A famous quote from Marcus Lemonis says, “If you don’t know your numbers, you don’t know your business.”
What’s the best way to know how successful your grocery store is? It’s simple: tracking your key performance indicators (KPIs). With changing customer demands, rapid inventory turnover, and increasing operational costs, knowing that you can make data-driven decisions to steady the ship is comforting, right?
So, which numbers should you track? There are so many options! But if you want to streamline processes, cut down on waste, and improve your store's profitability, it’s time to take the leap.
This article highlights the top eight inventory KPIs you can track to drive growth in your grocery store. We’ll also show you how a modern POS system helps to track and analyze the numbers, and how to set SMART goals. Let’s unlock some insights!
What Are Inventory KPIs, and Why Are They Important?
KPIs (key performance indicators) are metrics you can use to measure how well your inventory processes work. From stock turnover rates to customer lifetime value, knowing your numbers helps to optimize inventory management and make data-driven decisions for your store. No more guesswork or confusion!
Tracking KPIs is crucial to managing inventory efficiently. You can find gaps in your process and opportunities for improvements and cost savings. Your inventory should make you money, not eat into your bank balance. Tracking metrics over time also shows the impact small changes can have.
If you don’t set inventory KPIs, you risk operating blindly without insights into the health of your operations — which can lead to stockouts, excess stock, shrinkage, and lower profits.
With a holistic view of your inventory, you can explore the impact of shifting trends, track changes in consumer behavior, and adapt fulfillment models to optimize inventory management.
8 KPIs To Track for Your Grocery Store
Use these eight KPIs as inspiration. You can add to them, take some away — whatever works for your unique grocery store — and optimize your inventory management processes.
#1: Inventory Turnover Rate
This critical metric highlights how well you manage your inventory. It calculates how swiftly you sell and replace inventory over a period of time. The formula is:
- Inventory Turnover Rate = Cost of Goods Sold / Average Inventory
So, what does this mean? A high turnover rate indicates that you sell inventory and replace it quickly. This signals strong product demand and effective buying and inventory management processes. A low turnover rate suggests that products aren’t flying off the shelf and inventory investment and levels are excessive. Low turnover rates point to underlying issues like poor sales, ineffective inventory practices, or mismatches between supply and demand.
Pro tip: Your point of sale (POS) system tracks turnover by recording sales and inventory data. Automated inventory management provides real-time visibility into stock levels. You’ll see what’s selling and what isn’t, and how fast and how often inventory is sold. You can even set reorder thresholds and, in some cases, set up automatic reordering.
#2: Gross Margin by Product
Gross profit margin by individual product provides visibility into the profitability of each inventory item. Gross margin is revenue minus cost of goods sold, shown as a percentage of revenue. To calculate it:
- Gross Margin = (Revenue - COGS) / Revenue
Analyzing gross margin by product helps identify your most profitable inventory items. You can then focus buying decisions, marketing efforts, promotions, and sales for the highest gross margin products. Products with low gross margins represent opportunities to renegotiate supplier pricing, reprice the product, or potentially discontinue carrying unprofitable items altogether.
Pro tip: Use your POS system to track gross margins. The POS system automatically records sales revenue and the cost of goods sold per unit. By automating the gross margin calculation, you can get data-driven insights into product profitability.
#3: Backorders
How well do you align with customer demand and fulfill orders? Monitoring the rate of backorders can help you assess inventory management. A backorder occurs when a product is out of stock and needs to be ordered to fulfill a customer’s requested order.
Related: 5 Retail Pricing Strategies to Sell More and Delight Customers
A high frequency of backorders suggests issues with inventory planning and a lack of insight into customer demand and preferences. When customers repeatedly experience out of stock situations, they’ll go elsewhere. Unreliable product availability can negatively affect sales and customer loyalty. On the flip side, you can improve the customer experience and protect revenue by keeping backorders low.
Pro tip: Your POS system can track when a product needs to be ordered because it’s out of stock. You can use this data to identify problem areas and optimize inventory mix, safety stock levels, and replenishment planning.
#4: Stockouts
Stockouts happen. You won’t catch every instance; sometimes, products might surprise you! When customer demand for a product exceeds its availability, you might lose sales and customers.
Tracking stockouts is crucial because you need to know how frequently they occur, when they occur (seasonality can play a role), and diagnose issues with inventory planning, forecasting, and replenishment processes. By minimizing stockouts, you can provide reliable availability, enable sales, and strengthen customer relationships.
Pro tip: A modern POS system with real-time inventory management tools can track inventory in perpetuity. You can set alerts when items need replenishment and use forecasting tools to align inventory with customer demand. Setting stockout reduction targets and monitoring progress over time is key for optimizing operations.
# 5: Customer Lifetime Value (CLV)
For any business, knowing the total revenue you can expect from an average customer over the lifespan of your relationship with them is a valuable insight. You can project future revenue and profits, and identify your store's most valuable customer segments.
Look at data like average basket size, for example, which measures the total value of products sold together in a single transaction. You’ll get insights into customers' purchasing behavior, allowing you to identify opportunities to increase order values.
With this data, marketing becomes easier. You can focus your marketing efforts on acquiring and retaining customers with the highest predicted lifetime values. Tracking CLV consistently provides insight into whether your customer experience and retention initiatives are succeeding.
Pro tip: Use your POS system to collect customer transaction and activity data. With granular data on sales, products purchased, average spending, and retention, you can calculate CLV and set targets for the future. These targets will inform inventory management and relationship-building strategies.
#6: Fulfillment Cost per Order (CPO)
Fulfillment cost per order measures the total expenses involved in processing, picking, packing, and shipping each customer order. This is especially useful for your e-commerce and BOPIS (buy online, pick up in store) operations. You’ll know how efficient your order operations and delivery are, allowing you to:
- Streamline processes
- Optimize inventory allocation
- Improve packing and shipping methods
- Reduce overhead costs per order
With a lower CPO, you're maximizing profitability. However, keeping CPO low is crucial for protecting margins as order volume increases. Labor costs, materials, facility expenses, transportation, returns processing, and other operational costs all affect CPO.
Pro tip: Your POS system provides data on total order volume and sales totals. Combined with fulfillment spending data, you can calculate cost per order.
#7: Shrinkage Percentage
Shoplifting, employee theft, vendor fraud, administrative errors, spoilage, and damage are all factors that cause shrinkage. To calculate the shrinkage rate, divide the total value of missing or lost inventory by the total value of the overall inventory.
- Shrinkage Percentage = Total Value of Missing Inventory / Total Inventory Value
Related: What Is Inventory Shrinkage in Retail? 8 Ways to Prevent It
Next, you’ll need to identify problem areas. Keeping shrinkage low is a challenge, especially for grocery stores stocking perishable items. Do you have high levels of shoplifting or sloppy inventory handling processes? Find the root of the problem and take action.
Pro tip: Use your POS system to track shrinkage with real-time inventory visibility. Compare system-recorded sales and stock levels with physical inventory counts to spot unexplained losses. Some modern POS systems integrate with security cameras and other theft-prevention tools.
#8: Sales per Square Foot
Do you know how efficiently you use your store’s space to generate revenue? With sales per square foot, you will! Calculate it by dividing total sales by the total floor area of the store. This metric is particularly important for physical retail stores, like grocery stores, as it can inform decisions about store layout, product placement, and inventory selection.
- Sales per Square Foot = Total Sales / Total Floor Area
A high ratio indicates that you optimize and use all available space to drive sales. A low ratio indicates an ineffective store layout, products placed in the wrong sections, or changes in how customers navigate your store.
To improve your sales per square foot ratio, you can:
- Move popular grab-and-go items to the front of the store, making it more convenient for customers to access. You might also increase impulse purchases.
- Reserve end caps for showcasing and promoting deals, seasonal items, and new products.
- Add small display cases for showcasing baked goods. The sights and smells of appetizing fresh baked treats can spur add-on purchases and increase average basket size.
Pro tip: POS systems can easily track sales per square foot by providing accurate sales data. By analyzing trends, you can improve inventory planning, merchandising, and layout adjustments to efficiently use all available selling space.
Related: The 7 Best Grocery Store POS Systems in 2023 [Pricing and Reviews]
Set SMART Goals for Your Grocery Store
Tracking inventory KPIs can be a game-changer for your grocery store. But every KPI needs a goal. And every goal you set should be SMART (specific, measurable, achievable, relevant, and time-bound).
What would a SMART goal look like for your grocery store?
- Specific: Improve the inventory turnover rate of perishable items in the store.
- Measurable: Increase the inventory turnover rate of perishable items from the current eight times per year to 10 times per year.
- Achievable: Introduce frequent but smaller orders for perishable items to ensure freshness and reduce waste. Additionally, marketing and sales efforts can be increased for these items.
- Relevant: Improving the inventory turnover rate is relevant to the store's financial health. Faster turnover indicates better sales and fewer resources tied up in stock. It's especially crucial for perishables where the risk of spoilage is high.
- Time-bound: Achieve this goal over the next 12 months.
Grocery Store Inventory KPIs: Get the Help You Need
Monitoring inventory KPIs might initially feel overwhelming, especially if you don’t have the tools to make it easy! Modern POS systems can simplify tracking critical metrics like turnover rate, gross margin by product, and stockouts through custom reports and intuitive dashboards.
POS systems automate data collection and provide real-time visibility into inventory health. But you can’t set it on autopilot. Once you’re tracking the right metrics, it’s crucial to use those insights to spot issues, identify gaps and opportunities, and make smart inventory decisions.
Not every POS system is built the same. And as a grocery store owner, you need a POS solution dedicated to helping grocers win. Do you want to see how POS Nation can help you manage inventory with ease? Check out our free Guide to Grocery Store Inventory Management today!
