Before the pandemic, ready-made meals and fresh prepared foods had already started to gain ground in the supermarket. No matter if a shopper identified themself as an office-commuting professional, a busy parent, or just someone short on time, their local grocery stores were seen as go-to places for a meal in a hurry. Then March 2020 hit, and as a global pandemic was declared, the grocery store became more essential than ever.
With restaurants inaccessible for a time, people sought creative ways to plan and enjoy meals. As the pandemic continued, local business restrictions ebbed and flowed, but consumers didn’t return to their typical eating-out routine — across the U.S., restaurant sales were down $240 billion in 2020 from their expected levels. That being said, grocers and their partners have stepped up to deliver. In late 2021, Kroger announced that the company exceeded $1 billion in prepared food sales. And earlier this year, Instacart launched Ready Meals, partnering with major grocers to inspire consumers to “break up with takeout” by ordering prepared foods from the store.
More and more, shoppers are seeing grocery store offerings as restaurant replacement opportunities. But consumers’ increased appetites for purchasing prepared foods during their grocery trips has complicated the pursuit of forecasting accuracy and supply chain flexibility. Because of this, retailers are facing the unintended consequences of shrink and even tighter margins, unless they have a strategic plan in place.
Margin potential is exciting, but only when fresh inventory is reconciled. The majority of retailers’ margin is made on the store’s perimeter. The deli or meat counter, seafood, produce — these departments tend to be areas of larger margin opportunity. Consumers’ gravitation toward fresh prepared foods means that a retailer must appropriately forecast demand across the store, especially where a fresh item might be for sale on the shelf, and also needed as a primary ingredient for a recipe in a perimeter department.
Here’s a scenario that puts this into margin-protecting perspective. Say the deli needs mayonnaise for making the chicken salad they serve to shoppers. If by some chance they’ve made an error in their forecasted need for mayonnaise, they might go and pull mayo from the grocery shelf and use it to prepare the recipe. If that’s not properly accounted for from an inventory standpoint, an analysis would show that shrink was experienced in the grocery department. After all, the retailer had a unit (or several) of mayo on the shelf that’s no longer available for a customer to purchase. But this inter-store transfer of a fresh ingredient positively impacts the gross margin of the deli department in an unexplainable or unknown way. The deli used an ingredient they would otherwise have to buy, but because they didn’t technically pay for it, they’ve suddenly improved — again, seemingly — their cost of goods position.
This is just one instance that demonstrates why retailers ought to make every effort to pursue unified visibility across all departments, recipes, and prepared foods in which that item might be used or sold. When a retailer forecasts appropriately by department at both the primary-product and recipe level, they’re more likely to have on hand the items they need for food prep, and they will minimize food waste, while maximizing sales. Furthermore, embracing a more sophisticated process for fresh and kitchen item management delivers improved inventory accuracy, and improved margin visibility across all fresh departments. Plus, reducing food waste brings the non-financial benefits of environmental sustainability and social responsibility.
Simulation planning and alternative sourcing work best when systems are connected. There’s also an element of alternative sourcing, which we see playing out with product shortages and suppliers’ inability to deliver on time and in full. To put this into context, consider the Super Bowl, what many point to as the most popular day for enjoying guacamole. In January 2021, the U.S. imported a “historic record of 277 million pounds of avocados from Mexico.” But if for some reason a retailer couldn’t get the avocados needed from Mexico for their demand forecast, did they have the ability to pivot and receive them from California instead?
Or how about problematic weather events? Living on the East Coast, I’ve gone through hurricane preparations more times than I can count. Part of supply chain resiliency is quite simply having a plan in place for any given weather event, knowing what items will spike in demand and what will taper off. Scenario planning will continue to be critical for the communities a grocer serves, so that shopper needs are quickly met in emergent situations. When weather disrupts the fresh supply chain, a retailer needs to ponder if they won’t have sales on an item unlikely to arrive, where will those sales go instead? And importantly, how will they support maintaining the business of fresh prepared foods when they don’t have certain ingredients available for certain recipes?
Across the U.S., communities experienced a warmer-than-average December in 2021, and there have also been several headline-making weather events, including a catastrophic late-season tornado. Exacerbated by climate change, these increasingly common “outlier” events should have grocery retailers rethinking how equipped they are to forecast demand and execute inventory allocation and replenishment.
Embrace supply chain sophistication to keep fresh prepared profitable. As the business opportunity around fresh and prepared foods increases for retailers, they need to know how to manage it, and to do so profitably. By embracing new fresh item and kitchen management capabilities, retailers can boost their ability to meet real-time shopper demand in these critical high-margin categories, improve product quality and freshness, drive enhanced sales and customer satisfaction, and dramatically reduce waste.
Troy Prothero is vice president of product management, Supply Chain Solutions, at Symphony RetailAI.
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