Quote:
Originally Posted by Street Pharmacist
I keep seeing things like this mentioned about loyalty programs. There all like this for grocery. Why? Margins are razor thin in grocery. Maybe 8-11%. A loyalty program that gives back even 1% is actually 10 % percent of their entire profit margin. Then wages, rent, etc come off. That is actually a lot when you do the math
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Margins at the store are less than that. In the grocery business, only a fraction of the money is made at the store. The majority is made via inside programs with food suppliers who sell goods to the grocery chain.
As someone who used to work for one of the biggest food companies in the world, the cost to do business with a national grocery chain can be ridiculous. To buy one little ad in a flyer can run 100k+ in one week depending on how much volume the ad can generate.
I've seen some competitive food categories where vendors pay a program cost (rebate to the grocery chain based on how much the chain purchases) of upwards of 30%. Ie. a grocery chain buys $20,000,000 of a particular category from a vendor to supply its stores, they get $6mm back in rebates.
Listing fees are another huge revenue generator for grocers, which would be the cost for a vendor to start selling a new product with a particular grocery chain. I recall one chain who used to charge 40,000 per new item. Then they'd charge you again to delist the item when they wanted to get rid of it due to poor sales at the store.
One chain used to be notorious for penalizing vendors who who fund pricing initiatives at competitive chains. Say that one grocer received ad funding from a vendor to establish a low price one week on a product in the grocers weekly flyer, and say they undercut another grocery chain by $1.00 for that week on that product. The other grocery chain would send a "debit" at the conclusion of that ad due to the price protection it provided to their customers. Ie. Mr. Supplier, here's a bill for $50,000, because we price matched 50,000 units for $1 less our normal price due to the hot ad you ran with one of our grocery competitors last week.
There was even a recent situation where a grocer told their vendors that they were going to knock 1% off of what they owed their vendors because of escalating costs that the grocer was incurring that year for company initiatives to optimize their stores and their business.
These grocers have their vendors by the balls, so they can demand ridiculous amounts of "inside money" from them in order for those vendors to keep their products listed within the grocery chain.
So this is why you see all of these loyalty programs, and why stores run razor thin margins. It's to grow market share so they can continue to suck the real profits from their suppliers.