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.
Before we dive into fixes, let’s lay out the top expenses that grocery stores incur on a month-by-month basis:
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.
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.
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:
These are just a few ways that an integrated inventory management system helps you reduce inventory costs.
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:
Making your employees’ jobs easier saves you money in labor costs while freeing up more time to spend with customers.
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.
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:
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.
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.
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:
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
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.
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.