How ‘Margin Creep’ Kills the ‘Golden Goose’

Originally printed in the September 2021 issue of Produce Business.

There is a concern that is being circulated throughout the industry that affects everyone in it and their business. The concern is the fact that per capita produce consumption is going down. This is not a new phenomenon as consumption has been slipping over the past 20 years. Everyone seemed to recognize that this is not a good thing and is trying to pinpoint the reasons for it. With the emphasis over the past 20 years on margin and sales, perhaps is it time to re-evaluate this strategy.

As long as overall store sales and marketing goals are met, upper management doesn’t really care about the actual consumption of produce. Afterall, their backgrounds are mainly based on consumer products strategy and the driving of sales and profit dollars. Produce has simply become their “Golden Goose” to generate profit. Their lack of concern about this trend only goes to show, once again, that “they just don’t get it!”

The “elephant” in the room that no one seems to talk about when looking at why consumption is declining is the phenomenon known as “margin creep.” Margin Creep is the continuous rise of margins as a percentage of the price of goods at retail. It is no coincidence that approximately 20 years ago, the emphasis on increasing margins and thus profit numbers began to gain momentum, and consumption in terms of actual units of product sold began to decline. Upper management began to realize back then that the perimeter departments were where all the profit was made in the retail grocery store. Center-store was at best a breakeven proposition and most likely lost money, and management had to find other sources of profit to drive the overall success of the store.

They soon discovered that produce was the best candidate (Golden Goose) to generate additional profit. Given this revelation, upper management began to plan for additional profit dollars to be generated by produce, and whenever they needed additional profit to make periodic targets, they would ask Produce to generate the additional profit needed.

The operators in the produce department dutifully complied with this request every time and continued to allow margins to creep up, and in some cases be artificially set to generate the needed profit. Subsequently prices on all the items in the department began to rise in order to meet these expectations and satisfying the demands of upper management.

Successful produce retailers depend on the dollars they generate, not the percentages.

Consequently, because of all this increased margin and retail pricing, consumption began to decline. Despite this, management has continued to increase their demands for more profit from the produce department. As this imbalance continues, the consumption of fresh produce will continue to suffer.

Unfortunately, in all of this, the growers have not reaped the rewards of these higher prices at retail as their returns have not increased at the same rate. This has resulted in many of the produce suppliers resorting to strategies more common to consumer goods than perishables, such as adding SKUs to try to expand the category or a family of items. It seems everyone is caught up in this spiral of increasing prices of retail and expanding the number of SKUs in the department.

While the growth of SKUs in the department is not always a bad thing, it is the proliferation of similar products with slight variations that is part of the problem. It is time for retailers to begin to face facts and review and revise their strategies on profit-generation.

The first place to start is with the emphasis on margin as a percentage of the retail price. A wise old retailer once said, “You can’t take percentages to the bank!”. This truism is as old as retailing, and the key measurement in selling is how much you sell for how much in dollars. Successful produce retailers depend on the dollars they generate, not the percentages.

This same strategy should be adapted by upper management when setting goals for the produce department. They should look at setting reasonable dollar goals for the operation and allowing operators to determine how to generate those dollars without being tied to a certain percentage. This type of strategy results in a pricing program that encourages and drives actual consumption. In other words, “the more you sell, the more you make”. By pricing to move more product, instead of making a margin percentage, the result is in a far more sustainable focus than where the industry is presently heading.

This change can certainly be a major factor in reversing the decline in per capita consumption of fresh produce. If it is allowed to continue unabated, the entire future of the produce industry will be in jeopardy and we all will witness the death of the “Golden Goose.”

Don Harris is a 41-year veteran of the produce industry, with most of that time spent in retail. He worked in every aspect of the industry, from “field-to-fork” in both the conventional and organic arenas. Harris is presently consulting. Comments can be directed to [email protected].