The Independent’s Playbook: The Mystery of Margins

June 28, 2022

Jim Dudlicek, NGA Director, Communications and External Affairs

Perception is important for any business, and if it’s inaccurate, it can damage a retailer’s relationship with those it serves.

Today’s runaway inflation has folks scrambling to make ends meet, and many are looking for someone to blame – the government, the oil companies, any business seen reaping windfall profits as prices soar on essential household goods.

Certainly, there are many who believe that anyone who owns a business is fabulously wealthy and not averse to price gouging while using widespread inflation for cover. And certainly, there are unscrupulous businesspeople who are guilty of such practices. But one of the least likely places to find them is among independent community grocers.

Grocery retailers, particularly smaller Main Street operators, are being squeezed along with their consumers, forced to pay higher prices to secure goods their communities need while struggling to keep markups a minimum.

It’s no secret – to those in our industry, anyway – that profit margins are tight, historically 1% to 3%.

The trick seems to be getting consumers to understand that.

According to the latest research from the Feedback Group, shoppers believe their primary store has a net profit of 33%. I mentioned this while moderating a panel discussion at a recent industry conference, and there was an audible gasp from the crowd of mostly small-town grocers, folks who aren’t strangers to making personal sacrifices so they can keep the lights on for their customers while giving them a square deal at the register.

It’s important that customers understand this. “This inflated view of profits certainly leads some shoppers to think that food stores simply aren’t doing enough to keep prices down,” The Feedback Group’s Doug Madenberg remarked, suggesting these misperceptions influence their lackluster ratings of supermarket price competitiveness (average of 3.95 on a five-point scale) and only slightly higher marks on value for the money spent (4.18 on average).

We know that NGA members are fighting tooth and nail for their customers, finding alternate sources for products, securing volume discounts, searching for deals wherever they may be hiding. The most progressive grocers are engaging their customers on social media and other channels to update them on stock conditions, deals and ways to weather the economic storm. Better communications ought to help mend the disconnect between profit fantasy and margin reality.

Meanwhile, retailers can further respond to consumer needs based on their personal responses to inflation. According to the Feedback Group study, changing shopper behaviors include purchasing more groceries at stores with lower prices (46%), eating out less often (46%), buying more items on sale (43%), buying more store brands (38%), purchasing more bulk-pack items (25%), trading down within categories (24%) and using a store’s weekly sales flier to plan shopping lists (23%).

Luckily, independent grocers already enjoy a high level of trust from their customers, something earned over years of good relationships, investment in communities and being transparent about their operations.

While the industry has some work to do in educating folks about margins, independents have a head start because of those relationships they’ve built and the trust their customers have in them. Keep working hard to maintain it – it’s the greatest asset you have.