Mixing back delivers much needed margin

There is no doubt the margin retailers add is a source of frustration for suppliers. It takes a lot of hard work to produce food and beverage, with profits often very low. When you go through all the work and then see your customer, the retailer, selling the product with a 40% margin it makes supplier’s blood boil. This is not the retailer’s profit. They do have to pay for the expenses in the department, the store, the distribution network and the office. Two of the important numbers a retailer reviews every week are sales and margin. Google can provide definitions, but it does not always help you understand the importance of the term or perhaps even a specific meaning in our industry. In our SKUFood newsletter we are going to share some food and beverage industry terms and explain how they can benefit or impact your business.

Mixing back is planning to merchandise higher margin items, next to lower margin items. The goal is to sell the higher margin item too and deliver closer to the category margin for that consumer. Entice consumers in the store with discounted ad items and then sell them a higher margin, complimentary product, to improve the gross margin.

Items used to mix back will often deliver incremental sales. They can have a slight discount, but this is not always the case. If the lead item has a substantial discount consumers will be searching for the sale. If they believe they are saving enough on the lead item they will be more likely to pick up the items merchandised to mix back, even if they are at regular price.

Retailers need margin

Margin fluctuates weekly and it is a number retailers watch very carefully. It is a complicated process to price tens of thousands of items, select hundreds to be discounted in the ad, manage inventory to deliver sales but not have excess and manage shrink. These and many other factors will impact the retailer’s gross margin.

They are always looking for opportunities to deliver that margin, while keeping the momentum of sales. There is no doubt during my time with Loblaw there were periods where we asked to be more focused on sales, at the expense of margin or deliver margin and try to maintain sales. We used to refer to it as going from ‘ditch to ditch’.

Depending on their business model, retailers need a certain level of margin to operate their business. From a low of 14-15% for Costco to a high of 25-30% for a traditional grocery store, they must generate margin to pay their expenses. We can debate the merits of each business model but in the end, some have higher expenses which require higher margins to pay for the higher expenses. Labour is obviously a big one. More staff, doing more for consumers will cost a lot of money. If you review Costco’s results the membership fees they collect are very close to their annual profit. Their low cost model and guaranteed revenue from members, allows them to operate on much lower margins. They still must deliver those margins, but the percentage is much lower, hence the enhanced value offered to their members.

When items are sold with a retail that delivers less than the category margin, the merchant or category manager needs to figure out how to offset this. There are a few reasons why it is below the category margin.

1) It could be matching the retail on an impressionable item. For example, Walmart are selling the leading brand of mayonnaise for 4.99 and the category strategy at retailer ABC is to match Walmart on the top 100 items. It is possible the 4.99 retail delivers 5% below the category margin.

2) The item might be advertised as a lead item or even an inside block. Each category has to take their turn to draw people into the store. They are still expected to deliver their margin targets in the period.

3) The retailer might have excess inventory on an item with a limited shelf life. They might have to invest in margin to move the inventory before it is a total loss. We used to say ‘your first loss is your best loss’.

4) Seasonal products impact category margin. They often have a key period of sales and once that window passes sales decline rapidly. Retailers try to protect themselves with discount programs (funded by vendors) to move seasonal product in a timely manner, but this is not always the case. There are times when they are stuck with the inventory and need to move it.

In each these examples, the product will be sold below the category margin and they need to figure out how to mix back and deliver the targeted margin.

Nature Valley and Rice Krispie squares merchandised beside Oreos

Planning to mix back will improve the chances of delivering margin

When retailers advertise deep discounts, volume will increase by a factor of 4-5 times regular movement. Some items will even increase by a factor of 10. If the item is a leader in the category selling 5 times more volume with a 10% margin will really impact the category.

If we use laundry detergent as an example the obvious choice is Tide. Consumers love a deal on laundry detergent because everyone needs it at some point and there is brand loyalty to Tide. When a retailer decides to advertise Tide and reduce margin they need to find some way to mitigate the lost margin.

They will adopt one or more of the following strategies to mix back:

1) Increase inventory going to stores of complimentary items like fabric softener, bounce sheets and other laundry related products. Stores will be asked to build displays and tie in the complimentary items that sell at decent margins. They will always look for the items that will generate some sales and are higher than the category margin.

2) Merchandise private label products with higher margins beside the Tide. Private label bleach or fabric softener might deliver higher than the category margin. These items might sell to consumers buying Tide and they will help improve the margin on each order when consumers put them in their shopping cart.

3) Offer over and above space to suppliers for a fee or see if they are willing to fund an in-store special. When the suppliers pay for the space or keep the margin higher on a discounted item, it allows the retailer to mix back and deliver higher overall margin from the display.

4) Merchandise complimentary items in the display with loyalty points or offers to entice consumers to buy.

5) Display products that compete with the lead ad item that deliver higher margin, in the same display. Consumers might come in looking for Tide because they saw it advertised, but when they stand at the shelf and they are loyal Gain buyers they select the higher margin Gain product.

There are different options. They all require planning and some are opportunities for suppliers.

Dog treats merchandised with the discounted dog food

Mixing back is an opportunity for suppliers

Space in an off-shelf display can deliver incremental sales. Often you are not required to invest in significant discounts. Retailers do like to see some savings to compliment the lead items but they are not deep discounts. Remember, they want to deliver margin to offset the investment they are making in the traffic building ad item.

If your product is a great item to mix back, you need to get it planned into the displays. You have the best chance of getting the space if:

1. Your product is above your category margin

2. The product displays well in floor displays or end caps

3. You have a labour saving case pack that is easy to merchandise

4. Consumers are likely to buy your product with the lead item

5. Your social media is promoting a recipe that encourages people to use the lead item

6. Your in-store special calendar or multi buy calendar lines up with the lead item

7. You have provided the category manager with a great mixing back idea you saw when you were travelling in other markets

8. Your service level has been above the target. They will not plan items when they are concerned about inventory

9. Your product sells. They do not want to put inventory in the stores for displays that will not turn. Then they have to find a home for it and inventory costs money.

10. Your product performed well the last time it was planned for off shelf merchandising.

You do not need to meet all of these criteria but you do need to meet some.

Watch the ads and work with your customers to be a part of mixing back. There are many ideas and do not assume your customers will figure them out. Suppliers need to work in advance to try to coordinate some of these initiatives.

You must work in advance and ask about the planning. Focus where you can make a difference. When your sales deliver at one retailer where you are in these displays find the opportunity to mention it to another, without giving away the actual sales.

You will not get every mixing back opportunity but you will get some. If you have employees working in retail, supporting your items, they can play an important role in helping stores. Send them photos and wherever possible improve the execution at retail.

If you have any questions or require help being part of mixing back, you can always send me an email peter@skufood.com or call me at (902) 489-2900.

Peter

Sustainability does differentiate

We know plastic is in the news often and there are many consumers looking for brands to take a leadership role. Despite all of the challenges of the pandemic, sustainability has remained a key area of focus for consumers.

Lita’s are positioning their brand as a lead in this area. Many food producers and processors say it is impossible but some are figuring out how to deliver. In the end it will be interesting to see who retailers reward with shelf space and which products consumers put in their shopping carts.

Dunkaroos introduce a new flavour

It is frightening when a brand is considered a retro brand when it was first introduced while I was working in retail….

Looks like General Mills are taking a page from the Oreo playbook with new flavour introductions. Interesting to note they are only available at select retailers. This could be a good strategy to reward a few retailers and drive traffic or an indication many retailers said “no” to the new flavour. In the end consumers will decide.

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FCC Peer groups in fall of 2022

It has been a real privilege to work with FCC in 2021/22 to launch the pilot program for their food and beverage industry peer groups. We had some incredible discussions with processors about our industry and they really did learn some very valuable insights from each other. We discussed so many topics from customers to ecommerce to distributors to co-packers and so much more.