CHICAGO -- Reducing shrink, rather than trimming labor, may be a more effective means to cut costs while boosting sales in fresh food departments, according to two retail case studies.
When analyzing shrink, retailers generally look at scan margins first, said Mark Vanderlinden, vice president of produce merchandising for Price Chopper, Schenectady, N.Y. "But drilling down deeper, if you're throwing product away, you're also throwing away labor, wrap and supplies as well," he said.
By analyzing which bakery and fresh-cut fruit items had the most shrink and which had the least, the 190-store chain was able to tweak package sizes, eliminate underperforming stockkeeping units and increase production of items that were frequently out of stock in both their bakery and fresh-cut fruit sections. Similarly, a detailed forecasting analysis helped the company determine what times of day demand was highest for several popular items, allowing Price Chopper to schedule labor more effectively and improve product freshness.
"We learned to make more of what we were selling and reduce or eliminate what we were shrinking," Vanderlinden said. "And, we standardized labor practices to produce the right items at the right time."
Ultimately, Price Chopper was able to reduce shrink from about 25% to 15% in their fresh foods departments. Vanderlinden said he felt comfortable with the 15% range, because reducing shrink even further in a fresh department could lead to out-of-stocks.
"We did find some items that had little or no shrink, and those were the items that we felt we needed to be producing more of and devote more space to," he explained.
For example, an item-level profit analysis made with Fresh Market Manager category management software made by Park City Group, indicated that 379 of the company's 1,500 fresh bakery SKUs had a negative net contribution.
Although the company prides itself on the variety of items offered by its bakery departments, the slower, non-moving SKUs were taking up valuable shelf space. More than 680 items were cut, reducing shrink by $2 million and producing a 3% lift in sales the first year after implementation.
At Roche Brothers, a chain of 16 stores based in Wellesley Hills, Mass., a similar analysis revealed something surprising.
"We were shrinking the most on items that we were selling the most," said Paul McGillivray, vice president of perishables. With the chain's popular fresh dinner rolls, for example, McGillivray "found that we actually had more unit shrink than we sold."
The problem made sense at the store level, he said. Bakery department managers knew that the rolls were a popular item, so they made a lot of them every day. Better forecasting, however, helped the company reduce shrink on the rolls by over 30%.
Similarly, there were disparities in sales of the company's two sizes of fresh baked Italian and sourdough breads. "We were making too much of the larger size, while the smaller size had no shrink at all," he noted, agreeing with Vanderlinden that a total absence of shrink for a perishable item typically indicates an out-of-stock situation.
The analysis also led Roche Bros. to discontinue two SKUs in its pre-made salad category and increase production on its top three selling items. McGillivray said that the company is still in the early stages of determining the impact that the changes will have, but results currently look very positive.
"Most retailers have been doing category management in center store for a long time, but the problem with perishables is that they really lack the detailed information at the item level," said Mark Chandler, principal with Kurt Salmon Associates, a global consultancy with offices in the U.S., Europe and Asia. "If you know that your bagel category is marginally profitable, for example, that's good information, but if you know what is and isn't selling at the individual flavor level [such as onion, garlic or poppy seed bagels], you can make much better decisions."