Natural Foods Merchandiser

An Easy Tool To Optimize Product Mix

Let's take a look at classical natural products retailing. Marcus Aurelius instructed us to "Look to the essence of a thing." To that end, successful store management, in its essence, is about good customer service and good category management.

At first glance, customer service would seem to have all the nuance to it—it contains all of the elements that contribute to a pleasant, well-informed, convenient shopping experience. Category management is really just stocking shelves. But which products on which shelves and at what price? With how many facings? Discounted how often and by how much? And when should those products go into endcaps or cross-merchandising displays?

These are the questions that superior natural products retailers answer consistently well. How? For the most part by listening carefully to customers, selectively accepting advice from vendors, using creativity and intuition and, above all, testing and learning. In other words, "winging it."

Hidden Gems And Loss Leaders
A category is a group of products that fulfill a customer need in more or less the same way, such as jarred pasta sauces, boxed teas or multivitamin tablets. Of course, not all categories are created equal. Whether your store is large or small, is extremely high end or discount oriented, has predominantly groceries or supplements, different categories perform different roles for you and should be managed differently.

Classic loss leaders like milk and eggs, if priced with a low margin, can have a significant effect on your price image and theoretically build traffic into your store. (I say "theoretically" because when every store in an area chooses the same loss leader, the effect cancels out.) On the other hand, specialty Asian ingredients round out your assortment, give merchandising appeal and provide opportunities to cross-sell the other components of an Asian meal.

Categories can be divided into the following classifications:

  • Everyday Luxuries—High profitability; high traffic. These are items with high perceived value that are used often by many customers or very often by a core group. Coffee, chocolate and breakfast cereals are some examples.

  • Hidden Gems—High profitability; low traffic. These may be new items or things that your customers have overlooked. They have high perceived value but are only used occasionally. Many ethnic food items might fit in here, as would aromatherapy products and Ayurvedic health and beauty products.

  • Core Values—Moderate profitability; high traffic. These categories make up the backbone of most grocery stores. They contain everyday items, without a lot of flash. Your customers will have little patience with high prices for these items. Examples include bread, pasta, tofu and carrots.

  • Gap Stoppers—Moderate profitability; low traffic. You carry these categories as a service to your customers and to round out your assortment. They are also regarded as somewhat ordinary, but they are not used very often. These categories include many baking items and some canned vegetables.

  • Loss Leaders—Low profitability; high traffic. There are some categories that you almost have to price at low profitability—milk, eggs—because your customers have a very clear "reference price" based on getting these items cheaply for years. There may be a few others that you choose to place here because of their impact on your price image or for another mission or strategy. However, this should be limited.

  • Fixer Uppers—Low profitability; low traffic. You should never choose to have an item or category fit in this box. Usually, things wind up here because they sit around so long that they have to be sold at a deep discount. Something needs to be fixed.



Inventory Turns/Year


Boxed breakfast cereals



Everyday Luxury

Packaged soup



Core Value




Loss Leader

Thai pastes and sauces



Hidden Gem

Organic buttermilk powders



Gap Stopper

Packaged camel yogurt



Fixer Upper

Using The Tool For Pricing
You can get some top-line value just by looking at where your categories or products fall out and asking: "Does this make sense?" Here is how it works.

  • Develop a sales list of all the products in your department or store and evaluate them based on profitability and velocity. For profitability, you can use margin. (Note: Use "actual margin" after you have already sold the product. This will pick up the effects of discounting and shrinkage.) For velocity, you can use inventory turns.

  • Determine a storewide target margin/profitability that shows where you expect your average product to be. Moderate profitability will be anything within a couple of points up or down from this number. Determine an average velocity/ inventory turn number. This will divide high velocity from low velocity.

  • Are there luxury items that are showing up in Loss Leaders? Maybe you are giving away margin unnecessarily.
    Assign each category to one of the six classifications. Evaluate what you see. Are there luxury items that are showing up in Loss Leaders? Maybe you are giving away margin unnecessarily. Is there a category of high-traffic foods showing up in Gap Stoppers? Maybe you need to increase the product offering or give it more visibility. Is there anything in Fixer Uppers? If there is customer value in the category, the price should be raised. If there is minimal customer value in the category and no strategic importance, drop it like a hot potato.

A Fictional Example
Really Good Example Natural Foods carries six categories of products all in one department called Grocery. The store manager went to her point-of-sale system and generated the following results for the past 12 months.

She determined that her target margin was 33 percent, so any margin from 31 percent to 35 percent was considered moderate. Average inventory turns storewide were 10.

When the store manager looked at this list, she thought, "Wow! We should really be carrying milk and soymilk to go with our breakfast cereals!" She also noticed that the margin on Thai pastes and sauces was quite low relative to what customer expectations were likely to be. She nudged the price higher and saw an increase in sales through impacting customers' expectations of quality. Finally, she came to grips with the fact that packaged camel yogurt wasn't taking off in the way her sales rep had promised, despite an in-store demo. It was time to make a clean break.

The example in the chart at top right shows how to use category classification as a way to analyze performance and make incremental improvements, but it also gives you a way to set prices for new products. Sure, you've got a suggested retail price and you should pay attention to what your competitors are doing, but also think about the role the category will play in your customers' lives. Is it perceived as a commodity or as something unique? Unique products that add excitement to peoples' lives (wasabi, candy bars, fresh mangoes) can support a higher price than more common items like milk, flour and rice.

Sherwood Smith is the president of Blue Sky Marketing, a full-service marketing firm serving the natural products industry, located in Traverse City, Mich. He can be reached at [email protected]

Natural Foods Merchandiser volume XXIV/number 8/p. 28-29

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