The Survival of Mid-Size Grocery Retailers

As Wal-Mart, Target and other major retailers continue to expand their market share with hard-to-match prices, it’s more difficult than ever before to survive as a mid-size grocery retailer. Without the comparable buying power of Wal-Mart, stretching already razor-thin margins further just doesn’t impact the bottom line like it used to.

Survival and a return to profitability—the hard reality for many mid-sized retailers—is a constant uphill battle.

These urgent business pressures make it impossible for companies to source “the way it’s always been done.” The most successful and forward-thinking organizations embrace innovation, powerful technologies and targeted processes to generate consistent results in cost reductions and efficiencies despite the innate challenges of grocery retail sourcing. To compete against the ‘big boys’ and profit in today’s volatile economy, mid-sized grocery retailers need to take a new approach to sourcing.

 

Find new pockets of savings

Retail sourcing teams are at a crossroads. In most cases, they feel certain that they have already exhausted all viable approaches to find savings within non-resale goods and services categories. Additionally, some believe that further cost reductions using traditional sourcing approaches will erode the quality of their non-resale items and services—resulting in a negative shopping experience for their customers. Many retailers also fear that long-term supplier relationships will be damaged beyond repair if they continue to hammer already razor-thin margins. In almost every case, these organizations base their convictions on traditional approaches to information collection, price discovery, negotiation and supplier management.

While not a new form of procurement, e-sourcing ‘done right’ gives the power back to retailers. They can gain visibility into the market and ensure they’re getting the best overall value on price, performance history and quality, and any other additional elements that support the buying decision. Not only that, but through e-sourcing they can do this while maintaining and even improving quality standards. By enabling suppliers to make their own bids, a collaborative relationship can be formed between buyer and supplier.

To find truly substantial cost savings, retailers need to think outside the box and well beyond the products that they sell. Some of the biggest e-sourcing wins come from non-typical categories in non-resale goods and services such as construction, employee benefits and facilities maintenance.

So what is the right approach to e-Sourcing? Grocery retailers can deploy the below practices to:

  • Assure that all the critical elements within the sourcing project are addressed, including clear and concise specifications, adequate volumes and well-defined supplier expectations
  • Create a fair and equitable experience for the participating suppliers
  • Make sure your e-Sourcing partner does not have existing supplier relationships, pay backs, volume incentives or preferred status that hurts the integrity of the process
  • Introduce new potential suppliers to create a competitive element

Create ‘the’ shopping experience

Today’s grocery retail consumers are primarily motivated by the three elements of price, product quality and the shopping experience. While the last two have been partly ignored for some time, some retailers—think Wegmans, Trader Joe’s and Whole Foods—made a habit of putting them first, and in turn, accelerated their growth as a result.

The problem for most retailers is the time and effort required to handle category reviews, which often leaves little or no additional resources for stakeholders to explore new and innovative products, services or strategies to improving the shopping experience and push their business forward.

The best way to overcome this is two-fold. First, ensure that you enlist your suppliers’ help by requesting innovation and new services ideas from suppliers in the initial price discovery and procurement process. Second, leverage a solution or partner that automates and simplifies the e-Sourcing process. The key is to free up your procurement team to focus on more strategic initiatives such as new product evaluation.

Find innovative sources of supply

Finding new and reliable suppliers is a major challenge. After all, who better to purchase from than your incumbent? Not surprisingly, pricing and value often take a back seat to purchasing convenience. Why? Category managers and stakeholders aren’t always certain where to start when looking for new vendors. And considering the contraction which takes place in the supplier community, these challenges often don’t seem worth the effort. To leave the comfort zone of incumbent purchasing adds more work to an already burdened procurement team. What if the new suppliers don’t perform and you’ve burned the bridge with the incumbent? Even if new suppliers are identified, it’s time-consuming to take them through the certification process. With a traditional approach to sourcing, it’s easier to just stay with the incumbent.

One way for retailers to get around these burdens is to incorporate a supplier research element into the category review process. As a result, retailers become more aware of new potential suppliers and their capabilities and the supplier research and transition process is easier. Just knowing which retailers these new sources work with can bring comfort to the selection process. Are they supplying Whole Foods or Joe Shmoe’s convenience store? Whenever you look at new suppliers, make sure it’s a positive experience for all—even for those not selected—to ensure the long-term viability and integrity of any process that involves them.

The most mature organizations have the right blend of technology, process and staff—along with the category experience necessary to address the complex aspects of retail sourcing. Finding a “partial” solution—or handling negotiations manually—leaves the retailer to try to develop these processes on the fly, with the potential to result in disaster. And if a stand-alone technology investment is made, it can become a very expensive proposition to add support staff, especially when there’s little assurance of success.

Showcase community involvement

For mid-sized retailers, community involvement offers more than a huge PR opportunity. Supporting the community is just good business. But giving local suppliers an opportunity to work with local retailers presents some of the same challenges mentioned earlier: ‘How do you find the right local suppliers? And once you find them, how do you effectively engage them?’

Locating and engaging local suppliers, especially in the services area, can create a more competitive environment since local suppliers don’t have the same financial pressures of large, national organizations. Typically, they are more willing to go above and beyond to win business.

Existent sourcing opportunities

While the competitive landscape in grocery retail may look daunting, the sourcing team has a major opportunity to drive top- and bottom-line growth for their organizations. There’s money to be saved—especially in categories that the retailer may have overlooked—and new efficiencies to be found. Those new efficiencies are key and sometimes just as important as the actual savings because they free up retail staffs to focus on the issues that matter most to their customers—product innovation, local connections and the shopping experience.

But before you set out to transform your sourcing operations, make sure the new processes leverage in-house expertise where possible to avoid the ‘sweeping changes’ feel that may make it difficult to integrate and absorb. When addressed systematically, these new business processes and approaches can be highly successful and generate immediate positive results.

Competing against the ‘big boys’ will never be easy. But with the right sourcing strategy in place, mid-sized retailers can keep prices competitive and maintain the value, character and unique offerings that make them viable alternatives to big-box stores.

 

Len Kaplan is the Vice President of Sales at Intesource Inc., Phoenix, an e-sourcing company that helps organizations improve profitability and drive cost savings.

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