The WaPo Identified Independent Grocer’s Core Problem. AI is the Solution.

Sam Fakhouri

On August 25, Jaclyn Peiser’s article in the Washington Post entitled, “Small Grocers Feel Squeezed by Suppliers, and Shoppers Bear the Pain” laid out the core issue facing independent grocers across the US. Namely, as compared to the big box national supermarket chains, independents struggle to achieve economies of scale in their purchasing and therefore have had far less flexibility in staying competitive with their pricing in the midst of significant inflationary pressure.

The scenario Ms. Peiser detailed is indeed bleak, but it doesn’t have to be. While indeed, the wholesalers serving independents need to do a better job at negotiating and delivering competitive pricing with vendors and there are other structural issues that make independent grocers inherently less efficient than Walmart or Kroger, all is not lost. There is hope, albeit from an unexpected place – artificial intelligence.

But before we get into technology, let’s explore the problem in more detail.

The Pricing Disadvantage

Large retail chains enjoy substantial economies of scale, allowing them to secure bulk discounts and offer lower prices to consumers. In contrast, small grocers often pay more for the same products, leading to higher prices for their customers. Even as supply chain logjams eased, grocery prices did not decrease proportionally. According to USDA data, in 2023, 11.2% of consumers’ disposable income went to groceries, compared to 8.6% in 2020. This persistent rise in grocery costs reflects the ongoing strain on small grocers and their customers.

Small and regional retailers also face proportionally higher upfront costs compared to their big-chain rivals, which impacts their profit margins. Privately owned grocers reported a net profit before tax of 1.4% in 2023, down from 5% in 2020, according to research from the National Grocers Association. In contrast, net profit margins for big-box and supermarket chains stood at 7% in the first three quarters of 2023, according to an FTC study. Since the pandemic, major chains have been operating at the highest profit margins on groceries in two decades, as noted by the White House Council of Economic Advisers earlier this year.

The Threat to Local Communities

These structural issues of higher wholesale prices and lower profit margins have put many independent supermarkets on the edge of solvency. While that is upsetting for their owners, it can be catastrophic for the communities that they serve. The closure of independent grocers can have severe repercussions for local communities, particularly in rural or underserved areas.

Here’s how these closures impact residents:

1. Increased Travel Costs: In many rural areas, residents have limited access to large supermarkets. For instance, in Chadron, Neb., the nearest Walmart is 55 miles away. Many residents, lacking personal vehicles, must pay around $25 for a ride to the nearest superstore. This additional cost burdens those with limited financial means and can make grocery shopping more expensive.

2. Food Deserts: The closure of local grocers can result in food deserts—areas where access to affordable, nutritious food is scarce. Without nearby grocery stores, residents may turn to convenience stores that offer higher-priced, less healthy options. This situation can lead to poorer diet quality and increased health issues within the community.

3. Economic Impact: Independent grocers often serve as key local employers and contribute to the local economy by purchasing from nearby suppliers. When these stores close, it can lead to job losses, reduced local economic activity, and a negative ripple effect on other businesses. The loss of these businesses can also diminish community investment and support.

4. Loss of Community Hub: Local grocery stores often act as community gathering places, supporting local events and fostering social interactions. Their closure can erode the social fabric of the community, reducing opportunities for residents to connect and engage with one another.

Technology Solutions for Independent Grocers

Embracing modern technology Solutions for independent grocers can help them compete more effectively with larger chains. Here’s how technology can support their operations:

• Puzl AI: This predictive AI platform helps grocers manage their gross margins with leading-edge artificial intelligence. By forecasting margins up to 12 weeks in advance, Puzl AI allows grocers to proactively address potential issues and optimize their pricing strategies. The company claims it is able to add an additional 100-150 basis points to a grocer’s bottom line while lowering prices and improving cash flow by up to 40%.

• Afresh: Afresh uses AI to help grocery stores manage fresh food inventory more effectively. By predicting demand and reducing food waste, Afresh allows grocers to optimize stocking strategies while minimizing shrinkage. This tool is specifically tailored for managing perishables, making it ideal for supermarkets and independent grocers dealing with fresh produce.

• Focal Systems: Focal Systems offers an AI-powered platform that helps grocery stores automate inventory management through shelf scanning and real-time data collection. By using cameras and machine learning, the system detects out-of-stock products and ensures shelves are constantly replenished. This tool helps grocers optimize shelf space and improve customer satisfaction.

• Stor.ai: Stor.ai provides a digital commerce solution for grocers by integrating eCommerce, fulfillment, and customer communication into a single platform. It allows independent grocers to easily manage online orders, track customer preferences, and offer personalized promotions, creating a seamless online shopping experience while boosting customer loyalty.

• Reflexis: Reflexis provides workforce management and task execution software tailored for grocery stores. It helps independent grocers optimize labor scheduling and ensures store tasks are completed on time. The system’s real-time communication features also enable grocers to respond quickly to operational challenges, improving store efficiency.

Conclusion

Independent grocers face significant challenges from larger chains, but by leveraging new, profitability-enhancing technologies, they can improve their competitiveness while they improve their bottom line. As prices remain high and access to affordable groceries becomes more challenging, small grocers must adapt and innovate to serve their communities effectively and continue thriving in today’s market.