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How Do Grocery Stores Make Money?

By Ferdi Vol
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Cheap pricing and unbelievable offers are common things when it comes to grocery stores. Since you’re here, I’m assuming you want to know how do grocery stores make money. How do they keep their business afloat?

Grocery stores don’t make much on a single item, so they profit in volumes. Their profit margins are typically between 1 to 3% depending on the items. Besides, the stores' sales, brand deals, and carefully planned layouts also contribute to grocery stores' income.

But there's a lot more to it. Grocery stores have a lot of hidden ace cards on that table that you don’t know about. They get you to spend more money and maximize their profits. To learn more, make sure to read the whole article.

How Do Grocery Stores Make Money?

Grocery stores make money through high volume sales. Though they’re known for being low-profit businesses, a popular store can make up to 5 million dollars of profit. An average American pays 150 dollars every week when they visit a grocery store. About 30 million people in the United States shop from grocery stores.

So, there’s no doubt that they’re making money. They’re very efficient in their business too. Now let’s check a few sources from which they make money.

Collaboration with manufacturers

The manufacturer of a product sells it in a chain. Distributors, retailers, shopkeepers, wholesalers make this chain. It takes a long time to complete this process. So, they can’t put out a product in the market to be sold until this process is complete.

What if a product is due to be expired in 3 to 4 months? The manufacturer’s selling process may take about a couple of months, so ultimately, they’ll be risking a massive loss. And so, the manufacturers collaborate with grocery stores directly, avoiding this chain. This collaboration doubles the profit of both parties involved.

Would you ever buy a product that has a month left before expiring? I don’t think any sane customer would. Besides, a shopkeeper can return the expired products and demand a fresh one. The exchange will undoubtedly result in a loss to the manufacturer.

To stay on the safer side, manufacturers sell their products to grocery stores for 25% of the original price. It also takes the “return policy” away from them. Moreover, it’s also why manufacturers prefer grocery stores.

Buy 1 Get 1 Sales

You’d think that you're paying half the price of the two things combined for such sales. But the reality is far from that happening. You’re paying fifty percent of the original price of the product. So, you’re still paying two times more than the actual cost price of the product.

Besides, from “buy 1 get 1” sales, grocery stores make a 100 percent profit. Marginal profits cover the losses of products that couldn’t be sold before expiry. The subtracted price between what a customer pays and what the store has paid for an item is the marginal profit.

Brand Promotions

Brand deals and promotions are other significant sources of income for grocery stores. They can charge such brands for space, which is priced differently in different corners. And if they’re promoting multiple brands? It’s hard to imagine the money they’ll be making from such deals.

For this reason, you’ll usually see brands or dedicated shelves of their product in specific areas of the store.

Sale Tactics Used by Grocery Stores to Boost Sales 

I’m sure most of us are guilty of going to the grocery store and coming home with three extra shopping bags. So why does this always happen? Maybe you’ve at times wondered about this hidden mystery.

Behind the scenes, grocery stores use several tactics to boost their sales and make you spend more than you had initially intended to. Some of these might be a shocker, while others aren’t that surprising.

Items near the cash register make more money

It might not be surprising that grocery stores make 40% more profits from items near the cash registers than regular items on aisles. Items like chips, candy, and magazines are carefully placed near checkouts so that you’re tempted to buy one last thing before you go home.

Moreover, these items are priced less, usually within 75 cents to a dollar. When we go to checkout, we’re likely to buy small priced items without guilt. This is a psychological effect called the dominant impact. And you’d be surprised at how many customers fall for this.

Boosting Your Impulse

You’re most likely to feel the impulse to take advantage of sales and limited-time offers, and you’re not alone at that. We, as humans, are attracted to momentary and unavailable things. Limited-time offers make us feel like we will miss out on a good deal if we don’t buy it now.

That’s the same with “5 dollars for 5” deals. Even if you’re buying in bulk, you're purchasing the products with the same unit price. Moreover, these grocery stores also boost your impulse by having large shopping cart options. While you stock items upon items on a spacious shopping cart, they’re making excellent profits.

How often do you see people use the hand baskets? Even if you're in the store for a short time, you’re going to use the bigger cart and keep filling it. And after your brain is tired of making buying decisions, candy bars or magazines will catch your eye, and your mind will push you to go for it.

Eye Level Is “Buy” Level

High-priced items are typically kept on eye level on the shelves. Lower-priced items are placed on the bottom shelves, so you’ll have to bend down and reach for them. If you’ve ever wondered why everything is placed so conveniently, this is the answer.

On the top shelves, you’ll find more highly-priced items. Moreover, the grocery stores have introduced lights on stands, making the products seem brighter and more appealing. You’ll also notice colorful things to your eye-level calling you to take them home.

Specific brands with many options will also have high-priced items to your eye-level. The next time you go to the store, you can notice these things even more.

Placement: More Walking, More Buying

Generally, these grocery stores comprise a large area. So you’ll have to walk around to get the products that you need. Essentials like milk, bread, and other staples are stored in the back or not close to each other. You’ll have to walk around to get there, and when you go through different isles, you’ll likely put more stuff in your cart.

Selling more stuff means more profit for grocery stores. Moreover, they will change the aisles' layout to avoid becoming predictable to the customers. These changes aren’t necessary but decrease the chances of customers rushing out after they’ve got what they need.

Furthermore, many stores place their best sellers and expensive items to the right of the customers. Most people are right-handed, so they’ll generally walk to their right and grab things from that direction.

Seasonal Discounts

Our needs are different for each season, and grocery stores love to offer their services for that. They create seasonal campaigns during Easter, Valentine's Day, Mothers Day, Christmas, or Halloween and bring you products that you’re looking for at that time.

You’ll also see a lot of sales during this time, and I’ve already mentioned the strategy they adopt for sales. Overall, this too ensures selling more products, so they also make money from here.

The offers might start from a little before these holidays and increase during the time of the season. It’s certainly a good tactic that works.

Loyalty Programs and Reward System

There’s a reward system or loyalty programs introduced to you almost everywhere you shop. The membership services make it seem like you’ll be saving a lot of money in the long run in exchange for a monthly or annual fee.

Believe it or not, grocery stores are also making money from memberships and reward systems. Researches have shown that three billion people engage in reward programs in the United States alone. They’ll offer you exquisite discounts and benefit from being a part of those programs.

They aim for having loyal customers, and by increasing the loyal customer retention, their profits also escalate 25 to 95% at times! Moreover, dedicated customers shop about 60 percent more. The system makes them feel special and gives them an incentive to shop even more.

And the more you shop, the more rewards you’re going to stack, and the more discounts you will get. So naturally, more shopping means additional profits for the stores. There may be a loyalty ranking system, and based on that, you’ll get bonuses and special offers. 

When you’re engaging in such reward systems, they’ll collect data on your shopping habits and recommend you to avail offers and coupons that are personalized and target similar audiences like you.

Targeting a similar audience is called customer retention. The valuable data on purchase journeys and the nature of purchases will generate a personalized reward. These rewards will reinforce the customer, boost their impulse, and open their wallets ultimately.

Building a base of loyal customers will sooner or later ensure a stable line of profits. A business will undoubtedly tank if they don’t have faithful customers. So, a significant portion of income grocery stores also comes from these loyalty programs, membership, and reward systems. 

Such programs are worth it if you’re a big spender and often have to go to the grocery store for your necessities.

How Do Grocery Stores Work?

Grocery stores work through organized efforts. The store managers have the most responsibilities of running the store successfully and maximizing the profits. They look after their employer and hire mostly part-time workers. Hiring full-time workers will increase labor costs and obligatory benefits from the stores.

Because grocery stores hire part-timers more, the benefits and labor costs are kept minimal and more productivity is ensured. More productivity equals more profit. The competitive staff in checkouts and wide aisles guarantee a good atmosphere for people to hang out and shop more in. If you shop more, you’ll undoubtedly have them make more profit.

Which Items Make the Most Money on the Grocery stores?

Particular items in grocery stores have higher profitability compared to the rest. The stores sell lower priced items in bulk and make more profits in volumes than selling a few things with higher mark-ups.

Here are a few items that have higher mark-ups in the stores-

  • prepared foods
  • fresh coffee
  • cheese
  • body and skincare
  • deli meats

Whether you're planning to start a business or are a regular customer, now you know how do grocery stores make money. Hopefully, the insights I’ve given on how grocery stores operate and bring in maximum profit from customers, you have a proper idea about the grocery store business.

Hope you enjoyed reading this article and learning about the mysterious world of grocery stores. Thanks for stopping by.

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About the Grocery Store Academy
The Grocery Store Academy is a blog about everything that has to do with grocery stores. This is your #1 spot to find the right information for your needs.
About the Author
Ferdi Vol has worked several years in a grocery store and has a passion for good food. He's happy to share his passion with you!
About Ferdi Vol
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