2 Essential pieces of the Supermarket Business Model

The concept of business models is well known, in summary, it is the expression of how a business makes money. It always involves a matrix of revenue generated, the fixed and variable costs of generating that revenue, and the choices that the business makes about its customers and how they will be serviced, and the way they incur the costs of that servicing.
Supermarkets are a great example of a number of seemingly similar competitors that have slightly differing business models. At a macro level they have strong similarities, relying on volume, price, and shopper numbers to succeed.
 
1.     Revenue generation. Supermarkets generate revenue on both sides of the equation.

• Shoppers buy products, paying at the checkout.
• Suppliers “pay” for shelf space via a range of charges levied for every variable the retailers can dream up. Volume discounts, payment terms, promotional levies, preferred shelf positioning, promotional slots, access to sales information, and a host of others. Some are items for which suppliers receive an invoice, others are taken as discounts off the invoice price, increasingly applied automatically as a part of the trading term package.

2.     Cost management. Supermarkets work on very low percentage margins, relying on the volume to generate the cash margins.

• Fixed costs are a significant part of retailers total costs, made up of the provision of the retail floor space, the logistics infrastructure and personnel. Supermarkets attack their fixed cost base aggressively using their scale as negotiation tools with landlords and logistics suppliers, while keeping a very substantial proportion of front line retail staff as casuals rather than permanent employees so they can better adjust staff levels to match activity. The sorts of choices retailers make are between high density shopping centre locations Vs stand alone locations. There are costs a benefits to each which are considered as a part of their strategic decision making.
• The biggest variable cost is the cost of good sold, and they similarly use their scale to manage those costs downward. Tactics vary between retailers, but the core game is to maximise their margins while keeping prices as low as possible to attract the volume buyers. This is an extremely delicate balance.
• Transaction costs are usually pretty well hidden in most businesses, but are really significant in the case of supermarkets simply due to the number of transactions they make. 

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Insights on managing FMCG and related businesses (Groceries, Supermarkets, Hypermarkets, Wholesalers) from Ameen Ahsan Strategy Consulting (AASC).
AASC is based at HiLite Business Park, Calicut (Kozhikode), Kerala. AASC serves clients across Kerala and Gulf (GCC) countries.
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