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In the Trenches: Gross profit greed and labor cuts don’t mix

There are two subjects that generally do not fit together well in the eyes of a produce director — gross profit and labor. Why? The gross profit budgets keep getting higher and the labor hours keep getting lower.

As I’ve noted many times, the continued raising of produce gross profit rates has it traveling at a runaway speed headed for a wall. And that collision can hurt — a lot.

Some of the gross profit rates I am hearing from produce directors today are unrealistic expectations. It begs the question, why are we always so stuck on a percentage rate instead of dollars? Doesn’t it make more sense to target the profit dollars rather than just the rate?Intensive-labor-cuts-can-easily-create-out-of-stocks-and-loss-of-salesIntensive labor cuts can easily create out-of-stocks and loss of sales.

During my produce director days, I once made a decision — on my own — to go all out and shoot for gross profit dollars by means of a red hot produce ad to encourage mega sales. The results were tremendous that week, as we far exceeded the produce sales and especially our gross profit dollars. Even though our gross profit rate was off budget by 2 percent, those profit dollars alone subsidized the entire division in achieving the overall budget for the period.

Feeling that this was a huge success actually turned out to be frustrating when the marketing vice president dropped a bombshell on the whole celebration. He stood outside my office door and asked, “What happened to the gross?” He was referring to the percentage rate.

Making this matter worse, he went on to notify me that labor was being cut by 10 percent in all store departments for the following period. Produce comes through for the company every period and we still continue to get penalized for the struggles of other departments.

In today’s supermarket environment, nothing has changed as far as inflated produce gross and less help in the stores to achieve it. I remain convinced that the produce department is now suffering from “gross profit and labor fever.”

There are two cautionary measures to acknowledge and seriously consider in the gross and labor arenas — price inflation and fewer employees to care for the store.

Raising the gross profit percentage to excessive elevations will force some higher pricing. This may slow down product movement by driving away potential customers.

Reducing labor hours in the stores to save on expenses usually has a short-term life span. It may pay off in the earlier stages, but in the long run, it can harm the stores more than help them on payroll. Cutting staff hours can lead to substandard store conditions and can develop into disastrous consequences.

Since higher grosses and labor chops are still the “old normal” of today, here are a few highlights that can perhaps assist in some small ways in order to relieve some of our frustrating pain:

Gross Profit
Product cost — Keep negotiating and renegotiating with suppliers in determining every different way to control costs. Work on it “together.”

Inventory — Prevent getting stuck on product, especially advertised features. This is one of the biggest mistakes some stores make. It only results in higher shrink.

Price — You can’t get around it, no matter what the critics say some retails must be increased to keep up with higher gross strain. But be smart enough not to go overboard and lose your shoppers.

Merchandising strategy — Focus on readjusting your profit mix. Find the right combination of product to promote. Expand display size and push higher profit items more than ever before.

Save time — Set larger displays of higher velocity items to cut down on the wasteful time walking to and from the back room to get product for filling displays. Avoid backtracking or traveling back and forth unnecessarily.

Reduce handling — Save labor in handling product. Use totes, tubs and carts in moving product. Don’t keep re-handling items. Never just carry items in your hands from the back room to the display.

Source packs — Phase out as many labor-intensive items as possible. Have buyers secure source-packed leafy lettuce, fresh cut fruit and vegetables, sleeved celery, and other packaged produce. Cut down as much back room trimming and prepping as possible.

Scrutinize — Keep studying your operation. What ways of work can be eliminated or combined? What chores can be improved or changed? Teach employees to work using simplification principles.

Most produce directors have are performing the above principles. Yet the higher grosses and labor cuts still continue in budgeting year after year. Sooner rather than later, the balloon is going to burst.

This is a looming quandary that supermarkets have created. It is also one of the major reasons for losing much of their market share to the discount and specialty stores.