When it comes to setting profit margins and determining profit percentage versus volume sales, a produce director is pretty much on his own.
No one can tell you which path to take, but if you guess wrong, you’ll pay the price — on several levels.
“There is not a homogeneous profit model that retailers go by,” says industry consultant Bruce Peterson, president of Fayetteville, Ark.-based Peterson Insights Inc. “There is huge variability.”
Profit margins depend on a variety of factors, including size of your company, whether it’s private or publicly held, and what you’re trying to accomplish.
“You have seen margins increasing over the past couple of years in order to cover increased expenses because sales had flattened,” Peterson says.
However, he said in early November that over the past two quarters, sales have begun to improve, so margins have started to flatten out.
Jim Madala, produce director/buyer for the eight locations of Palm Springs, Calif.-based Jensen’s Finest Foods, has a system that he follows for pricing the stores’ top-selling items.
He and three produce managers survey five local competing stores each week and record their prices for 60 different items.
If his vendor’s price on an item would put Jensen’s out of reach of other retailers, he’ll lower his price to be competitive. If his vendor’s price would be a little lower than competitors, he’ll raise his price to match theirs.
Certain items, however, are price sensitive — such as bananas.
“We don’t make our markup on bananas,” he says. “It’s a price that sticks in a consumer’s mind.”
Madala’s pricing method is not a straight formula.
“I take many factors into consideration when I do my pricing in order to be fair and competitive, with repeat sales in mind,” he says.
No set markup
Nor is there such thing as a set-in-stone markup at Thrifty Foods, a Victoria, British Columbia-based chain of 30 stores and a division of Sobey’s Inc., says Michael Mockler, director of produce operations.
“You want to have a balance between labor and profit,” Mockler says.
That means that items that require a lot of labor, such as hand stacking, culling and rotating, will have a higher markup than a 5-pound bag.
“There’s huge shrink” with many items that require heavy labor versus those that do not, he says. “You have to cover that internally by charging for those sorts of things.”
Loose baking potatoes have among the highest markup because of the labor they entail, he says.
Lowest profit margin is on specialty items, such as dragon fruit, passion fruit and fresh herbs, because they have the highest shrink.
Customers also must pay for convenience.
Discount stores tend to be more profitable than full-service stores because they rarely offer bulk foods, they require less labor and are fewer in number, so consumers have to travel farther to get to them, Mockler says.
Traditional stores must charge more because of their higher overhead and the convenience factor.
“If you just want to buy one cucumber or one green onion, it’s there,” he says.
The top 30 items in the produce department may create 75% of the business at Northgate Gonzalez Market, a chain of 37 stores based in Anaheim, Calif., says Alfonso Cano, assistant produce director.
Since everybody is selling those items, which usually include tomatoes, avocados and white onions, they’re typically priced competitively, and there is less chance to make a profit from them, he says.
“We’re always looking for things outside the top 30 to create profit,” Cano says.
At Northgate, the most profitable items are packaged salads, nuts, flowers and “things that are off the mainstream radar.”
“There is a lot of room to make profit,” Cano says, “but you have to be sagacious and strategic.”
Conventional markets have been losing sales and market share, so to supplement, they are “padding” grosses, Cano says.
In other words, they’re raising their prices, selling less, but still making a profit.
“They supplement their loss of sales with gross profit dollars,” he says.
That process “is a dangerous game to play,” he adds.
The end results may look good for the market, he says, but it doesn’t work for the customers or the grower-shippers.
Northgate doesn’t play that game.
“We always try to sell as much as we can all the time,” he says.
Retail rip off?
Indeed, a common complaint from suppliers is that retail markup often is unreasonably high and discourages movement.
Peterson, however, has a different take.
“There is absolutely not a 1-to-1 correlation between what someone pays f.o.b. and what the retail price is,” he says. “There are many, many variables that go into that.”
Growers may feel that the retailer is ripping them off, Mockler says, “and we’re not.”
“Growers have to realize that, before you have one customer, it costs thousands of dollars just to the open door,” he says.
Major retailers are publicly owned companies with financial information readily available, he says.
“If the growers think we’re making more money,” he asks, “why doesn’t it show on the bottom line?”
Jensen’s Madala is against the idea of selling less volume at higher prices.
“That’s totally the wrong concept,” he says. “You have to price it correctly for proper movement to ensure quality to the customer.”
A chain’s markup can vary by commodity, labor, season, competition and space allocation, Northgate’s Cano says.
“We are empathetic to packing, transportation and material costs,” he says.
But he says lowering prices doesn’t necessarily result in sales increases.
For example, if you lower the price on bananas, shoppers are not likely to buy more, he says. But if you slash the price of corn by 50%, you’ll sell four times as much as usual.
Suppliers not top of mind
Typically, the plight of their suppliers “is not in the top five concerns that a buyer has,” Peterson says.
“It’s not that they don’t care,” he says. “But there are other things that come into play before they get around to really worrying about that.”
Retailers have to worry first about their own jobs and what they are being judged on.
“If price is the only issue, you don’t care whether the grower is making money or not,” he says. “That’s not what you’re being judged on. Those are the cold realities.”