Your traditional grocery chain costs more than shopping at Walmart, Aldi, and Costco.
That’s something we’ve seen doing live price comparisons at TheStreet that’s backed up by a more extensive study done by Consumer Reports.
In addition, grocery giants Kroger and Albertsons both admit that they can’t compete on price.
“We are not in the game of being the cheapest because we do not have the lowest costs. But we can provide the best value,” Kroger CEO Gregory Foran said during his chain’s second-quarter earnings call.
Albertsons CEO Susan Morris said almost exactly the same thing during her company’s Q2 earnings call.
“Our goal is not to be the cheapest guy in town, but rather to have the right balanced value proposition that resonates with the customers that we serve uniquely by market,” she said.
Price Chopper, a smaller chain that’s a major player in the Northeast, does not agree. It has launched a new banner designed to be the cheapest option for grocery shoppers.
Price Chopper’s new brand offers price transparency
Retailers rarely offer transparency when it comes to prices. That’s at least partially because on many items, the markup is fairly high, or would seem high to consumers who don’t understand all the costs of running a store.
Back in my retail days, for example, many products were “keystoned,” which means sold at double the price we acquired them for. That’s a 50% retail margin, and it helped cover the fact that some items we sold, Legos being the largest brand, were sold at manufacturer-set prices that gave us a 30% margin.
Since our operating overhead was around 40%, we actually needed to sell some items over that number to offset the ones that fell below it.
Retailers generally don’t share their markup or retail margin numbers; the Peterson Institute for International Economics (PIEE) publishes a study showing markup and margins for 13 national chains, with Costco and Walmart having the lowest markups.
- Costco markup 14.4%, margin 3.6%
- Walmart markup 32.2%, margin 4.2%
Only Kroger had a lower markup among grocery chains than Walmart, coming in at 28.6% while only showing a margin of 2.1%. Aldi and Lidl, two discount grocery chains with a national footprint were not on the list.
“Markups are calculated by subtracting the cost of goods sold from sales, then dividing the result by the cost of goods sold. Retail margins are calculated as operating income divided by sales. The markup average is 48%, and the retail margin average is 6%,” according to PIIE.
Costco marks goods up less than Walmart, but only makes a slightly lower margin because of its lower operating costs and cheaper cost of acquiring goods.
Price Chopper’s new store, ChopMore by Price Chopper, offers full pricing transparency.
“You pay cost plus 10% at checkout,” the company shared on its website.
Price Chopper launches a discount brand
Price Chopper’s ChopMore model looks a lot like the business model being used by Mark Cuban’s Cost Plus Drugs, which marks up all the prescriptions it fills by 15%.
“We calculate our 15% markup by multiplying the price we pay for the medication by 0.15. This gives us the markup we add to the original price. For example, if the medication costs us $50, the markup would be $50 x 0.15 = $7.50. We then add that $7.50 to the original $50, plus any pharmacy labor and shipping fees,” the company shared on its website.
That’s an online-only company without the costs associated with running a storefront. Operating a grocery chain that does not charge a membership fee like Costco and only marking items up 10% seems like a very challenging business model
Price Chopper’s parent company said it’s able to offer such ChopMore discounts by cutting expenses in other areas.
“Stack it high and sell it low. No marketing, no ads, no gimmicks, no loyalty cards,” Executive Vice President John Cosentino told KCUR. “Some products are in bins. Pallet drops on the endcaps. So it’s a different way of merchandising. Quicker, less labor.”
More retail:
- Kroger cuts discounts, promises pricing changes
- Walmart gets aggressive when it comes to holiday sales
- Costco copies a popular Trader Joe’s collectible
The new store, which replaced a traditional Price Chopper, will operate with fewer employees.
“The former Price Chopper store in the space had about 100 employees a year ago. ChopMore now has about 60. But the company did not lay off workers. Instead, it gradually downsized through attrition,” Startland News reported.
10% is a really low markup
As a former retailer, I have a hard time believing that ChopMore can operate profitably on a 10% margin.
“Look, a 10% markup sounds great until you realize that’s only about a 9% gross margin. From that little slice, you’ve got to pay the employees, keep the lights on, cover rent, credit card fees, and pay for all the food that spoils before somebody buys it,” RTM Nexus CEO Dominick Miserandino told TheStreet.
There’s a reason, he noted, that retailers generally mark their prices up higher than that.
“The only way this works is by moving an enormous amount of merchandise and keeping expenses incredibly low. Costco has membership fees helping its economics,” he wrote. “Price Chopper doesn’t have that cushion here. They need shoppers coming back constantly, and they need those shelves turning over fast. One bad month could eat up whatever profit they’ve made.”
TheStreet Co-Editor-in-Chief Todd Campbell spent nine years in the grocery business working for Stop & Shop, another leading supermarket chain in the Northeast, and thinks the ChopMore could work.
“Price Chopper seems to be making a market share play to gain scale. Grocery operates on razor-thin margins, which is why so many have turned to lower-cost private label, like Aldi,” said Campbell. “It’s tough to turn a profit on a 10% markup without cutting services and embracing a bare-bones model.”
Even then, he added, with Walmart and Costco’s pricing power, “ChopMore may not be the cheapest option.”
Related: Ollie’s, Five Below, and Dollar General see troubling sales trend
