Achieving and Sustaining Profitability in Grocery Retailing

Male hands taking inventory of goods on tablet

Let’s be clear: Grocery retailing has never been easy. There are fundamental challenges with making available the right mix of products to an ever-shifting customer base, immediately and cost-effectively. However, it is not unreasonable to say that meeting those challenges has become increasingly demanding.

In the past few decades, many of the ongoing challenges were met with sizing up. New efficiencies were gained with larger automation in larger distribution centers delivering to larger retail stores. But while definite advantages remain to be realized by this approach, grocery retailing has reached a point where sizing up can no longer be a sole solution.

Customer interests have become more specialized — customer tastes have become more nuanced. Today you are just as likely to have a significant customer-base looking for bulk-sized packages at a massive suburban supercenter as you are to have one looking for fresh produce at a convenient urban mini-store. Often, they are the very same people.

In this — let’s call it the post-modern world of grocery retailing — sustained profitability and logistic success will come from the strategic application of technology. It will be less about following a tried and true system and more about anticipating change. And more change is most definitely coming.

Key trends

Of course “key trends” is hedging. Grocery retail has loads of current and future trends, not all of which are specifically related to logistics and the flow of products. But for the sake of simplicity, let’s concentrate on trends in logistics. Later, we can summarize logistics-related issues with potential solutions.

A growing number of grocery companies have been shifting away from the Superstore model in favor of the Convenience Format model. In many regions, Superstores have saturated the market or real estate prices have made their large footprints uneconomical. Smaller, more focused stores (typically in urban areas) have become more viable. The Convenience Format can be defined as:

  • Stores less than 5,000 square feet (instead of 40,000–80,000 square feet)
  • Stores that carry a limited variety of SKUs, with inventory weighted toward fresh, prepared food and quick consumables (instead of stores carrying up to 60,000 SKUs)
  • Stores that target shoppers making irregular, spot purchases of less items (instead of shoppers making large, regular, planned purchases)

The Convenience Format is seeing significant growth. Consumers are seeking shopping options that fall between full-fledged supermarkets and traditional convenience stores. The Convenience Format meets the needs of consumers looking to buy less groceries in more frequent intervals, rather than shopping at large supermarkets every two or three weeks. These new stores have a smaller range of options, but over half their space dedicated to fresh foods such as fruits, vegetables, bakery goods, and deli products. This dovetails nicely with growing consumer demand for fresh, healthy food.

Per-store revenue for the Convenience Format is outpacing the growth in number of stores, which means grocery companies are likely to continue investing in new openings. See the table below for a breakdown of the issues related to Convenience Format stores:

As growth slows in developed economies (while store and distribution networks continue to expand), grocery companies are seeking ways to maximize efficiencies to find profits. This has led to a general industry trend toward consolidation — companies acquiring or merging with other companies to gain advantages in operation costs.

Some specific areas where consolidation can yield value include:

  • Inventory Visibility: Allows companies to be informed about their inventory to make their supply chain as effective as possible. Inventory Visibility presents immediate and accurate data that helps optimize the end-to-end supply chains process.
  • Transportation Cost Reductions: Allows companies to standardize on routes and times for delivering products. This minimizes the need for buffers of inventory and reduces the total number and quantity of shipments.
  • Labor Cost Reductions: Allows companies to maximize productivity of their workforce. This can be done a number of ways, including automation, education, and job flexibility.

Whether a grocery company is participating in consolidation or is competing against companies that are, it will face the challenges of increasing inventory visibility and reducing transportation and labor costs to compete. For example, grocery companies will continue to be challenged by the ever-growing number of products (and variations of products) consumers expect to be readily available. Efficiencies gained can mean the difference between profit and loss.

Click and Collect is a service where customers place orders online and then stop at a store (or some other convenient location) to pick up their orders. There are generally no shipping charges, and customers often do not have to leave their vehicles. This became particularly attractive to customers during the pandemic and continues to be popular.

As this service offering has grown, stores have needed to forecast for demand driven by foot traffic as well as from online orders. Click and Collect requires more piece picking in the store, so labor requirements have grown. Increased fulfillment and replenishment speeds will be key for expanding Click and Collect capabilities.

Flexibility in the supply chain is vital because orders are now placed anywhere and at any time. Consequently, supply chains have needed to react and fulfill orders quickly and cost effectively and be distributed through multiple channels.

Home Delivery of online orders has quickly gone from a rarely used option to standard practice for grocery retailers — squeezing profits by increasing labor and transportation costs. Home Delivery creates a need for order consolidation buffers where goods can be assembled and sent out for delivery. Speed to the customer is critically important, as most customers expect delivery of their orders to be made in a short time frame.

Post-pandemic, Home Delivery continues to appeal to customers who simply do not enjoy the shopping experience, whether it is the effort required or the time that it takes. And it is quite obvious now that grocery retailers that can pick Home Delivery orders most efficiently are the ones that will win these consumers.

Summary of logistic issues

Now that we have accounted for several of the major trends in Grocery retail, let’s dig down a little further. Specifically, let’s consider logistic issues generated by these trends so we can better assess potential solutions for success.

  • Speed and Accuracy: Orders must be processed, picked, and shipped with ever increasing speed — often with smaller, more frequent shipments. All this while order accuracy remains critically important. Consumers do not tolerate errors and correcting them can quickly become costly.
  • Spikes in Throughput: Seasonal increases in throughput rates require the addition of temporary labor. Seasonal labor can be difficult to hire, train, motivate, and manage.
  • Inventory Control and Turns: SKU proliferation and an increasing total volume of products create pressure to limit the growth and reduce the amount of inventory. First-in-first-out strategies must be maintained, and inventory must be turned more often.
  • Real-Time Control and Visibility: As speed and volume of product throughput increases, the need for real-time data becomes more vital to optimize the supply chain. Managers need to know item location status at all times.
  • Harsh Working Environments: Freezer storage often requires that product be held in sub-zero temperatures, which are not ideal for worker comfort and health. Workers can only be exposed to a freezer environment for limited periods, which necessitates adding workers and costs.
  • Biomechanical Injuries: Food distribution centers primarily handle case goods. Case goods tend to be heavy, especially when workers handle these loads for an entire shift of operation. Workers must bend, lift, and twist hundreds of times a day while handling cases. Injuries can affect the health of workers and generate high medical and absentee costs.
  • Labor Availability and Turnover: The difficulty of finding and retaining labor (from distribution center to stores) presents grocery retailers with a difficult challenge, especially when locations are away from population centers or in fast-growth areas.
  • Space Use: Existing distribution centers and stores alike are “using the cube” to provide more productivity with the same space. New facilities must deal with more and more SKUs at a greater velocity in less space.
  • Store Ready: Grocery retailers need to reduce in-store labor requirements and reduce the time it takes to re-stock shelves. Product shipped to the stores needs to be more “store ready” with items arriving pre-sorted and grouped by product family.
  • Strategy for Slow Movers: Slow moving items each require a pick face, so they often take up a disproportionate amount space in a distribution center. Storage and picking solutions are needed to accommodate slow mover requirements.

Solutions for success

As with trends, there are many and varied solutions for grocery retailers. However, with solutions it is more important to be specific because solutions become investments in time and resources. They need to return real value.

Presented here are potential solutions to the trends and their logistics issues, each with a clear path to success.

Voice Picking systems have evolved to help companies achieve higher levels of productivity, efficiency, and accuracy in their supply chains. Voice-directed picking is a technology option for greater productivity in fulfilling for click-and-collect and home delivery orders. Voice commands via handheld devices or wrist-mounted mobile computers can be implemented quickly while reducing cycle time to complete orders. Distinct benefits for grocery companies include:

  • Higher productivity with employees working totally hands-free with their eyes focused on their task.
  • Higher accuracy by eliminating distractions from looking at and handling paper lists, scanners, or screens.
  • Reduced labor costs from simple, quick, and effective training.

Home Delivery Order Fulfillment systems are order picking system for grocery retailers that need to pick, pack, and ship discrete customer orders. The system arranges warehouse into picking zones with each picking zone supporting a specific SKU category, typically by family group and velocity. The layout typically includes multiple picking zones. The system accommodates the transport of inbound inventory as well as automatic replenishment of the pick faces.

Orders are picked into plastics totes with voice or light directed technology communicating picking instructions. When orders are complete, they are conveyed to an automated tote buffer system where each order is consolidated. Order totes are then released to the shipping operation when the appropriate route delivery truck is ready for loading.

Home Delivery Order Fulfillment systems are excellent solutions for Click and Collect as well as Home Delivery. Distinct benefits for grocery companies include:

  • Order totes automatically travel to the order picking staff positioned in the warehouse, reducing walk time.
  • Labor productivity and processing speed are increased with order and inventory accuracy maximized.
  • Temperature controlled storage and picking modules are integrated into the process.

Automated Pick-Face Replenishment systems store and buffer cases/totes in a “shuttle” AS/RS. The system automatically delivers cases/totes to case flow lanes and workers pick required products by RF, voice, or label. The speed and flexibility of Automated Pick-Face Replenishment make it particularly well-suited for supplying Convenience Format stores. Distinct benefits for grocery companies include:

  • Maximum capacity with minimum footprint reduces building and land cost.
  • Reduces storage, retrieval, and replenishment labor and costs.
  • Improved inventory and shipping accuracy.

Split-Case Order Fulfillment systems deliver split case items to workers in a way that optimizes pick rate speeds. These systems also provide high pick accuracy be- cause only one SKU is presented to worker at a time, and in the needed sequence. The highly efficient picking is perfect for grocery companies looking for advantages in competing with industry consolidation. Distinct benefits for grocery companies include:

  • A high density, compact logistics solution that could be implemented without adding on to the existing building.
  • Automated material flow provides strategic system management to stream- line functions from receiving to shipping.
  • Pallets can be assembled “store ready” to make shelf restocking easy and efficient.

Mixed Case Palletizing is the assembly of cases and/or totes onto an outbound shipping pallet with a pre-determined sequence matching the point-of-use process. In grocery retailing, this means pallets built for individual aisles of retail stores (store friendly and aisle ready).

Mixed Case Palletizing systems can be partially or entirely automated. A specific advantage of automation is increased cube utilization. That is, pallets are built to take full advantage of the physical characteristics of the cases: Heavier cases at the bottom, lighter cases at the top, and all oriented for maximum density.

Mixed Case Palletizing systems are excellent examples of technology and automation coming together for short and long term profitability by addressing the need to reduce costs throughout the supply chain. Distinct benefits for grocery companies include:

  • Quicker replenishment of store shelves increases customer satisfaction.
  • Less floor space is required in back room for storing/sorting goods.
  • Refrigerated and frozen items can be handled by automated equipment in temperature-controlled environments.

Goods-to-Person Order Fulfillment means order pickers stay in one place, and the system brings the “goods” or SKUs (stock keeping units) to them. It is an excellent solution for getting greater productivity out of DCs needed for delivering to Convenience Format stores. Goods-to-Person Order Fulfillment increases inventory visibility to optimize the end-to-end supply chains process. Distinct benefits for grocery companies include:

  • Reduced labor costs by minimizing the time pickers need to travel.
  • Increased accuracy as pickers are typically handling one SKU at a time, making errors much less likely.
  • Accommodating growth and change with flexibility to quickly adjust for SKU proliferation.
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