How do grocery stores make their money?

In the US, grocery stores usually have these buy 6 and save $5 'deals', or save 10% if you use your grocery store card, or whatever. Given all these gimmicks, how can they be profitable? I'm convinced they're not in business with the consumer's best interests in mind. Is it that their prices are inflated so that what you save is actually what the original price is?

My own theory is that by suggesting to the buyer that she saves more by buying in bulk, the buyer ends up spending more money. The trick then, for example, is that when you buy twice as many cartons of juice it doesn't take you twice as long to drink it. If you're like me, it takes you the same amount of time. That makes you come back and keep buying.

Thoughts?

 

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§outh§tar for starters your right.

Woolworths and coles have so much market share that they can screw (and yes i do mean screw) the food producers and then turn around and sell at HUGLY inflated prices


The other side of the coin is that these discounts can actually take the prices on some items down to at least the break even point or sometimes even below the price they paid for it

Supermarkets in THESE cases are relying on the fact that people will buy more than just the items which are on special especially lollies and choclate which can be HUGELY inflated.

So they can take the hit on say milk and then make it up by increased sales in other area's. This was the origional aim of the woolworths petrol stations when they first started. The prices in store were the same as in the supermarket and the petrol was set to the same price as whatever stores were around but the 4 cent discounts (which sometimes brought the cost of petrol BELOW the cost to buy it) got more people into the supermarkets where they really make there money. The rest of the stuff was there to make the store break even only so they wernt making to big a loss to off set the gains in the supermarket

 

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Case and point, don't buy sweet dark tanned chocolate bar, cause she will drive you empty

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Grocers in the United States have very slim margins of only one to three percent. So they make their money on volume. The more they sell, the more they make.

 

I'd disagree with you on that. As an example I have a market here that sells Coke for 1.40 per liter but their own store brand costs .99 for the same product, cola. Which means that they have marked up the coke .40 cents! I also know that the stores charge allot more depending on the type of store it is. Small convience stores mark up stuff over 100 percent sometimes. Larger stores will reduce the price somewhat but still get a profit margin of over 10 percent on most items and even more on other items.

 

And the more their customers spend, the more they save.

 

That's too vague....Grocers have very high markups on personal items, school items, pet products, and decent markups on items displayed eye-high.

 

Is that why their customers develop a permanent stoop ?

 

Creating gimmicks to get a few extra pennies is what MBAs are good for.

The Supermarkets want to sell at high prices to those who don't care about price and sell at low prices to those who would find another place to shop if you try to charge them the higher prices. The Gimmicks enable this multi-level pricing.

Some people ignore the gimmicks and just buy whatever they want. Others wait for what they want to be on sale before they buy. People shopping for big families have more incentive to shop for bargains. This explains why so many of the gimmicks require a single person to buy more of a product than they can use. The gimmick is trying to retain the customer who shops for big families.

The club cards also help establish store loyalty in the same way that frequent flyer miles help establish airline loyalty.

 

Items on sale are often "loss leaders", meanig they lure you into the store and then you spend money on stuff the store makes money on. Nevertheless, as has been noted, grocery stores usually have a very slim margin.

 

This is one of the few occassions Mad and I are in agreement. Each product has it's own cost structure. Brand name products cost the grocer more money than their private label products. The owner of the brand his passing the cost of branding on to the grocer and then to the customer. In private label situations there are no branding costs. So you cannot compare pricing, profits and costs of private label products with branded products...two seperate cost structures.
Club cards also help retailers identify buying habits and better tailor their marketing programs.

 

You know shit about economincs. Since we don't know how much it cost for them each, your statement is ignorant at its best. Because Coke spends a lot on advertisement, their cost is probably higher then the no-brand cola. The brand cola also could be better and using more expensive ingredients...

Although that is possible that you are actually right and you are just paying for the brand name but getting the same shit. We just don't really know...
Generally higher price means a little better quality but not always...

In my area pharmacies are growing like hell. There are like 5 in the same shopping center. There is absolutely no reason why should there be more than 3...Apparently it is good business...

 

Life is tough for a retailer they own every dime! It is not as easy as people think. In addition to fickle customers and theft, they have to deal with some pretty rotten labor.

 

so you are sympothizing with them and thus justifying their high prices?

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I empathize with them. I was in the business at one point...it is not an easy life as you seem to think it is. The markets in which they operate are very competitive...probably the most competitive of all markets in the United States. They do not have as much control over price as you think they do.
Manufactures have more price control. But even they are subject to production costs. And the biggest source of price increases are oil and transportation and imported products.
Because of years of financial neglect and mismanagement by our government, the US dollar is in a free fall. I have made over 10k investing a small amount of money in Euro over the last two weeks because the dollar has fallen that much. The price problem is simply the price of imports and almost everything is imported these days...the result of bad management and bad trade policies of a government who sells law and favors to the highest bidder.
So if you are angry about prices, you need to look to your own government.

*ps the answer to every economic problem is not a tax rebate or a tax cut as one of our political parties seems to think.

 

It's psychology. They are just decreasing their profit margin a little bit to encourage consumers to buy more.

That's illegal.

That's not the reason. You DO save money, if you make the calculations. Yes, you may spend quickly, some people do. But the real reason why they do that is to accelerate the rate their inventory turns over. This is particularly true to perishables.

 

Of course they don't... it's a competitive market! The market sets the price.

And inneficient production (thought it's already pretty meticulous).

 

Most deals, sales etc. are promos of the suppliers and not the retailer. Campbell soup pays for it's product to be on special...not the grocery store. If a can of soup was 1.25 but on sale for 99 cents this week, the store isn't puting up the 26 cents...it's Campbell soup. The retailer makes money off of goods being sold and they won't stock brands that don't sell well...this is one of the major reasons suppliers have sales (the other getting the customer to try a product). Also, the end display space on aisles, etc. is sold to suppliers. It is either sold for an outright fee or paid for via greatly discounted price on goods to the store.

My sister worked in a retail store and they paid (for example) 1.45 for a large bottle of Pepsi...the same product was on the shelves of Walmart for less than what their store had to pay for it. You will often see small retailers buying product at box stores because they get it cheaper than if they order from the supplier.

 

But they don't get all of that markup, the local Coke bottler gets most of it for the label. Nobody is stupid and Coca-Cola is not letting grocery stores cash in on its brand name to command premium prices.

In any event, here's how these stores work. Volume is the main principle, but they also use loss leaders (and paradoxically premium, name brand, soda is often their loss leader because they need something people really like and want to get them to come into the store). They offer you deals so good that they know they lose money on every transaction. They also know that while a good deal may get you into the store, few buy just one thing. Most people shop and, in the process pick up items that the store is making a profit on, and the net effect is an overall small profit per customer. If you had the time and patience to wander from store to store all day, you'd see that different stores often have different loss leaders, so you could scam the whole bunch of them by only buying the best deals. That said, you'd need to visit like 50 grocery stores to even begin to put together a week's worth of groceries that way.

In addition to that, they also save money in exchange for product placement. The better shelf-space you get for your cereal brand, the better the deal you have to give them to put it in that premium spot.