Grocery insights: Sustainable cost reduction - an achievable goal

Grocers’ financial performance is under pressure from all sides. Commodity prices are rising. Convenience and specialty food stores’ emergence of ready-to-go meals are creating new competition. Customer behaviours are more sophisticated. Omnichannel demands are growing. Legacy processes and structures continue to pose ongoing, costly challenges. And these, of course, are on top of grocers’ notoriously thin margins and years of low growth: according to Statistics Canada, the grocery sector grew 1.3% (compounded annually) between 2011 and 2015, a growth rate consistently ranked near the bottom of the approximately 25 Canadian industry sectors tracked by the agency over the past five years.

This high-pressure reality is driving grocers to find new ways to reduce costs, improve efficiencies and drive performance—without disrupting consumers’ in-store experience and compromising growth initiatives.  Historically, grocers have concentrated on harmonizing processes across their store network; this typically impacts categories such as labour, which can represent roughly 10% of a grocery store’s costs. At the same time, grocers have focused using more modern warehouse and distribution solutions to optimize their supply chains. Achieving the desired result hasn’t been easy, and grocers large and small have experienced varying degrees of success.

Typically, half of companies that try to drive a significant cost-reduction initiative fail to meet targets or objectives. Sustaining the cost savings achieved has been even harder. Canadian grocers are turning to less traditional approaches to achieve the results they need. Global grocery chains have experimented more aggressively with new cost-saving innovations: US grocer Kroeger, among others, has explored the potential benefits of digital shelf labels. The use of digital labels is expected to reduce labour costs in stores, one of grocers’ largest cost categories: digital labels can also manage weekly price changes and promotion activity more efficiently, for example, freeing up store employees to focus on customers and higher value-added tasks.  

With traditional opportunities getting more difficult to deliver cost savings and new approaches likely to bring added complexity, grocers will need to bring more rigour and structure to the table. It’s important to avoid common pitfalls in driving cost reduction. The experience and insights we’ve gained working on cost-cutting programs suggests three basic principles that shouldn’t be overlooked:

1. Set a solid plan and don’t underestimate preparation: With grocers managing so many initiatives on the go, it’s vital that they set clear cost-cutting targets and clearly define the initiatives to achieve them. This should include using robust analysis to validate hypotheses on where to cut costs, and working with the store network and support functions to ensure savings are achievable within the timeline defined. Beware of “fast tracking” this upfront planning, preparation and alignment—doing so can create difficulties in execution and tracking.
2. Commit talented resources to deliver and govern the program: In our experience, companies with a validated cost-reduction program and clear targets can successfully achieve savings as long as there’s strong governance and a committed team in place to make it happen. Grocers need to commit a highly skilled team—whether internal resources, external experts or both—to lead, drive and accelerate cost-reduction initiatives; the savings achieved typically exceed the cost by several multiples. Taking cost out isn’t a part-time job; it shouldn’t be managed as such.
3. Execute with focus on defined initiatives and track them to drive accountability: Grocers must ensure a clearly defined baseline is used to closely monitor the execution of their cost-reduction program once it’s begun to ensure anticipated savings are realized well beyond the initial execution. Ongoing progress tracking and reporting are essential tools, but they’re often not leveraged or employed long enough to be effective in maintaining accountability for results. Anticipating multi-year requirements—and tying reporting to leadership compensation—can go a long way to ensuring cost savings are sustained.

It can be done

In today’s intensely competitive, stubbornly low-growth environment, the complexity of legacy processes and structures will continue to present cost savings opportunities for grocers but will just be more difficult to realize. Grocers will need to continue raising their game and level of rigour in how they approach and manage cost reduction efforts. The good news is that these approaches don’t have to be overly complicated to get results. With careful upfront planning and analysis, clearly defined targets and initiatives, committed governance and the right level of ongoing tracking, grocers can better position themselves to achieve their cost-reduction goals—and keep costs from creeping back in.

For more information on how to achieve sustainable cost reduction, contact.