It doesn’t matter whether you believe that Sunday Shopping should legalize in the retail or section or not. No matter what your opinion is the retailers will want to open on Sunday’s. Is this in their best interests? Why wouldn’t they be motivated to open on a Sunday? There are some strong economic reasons not to open your store on a Sunday.
It all began one day when I read an editorial in the Daily News. One particular reader was explaining that even if all the grocery stores were open on Sundays they wouldn’t make any money. He said that people can only eat so much food in a week and opening on Sunday won’t motivate people to buy more groceries. That got me to thinking on the subject and this is what I came up with.
Whether you’re a penny saver, cheap, poor, rich, have a hole in your pocket or just a plain stupid idiot with money there is no denying the fact that you normally spend the same amount of money on groceries every week. In any given month your grocery cost per day is the same. It is unlikely that you will spend more just because the grocery store is open on Sundays. Let’s take the example of Joe Samsquanch. Now Joe is a normal person who spends approximately $126 in the course of the week. This may not seem reasonable, so give him a wife, kids or whatever until you think that $126/week of groceries is normal. Anyhow, this is how his budget would look:
Now, how would Joe’s budget look if the grocery stores were open on Sunday? Let’s look:
After looking at these tables, one has to ask what the grocery stores have to gain by opening on Sundays anyway. Well, they want to open because little stores such as shoppers are stealing business they could get on Sundays. One thing left out of the tables above is where Joe spends his money. Assuming that Joe is an average customer that doesn’t care where he buys groceries:
My point is not to make an ultra realistic model, but to show you that there is money being spent on groceries on Sundays that the big store aren’t getting. Obviously Sobeys and Loblaws make more grocery money than shoppers and Pete’s in a week. I’m also being quite generous to the Co-op by giving it $0 of sales rather than negative numbers.
Anyhow, if the big grocery stores were to open on Sunday’s things would look like this:
So as you can see, although people don’t spend anymore on Sundays, the big groceries stores see that there is some money to be made. The key being that there are no new sales dollars to be made, but they can steal sales dollar form the competition. But is it feasible to open on Sundays? Let’s look at some profit and cost models. These look at the industry as a whole, not any particular store. There are no numbers in this model (the numbers are to come in the next model)
Now I don’t know how much you know about this stuff. So let me explain. I apologize in advance if you know this stuff already; I’m trying to write this so an idiot can follow along.
There are three types of costs, Variable, fixed and mixed. Variable costs are the costs that we incur in relation to the products that we sell. For example, we only incur the cost of plastic bags if we sell product.
Fixed costs are the opposite of variable costs. They are a lump sum that remains the same no matter how much business we do. Rent is a good example of a fixed cost, as is a salaried employee. No matter how much we sell or how long we stay open, these costs remain the same.
Mixed costs are a combination of fixed and variable. The cost of the employee’s wage, power, and Heat/air conditioning are examples of mixed costs. These costs are fixed for an entire day, but are only incurred if we open for the day. As you can see, they have aspects of both costs. They are only incurred if we are open, but will cost us the same every time we open.
So for our model let’s say that variable costs are $0.20 for every dollar in sales, $200 of fixed sales everyday, and $75 of mixed costs for every day we are open. So let’s look at our model with numbers (for a Monday –Saturday Grocery Store):
So as you can see opening 6 days a week nets the industry $3,970 in profit. I bet they won’t make as much money if they open 7 days a week. Look below:
The industry made $3,895 when they opened all seven days. That is $75 less than when they opened 6 days a week. What happened? Well it’s a combination of two things. The first is that people are not going to spend more money on groceries just because there are more stores open on Sunday. People only buy a certain amount of groceries in the course of a week.
The second reason that less money is made is because we incurred more mixed costs. The variable costs won’t cost any more because they are in direct proportion to the sales revenue. Fixed costs don’t change because these are incurred these anyway, open or not. Finally, mixed costs do increase because they are incurred only when they are open and they are a fixed amount, regardless of how much sales revenue there is.
For the industry to make money they must make enough new money to recoup the extra mixed costs. Unfortunately since shoppers don’t buy extra groceries even when grocery store are open and they have the disposable income, they can’t increase sales in order to achieve this.
So why do grocery stores want Sunday shopping? Because from my earlier point that individual grocery stores can make money by opening on Sundays. Sobeys and Loblaws can steal grocery sales away from Shoppers and Pete’s. People buy stuff on Sunday. They can only go to Shoppers and Pete’s. By opening on Sunday, Sobeys and Loblaws can steal some of that revenue form Shoppers and Pete’s. This is like new money to them and they can recoup some of their mixed costs.
Can Sobeys and Loblaws steal enough money form Shoppers and Pete’s to make up their lost mixed costs? They seem to think so.
This whole scenario revolves around the fact that there is limited consumer dollars in the industry. The idea should be to stay open the least amount of time possible. If the industry only opened one day a week, they would occur mixed costs only once a week. Why doesn’t this happen? Well besides the fact that it would piss of everybody and provide for poor customer service, there are some economical reasons. If a store only opened one day a week, a competitor that is open 6 days a week will steal sales away from the store that is open one day a week.
Grocery stores open longer because they realize that even though they incur more mixed costs, if they steal enough sales away from the competitor that is closed they can make up their mixed costs. So the competitor that is closed catches on and opens longer to try and steal the sales back. What happens is that stores stay open as long as they see feasible, which is 8am – 10pm, or 24 hours in a few cases. Grocery store don’t necessarily want to be open as much as they do, but are somewhat forced to because of competition.
My viewpoint was strictly about the money and costs. Stores stay open to provide extra customer service and other qualitative reasons. Stores that are open longer than their competitors will also have chance to show the customer a good shopping experience that will generate repeat business.
The key is that in the face of fierce economic competition each store has the potential to re-coup the extra costs of opening on Sunday, but based on my simplistic model, the sales must be at the expense of someone else, there is always going to be a winner and a loser.
A friend of mine pointed out that Shoppers and Needs are owned by Sobeys or Loblaws and therefore both grocery chains would effectively make the money lost on Sunday Shopping since they both will have a segment open on Sunday. Not true in my opinion. Neither store sells groceries to the extent that Sobeys does. These stores specialize in impulse items, necessities and basic groceries; they are not meant to offer the wide variety of selection as a Sobeys or Loblaws would. If they offered the same products as Sobeys they in fact would be a Sobeys, defeating the point of having them. To sum up this point; the small convenience stores are pursuing a different strategy and not meant to take the place of large grocery giants on the weekend.
If one were to go to the Toronto Stock exchange (www.tsx.com) and search for Shoppers drug mart, you will find that it is in fact a publicly traded company. This means that even if Sobeys or Loblaws owns this chain, they only get some of the profits. Obviously if they owned 100% of Shoppers Drug Mart, Shoppers Drug Mart wouldn’t have publicly traded shares. What I’m getting at here is that Sobeys and Loblaws only get a dividend back from Shoppers for their ownership. Most people don’t realize that just because you own 30% of a public company, you don’t actually get 30% of their net income in cash. It’s a little too complicated to get into here (accountants making up silly rules and numbers), but the bottom line is that Sobeys or Loblaws have to wait for dividends. So if Sobeys and Loblaws get Sunday Shopping they can seize of this cash flow for themselves.
Why would they own shares in Shoppers then? Why not? You get a share of the Sunday Shopping market through dividends. Someone did an analysis and saw that buying shares in Shoppers would look good for the financial statements and might be a worthwhile investment with a positive return.
In closing I would like to quote an editorial in the Daily news… “Why can I buy a liter of milk from a farm, convenience store, or a farmers market, or a restaurant on a Sunday, but not from a grocery store? What’s the difference? 4000 square feet or 4000 +1 square feet?”