How Dynamic Markdowns Can Help Mitigate Food Waste
The United States has a startling food waste problem, much of it caused by the grocery retail market. Thirty percent of food in grocery stores is thrown away in the U.S., and 16 billion pounds of food is wasted by retailers every year, according to RTS data. In fact, the food that grocers waste is valued at almost double the amount of profit from food sales overall. This is the heart of the issue for retailers.
When a product expires on the shelf, it must be discarded. An expired product represents a huge drain on profitability, particularly when it comes to fresh food. Every time a product is thrown away, a sale is lost. This impacts both a retailer’s top and bottom lines because stores not only miss out on the sale of a product, but they also have the further cost of dealing with the wasted product at the same time.
To combat this issue, grocers may implement markdowns (i.e., price reductions) to encourage customers to buy those items approaching their expiry date. However, 30 percent of U.S. retailers have no real markdown processes in place, a recent Retail Insight study found, which means they're wasting a significant percentage of their fresh food and missing out on vital sales.
A Land of Opportunity
After studying over 50 U.S. food retailers across 263 stores in 39 states, Retail Insight found that most retailers using a markdown strategy deploy static discounts. This means they discount products in nondynamic increments (25 percent, 50 percent, etc.) or use flash labels ($1, $2, 5$ off, etc.) to encourage customers to buy expiring products.
While these retailers are at least doing something to capture lost sales, they’re still missing out on potential revenue. Grocery stores already operate on razor-thin margins, so it’s crucial that retailers do everything they can to maximize the value they get from each product and sale. A bigger opportunity exists through the effective use of dynamic markdowns.
Utilizing Dynamic Markdowns to Capture Lost Value
A dynamic markdown is designed to produce a price that optimizes the likelihood of purchase and to maximize the profit margin that the retailer captures. In other words, the price at a given point in time represents the “sweet spot” for both the customer and the retailer.
Retailers already sit on a mountain of data from their stores. That data can provide real-time views into sales, inventory, promotions, and more to calculate the optimized price for expiring items.
While static markdowns are easy to implement, often through stickered labels, the discounted price is not optimized for volume or profit maximization. This means that retailers using this basic approach miss out on the full value of their expiring product, and customers don’t save as much as they could on these items.
Another challenge of the static markdown approach is the fact that the discounts aren't applied consistently across products or stores, meaning there's no visibility to compliance for head office teams. In simple terms, they're unable to see how effective their expiration management process is being run, which is a huge issue as environmental and regulatory pressures rise.
A Smarter Approach Provides Long-Term Benefits
Overall, a dynamic approach helps retailers maximize sell-through and reduce waste. Utilizing dynamic markdowns allows retailers to better manage expiring products and create value for customers. This doesn’t just make customers feel like they’re saving more money; they actually do save more money, which increases their willingness to spend and improves overall loyalty.
The use of dynamic markdowns in retail can also be an important tool in the fight against food waste. Ultimately, the more stores that implement dynamic markdown strategies, the smaller the enormous pile of wasted food in the U.S. becomes — a win-win for retailers, customers, and the environment.
Paul Boyle is the CEO of Retail Insight, an advanced analytics platform that enables retailers and CPG brands to sell more and waste less.