WholeFoods Magazine’s annual retailer survey, published each December, reveals tremendous detail about the variety of independent U.S. natural products stores. At my recent survey seminar for the Southeast Natural Products Association SOHO tradeshow in Orlando, attendees asked me to “build” a model using examples from the survey so retailers could see the impact on the final store. So, let’s build a store!
Departments Drive Results
The survey covers the universe of independent natural products retailers, from those focused almost exclusively on selling vitamins and supplements to more complex fresh-foods operations, with large produce, meat, seafood and prepared foods departments. Each department comes with its own set of labor and inventory requirements and profit margins. Together, these distinct departments combine to form overall store costs and profit performance.
What follows is a department-by-department profile of a model store with 30% of total sales coming from fresh, refrigerated or frozen foods departments—about the minimum level of fresh foods sales you need before shoppers believe you are “in” the fresh foods business. By comparison, Austin, TX-based Whole Foods Market generates an estimated 70% of sales from fresh perishables.
In each example, I will give you gross sales, cost of goods, gross profit, direct labor and pretax profit available for overhead; these are the line items that appear on your Profit & Loss statement. In addition, you will see your inventory turns target for each department; inventory value at retail and wholesale. Your wholesale inventory value appears on your Balance Sheet. Your shrink (i.e., lost sales due to outdated, damaged or unsalable product) should be less than 2% overall, and is baked into the cost of goods line item for each department. In order for you to easily compare across departments, our model store gets 10% of sales from each department, except dry grocery, which gets 50% of sales. While your store will likely differ, the cost and profit comparisons should be useful.
Vitamin and Supplement Department
While fresh perishable foods get most of the attention from the media and from consumers today, it is still true that vitamin and supplement departments contribute more of each dollar of sales to net profits. Even the largest independents with the highest percentage of sales from fresh foods generate significant gross sales and net profits from their nutrition departments.
For example, in a large fresh foods store doing, say, $10 million in total sales with 10% of those sales coming from vitamins and supplements, you still have a $1-million nutrition department likely generating 45% gross profit margin, or $450,000. Because of the higher gross profit margins and lower labor costs of selling vitamins and supplements compared to prepared foods, perhaps 35% (or $350,000 of that $450,000) will “contribute” to pretax net profits.
Fresh produce departments have some of the largest “shrink” from unsalable product of all the departments. In addition, gross margins are limited by the competition and direct labor costs are relatively higher. The result? Just 11% of each sales dollar contributes to net profits. Notice the rapid turnover rate for the inventory: 40 times per year, or about once every nine days.
The department you love to hate. Having installed your juice/sandwich bar, you hate to take it out because customers depend on it. Different from all other departments, you are actually manufacturing; making the finished product in-store. Your direct labor, therefore, is really a cost of goods. Added together with food and supply costs, 90% of your sales go to finished-product costs. As thousands of independents will affirm, you’ll be lucky to bring 10% down to the bottom line. Notice the almost weekly rate of inventory turns!
Wholesalers have a habit of squeezing your gross profit margins down for refrigerated and frozen foods, and it costs you a bit more than dry grocery departments to keep the goods in stock. As a result, just 17% of sales contributes to your pretax net profits.
The largest department as a percentage of sales in most food-oriented stores, the dry grocery department typically contributes the most absolute dollars to pretax profits, but just 18.3% of each sales dollar.
Health and Beauty Aid (HABA)/Personal Care
While HABA departments are relatively easy to run (with products that have long shelf lives and small cube size), the danger is stocking way too much inventory. In terms of profits, HABA is the Number Two department behind nutrition, contributing 32% of each sales dollar to pretax net. Notice the relatively slower inventory turns of eight times per year. How is your HABA department doing?
Tallying up each of the six departments gives us these results. Direct labor, at 16.4% of sales in our model, includes taxes and benefits. Remember, you must deduct from your pretax net profits all your other expenses including rent, utilities, insurance, bank charges, marketing and so forth. And notice our well-balanced store turns its entire inventory over a little more often than once a month.
The Bottom Line
I know I have not answered all your questions about store operations, and my hope is you’ll ask me those that come up as you compare your store with these tables. Look for the new Merchandising Insights Blog on WholeFoodsMagazine.com/blog, where I will answer your questions and keep the conversation going. Happy retailing! WF
Published in WholeFoods Magazine March 2016
Jay Jacobowitz is president and founder of Retail Insights®, a professional consulting service for natural products retailers established in 1998, and creator of Natural Insights for Well Being®, a comprehensive marketing service designed especially for independent natural products retailers. With 39 years of wholesale and retail industry experience, Jay has assisted in developing over 1,000 successful natural products retail stores in the U.S. and abroad. Jay is a popular author, educator, and speaker, and is the merchandising editor of WholeFoods Magazine, for which he writes Merchandising Insights and Tip of the Month. Jay also serves the Natural Products Association in several capacities. He can be reached at (800)328-0855 or via e-mail at email@example.com. Jay is happy to speak with you at Natural Products Expo West on a pro-brono basis. Email firstname.lastname@example.org to set up a meeting.