up, and it’s important to ensure you’re not overpaying.
It’s very important to note we’re not advocating for paying your workers less, but instead to find opportunities within your processes to reduce unnecessary costs.
Think of all of the various tasks your employees do on a given day, from manning the checkout aisle and stocking shelves, to creating purchase orders and preparing pickup orders.
How many of those tasks are being done by hand, and which could you potentially save time on by automating or finding ways to make them more efficient? A grocery store POS system helps reduce manual labor with features like:
- Consolidated vendor management and simplified purchase order creation
- Mobile barcode scanners to speed up inventory counts
- Low-stock alerts to reduce time spent manually walking the aisles and checking stock levels
- Unified order management workflows to ensure online orders, third-party orders (InstaCart, DoorDash, etc.), and other orders are handled at the right time, and customers are automatically notified of order status
- Streamlined invoicing that allows you to update your inventory against an invoice with a single click, reducing the need for manual data entry
- Integrated scales and barcode printers to weigh and print scannable labels
Making your employees’ jobs easier saves you money in labor costs while freeing up more time to spend with customers.
3. Optimize Your Staffing Schedule
In addition to streamlining processes, you can also use the reports on your POS system to identify your peak hours to ensure you’re not putting extra people on staff when they’re not needed.
If you really want to dive into the weeds, you can calculate your sales per labor hour (SPLH), which measures how much money you’re making in sales versus what you’re paying in labor. The basic formula for SPLH is:
Calculating SPLH is useful because it gives you an unbiased look at your return on investment (ROI) from the amount you spend on labor. A low SPLH number may indicate you have too many people on staff at those times.
4. Maintain and Check Your Refrigeration Units Regularly
About 33% of all maintenance costs at a grocery store are spent on refrigeration units — and for good reason. Experts estimate that refrigeration accounts for about 40% of the total energy costs in your store, so ensuring those fridges and freezers are working as efficiently as possible is a key way to reduce energy costs.
Here are some things you can do regularly to avoid more costly repairs and replacements:
- Regularly empty and clean out your refrigeration and freezer units, taking special care to clean the cooling coils at the back of the units to encourage more efficient heat transfer.
- Check the temperature in your fridges to make sure it’s between 35° and 38° Fahrenheit. Anything significantly different from that temperature might indicate a fridge is too full or is in need of repairs.
- Routinely check the condition of door seals and replace them as needed. Worn seals will cause the freezer or fridge to work much harder to keep things cool, both increasing costs and reducing the lifetime of the unit.
Remember to call in repairs for even small issues. It’s far better and less disruptive to routinely pay for maintenance than to put it off and wait for the unit to fail.
Bonus energy tip: In addition to using energy-efficient LED lighting to illuminate your aisles, consider installing motion sensors to dim or turn off lights in lesser-used areas outside of peak hours.
5. Use the FIFO Method
Spoilage is a unique problem that grocery stores and supermarkets deal with far more often than other types of retailers. As a result, one of the best ways to reduce losses of perishable items is to follow the first in, first out (FIFO) stocking method.
Put simply, the FIFO method ensures that the first items you receive in the stockroom are the first to be sold on your shelves. In other words, using FIFO, you prioritize stocking and selling the fridges with all of the dairy you received on Monday before rotating in the new dairy shipment that came in on Thursday.
This method helps you sell items when they’re at their freshest and to avoid products languishing and going bad in the stockroom.
Your inventory management system helps you follow the FIFO method by tracking items based on when they were received.
6. Rightsize Your Produce and Perishable Displays
Having large, colorful displays in your produce section is a great way to create a strong first impression with customers. Unfortunately, if your produce displays don’t match demand, they can affect your bottom line.
Many small grocery stores buy produce bins that are bigger than they need, resulting in employees putting out items earlier than they should just to keep a display full. If this sounds familiar, the good news is that the solution isn’t to throw out your bins and buy new ones.
Here are some cost-effective ways to rightsize your displays and cut down on spoilage losses:
- Buy shelf and case dividers to split up larger bins into multiple sections, reducing the need to buy entirely new displays.
- Use your larger bins for produce that has a long shelf-life (onions, garlic, potatoes, etc.) and smaller bins for items that perish more quickly (meat, fresh berries, apples).
- Use the reports on your POS system to understand your customers’ preferences and base your display sizes on actual customer demand.
Rightsizing your produce and meat displays not only helps cut down on spoilage losses, it lets you put a wider variety of items in front of customers — a win-win!
Related Read: How To Increase Fresh Produce Sales: 5 Tips & Tools
7. Use a Consolidated, Cloud-Based System
Even for small, family-owned businesses, using modern systems is essential for creating a great customer experience and keeping up with the competition. However, many grocery store owners are scraping by using older systems or with a hodgepodge of different software.
Not only is it much more complicated to get things up and running when things go wrong, but having disjointed or outdated systems can contribute to higher technology costs.
If you’re using an older system, maintaining servers and software on-site can be costly, and a lack of updates can increase your risk of fraud, especially as your store grows or you add sales channels (grocery e-commerce, curbside pickup, etc.).
Instead, consider upgrading to a modern point of sale system. Today’s grocery store POS systems do more than process payments — they also include inventory management systems, reporting tools, employee management and tracking, vendor management, and everything else you need to run the store.
In other words, why have five systems to run your store when you can have just one? While most systems have a monthly cost instead of a one-time licensing fee, they’re also constantly updating with new features, ensuring your store stays up to date with the latest trends and tech.
Take Control Of Your Grocery Store Operating Costs With a Trusted Grocery Store POS
Small grocery stores are essential parts of our communities, and finding practical ways to improve cash flow is vital to weathering economic uncertainty and finding long-term success.
While we might be biased, we truly believe that the right technology gives you the visibility you need to make smarter, more strategic decisions about pricing, staffing, and other costs.
IT Retail is built on over 30 years of experience working with independent grocery stores, corner shops, and international markets. Our tools are specifically tailored to the grocery industry, giving you the best tools available — without the fluff.
To see how much you can save by switching to IT Retail, try out our ROI savings calculator today.
by Margaret Thacker
