ELUSIVE PROFIT

David Merrefield

Supermarket operators who consider their food-service offering to be an integrated unit, as opposed to being a number of individual items, are well on their way toward achieving satisfactory profitability.

That's one of the major findings of a study presented at last month's Food Marketing Institute Midwinter Executive Conference. The study pointed out that in all likelihood, the present food-service methods used by supermarket operators are producing a loss on the activity.

A detailed look at the study, conducted by the Hale Group, can be seen on Page 17. Preliminary issuance of this important study was also the subject of reporting in SN of Oct. 6, 1997. This week's report on the final findings was written by SN Senior Editor David Orgel.

The quick version of the study is that most supermarket operators are registering a net loss of about 2% on their food-service business. Let's drop right to the bottom line and take a look at how that loss can be turned into a gain of 10%, according to the study:

Buy carefully. As is the tradition, supermarket buyers usually base purchasing decisions about food and ingredients, which constitute 55% of the cost of goods for supermarket food service, on price alone. But that scenario ignores factors that may be critical in the profitability mix such as yield characteristics and batch size. The lesson here is to buy with more of a strategic view in mind; with consideration of factors such as production costs and the number of uses to which a particular food item might be put.

Train and assign well. Labor costs comprise about 28% of the cost of food-service goods, an impressive percentage. Nonetheless, many supermarket operators undertrain and undersupervise food-service workers, leading to product waste and production inefficiency. The answer here is clear enough: Be sure food-service workers are properly trained and closely supervised. Additionally, the study recommends, when trained employees are in place, they should be considered specialists who are not to be rotated to unrelated tasks elsewhere in the store.

Buy equipment wisely. Some supermarket operators may be spending too extravagantly when it comes to production equipment, the study says. The problem is that many purchasing decisions result in the acquisition of equipment that is capable of just a single task. The prescription here is to make sure that production equipment can be used for multiple production purposes. If that can't be done, it's probably better to spend labor, not capital, on the performance of the task. The study also said that supermarkets tend to underspend when it comes to maintaining equipment and production spaces.

Manage shrink. Shrink is always a major problem in food-service production, but the study says supermarkets do a particularly mediocre job of managing shrink as compared with similar restaurant operations. At supermarkets, product discarded or marked down because it's spoiled, outdated, unsold or of poor quality comprises about 11% of food-service sales. The problem here seems to be that supermarket food-service operations don't think of food product as menu components, rather as individual items. This contributes to the practice of selling an item, or tossing it out. Restaurants, on the other hand, don't budget for shrink. They produce menus that allow for each food component to be used in a variety of ways, so if a food product fails in one context it can be put to use elsewhere. In practice, a vegetable could be served as a side dish, or failing that, become a component in a pot pie.

Take a look at this useful study to bring food service into the realm of profitability.