With political figures and pundits weighing in on the minimum wage issue, and cities such as Seattle and San Francisco raising minimums on their own, it seems likely that Congress will raise the federal minimum wage at some point. That would cause problems for grocers across the country, and although some will hurt more than others, all will be affected in some way.
Of course, not all grocers follow similar strategies. Some premium-price grocers with distinct service and/or business models already pay their staffs more than $10.10 an hour, which is the rate often proposed as a new minimum. A higher minimum wage would be less of a hurdle for these companies than for others.
But the majority of grocers would see their selling, general and administrative (SG&A) expenses rise by 1.5 percent to 3 percent of revenue. Given that many grocers have profit margins of only 3 percent or 4 percent, this would hurt profitability in a significant way.
Industry Pressures Abound
But even before considering the implications of a higher minimum wage, grocers are facing tremendous industry pressures. They continue to expand in terms of capacity faster than they grow their sales. Between 1995 and 2013, total U.S. grocery retail capacity measured in millions of square feet grew by 69 percent, but sales grew only by 43 percent over the same period. As a result, grocers have seen significant supply-and-demand imbalances and growth challenges, according to Food Marketing Institute research.
In addition, volume is moving out of grocery stores to e-commerce grocers like FreshDirect. We expect online grocers' revenues to go from $6 billion in 2012 to $106 billion in 2025. The same time frame will see supermarkets' grocery sales fall from $398 billion to $353 –- a drop of almost 12 percent. The emergence of online grocers as serious competitors will limit traditional grocers' ability to raise their prices.
With profitability threatened, but little room to raise prices, grocers will have to take a different approach to clearing the hurdle of a higher minimum wage. They will need to employ a four-step process to transform their cost structures entirely, which can actually give them an advantaged position.
- Sharpen your differentiation or the way to play. Before anything else, grocers must define their distinct strategy, and communicate it effectively throughout their entire organization. This may sound simple, but it’s not: According to a Strategy& survey of 500 executives at companies around the world, more than half of executives attest to significant shortcomings when it comes to developing and executing business strategies. To become industry leaders, companies must determine how they will differentiate from their competitors and win in the marketplace.
- Develop agendas for building the differentiating capabilities required for strong growth. As part of the strategy development, grocers need to undergo a rigorous assessment of the distinct capabilities needed to achieve and retain a leading position in their industry, along with a dispassionate review of where those capabilities currently stand on two levels: effectiveness, and the funding and investment they're getting. To home in on developing these key capabilities to a point where they can drive growth, companies must develop powerful capability agendas.
- Make ruthless cuts elsewhere. Grocers should reduce to a minimum spending on any capability or business offering that doesn't support their strategy and contribute to their differentiation. They should employ zero-base budgeting to scale back unnecessary expenditures as fully as possible.
- Strategically reinvest savings. To ensure that their cost transformation goes beyond simple cuts and contributes to future growth, grocers must redeploy their savings to strengthen their differentiating capabilities. Only by building these strategic growth areas can companies set the stage for strengthened performance in the future.
A minimum wage increase would create significant challenges for many grocers, but these challenges shouldn't be insurmountable. By focusing their overarching strategy on what differentiates them, determining the key capabilities necessary to execute that strategy and drive growth, and then slimming down elsewhere while reinvesting in those differentiating capabilities, grocers can turn such challenges into an opportunity for strengthened performance and significant growth.