Imagine you’re shopping at a wholesale supermarket like Costco or Sam’s Club. You see a great deal on a large pack of ribeye steaks (15 lbs. for $7 per lb!) that you can’t pass up — the only problem is, you don’t have the freezer space for it. You only end up using four lbs. of your steak before the rest goes bad.
Suddenly, what seemed like a great deal ends up being a big loss. This is the exact scenario small grocery stores deal with every day when handling minimum order quantities (MOQs) with their suppliers — only at a much larger scale.
To keep costs down and profit margins high, store owners must constantly strike a balance between negotiating a good deal with a supplier without overcommitting to stock they can’t sell fast enough or don’t have the storage space for.
In this article, we’ll go into the basics of minimum order quantities for grocery stores — what it is, how to calculate it, and some tips for reducing your costs.
Minimum Order Quantity: What It Is and Why Suppliers Use It
The MOQ is the smallest number of items that can be purchased from a supplier in a given purchase order. This threshold is set by suppliers to minimize the costs of shipping merchandise to grocers, especially for perishable goods, which typically require refrigerated trucks to transport.
Put another way, suppliers want to reduce the amount of time and effort spent on preparing each shipment, so the more they can do at once, the better.
For example, it’s not worth the labor and transportation costs to pick, prepare, and ship 10 boxes of cereal that only cost $3.50 apiece. However, if a grocer orders 100 boxes of cereal and other dry goods totaling $500, the supplier can earn back its costs and turn a profit.
Minimum order quantity often varies between different suppliers or even different product types. Suppliers may also adjust MOQs for seasonal fluctuations and peak periods. MOQs aren’t all bad news for grocery stores, however, since ordering certain items in bulk can help keep inventory costs low.
Common Grocery MOQ Challenges
MOQ is a common requirement for many suppliers, but it can create real logistical headaches for grocery stores. Here are some of the most common small grocery MOQ challenges:
- Limited storage space: Unlike a Walmart or other giant chains, most family-owned stores have storage limitations when it comes to having extra inventory on hand — meaning a high MOQ could result in a stockroom overflowing with slow-moving, specialty items.
- Spoilage and waste: A high MOQ for perishable items can also lead to having more of certain products than a store can reasonably sell before they go off — the result is that a certain percentage of these orders go bad and are a total loss.
- Product variety: Small grocery stores thrive on having a wide variety of products — but with limited shelf space and higher MOQs, store owners may have to sacrifice variety for the sake of cost.
- Seasonal fluctuations: The grocery industry is highly seasonal, and failing to proactively address MOQ requirements with suppliers can end up creating cash flow problems when demand for certain products suddenly fluctuates.
- Specialty products: Some specialty products or international suppliers have high MOQs, forcing stores to choose between authentic, high-quality products and using a lower-cost (and lower-quality) alternative.
- Language barriers: International markets and other specialty markets that deal with international suppliers can sometimes hit a snag when negotiating terms due to language and cultural barriers.
- Variable lead times: With thousands of different products on the shelves, most grocery stores are also dealing with a large number of suppliers, each with different lead times, requiring careful logistical planning.
With all of these variables at play when creating purchase orders, it’s no wonder that inflexible MOQ can become a huge drag on a grocery store’s operating costs.
How To Calculate Minimum Order Quantity
Suppliers generally set MOQ, so what do we mean when we talk about calculating your MOQ as a grocery store? In short, calculating MOQ at the store level helps you determine the lowest quantity you need to purchase to maintain a profit.
This will help with negotiations and also ensure that you work with suppliers that align with your store size and sales.
There’s no single best way to calculate what an ideal MOQ, but here are the basics:
- Calculate demand: Use the numbers on your point of sale (POS) system to look at your historical sales data and demand forecasts to understand how much of a certain product or product category you’ll sell over a given period.
- Account for storage: It’s important to know both how much you can sell over a given period and how much physical space it will take up (and storage costs). If you can use sales data to show that sales are strong for a certain item, you might be able to negotiate breaking up a larger shipment into smaller, more manageable chunks.
- Determine your costs: It’s important to understand how many units you’ll need to sell to turn a profit. If a supplier’s MOQ is 25 units and you only sell 10 every three months, is the cost of the item, shipping, and storage, worth the eventual profit? Or are you creating cash flow problems by committing to more units than you need?
Understanding your fixed cost, profit margins, sales volume, and storage limitations will help you make smarter, more confident ordering decisions.
Additionally, if you sell any items in bulk to wholesalers or other parts of the supply chain, you will need to calculate your own MOQ costs to understand how many units you need to sell at a given time to offset labor, storage, and other overhead costs.
Tips for Cutting Waste and Lowering MOQ Supplier Costs
Keeping inventory costs down and eliminating unnecessary costs is the foundation of building a strong, long-term business. However, that can be easier said than done.
It’s worth noting that if you’re starting a grocery business for the first time, some of these tips and negotiation tactics won’t be immediately available to you. You’ll need some time to get reliable sales numbers — and the reality is, it will be difficult to effectively negotiate with your suppliers until you have some history working together.
That said, here are seven things you can do to reduce your supplier costs, whether you’re opening a store for the first time or are an experienced owner looking to decrease your overhead.
1. Take a Deep Dive Into Your POS Data
The first step toward understanding how to navigate suppliers’ order requirements is to know your own store. Until recently, having an easy way to visualize store data was out of reach — luckily for you, that’s no longer the case.
Modern grocery store POS systems automatically generate data every time you create a PO, receive an invoice, or ring up a sale — and the same systems can take that data and visualize it for better decision making.
Specifically helpful for negotiating rates and choosing suppliers are metrics like:
- Average sales volume over time: See how many units of an item you sell and whether there are spikes in demand during certain times of the week or seasonally.
- Profit margin: Understand how much you’re earning in profit per sale and how much certain items contribute to your overall profit margins.
- Spoilage/shrink reports: Understand which departments or product categories are contributing the most to losses due to spoilage or improper storage.
- Inventory turnover: See how long it takes for you to sell a given inventory item entirely, so see how much is being tied up in dead stock.
Getting an unbiased view of your store performance is the first step in setting reasonable expectations with suppliers on how you can sell.
Over time, this data can be a powerful tool in negotiations because it gives suppliers a clear, objective view of your store’s customers and overall health.
For example, you might want to order fresh refrigerated pasta in a smaller volume because you have limited cold storage. At first, the vendor may want to charge a higher per-unit price for a smaller order — but if you can show them that sales of these items are consistently high, they may be more willing to cut a deal since you seem like a reliable long-term partner.
Similarly, accurate sales data will help you discuss flexible order thresholds for perishable items, allowing you to set up smaller, but more frequent orders to avoid unnecessary spoilage.
Related Read: 10 Key Performance Indicators for Grocery Stores
2. Pay a Higher Price per Unit for High-Margin Items
Many small grocery stores pride themselves on carrying a selection of high-quality or specialty items that you can’t get at a big-box competitor. However, negotiating a reasonable MOQ for these items can be tricky, especially for international markets or food markets selling imported goods.
In these situations, it’s a good idea to look at your product pricing and profit margins. For slower-moving but higher-margin items, it might be worth taking a small profit hit to avoid dead stock and free up storage space.
Paying a high price at first doesn’t mean you’ll need to forever — especially for suppliers of rare and specialty goods. If you can prove that your store is a valuable partner for getting their products in front of customers, they may be willing to negotiate a lower price down the line.
3. See if Suppliers Will Do a Trial Order
Ordering in bulk is a great way to get a preferred rate on popular items, especially staples that fly off your shelves. However, bulk orders aren’t always ideal when it’s a brand new supplier or a brand that you (and your customers) aren’t familiar with.
For these scenarios, see if your supplier is open to a trial order with a lower MOQ. This allows you to monitor sales information for a smaller selection of items to see if their products are a good fit for your store. If they are, make it clear that you intend to increase the size of the order and form a long-term partnership.
It’s worth noting that a trial order is a bigger risk for a supplier, so it’s particularly important to back up your request with data and anecdotal evidence. Show them why their products would be a good fit for your customers and the potential for profits down the line.
Related Read: 10 Supermarket Pricing Strategies To Try Today
4. Build Strong Relationships With Local Suppliers
Having redundancy among your suppliers is always a good idea, especially in the face of supply chain disruptions. The farther a product has to travel, the more chances there are for something to go wrong.
Not only that, but the farther a product has to travel, the more expensive it is for the supplier to send it to you. To top it off, local vendors often have access to unique products that you can’t find anywhere else, helping you further differentiate your store from bigger competitors.
This is why we recommend building relationships with local wholesalers and food suppliers. They may be willing to offer lower MOQ because the products aren’t traveling as far (or you might even be able to pick them up yourself). It also doesn’t hurt to show up in person to establish that you’re invested in their business as a partner.
Local suppliers can also be a godsend when there are larger national disruptions, and a solid relationship might just get you out of a jam in the event of a major weather event, bad crop, or other supply chain problem.
5. Understand Your Grocery Store’s Seasonal Trends
When is the demand for a whole turkey highest? Most of us know instinctively that it spikes around November and starts to tail off in January — if you stocked the same number of whole turkeys in your store in March as you do in November, you’d probably end up with a lot of unsold turkey, right?
While the above example is obvious, there are wild swings in demand for all kinds of products seasonally, and these trends aren’t universal. Different communities can have vastly different relationships with the food they buy season to season, and understanding your store’s unique seasonal trends is key to negotiating MOQ with suppliers that make sense.
By using your POS data for demand forecasting, you can anticipate these shifts so you can talk with suppliers and avoid being saddled with a high MOQ commitment that doesn’t match your sales volume.
Many suppliers will adjust their MOQs to match seasonal trends, lowering order thresholds during out-of-peak seasons to boost sales. Again, the supplier’s seasonal changes may not match yours.
6. Group Your Orders To Keep Costs Lower
One of the easiest ways to reduce costs (and keep vendors happy) is to buy more products from the same supplier. In many instances, a supplier will be willing to lower the MOQ of certain items if you order other stock to make up for it.
Suppliers may also be willing to lower the per-unit price for certain items if the total order is larger. Talk to your suppliers to understand if their MOQ threshold is on a per-product basis or per order.
After all, it’s not like you’re giving them less business — and leveraging a single supplier for more items can be a good way to build a solid relationship.
However, a word of warning: Make sure you only do these types of bulk orders with suppliers you really trust. By putting more eggs in one basket, you risk a bigger disruption if something goes wrong with the order.
7. Plan Promotions Around Popular High MOQ Items
Sometimes, bulk ordering isn’t just good to keep inventory costs down — it can be part of a promotional strategy. Run basket analysis on your customer data to see if there are certain types of items that customers tend to buy in bulk or together with other types of products.
Seeing these types of items might provide you a chance to negotiate a higher MOQ at a lower per-item cost, which you can then turn around into a buy one, get one (BOGO) or combo offer (or both). If an item is popular enough, ordering extra isn’t as much of a burden because it can be used for multiple promotions — and because of the lower cost, you’ll turn higher profits as a result.
Of course, sometimes we get saddled with a high MOQ commitment that we didn’t hope for. Smart promotional strategies can help move that inventory and prevent these large orders from going bad or eating up space in your stockroom.
Negotiating Better MOQ With Suppliers Starts With Accurate Data
While corporate chains and big-box stores can afford to shrug off supplier price increases, many small grocery stores cannot. Having accurate sales and inventory data is essential for smarter merchandise planning and a better understanding of your customers’ wants, and is an essential negotiating tool.
IT Retail is a specialty solution built for small grocery stores and international markets, providing independent and family-run stores with the powerful solutions they need to reduce costs and stay competitive.
With in-depth reports on item sales, supplier performance, seasonal trends, spoilage sources, and more, you’ll have the data you need to demonstrate your value, make better deals with suppliers, and negotiate minimum order quantities that make sense.
Try our Build and Price tool today to create your perfect grocery store POS system.
by Margaret Thacker
