Mark-ups At The Grocery Store

 

Today, I'm looking at how grocery stores determine the amount of markup they use since most of our students end up going there to shop for something. They are familiar with them so taking time to talk about markups and connecting them to a personal experience can help students relate to the topic.  

Even when discussing the amount of markups used by grocery stores, it isn't a clear cut percent because it depends on the type of product. Some items are marked up only a bit while others have a huge markup.  In fact, there are so many different factors, my mind is going wow.

In general, the people who determine the markup in grocery stores base it on the category such as competitive, destination, innovative, etc, market intel, demand, gross margins, and sales target.  There are staff members who negotiate prices for every product such as milk, vegetables, etc, are trying to get prices that are best for the store but allow them a better margin but some like milk are subject to both state and federal pricing regulations and it's price for store brand is set so there is a single digit or negative margin so they match other retailer pricing.  If the milk is more of a specialty item that is locally produced with cream and undergoing low heat pasteurization, it might have a much higher margin of 20 something.  The idea is that one looks at the amount of sales and margins across the whole category so the gross margin where the store wants.  So they have to look at what margin the whole category brings in with all the individual product margins taken into account.

Another thing to look at is the wholesale price they pay.  Wholesalers are the people who sell the products to the stores.  Sometimes the wholesalers are a part of the grocery chain but more often they are a third party who sells these products to make a profit. These people markup their products from a low of 2 to 3 percent for mass market products to 30 percent for specialty items but most range in the 5 to 15 percent range.  Next we'll look at the product producers who sale to the wholesalers.  These people sell their products to wholesalers based on what they believe retailers want.

Farmers who sell fruits and vegetables sell their products by the case and price them according to what the market will bear so they cover their labor and overhead and what the wholesaler is willing to pay. They hope to end up with a price that covers their operational costs while hoping to make a profit. For multi-ingredient products, pricing gets trickier but depending on the product can have a high markup.  Again it all boils down to setting a price that wholesalers are willing to pay.

So it boils down to the farmers who sell their products either to a wholesaler who sell it to the stores or sell to a manufacturer who turns it into another product to sell to another wholesaler who sells it to the grocery store. Basically, everyone from the farmer to the grocery store have to include a markup to cover operating expenses.  In addition, the markup is often determined by whether its a name brand, off brand, is a specialty item or a mass product, demand, and overall categories. 

Furthermore, once the products hit the stores, they do things to add more markup such as anything that is chopped, cubed, or riced fruits and vegetables can have up to a 40 percent markup but if you chop up, cube, marinate, or just cut up meat, fish, or chicken can have even higher markups of up to 60 percent.  If you look at the baked goods in the bakery, the markup could be as much as 300 percent.  These markups are on top of what the grocery store paid the wholesaler.   

So there are markups all along the way.  Let me know what you think, I'd love to hear.  Have a great day.