BOCA RATON, Fla. -- Supermarket operators will need to look at food service very strategically -- or else perhaps not at all, according to the final results of a study unveiled here.
The study, titled "Building a Meal Solution Delivery System," stressed the need for an elaborate thought process incorporating store positioning, sourcing and cost control. That means analyzing each cost line of a supermarket's food-service profit-and-loss statement -- an exercise that can present surprising results, the researchers showed.
The findings were previewed late last year but presented in final and comprehensive form during two sessions of the Midwinter Executive Conference of the Washington-based Food Marketing Institute late last month. The research was sponsored by the Coca-Cola Retailing Research Council and conducted by Hale Group, Danvers, Mass.
"If you're not really committed to food service, please don't get into it," said Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill., who acted as a coordinator between Hale Group and the Coca-Cola Council. "It can be rewarding, but it's hard to do."
"You need to look at food service as a separate business, as if it's a new store or grocery company," said Edward S. Dunn Jr., former president of Harris Teeter, Charlotte, N.C., who also spoke at the midwinter event.
Neil Golub, president and chief operating officer of Price Chopper Supermarkets, Schenectady, N.Y., warned supermarket executives, "Most retailers are realizing a negative contribution from food service."
The study created a "hybrid" profit-and-loss statement that can be used to gauge supermarket food-service costs and profits. The data was based on input from a large range of retail operators. The model used to create the hybrid P&L assumed overall sales of the supermarket per week are $500,000 and that the food-service department represents 3% of store sales.
Researchers came to a sobering conclusion from the data. They found that a supermarket operator generating $780,000 a year on food service (or 3% of store sales) is probably losing about $19,000 (or 2% of the overall food-service business).
The study contends supermarkets can turn the 2% loss on food-service operations into a 10% gain if they make some right moves. "The tools and approaches to help achieve the 'possible' P&L in supermarket food-service departments exist in traditional food service and can be adapted to meet supermarket needs," the report states.
The road to better net profits, the report contends, includes boosting the top line, building an efficient menu mix, managing costs, training the staff, and creating the right levels of equipment and facilities.
The research suggests many ways in which supermarkets can better manage costs both on the production and sales side.
Food and ingredients -- at 55% of the cost of goods -- were the biggest item on the production side. These costs include a wide range of raw materials. But supermarkets have too often based ingredient component decisions on price, while ignoring other crucial factors, such as yield characteristics and batch sizes, the report said.
The study's authors urged the industry to look at the big picture by basing recipe evaluation on the "total cost of production, including labor and supplies, to determine the best cost scenario." They called for the development of strict product specifications, careful evaluation of the final products and supplier involvement in upgrading ingredients' performance.
Labor involved in production was found to represent 28% of the costs of goods. Despite the key role of labor, "undertraining as well as undersupervision can lead to waste and inefficiency," the report said.
The report implored supermarkets to dedicate a group of employees to food service and avoid rotating them into other tasks. These workers would be given initial and ongoing training and hands-on supervision. They would also benefit from scheduling software, carefully designed workstations and other tools.
In discussing fixed costs of production, the report notes the need for better thinking involving equipment purchases. "There is a tendency to overspend on equipment for the production department; overspending is due to purchasing unnecessary equipment or excess capacity.
"There is also a tendency to purchase a piece of equipment to produce, or be used for, only one food product. The rule of thumb in the food-service industry is: 'Do not purchase a piece of equipment unless it will have multiple uses, or it is to be used constantly for one product.' "
The study didn't always point to costs that were higher than necessary. In pointing to maintenance costs (which are on the "other costs" line of the P&L), the report notes, "In many ways, this cost is lower than it perhaps should be. Maintenance of the equipment and work area is critical to the productivity and efficiencies of the department."
The study pointed to markdowns/selling shrink as "a major, non-value-adding cost component in the supermarket food-service P&L." This cost, which includes poor-quality or outdated items, was found to represent about 11% of departmental sales. These items are marked down or, if spoiled, discarded.
Bill Hale, president of Hale Group, said supermarkets are far behind food-service operators in controlling shrink. "Shrink in selling of merchandise is 11% in supermarkets, and 0% in food service." He added that while shrink exists for food-service operators, it isn't built into the P&L structure. "It's managed and minimized."
The supermarket problems were pinned on factors including lack of adequate forecasting systems, failure to allocate product based on traffic patterns and demand levels, inadequate training, and failure to measure shrink levels. Supermarket executives were told packaging that extends shelf life and careful menu planning are powerful remedies.
"Establish a core product offering -- all the time, every day -- and establish a rotation menu," the report said. Supermarkets should also create guidelines for sales, such as, "Product should produce at least 5% of sales to appear on the menu."
Analysis of the P&L also found supermarkets are overemphasizing price promotions. The "features cost" line of the P&L represents budgeted, preplanned discounting or promotional activities. But, the report said, these programs are often being implemented "in the same manner the grocery chain/store would use for a box of cereal . . . The current practice in supermarkets is largely to discount products" rather than pursue value-enhancing promotions.
The recommendations are that supermarkets focus their marketing on bundling products (such as a free side with a rotisserie chicken) and linking promotions to other events (such as a sporting event or movie release).
The Hale Group report found that few supermarket managements have adequately focused on concepts and enablers in developing food-service strategies. "It is recommended that supermarket management clearly define the concept that will deliver the value proposition/desired customer outcome and put into place the operational system -- the enablers necessary to generate consistent execution of the concept," the report said.
The concept, which "defines the food-service positioning, offering and value equation," includes the menu, targeted price point, service system and ambiance/image. The enablers include standards and specifications, a linked supplier network, ongoing training and real-time measurement and scheduling systems.
The report notes the choices of options for sourcing food-service items, including on-site scratch preparation, manufacturer-supplied products and commissary-supplied products. The conclusion is that sourcing considerations cannot be divorced from the final outcome.
"It is recommended that supermarket managers involved with food-service concept development tailor their sourcing to match the strategy and concept," the report said. "The sourcing options are a means to an end, not the drivers of decisions. Furthermore, it is unlikely that one sourcing option will be right for every menu item."
Ultimately, the study urged retailers to borrow tools from traditional food service to make supermarket efforts profitable.
As an example, the authors pointed to the need for supermarkets to build their top lines in food service. This can be accomplished by creating a "superior value proposition so the consumer has the desired outcome and chooses supermarket food service," the report said. Supporting this effort are advertising and consistent execution.