COVER STORY: Reclaiming lost dollars

Think like Ebenezer Scrooge. That's how vigorously some tightwad grocery retailers pinch pennies. "Every company has low-hanging fruit," says Frank Dell, president of DellMart & Co., a management consulting firm in Stamford, Conn. "It's normally found through rigorous process reviews." Take every expense item by item to see where costs can be wrung out, say experts.

"You've got to go after the whole thing," agrees Tom Jackson, president of the Ohio Grocers Association in Columbus. "There are savings here and savings there, and when it's put together you have a nice package." The trick is to avoid losing customers with service cuts.

Here are six places to begin.

1. Labor

Start with high-cost deli and meat counters. "These service counters have lots of hidden costs and additional manpower," says Don Stuart a partner at Cannondale Associates in Wilton, Conn. "Intensive waste and labor means they are deceivingly less profitable."

One penny-pinching antidote at meat counters, says Stuart, is using prepackaged beef. "It's the wave of the future," he says. And try using prepackaged goods in the deli, too. Outsourcing baking slashes manpower costs and saves on wasted food.

Employee turnover above 30 percent is chronic and costly. "It's one of the greatest costs any company will bear," says Jackson. He points to three culprits: poor hiring methods, poor new employee orientation, and poor training. Instead, give employees tools for success, he says, by teaching and coaching them. Create a training program on video or paper. As for hiring, Larry Miller, president of Trax Software, advocates using hiring and screening technology to make good choices; one example is online employment forms with filters for honesty and compatibility. "Weed out the potentially short-term employees," he says, "and you'll drive costs down."

Disciplined scheduling that matches employees to store traffic slices in-store labor costs. "Workers are usually in the store at the wrong time," says Bob Blattberg, director of the Center for Retail Management at Northwestern University. Efficient staffing eliminates costly overtime. Self-service checkout is another labor-saving option. "It's in its infancy and very well-received," says Stuart. "Consumers are much more accepting." The payoff is shaving up to 20 percent off labor costs, he says.

2. Out of stocks

The figures here are jolting. According to a study commissioned by the Grocery Manufacturers of America, out-of-stocks can reduce annual sales by 2.9 percent for the average supermarket. Why? The top 10 percent of the fastest-moving items account for 45 percent of all out-of-stock items.

One low-cost cure is relying on manufacturers to do more in-store work for you. To begin, set a specific goal, like a 95 percent on-shelf position. Then take it to manufacturers and say, "Let's figure out the best way to achieve those goals."

"Call your broker or hire additional retail reps so that in-store execution supports your plans and strategies," Stuart says. Measure where you are, find out the root cause, such as insufficient shelf inventory. Then put a plan into place; monitor the results with joint scorecards.

Pittsburgh-based Giant Eagle focuses on its 50 top-selling items. "We look at the movement data at cash registers in each store to forecast future need," says Robert Garrity, s.v.p. of information services. "Before, the process was manual and we didn't understand the [buying] patterns."

Someone must be in charge of faster-moving items, say experts. Prepare special tags for these items and set aside back-room locations for rapid replenishment between loads. "Give slow-moving items to a consolidated warehouse," adds Ken Harris, a partner at Cannondale Associates in Chicago. "And handle the fast-moving items directly."

Independents take about 7.1 weeks to get new products on the shelf, compared to 3.6 weeks for chain grocery stores, according to a speed-to-shelf study commissioned by Food Distributors International. The problem, says Brian Harris, chairman of the Partnering Group in Cincinnati, lies in having poor planograms, which can make a 7-percent difference in gross margins. You don't need whiz-bang software, he says, just good, old-fashioned discipline.

3. Unsaleables

The supply chain is usually the culprit here. The usual location: perishables. To squeeze waste, arrange deliveries close to packing time to prevent damaged perishables, suggests Trax's Miller. Prepackaged beef is optimally delivered within 14 days from the packing date; produce is sold within three days of receipt. To track perishables, Miller advocates code dating the cooler with a marking pen, designating the "5" for the fifth day.

Monitor known loss, says Miller. Proper ordering according to customer sales is important. "If you're getting three trucks a week," he says, "order more effectively truck to truck." And repack overstock so that it isn't damaged. Finally, don't buy perishables indiscriminately, such as ordering 20 cheap cases of meat that sit in coolers for a week. About 22 percent of meat shrink is thrown away, according to Miller.

Giant Eagle uses hand-held units to capture damaged goods data. That data is plowed back into forecasting and tracking models. "If there's a lot of damage from a process, we look at the root cause," says Garrity. "It may be damaged because one product was put under a pallet."

To speed stocking, Giant Eagle's three warehouses now have voice-directed order picking. Before, the company worked from lists that identified and slotted product. "It was a matching process," says Garrity, "and there was error." Now, he says, the chain catches cases mistakenly placed in the wrong spots since picking and order accuracy has risen. At the refrigerated meats warehouse in Butler, Pa., the number of mispicked cases has dropped by 88 percent.

The model, say experts, is Wal-Mart's famed just-in-time process. Work with suppliers so that the proper inventory--but no more--is on hand, says Neil Stern, a senior partner at McMillan Doolittle in Chicago. "The amount of capital tied up in inventory is often overlooked," he says. "The back end is most neglected in terms of cost." His counsel: Lean more heavily on suppliers.

4. Shrink

About 68 percent of all shrink is preventable, says Miller, "so shrink prevention is rising as a core operating priority." One chronic area ready for paring is cashier errors or fraud. They accounted for 35 percent of all shrink in 2002, compared to 26 percent the year before, while shoplifting sank. Dayton, Ohio-headquartered Lofino Food Stores is installing point-of-sale software in its 14 stores that reveals which cashiers have lots of voids and no-sales. "Anyone that varies is a red flag," says Joe Miller, loss prevention manager.

Product identification is also a real problem at cash registers, says Trax's Larry Miller. He estimates that it accounts for 20 percent of all produce shrink, because cashiers may manually punch in the wrong price. They also sometimes forget to look into shopping carts or under them. "All of this is trackable and catchable," he says. "Many companies aren't teaching people ways to prevent this loss."

Radio frequency identification is a relatively new way to prevent customer-caused shrink. "You can keep a better handle on what's walking out the door," says Stuart. Lofino electronically tags high-theft items like cosmetics and baby formula, a tactic that boosted one store's gross by 2 percent.

Fingerprinting customers who are cashing payroll checks for the first time also showed quick results. "We've had much fewer counterfeit payroll checks," says Joe Miller. Miller uses a reporting form that tracks shoplifting and is passed on to other stores. "We've caught several people that way," he says. As an incentive, Lofino Foods gives up to $50 to anyone who catches a thief.

5. Energy

Want to upgrade lighting and get paid for it? There are rebate dollars galore available for improving energy efficiency, says Dan Raftery, president of Prime Consulting Group in Bannockburn, Ill. Though most grocers are already retrofitted, he says, don't forget continuous improvements. "Even if your lighting system is two years old, you can qualify and reduce utility bills," he says. And since these programs expire, do it now.

Then there are new, innovative products. For example, John Puskar, a principal at CEV Consultants in Cleveland, recommends remote sensing heads or new fluorescent lighting called Biax that uses 40 percent less energy than metal halide fixtures. He suggests getting an energy audit, which many companies will do for no charge.

Want low-tech solutions? Outside the store, white roofing materials reflect light and heat, a good thing in the warm South, says Raftery. In the North, look for black materials to absorb light and heat.

Inside, conservation is key. Coolers aren't energy-efficient, so grates need cleaning; non-door coolers need clear air flow, so stockers shouldn't violate the load line. And anywhere there's frost or ice on the floor, you're losing money because cold is leaking in, says Puskar. Insulate all steam piping, valves, and flanges, which are often overlooked.

To lower overall costs, negotiate lower energy contracts. Most electric utilities offer special deals, say experts. To take advantage of them, make sure you understand all available rate schedules.

6. Insurance

Premiums soared over 30 percent last year and show no signs of slowing, according to experts. "The insurance marketplace is the perfect storm," says Tony Kamnikar, v.p. of sales and marketing at the Gleason Agency in Johnstown, Pa. A dreadful stock market and miscalculated reserves have pushed some insurance agencies over the edge. The result: Deep-pocketed insurers are charging more.

So how to save? In worker's compensation, says Kamnikar, there are three ways. Forming a doctors network that's pro-business is one. "Their goal is to treat people and get them back to work," he says. Second, employees collecting worker's comp should be given light duties.

And third, form a safety committee that scrutinizes working conditions in the store. The committee might recommend using safety gloves around slicers or showing back-room workers how to carry boxes. The most common hazards are cuts from boxes, slips, and back pains from lifting.

"But if you're a good operator," says Kamnikar, "you get categorized as a good risk." The payoff is slicing as much as 50 percent off worker's comp premiums.

In property and liability, the key is also prevention. Liability represents 80 percent of claims, property 20 percent. So the goal is limiting customer slips and falls. "Keep your store neat and clean," says Kamnikar. Some easy fixes: floor mats near entrances on rainy days, procedures for cleaning wet spills, and store interiors free of hazards.

"If you can prove reasonable care," says Kamnikar, "lots of claims are dismissed. To prove that, take hourly walks around the store and then document them."

Reassess property and casualty deductibles, he adds. "Everyone buys $1,000 in insurance deductibles," he says. "But I think the minimum might even be $10,000 since you don't usually need it."

At Lofino Food Stores, Joe Miller installed Gleason's Electronic Sweep Log Protection System. It records associates' walks around the store with a probe, where data is recorded. It's then downloaded into a computer that Gleason uses to tabulate data on all the stores. The result is that one Lofino store had only four insurance claims last year, compared to 20 in 2001. "Our stores are much cleaner," he adds, "and we build rapport with customers."

Miller's final counsel: "The key is taking an active approach."

Former PG senior editor Constance Gustke is a New York City-based freelance writer.
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