What are Grocery Store Profit Margins? (and How to Increase Yours)
When life gives you lemons, you squeeze them. But what do you do when you need more juice and you’ve run out of lemons?
Increasing profit margins can often feel like trying to squeeze more juice out of already-squeezed lemons. The options can feel limited when your profit is determined by dollar amount of goods sold versus dollar amount spent. However, there are a few key ways you can start to push the envelope forward and see better profit margins for your grocery store.
We’re going to walk you through a breakdown of what profit margins are, introduce you to key terminology, and then explore a few different strategies you can adopt to increase your store’s profit margins.
Profit Margins 101: What are They?
Your profit margin is the revenue you make when you sell an item minus the cost you paid to make or buy the item. To put it simply, your profit margin is the money you take home from a sale.
Grocery store profit margins often sit between one and three percent, but what they lack in percentage, they make up for in volume. Large grocery stores have small profit margins but huge sales volumes, resulting in satisfactory revenue.
A few key terms to understand include:
Gross profit margin:
Your gross profit margin is your total revenue minus total cost of goods sold.
Operating profit margin:
Operating profit margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. (Calculated by dividing a company’s operating income by its net sales.)
Pre-tax profit margin:
Pre-tax profit margins are used in accounting to measure the operating efficiency of a company. It’s a ratio that tells us the percentage of sales that has turned into profits or, in other words, how many cents of profit the business has generated for each dollar of sale before deducting taxes.
Net profit margin:
Measures how much income you generate as a percentage of revenues received (Net profit margin = Net income divided by revenue multiplied by 100).
Understanding how to calculate and analyze profit margins is a core piece to your success as a grocery store.
1. Automate Data to Develop Informed Strategies
Modern POS systems use technology to help you identify trends, patterns, and opportunities in sales. They can give you an overview of top-selling products and what isn’t moving from the shelves, giving you the opportunity to create campaigns or action plans accordingly.
Sales trends and patterns provide valuable and actionable insight. With a modern POS system, you don’t have to invest in an analyst or spend hours pouring over reports yourself to uncover this valuable information.
Price optimization is another key data point that can help you with improving your profit margins. Assessing inventory data will allow for changes to your pricing strategy. Price optimization pairs analytics software with the massive amounts of data collected by your in-store inventory and POS system.
Can you increase the price of certain popular products, or reduce the price of things not leaving the shelves? Utilizing data insights to help you determine what changes can be made, or what tests you can run in order to sell more, are great tactics to improve your profit margins.
2. Improve Private Label Strategies
Private label goods are products produced in-store or locally that can be sold at significantly higher margins than branded products. Popular private label goods include deli and bakery items, meats, pre-packaged food, and florals. These types of products are key, as private label goods are more profitable and result in higher profit margins. The challenge with a private label strategy is selling high-ticket items or lesser-known brands or products.
Grocers can take advantage of private labels by keeping their manufacturing in house — investing in your own manufacturing facilities. Local grocers can also consider working with local artists, or selling locally-sourced food that can be sold at a higher price.
Data and analytics can surface valuable customer insights to support product development and strategic pricing, and employing both these strategies can really help you find more products to sell that have higher profit margins.
3. Buy-Online-Pickup-In-Store (BOPIS) Strategies
E-commerce is becoming an increasingly popular form of grocery shopping. Free shipping and delivery are helping e-commerce gain steam, and buy-online-pickup-in-store (BOPIS) strategies have become a popular option for grocers to increase revenue. The convenience of a BOPIS strategy can offer customers additional incentive to purchase, simply because of how easy it is to make purchases.
A BOPIS strategy is only as good as the technology that supports it; functionality and efficiency are key in keeping the process fast. A POS system that offers a robust inventory management system can help you make sure products are in stock, but can also help you communicate to customers what you might not have. If the process is inconvenient or not enjoyable to customers, you run the risk of losing their loyalty.
Offering a buy-online-pickup-in-store service also means that you may be able to increase sales without having to invest in more labor or hire more people. It’s the perfect way to create more revenue streams, but not have to manage the logistics or additional spend associated with other offers like delivery. When executed correctly, it can be an incredibly sustainable and scalable way to increase profits.
Leveraging Profit Margins Without Affecting the Customer Experience
Shoppers of today aren't just looking for great deals and prices — they expect the experience to be efficient and enjoyable. Locally-sourced products and goods are a great way to introduce high-ticket items with high profit margins.
Combining that with technology and systems that can give you product insight and buyer data can help with product sales, and inform your pricing strategy on specific products. Offering buy-online-pickup-in-store can also help with volume sales without forcing you to invest in more labor or operational costs.
The data analytics and inventory management offered by a robust and modern POS system can enable a number of strategies that can help with increasing your store’s profit margins. They can help you communicate stock levels to online customers to ensure a positive BOPIS strategy, and analyze important product data points to optimize sales for private label strategies. There are a number of different ways to take advantage of modern technology to boost store profits.
IT Retail is a leading platform and full-scale POS system that can give you the buyer insight and product data that you need to push your business to the next level. IT Retail has helped countless grocery stores get the right technology, systems, and processes to grow their business, and if that sounds like you, we’re here to help.