Survey Cites Areas for Cost-Cutting

MARK HAMSTRA

TORONTO — Many supermarket operators squeezed by the current economic slowdown may have opportunities throughout their organizations to reduce costs through a close examination of their spending, according to research by Karabus Management, based here.

Citing a benchmark survey of more than 20 North American operators, Karabus found that best-in-class retailers realize considerable savings in areas such as real estate costs, advertising spending and other areas.

For example, the survey found that some companies spent as little as 0.02% of sales on travel and entertainment, while the highest spenders shelled out 0.16% on such expenses. The median was 0.08% of sales.

“Operational excellence demands a bottom-up analysis of every cost in every area with no exceptions or sacred cows,” Karabus said in a report summary provided to SN.

One of the primary areas of opportunity for cost-cutting is in real estate, according to Marty Weintraub, vice president of the grocery practice at Karabus Management.

“With the balance of power with landlords shifting in favor of retailers, the time is ideal to reassess your real estate strategy and store portfolio profitability, and then develop a strategy for renegotiating leases,” he said. “Some chains have been able to negotiate between 5% and 10% occupancy cost reductions by using that approach.”

According to the Karabus research, occupancy costs for food retailers ranged from a minimum of 2.43% of sales to a maximum of 4.88% of sales, with a median of 3.16% and a mean of 3.51%

Some factors Weintraub suggested to consider when renegotiating leases with landlords include the following:

SERVICE CONTRACTS

• Specific landlord concentration and power vs. total portfolio of locations.

• Site-by-site importance of a store, in terms of traffic-building power, vs. others in a mall.

• Current store profitability, and longer-term forecast for profitability.

• Opportunity to reduce fixed rents in favor of percentage rental agreements.

• Short-term rent relief until performance improves.

Another big area of opportunity is in procurement of services and not-for-resale goods, which include such expenditures as commercial printing and janitorial services used in the operation of the store.

One retailer in the Karabus study was able to reduce his costs by 25% through a careful review of expenditures, Weintraub explained.

The process begins with an enterprise-wide “spend analysis” to understand where spending is occurring and what the spending profile should look like.

Then, retailers should look at areas where there is a combination of both high levels of spending and incumbent vendors who provide a service that has not been competitively bid for at least two years.

“The current economic climate has materially changed the competitiveness of the supply base in many indirect spend categories,” Weintraub explained.

He also suggested retailers establish a dedicated role in the organization to oversee all such spending activities and ensure that a competitive process is always followed.

In the marketing department, retailers can trim costs from the ad budgets by evaluating many aspects of their programs, Weintraub explained.

Retailers in the study spent anywhere from 0.82% to 1.3% of sales on marketing and advertising.

Many chains are pulling back on their TV and radio spending, Weintraub noted, and in addition are taking steps to make more effective use of their weekly circulars.

Among the areas chains are looking at are distribution strategies for the fliers, and the number of pages in the flier — more pages do not equate to more sales, he explained.

In addition, some chains are taking what Weintraub called an “earned real estate” approach to their circulars — giving closer scrutiny to which items are featured, for example, and making suppliers accountable for what goes into each flier and how it performs.

In addition, some companies are seeking to more carefully manage their spending by taking a closer look at their corporate giving programs, centralizing donations at the corporate level and narrowing the focus of their charitable efforts to a few key organizations.

SHRINKING SHRINK

Shrink is another area that retailers have attacked to strip costs out of the system.

“Many chains struggle to reduce shrink because they are challenged to identify and quantify the root causes,” Weintraub said. “In a difficult economy, management can pull many levers to reduce shrink that will only help protect margins in a time when shoppers are demanding lower retail prices.”

Specifically, retailers have been focusing a lot of attention on “production planning shrink,” he noted, “especially in bakery, deli and produce.”

Although technology is available to help retailers handle shrink, Weintraub noted that retailers can design a production solution in-house using simple tools like spreadsheets and databases.

Some retailers have seen 10% to 20% reductions in shrink in those departments through close scrutiny of their production plans, he said.

And in another effort related to the scrutiny of production levels, Weintraub noted that now might also be a good time to take a close look at assortments for the possible elimination of vendors or products in favor of more profitable offerings.

“Our study showed that 25% of retailers said they were over-SKU'd,” he said, noting that the increase in demand for private-label products only widens the challenge. “Most chains are selling more private label at higher margins these days, but they may not be optimizing their categories holistically. Categories that were once destination may now be convenience, and vice versa.”

Improving inventory turns can improve working capital, the study pointed out. The benchmark survey showed that inventory turns range from 10 to 17 for supermarket operators.

Some suggestions Weintraub had to address this issue include: