According to McKinsey & Co.: The smartest way to control grocery store shrink loss, better known as ‘internal gross margin erosion’, is to use a data-informed, holistic, collaborative, people-centric, store-by-store approach. We would add that recognizing that data’s purpose is to trigger specific behaviors, processes, and practices that will get you up to an 18-20% gross margin boost in just the first 100 days.
The Bottom Line: Targeted, Personalized Analytics helps but profit is triggered by proactive human behaviors, processes, and practices.
The solution is to empower Store Teams with smart technology and training in these 5 Keys areas for Gross Margin Optimization. These 5 Keys also point to the 5 Root Causes of Gross Margin Erosion, which every store and department team leader must understand and consistently work with to grow whole-store gross margins.
5 Keys to Preventing Shrink Loss for BIG Gross Margin Gains:
- Variety Optimization – Whole Store Gross Margin Optimization (e.g. shrink prevention) begins with having the right items available for sale when shoppers want to buy them. Often, Variety expands faster than it contracts. This leads to slow-moving/low-velocity items (LVI) taking up shelf space that can be better used for new items or each store’s top-selling items, and wasting labor for double and triple touching, and less than optimal cash flows. Companies and Stores need a System to optimize Variety for Turns on a store-by-store basis. (Recommendation: Use a ‘Variety Optimizer’.)
- Ordering - As Variety is optimized, stores will be ordering items that sell creating gross margin dollars and cash flow. Ordering Best Practices should ensure sales readiness and related demand-based space allocations. This will protect shelf stock availability and protect IOH during short-term stockouts. Smart Ordering for Turns begins with Variety Optimization for Turns. In Fresh Departments, freshness, quality, sales, shrink prevention, and resulting excellent gross margin depend on Turns… before shrink occurs. Inspecting for the proper execution of Ordering Standards in each department is a vital factor of the Purposeful Store Walk Best Practice. (Recommendation: Train Store Teams to use the ‘Rule of 3’ Ordering Standard and use the Computer Assisted Ordering System.)
- Sales Forecasting / Production Planning - In Fresh, a basic rule of thumb is to produce and display quantities for optimal freshness and sell-through before shrink loss occurs. Using PAR production levels is a flawed concept. Better to forecast precise item sales and produce for those sales with a computer-assisted production system for sales readiness, Turns, and shrink prevention. Well executed Sales forecasting and Production Planning are vital to ensure product availability, optimal freshness, reduced double handling for improved labor efficiency, and reduced packaging expenses. (Recommendation: Investigate Fresh Item Production Planner’)
- Space Allocation - Excessive Space Allocation is most often a direct outcome of over-ordering and/or over-production. Driven by daily sales forecasts and formal production planning, space allocation should never exceed peak freshness days and should help to ensure sales (Turns) before product quality degradation. Proper space allocation ensures that high-demand items are given priority space allocation, reducing the risk of stockouts, improving sales, saving labor and customer satisfaction. (Recommendation: Be guided by the Low Velocity Items report)
- Known Loss Tracking & Corrective Actions – Don’t track Known Shrink Loss just to track it. When tracking Known Loss, track to ‘see’ gross margin erosion and determine its causation. Tracking is just a vital first step in the process of reducing loss. This provides visibility and reveals shortfalls in Variety Optimization, Ordering, Production Planning, and Space Allocation – all causes of Failure to Turn. Most important is teaching, training, and inspecting proven behaviors, processes, and practices that prevent gross margin erosion at its root point of causation. (Recommendation: Follow the 5 ‘Known Shrink Loss Reduction Best Practices’)
People Need a System To Follow.
Smart Analytics is an important enabler, but your store teams must have a clearly defined “System” of Behaviors, Processes & Practices to follow.
More data alone is not enough. In fact, too much data or disparate data can cloud operational effectiveness. The term actional data tends to be a misnomer unless people know what actions to take and are accountable for taking them to disrupt and preempt shrink loss to grow gross margins.
The right data provides “answers” not just insights.
The System:
- Store Teams need to start every day for 15 minutes reviewing their stores’ vital KPIs.
- See top selling items to promote for added sales.
- See top known shrink loss items to investigate for over ordering, over production and/or excessive space allocations causing excessive gross margin loss. Armed with this (data-informed) rear-view knowledge, store and department managers will be able to move forward to take action to sell more and shrink less.
- Start walking, looking, seeing, and talking to your team. Be purposeful to SEE that the Behaviors, Processes and Practices for efficient Ordering, Display, and Production are all in place and being followed. Properly integrated, these make life easier for store teams.
Simply, the accountable actions are to drive sales, improve inventory turns and reduce gross margin erosion for everyday ROI.
