Guide

The Complete Guide to Grocery Store Profitability

Let’s face it: Achieving profitability as an independent grocer gets harder every year.

But succeeding despite stiff competition from big-box supermarkets, rising inventory costs, and the constant threat of spoilage and shoplifting isn’t impossible — you just need the right plan.

In this guide
we’ll share everything you need to survive and thrive as a small business grocer.

Here’s a peek at what we’ll cover:

Average overall grocery store profitability and margins by department

Inventory management and pricing strategies to help you compete and win

How to cut costs and manage cash flow without sacrificing your customers’ experience

Must-know KPIs for grocery store profitability and how to track them

Step-by-step plans for new and veteran grocers to achieve financial health

Grocery Store Profitability: The Industry Average

First, let’s compare your grocery store’s profitability to the industry average.

Grocery stores have notoriously thin net profit margins, usually ranging from 1 to 5%. This means that $1,000 in revenue generally yields between $10 and $30 in profits after you account for operating expenses.

However, don’t think of these average numbers as the limit to your grocery store’s profitability. Adjusting your product selection, marketing approach, pricing strategy, and more can help you exceed them.

Grocery Store Profit Margins By Department

Each of your grocery store’s departments plays a different role in shaping your bottom line.
In other words, some product categories make more money than others.

Let’s look at the average gross profit margin by product category:

Produce (25-40%)

Produce offers high profit margins, especially if it’s organic avocados or local tomatoes that customers pay premium prices for. However, you have to weigh these higher profits against the risks of spoilage and inconsistent quality.

Meat (20-35%)

Meat is your next most profitable category, with higher margins if you offer custom cuts at a true butcher counter. Keep in mind that you have to budget for specialized coolers and tools for proper meat inventory management.

Dairy (15-25%)

Dairy products like milk, cheese, butter, and yogurt are fairly profitable, but they require careful inventory management to prevent waste.

Prepared foods (35-50%)

Customers will pay more for convenience, so prepared foods like deli sandwiches, rotisserie chickens, pre-made sides, and fresh-baked goods can be your most profitable category if you offer the right options.

Non-perishable items (5-15%)

Canned goods, cereals, bottled drinks, and other shelf-stable essentials in your center aisles have the lowest gross profit margins, but they often have higher sales volume than your other perishable items.

Stop Losing Money on
Inventory Mistakes

Poor inventory management is one of the biggest hurdles to healthy grocery store profit margins. These mistakes seem small, but over time, they chip away at your bottom line and skyrocket your stocking expenses.

Here are five inventory problems to watch out for →

Spoilage is most common in your perishable departments. If you don’t label and rotate batches of dairy, meat, or produce properly, these high-margin items will spoil before you have the chance to sell them.
Stockouts happen when you run out of your best-selling products, and they’re generally the result of manual inventory counts and mistakes. If they happen too frequently, you’ll see a dip in revenue and customer satisfaction.
Ordering issues due to inadequate inventory forecasting can lead to overspending and waste or stockouts, depending on whether you order too much or too little.
Overproduction of baked goods and prepared foods is a waste of work hours and money. If customers don’t buy these items while they’re still fresh, you’ll have to throw them away at closing.
Checkout mistakes lead to minor discrepancies in your sales and inventory records — but over time, they can add up and contribute to spoilage and stockouts. These mistakes are most common with weight-based items like meat, deli products, and produce.

These issues create stress for you, limit your customers’ options, and hurt your grocery store’s profits — but they don’t have to.

Our number-one tip to eliminate these mistakes is to invest in grocery inventory management software. This powerful tool takes the burden of manual inventory counts and record keeping off your shoulders by tracking your stock levels in real time.

That way, you can easily see exactly what you have in stock, when it expires, and how long it should last based on average customer demand for more accurate inventory forecasting.

For example, let’s say you’re struggling with spoilage and stockouts in your produce department. This is one of your most profitable departments, so stopping these issues is crucial.

With inventory management software, you can take a closer look at which types of produce are at risk of which problem. Your organic options might be flying off the shelves — but your traditional produce offerings are wilting before they sell.

With this data, you can adjust your ordering approach to meet your customers’ growing demand for organic produce and decrease spoilage and waste.

Cut Costs the Smart Way

Inventory mistakes are only one contributor to excessive grocery store operating costs. You might be losing money in other, harder-to-spot ways.

Let’s look at a few common culprits of high spending and how to address them:

Staffing

Does your staff schedule look the same on your busiest and slowest days? Use your POS system’s reports to identify the peaks and valleys in foot traffic and sales, then use this data to schedule your employees. Consider investing in a few self-checkout machines to save money on staffing and shorten checkout lines during peak sales times.

Shoplifting

Sales and inventory reports not matching up? You could have a theft problem on your hands. Security cameras and staff training can deter and prevent shoplifting, and a POS system with security features and employee permissions settings can reduce the risk of internal theft.

Outdated systems

Do you feel like you’re overpaying for your POS software, hardware, and payment processing? You might be! Check out our ROI savings calculator to see if upgrading your POS system could cut your operating costs in the long term.

Staffing

Shoplifting

Outdated systems

Stay Out of the Lowest Pricing Race

One of the biggest mistakes independent grocers make is trying to compete against big-box supermarkets on price — but grocery giants like Walmart have more resources and more stable supply chains than your small store.

They can afford to take risks and lose money on some of their sales. You can’t.

Instead, focus on setting your store apart in other ways — whether it’s your perfectly curated product selection, unbeatable customer service, or community-oriented business model. Let's look at four steps to take the guesswork out of setting prices in your grocery store:

1. Visit your competitors

While you should avoid the race to the bottom, your prices should still fall within a range of customers’ expectations. If your prices are way above your competitors’, you’ll drive shoppers away.

2. Use your POS system data

Instead of setting prices that “feel” right, dig into your grocery POS system’s data, analyzing the wholesale cost and demand for each of your products.

3. Charge smart markups

Use this information about cost and demand to set a markup for each individual product and category. For example, you might charge a higher markup for your customers’ favorite products, but offer lower prices on underperformers to increase turnover.

4. Stay flexible

Your prices aren’t set in stone! Analyze and adjust your prices regularly, and consider using electronic shelf labels to maximize profits through a dynamic pricing strategy.

Manage Cash Flow Like a Pro

What’s the most important ingredient for grocery store profitability? The answer is healthy cash flow.

Poor cash flow can become a vicious cycle. If there isn’t enough cash flowing into your accounts, you won’t be able to pay your vendors on time. Without adequate inventory, you’ll see another drop in incoming revenue — causing even bigger financial problems.

Here are a few of our top tips to help you escape and stay out of the negative cash flow loop:

Use promotions strategically

Need a quick influx of cash? Launch a promotion on one of your underperforming or near-expiry products. This is a win-win since it boosts revenue and increases inventory turnover.

Leverage instant payouts

Struggling to cover an upcoming bill? Look for a payment processing provider that offers instant payouts. This feature lets you transfer revenue immediately into your business’ account to pay bills and avoid expensive late fees.

Track your finances

Feel like cash flow issues sneak up on you each month? Try keeping a closer eye on the money flowing into and out of your business with your POS system’s accounting features. Some systems even integrate with dedicated accounting software like QuickBooks for even more in-depth financial tracking.

Use promotions strategically

Need a quick influx of cash? Launch a promotion on one of your underperforming or near-expiry products. This is a win-win since it boosts revenue and increases inventory turnover.

Leverage instant payouts

Track your finances

5 Essential Tools for Grocery Store Profitability

Now, let’s make sure you have the right tools to put these strategies into action.

If you’re already struggling with profit and cash flow issues, it might sound counterintuitive to invest in a new grocery store technology, but when used properly, these tools should pay for themselves.

Let’s look at five things you need for smooth, profitable grocery store operations:

All-in-one POS system

First, we recommend investing in an all-in-one POS system specifically designed for grocery stores. This powerful tool should help you manage perishable and weight-based inventory, set prices, track profit margins, and make data-driven decisions to grow your business.

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Barcode scanners

Barcode scanners are a must-have for accuracy at the checkout counter and during inventory counts. Instead of manually entering items, your employees can simply scan each product’s barcode, ensuring every sale is reflected in your records.

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Integrated deli scale

To reduce waste and improve inventory management in your butcher and deli department, you need a deli scale and label printer that integrates seamlessly with your POS system. This eliminates the need for manual calculations and ensures your customers are always charged the right price for weight-based items.

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Self-checkout machine

Adding a few self-checkout kiosks alongside your traditional cashier lanes creates a more convenient shopping experience and reduces your staffing costs.

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Electronic shelf labels

Adopting a dynamic pricing approach with electronic shelf labels can help you bring in more revenue during your peak sales times. When your store is busiest, consider raising your prices by just a few cents. These small increases can have a big impact on your overall revenue.

Establishing a Baseline: How To Measure
Your Grocery Store’s Profitability

Before making a plan to boost your grocery store’s profitability, you need to establish a baseline and set some data-driven goals.

Let’s look at seven key performance indicators (KPIs) to track:

Cost of goods sold (COGS)

is the total amount you spend on stocking your grocery store, including wholesale prices, transportation, and storage.

Gross profit margin

represents how much profit you make on each product before factoring in your other operating expenses. It’s calculated by subtracting COGS from your overall revenue.

Net profit margin

represents how much profit you make on each product after accounting for all of your inventory and operating expenses. This is the most important number to look at when evaluating your grocery store’s profitability.

Average transaction value (ATV)

shows how much customers spend during each visit to your grocery store.

Average basket size

shows how many products customers generally purchase during each shopping trip.

Shrinkage rate

reveals the percentage of your inventory impacted by issues like theft, spoilage, or other damage.

Customer retention rate

represents how many one-time shoppers become loyal customers at your grocery store.

Category Profitability

reveals how profitable each of your grocery store’s departments and product categories are.

A Step-by-Step Plan To Transform Your Grocery Store's Bottom Line

You’ve got the tools and knowledge — now it’s time to make a concrete plan to increase your grocery store’s profitability.

For Brand-New Grocery Stores

Still planning your grocery store’s grand opening? Right now is the perfect time to lay a solid foundation for profitability.

Here are five steps to give your new business the best chance of financial success →

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Draft a business plan with a comprehensive overview of your projected startup costs, operating expenses, revenue, and profits. This document will give you a roadmap to follow as you make critical decisions about your store’s future.

Evaluate multiple vendors and negotiate contracts to get the best deal on your grocery store’s inventory. Visit other small grocers and ask who they trust. Choose suppliers who will deliver high-quality products on time to prevent stockouts and spoilage.

Invest in a powerful POS system that you can use from day one to manage perishable inventory, track KPIs, and keep your store running smoothly.

Create a pricing strategy that accounts for your store’s financial needs and your customers’ price expectations. Start by visiting every competitor within 5 miles so you have a baseline. Then, use your POS system to workshop the cost, sticker price, and margins on each of your products.

Craft a marketing plan to attract local customers, boost loyalty, and increase sales for steady, high revenue. Sponsor local sports teams, donate to school fundraisers, and stock products that reflect your neighborhood's culture. Happy customers become loyal customers.

For Established Grocery Stores

It’s not too late to transform your grocery store’s profitability — but it will take hard work and a solid plan.

Here’s what to do →

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Assess your current KPIs, paying special attention to your profit margins by department and product category. Are you making 30% on produce but only 5% on canned goods? Is your deli losing money because of spoilage? You can't fix what you don't measure.

Identify three to five areas for improvement. Maybe your expensive steaks expire before they sell. Maybe you're paying employees to stand around during slow hours. Maybe customers leave because you're always out of popular items. Focus on the biggest money drains first, then come up with a plan to cut inventory costs, reduce spoilage, or increase overall revenue through marketing.

Secure the right tools. Consider upgrading your POS system, investing in new deli scales, adopting electronic shelf labels, or using self-checkout machines to reduce labor expenses.

Get your team on board. Share your new goals with your employees, and ensure they have the tools and knowledge they need to contribute. For example, explain how proper rotation saves money on spoilage. Or show them how accurate scanning prevents inventory mistakes. When they’re invested, they’ll care more about the details.

Measure your success. Regularly check your KPIs to see how your efforts have impacted your bottom line, and continue setting new goals to improve your grocery store’s profitability.

Boost Grocery Store Profitability With IT Retail

Ready to start your journey to healthier grocery store profits? We’re here to help.

For more than 30 years, IT Retail has helped independent grocers like you tackle your biggest challenges — including everything from perishable inventory tracking to effective marketing.

Our all-in-one grocery POS solution includes everything you need to get a handle on your expenses and boost your revenue, including robust inventory management, in-depth reporting and analytics, built-in marketing tools, and e-commerce integration.

Discover how these features (and more) can help you cut costs and make more money by scheduling your live, personalized demo with one of our grocery industry experts today.