BAD MATH STILL GRINDING INTO PROFITS: MEAT STUDY

LYNNE MILLER

CHARLOTTE, N.C. -- As many supermarket retailers consider overhauling their meat departments to accommodate case-ready product lines, the time could also be ripe to standardize and fine-tune accounting practices to get a clear picture of profitability and loss in those departments.

An executive with Harris Teeter Stores who served as moderator of a panel on meat department management and profitability at the Annual Meat Conference here acknowledged the transition will be full of hurdles. Harris Teeter has not widely embraced the concept of case-ready meats, though the company certainly has not ruled out the possibility, said Brad Graham, vice president of meat, poultry & seafood for the Matthews, N.C.-based chain.

"We've analyzed it very thoroughly," Graham told SN. "It will have a huge financial impact on our company. We anticipate in the future [the industry] is going that way."

Graham moderated a panel that featured a return appearance by Richard Levin, a professor emeritus at the University of North Carolina, Chapel Hill. At last year's meat conference, Levin criticized the non-standardized, inconsistent nature of accounting procedures in retail meat departments, and how they prevent retailers from getting an accurate handle on the financial condition of their departments [see "'Disjointed' System Cuts Meat Profits: Survey," SN, April 10, 2000]. His impressions were based on 10 weeks of surveying supermarkets of different sizes and formats.

At this year's conference, Levin took attendees through seven levels of measuring profitability -- from simply measuring meat sales minus the cost of meat and ingredients, to calculating meat department net profit by item. He also illustrated three scenarios highlighting different financial dilemmas faced by meat department heads.

In introducing the professor, Graham told the audience his company gave Levin access to Harris Teeter's financial data to develop the presentation. While the numbers Levin released did not reflect Harris Teeter's actual records, Graham said they were realistic. Many meat departments have a long way to go before they'll come close to having a comprehensive picture of their financial condition, said Levin, who noted the task should be a team project.

"The problem with 60,000 stores is there are 60,000 definitions of what's cost, what's profit," he said. "That makes comparison very difficult."

In defining profit, well over one-third of meat departments go no further than calculating meat department markup less markdown, special shopper- designation discounts and shrink, Levin said.

"I think that's a crime," he said.

As an important benchmark, Levin pointed to Level 5, which would measure meat department net contribution less store allocated expenses, including space, warehouse and utility costs, insurance, store overhead and supplies, transportation and advertising.

"Unless you've gotten to Level 5, you're not able to be a significant player in the future of the meat industry," he said, estimating that no more than a quarter of the 60,000 stores are keeping records at that level.

Case-ready beef and pork products are gaining acceptance at a growing number of supermarket companies, which see case-ready programs as a solution to the problems of specialized labor and out-of-stocks. Though by some estimates case-ready beef makes up just 5% of the red meat sold in this country, industry observers believe the figure will increase.

In one of Levin's scenarios, the hypothetical XYZ supermarket chain considered replacing 60% of its meat items with case-ready cuts. The only financial information officials had was meat department gross profit. The case-ready meat lines would provide the company with less profit, though officials knew such a lineup would eliminate a significant portion of meat department labor and free up considerable space. Yet, they were not sure whether those factors were worth the reduction in gross profit.

Under Levin's scenario, officials could make a more informed decision if they had hard numbers on labor as a percentage of sales; meat department labor savings; fringe benefits and workers' compensation; training costs; department wrap supplies; store allocated expenses; the amount of meat department space that would be freed up; and estimated shrink.

Levin acknowledged that stores cannot keep such extensive records without the help of accountants -- a steep expense, but worthwhile in the long run.

"It can help you make better decisions and gain tremendous return on investment, against modest accounting costs," he said.

At Harris Teeter, a public company with 161 stores in the Southeast, the accounting department is extensive.

"We have a very large accounting department with elaborate systems to help us drive these numbers down," Graham said, noting that his company probably spends more on accounting expenses than rivals.

He said he's convinced that, over the long term, the returns will pay off the extra costs.

Harris Teeter officials had worked with Levin on other projects before he came on board to examine several years' worth of financial data, Graham said. While the exercise did not result in sweeping changes in the way the company keeps its books, it was still enlightening.

Graham said he watches the numbers even more closely now than he did before Levin's audit.

"You need to think about each one of these [product] lines," he said. "I used to do it, but not in as finite a way as I do today.

"Product lines, equipment purchases, store design and square footage -- they're real numbers we have to deal with," he said. "We've looked at them more seriously from a return-on-investment perspective.

"If we're to survive in the industry, we'll have to become more focused."