GOING HIGH-TECH ON PERISHABLES

Julie Gallagher

Larry's Markets is on a roll.

The six-store, Seattle-based food retailer has been voted No. 1 in the Seattle area for produce quality, on an annual basis for the past 22 years.

Larry's has translated that reputation into business results, its produce sales generating nearly twice the industry average. "The produce department in [the Bellevue, Wash.] store does 28% of that store's business," said Russ Ruby, vice president of sales and marketing, Larry's. "The industry average is probably about 15% to 17%. For a traditional operator, produce management is pretty basic, but for us, this is a standout section."

Produce is not the only perishable item that stands out at Larry's. On top of more than 400 stockkeeping units of produce, the retailer's stores offer more than 450 SKUs of cheese and over 600 SKUs of items made in its scratch bakery, as well as a sit-down Market Cafe and the largest food catering business in Seattle.

"To a lot of store operators this looks like a nightmare," acknowledged Ruby. "We have different demand cycles, different shelf lives and different production cycles [for perishables products]. [Still,] perishables have, and always will, represent an area that offers us the fastest growth and the highest margins."

That being the case, last year the retailer decided it was time to introduce a technological approach to perishable products, applying a Fresh Item Management system to more precisely determine profitability, shrink and out-of-stock levels, among other metrics, for perishables. "Since it's so critical to our brand and our reputation, we felt it was time to

focus on managing the business correctly," Ruby said.

FIM is becoming an increasingly important tool to retailers who put an emphasis on perishables. "An average store generating $20 million in revenue with 40% coming direct from perishable sales could see 25% to 33% improvements in total bottom-line profitability with FIM technology," said Scott Langdoc, analyst, AMR Research, Boston, in an AMR newsletter.

Larry's selected Fresh Market Manager (FMM), a FIM system from Park City Group, Park City, Utah, and began using it at its Bellevue store last year. Other FIM suppliers include ADC, Tampa, Fla., used by Lowes Foods, Winston-Salem, N.C.; and Eatec, Emeryville, Calif., used by Thrifty Foods, Victoria, British Columbia. (See, "The Human Side of FIM," SN, March 7, 2005, Page 61.)

Ruby outlined Larry's plans at a session titled "Create an Efficient Plan to Improve Product Freshness" at the Retail Systems Conference and Exposition on May 25 at McCormick Place in Chicago.

MULTIFACETED GOALS

As Ruby described it, Larry's goals for managing its perishables with a FIM tool are multifaceted. On a broad scale, Larry's wants to increase perishable sales by delivering the right product at the right time in the right quantities, as well as maintain its award-winning quality level. Moreover, Larry's is moving from store-by-store management of perishables to a more centralized strategy that takes each store's demand into account.

The complexity of perishable items "makes it nearly impossible for store managers to realistically manage this portion of our business," Ruby said. "Our stores needed help." At the same time, he cautioned, stores tend to resist change and technology, so retailers need to "be careful when deploying FIM, or store compliance can become an issue."

Broken down, this strategy means that the retailer wants to understand "if we're selling the products that our customers want," Ruby said. "We want to get into really understanding what is selling in each particular store during the various parts of the day."

But these factors must be balanced with profitability. "In the past, we put together [prepared] items that we knew we could sell with very little thought surrounding the cost of actually producing them," Ruby said. "We knew what the ingredients cost and we had an idea of how much labor it required to produce them, but we really had no system to support the decision."

Larry's also wanted to get a better handle on shrink, or wasted product, to prevent overproduction. This started with looking at "the [sales] we were expecting to get from a product, and what we were actually getting," Ruby said. However, the absence of shrink may not always represent a positive -- it could reflect underproduction.

"If you have a great product and you never have any left over the next day, you might think that's great because you don't have any shrink," he said. "But that's not great because you've probably been out-of-stock with that product. Finally, we have a system that helps us manage shrink while maximizing sales."

The FMM system itself has multiple components for managing perishables, food-service departments and even non-perishables. The system, as Larry's is employing it, begins with category management (shrink and production capture, and item sales), progresses to in-store execution (demand forecasting and production planning) and concludes with a demand-driven supply network that includes computer-assisted ordering and perpetual inventory.

Larry's is currently applying the category management module to its bakeries. "We felt that [the bakery] would provide the easiest entry and most effective use of the system," Ruby said. That includes determining what the bakery should be producing, at what times, and the department's overall contribution to sales and profit.

In its profit calculation, FMM's category management system categorizes everything used in the bakery down to individual items and their ingredients.

Of course, labor must be factored into profitability, and FMM has improved Larry's labor management practices as well.

"We have a higher wage rate [than other grocers] because we have very skilled people working in our bakery," said Ruby. "How we apply that labor is very critical to the profitability of the department and this gives us a good view of that."

After Larry's began using the FIM tool, it realized that many of its prepared items actually made a negative contribution to profitability. "At times, the ingredients' costs and the time to produce items was actually working against us," Ruby said. "We've been able to identify that and say, 'Maybe that is not the best item to have or maybe there is a better way to produce it."'

To calculate shrink, each day at Larry's corporate headquarters, point-of-sale sales data is compared against inventory information, with inventories adjusted up or down accordingly.

As a result, Larry's has reduced overproduction and minimized out-of-stock conditions, said Ruby. It has also improved its sales, though Ruby did not provide specifics.

Larry's is preparing to roll the system out to the bakery departments in all of its stores, and setting the stage for using it for forecasting and production planning in food-service departments that produce hot and cold buffet items, integrating with the central kitchen.