Art Powell, senior director for global business development at Digimarc Corporation, has more than 30 years of experience in the U.S. retail industry. Specifically, he managed information technology, including point-of-sale and electronic payment systems for Albertsons.
Pre-cooked rotisserie chicken sure is convenient for consumers, and so is buying cranberry quinoa salad by the pound.
Fresh foods, including organic produce, artisanal baked goods, specialty cheese counters and craft beer fill stations, have reshaped the perimeter of many supermarkets as shoppers seek high-quality products that fit into their busy lifestyles. Today’s shoppers want convenience and they expect "an experience," not just a place to pick up a can of soup, box of cereal or jug of milk.
As a result, deli and prepared foods is a $24-billion business and the fastest-growing retail category, according to a 2016 study by Nielsen and the Food Marketing Institute (FMI). In fact, sales growth on the perimeter was 2.7 times greater on average than increases for the whole store over the past four years, IRI Research says. Other data show that perimeter departments, on average, are approaching about 40% of store revenue across the industry.
Grocers are simply responding to current consumer demands, and the opportunity to sell fresh, premium products with higher profit margins is alluring.
However, as a longtime retailer who remembers how tedious it is to manually mark down items with a sticker gun, it makes me uneasy that grocers are investing so heavily in high-profit departments that are also highly inefficient without more carefully addressing the challenges.
The foibles of fresh foods
Although fresh prepared foods are growing fast, they put food retailers in a challenging position. Fresh prepared foods are perishable and labor-intensive, substantially contributing to shrinkage and inefficiency.
Spoilage is an obvious, and serious, issue. In the United States, unsaleable goods — products that are expired, damaged or discontinued — cost an estimated $15 billion annually, according to the Trading Partner Alliance, an industry association for food retailers and manufacturers. The group estimates that reducing unsaleable goods by just 1% through process improvements would save about $100 million each year.
Slow checkout also remains a top consumer complaint. And, research shows that fresh foods with damaged and unreadable retail scale labels — torn, misprinted, or soaked by bloody steak juice – are among the biggest culprits of slow checkout, requiring cashiers to check pricing and manually enter product codes.
Investing in an evolution
Still, retailers are doubling down on the expansion of high-dollar perimeter departments. FMI estimates that 80% of food retailers plan to allocate more space to deli and fresh prepared food departments in the next two years. Even discount grocers Aldi and Lidl, famous for their limited selection of low-cost, packaged products, are adding bakeries to better compete.
Meanwhile, the center aisles of brick-and-mortar stores could dramatically change if, as some experts anticipate, grocers stop stocking boxes, cans and other shelf-stable products altogether and sell them largely online instead. Shipping directly to shoppers would clear square footage for even more fresh prepared foods and hosted events. The industry is already evolving to offer meal kits, in-store restaurants and social experiences such as cooking classes and wine tastings that make grocers a community destination.
Efficiency is essential
My experience installing some of the grocery industry’s first large-scale point-of-sale systems in the late 1970s and early 1980s revealed how technology can dramatically increase efficiency, cut costs and pump profits.
The center aisles have long been central to the success of the grocery industry, in part because technologies — including barcodes, scanners and package designs — were optimized specifically for selling packaged products more efficiently.
The good news for grocers is that technologies are already available to help make inherently inefficient perimeter departments more reliable and efficient profit centers.
The ability to dynamically mark down pricing for fresh prepared products before they expire is critical to containing costs and maximizing monetization of perimeter departments. Likewise, ensuring that fresh food labels don’t drag down employee productivity and checkout speed will help maintain profit margins and shopper satisfaction.
Technology solutions for instant discounts on expiring foods, robots that automatically manage inventory after hours and mobile apps that enable shoppers to checkout right in the aisle all aim to address current industry challenges, and are gaining traction.
For grocers focused on gaining market share by selling fresh prepared foods, technologies that continue to improve efficiency will need to take center stage.