In a recent post, When risk is all in your head, I described how tricky risk has become as humans simply can’t keep all of the important information and scenarios in their heads.
The same can be said for the opposite of risk; opportunity. Especially in commoditized businesses, models have become so mature and competition is so fierce that profitability comes from volume, not from margin.
Fewer industries are more on the extreme side of this problem than grocery stores. Grocers buy from almost the exact same vendors and sell at nearly the same prices. A 2% margin is considered respectable.
So where does a business go to find opportunity? Just like risk, the opportunities come from automation of the things that no human can ‘see’ amidst the chatter. You’d think grocery stores were fairly simple models, but they’re not. Grocery stores operate by balancing waste from tossing out unsold good against lost sales from not having enough of something (both missing the revenue and driving a customer to a competitor). And then there’s pricing…
The key to profitability is getting the balance just right. It becomes enormously beneficial to be able to predict what will increase or decrease demand and pricing. That complex formula includes:
- Competitor’s prices
- Current stocks (in each store, warehouse and enroute),
- Perishable stocks and availability locally and otherwise
- Supplier information (many products have multiple suppliers and multiple SKU’s, AKA product IDs)
- Storage space and shelf space allocations
- Past selling patterns
- Discounting effectiveness (what will coupons do?)
- Replenishment frequency, availability
- Customer satisfaction importance (like milk, bread)
- Loyalty discounts
- Weather, especially during summer holidays
This list makes it clear quickly that moving beyond a 2% profit margin is challenging to say the least. The only real option is to employ technology to manage the details and watch for the opportunities to increase sales, decrease waste and maximize pricing (while remaining competitive, of course). The good news? There’s lots of room for improvement.
This is being done increasingly by event processing software. Careful analysis of historical data gives an understanding of the interaction of many factors like those above. The understanding is expressed as patterns that can be loaded into software that continuously watches for the specific occurrences (or lack of something occurring) or the intersection of many ‘events’. Once identified, logic is be applied to create responses like automated reorder, price cuts or increases, stock moves, couponing, alerts to humans or even sending data for further analysis.
Until now, this has been an untapped opportunity in grocery and across many industries with complex supply chains, intense competition and very skinny tolerances for profitability.
Seeing it work is remarkable and the future of squeezing opportunity in the midst of razor-thin margins.