Why measuring capacity utilization is essential for grocers

By making better use of your existing assets, you could see a profit that could cover the cost of hiring additional staff to fill that empty register. Learn more here.

December 13, 2022
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Why measuring capacity utilization is essential for grocers
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Why measuring capacity utilization is essential for grocers

As a grocer, the majority of your costs are related to goods sold, location, maintenance, and labor.

When factoring in all of these costs, opening or acquiring a new store can require anywhere from $1 million in small markets to more than $50 million in high-traffic areas. Once the store is up and running, grocers often spend more than 70% of their gross profits both paying off these assets (mortgages, interest, and rent) and operating the store (staffing, accounting, utilities). 

Despite the considerable dollars grocers allocate to these parts of their business, few grocers measure how effectively these assets are being utilized on a daily basis. Every minute a checkout lane is left unstaffed because employees are stocking shelves is a minute you’re not using the resources you’re paying for — like the register and staff members — to their full capacity. And that leaves profit on the table. In fact, by making better use of your existing assets, you could see a profit that could cover the cost of hiring an additional team member to staff that empty register. 

In the current economic environment, maintaining—let alone growing—bottom line profit is a challenge. The average consumer visits almost five different banners a month and, compared to pre-pandemic levels, 25% more of a consumers’ spend is going to their secondary or tertiary stores. Even market leaders are struggling to capture more share of wallet.

Unless you’re already capturing 100% of grocery spend in your markets, it’s important to pull new consumers in, and motivate existing consumers to add more to their baskets in the most efficient way possible. 

We call this capacity utilization, and it’s a formula that can fundamentally change the way you think about your business. 


Understanding and measuring capacity utilization

“Capacity utilization” is the measurement of how many transactions occur during a specific time frame, compared to the transactions that could have occurred during the same time frame if resources were fully utilized.

This measurement is tough for grocers to nail down because of the many moving parts: inventory, available registers, parking lot size, and most importantly, labor. As you grow your consumer base, your biggest operating cost will be staffing your grocery store just to keep up with that growth. Labor is a considerable expense to consider, but by maximizing capacity utilization you will be able to cover those rising labor costs.  

Let’s start by breaking down how we measure capacity utilization. At Upside, we calculate both average utilization as well as utilization at the busiest times. Of course, there are days in the year when you serve an unusually high number of customers — like the week of Super Bowl Sunday and Thanksgiving — so we take those peak days into consideration (top-performing 10%) and remove them from our analysis as outliers. 

  • Average utilization: Looking across a 12-month period, we identify the single hour with the highest number of transactions to give us an idea of the maximum capacity of the store, and use that as the max capacity benchmark. Some stores go a step further to look at items per hour, or items per minute, to measure this max capacity benchmark, but Upside uses the number of transactions to simplify measurement. We then compare this benchmark to every other hour the store is open, record the number of transactions, and divide the total number by the max capacity benchmark to find the average utilization.
  • Utilization at the busiest times: For this higher average, we take the three busiest hours on any given day and calculate the average number of transactions during those hours specifically, and compare it to the max capacity benchmark. This comparison shows whether utilization reaches its full potential during those spikes in traffic.

In an analysis of small, medium, and large grocery store chains nationwide, we found the average store is only utilizing 24% of its capacity. During peak hours when stores are seeing the most foot traffic, utilization jumps to 46%. This means anywhere from 54% to 76% of store capacity goes unused.

That wide gap represents what stores are actively earning today versus what they could be earning by using their existing resources to drive customer spend away from competitors and into their stores. It’s a story of unused potential that grocers must figure out how to capitalize on. 

Four common approaches for increasing capacity utilization

Right now, you’re probably using a few different strategies to get more consumers in your store. Here’s why they’re not enough:

  • Lowering prices is tricky with ongoing inflation — retailers are often forced to pass rising costs onto consumers, increasing the friction of choosing their store.  
  • Loyalty programs only reach a considerable portion of existing consumers, but do little to bring in new ones.
  • Third-party delivery services are effective at meeting consumers on their smartphones when they’re making purchasing decisions, but product fees eat into already razor-thin margins. 
  • Traditional and digital advertising costs are rising, and privacy laws around third-party cookies limit the ability to collect consumer data that can target potential new customers.

Current solutions rely too much on cutting costs and can do more to efficiently change consumer behavior. Grocers need to look beyond traditional tactics and think of ways to create conditions that will maximize their capacity utilization.

The financial impact of increasing capacity utilization

Let’s take a look at an abbreviated monthly profit and loss statement from grocery transactions at an average grocery location.

Here’s how this store was faring: 

How does capacity utilization play into this?

Imagine if you could get each consumer to put just one more item in their shopping cart during a grocery run. Or if you could identify consumers shopping with nearby competitors, and get them to shift their purchase to your location. This extra purchase would fall straight to your bottom line since it would come at no additional cost to your store beyond the cost of the good itself.‍ 

 

So why does implementing a concept this simple feel so complex? 

Because instead of considering these profits and losses at a store-level, now retailers need to think about profit and losses at the customer or transaction level. This means moving away from existing broad-based tactics that touch the entire user base, and instead identifying the consumers they don't have today on a one-on-one basis to get them to their stores in a profitable way. 

 This is why we designed Upside to:

  • Expand your store’s reach by identifying untapped customers who have yet to visit your store.
  • Measurably change consumer behavior to bring new, incremental transactions and higher spend in a way that’s profitable for you, the grocer.
  • Drive consistent, incremental revenue to your store through higher capacity utilization by making ourselves — and your business — a larger part of even your most frequent consumers’ routines.

Upside provides our merchants with a 1% to 3% lift in total revenue on average within the first 12 months of launching, which in the case of this example, significantly elevates the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). 

Here’s that store after introducing Upside:

With this increase in profit and new customers, you may be wondering how your staffing would keep up with larger demand. Many businesses find that they have underutilized labor, and they can shift to fill increased demand. But even if you are understaffed, the increased margins that Upside provides allow you to hire as-needed and still earn a profit.

Assuming a new field employee spends half their time working as a cashier and the other half stocking shelves, if they can process an average of 30 carts per hour, we estimate they can each check out $96,000 in revenue per month

This means for every $96,000 in incremental revenue, you need to hire a new staff member to work 160 hours per month. If you pay a fully-loaded hourly rate of $20.25, this would translate to $3,240 in new operating costs.  

In our prior example, we drove a 3% increase in revenue, equal to a $60,000 boost. This would require a retailer to staff an additional 100 labor hours, or add $2,025 in operating expenses monthly:

Depending on the state of your labor market (as many businesses are struggling to hire), you can elect to offer a higher, more competitive wage upfront. Luckily, as these calculations show, even a 20% increase to a $24 fully-loaded hourly rate would increase labor costs to $2,430 and still provide an EBITDA growth of 5.87%. This figure could even be distributed so you could hire staff at a slightly higher rate (say $21 to $22 an hour) and pay out raises to existing staff.

If you can split the difference correctly, you can bring in new profit, attract new talent, and reward your team all at once.

Upside’s success with Grocery Store X proves that thinking about your business in terms of maximizing your capacity utilization can lead to results that wildly exceed your expectations. By thinking about your business differently, you can transform monotonous growth strategies into truly effective ones, and start experiencing a greater bottom line every month.

To learn more about how Upside can help you maximize your capacity utilization, get in touch: 

Why measuring capacity utilization is essential for grocers

Tyler Renaghan

Linkedin - Upside

Tyler Renaghan is a business development leader with over 15 years of experience in identifying new segment opportunities, developing high-performing sales teams, and elevating company profiles with target markets. In his current role as Vice President of Grocery, he is responsible for developing the go-to-market strategies that drive merchant adoption and continued growth through our retail partners on the Upside platform. Prior to joining Upside, held critical leadership roles at Instacart and Groupon.

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