CHICAGO -- When Minneapolis-based cooperative Fairway Foods and two of its retail members put their meat departments under the microscope earlier this year, they found a pricing system so full of holes that profit dollars were pouring out by the thousands.
In a case study analysis aimed at discovering the sources of these leaks, Fairway and the retailers -- Coborn's Inc., St. Paul, Minn., and Lunds Inc., Minneapolis -- learned the hard way that meat departments need to start gathering and evaluating the right kind of marketing information -- data gleaned from more sophisticated pricing systems.
The results of that pricing and profit analysis, fostered by Fairway, were revealed to attendees of the American Meat Institute's 1995 International Meat Industry Convention and Exposition here last month.
"A lot of times retail meat pricing is based on competition or assumptions that we have," said Randy Wallerich, manager of meat sales and merchandising at Fairway Foods, who presented the analysis at the convention. "There are some areas [where] that can cost you a lot of money." Decisions should instead be based on more detailed facts, he said.
Managers cannot make projections or proactive decisions about their meat departments because the information they have is based on tonnage received at the back end of the store, rather than on the variety and quantity being purchased at the front end, Wallerich said. Even when scanning procedures are in place, he added, few managers understand how to make use of them or of the information they provide.
He pointed to a specific example from Fairway's examination of its meat operations to illustrate the type of profit-draining situations that can be avoided when information is properly gathered and processed.
Wallerich said a recent examination of meat orders going into the stores revealed that the value of the product had declined an average of 20 cents a pound since the time it was ordered. Although the average cost on that product also had declined, by about 15 cents a pound, it was determined that the retailer was losing 5 cents a pound in profit on average.
"We looked at product mix, [and the] conclusion was that we did not increase enough tonnage to offset the decreased value of the product," Wallerich said. "We knew we needed to increase our tonnage in order to get those sales back and hopefully get our profit dollars back."
In an effort to boost the tonnage, the companies chose to promote ground beef, which they hoped would draw stronger sales of other items, Wallerich said. "We did that in the second quarter, and we increased our tonnage by 13,000 pounds. Sales we pretty much kept on an even keel."
However, the efforts had limited effect. "When it came to the bottom line, even though we maintained our sales [compared with the same quarter a year earlier], we lost $11,000 of the boss's money," Wallerich said.
When Fairway and its retail partners decided to re-examine the situation, they found that a lack of understanding at the store level of the systems currently in place was creating misinformation and confusion.
"In a lot of cases we found that the stores were dumping the information" scanned in at the front end, Wallerich said. "Nobody really knows what to do or how to handle that information.
"We had some like items in different departments in the same group of stores. We found products in wrong departments, incorrect pricing. And with stores not looking at the [scanning] information, there was no way of telling whether they had the right price or not. We needed some software program, or some way of telling us what was really happening in those departments."
Fairway is currently at work with the National Livestock and Meat Board to facilitate the use of such a software program, and try again to gain control of the meat department information flow and analysis.
FAIRWAY'S FINDINGS
Fairway Foods was able to increase the total profit and volume for meat through Coborn's and Lunds' stores by modifying the product mix. However, Fairway said a closer look revealed that use of inadequate pricing information still cost the company $11,000. The tables here reflect changes in department performance and product mix in the first and second quarters of 1995 in the stores Fairway analyzed.
