Chapter 4: Product Strategy – Choosing the Right Product Mix in Grocery Retail

 

Chapter 4: Product Strategy – Choosing the Right Product Mix in Grocery Retail

“The secret of success in retailing is not having more products, but the right ones in the right place, at the right price.”
— Philip Kotler

Introduction

In grocery retailing, success hinges not only on location and price but also on the product strategy — particularly the product mix and product line decisions. A strategically curated mix of products can turn an ordinary kirana shop into a customer’s preferred daily destination. With increasing competition from organized retail and e-commerce, traditional and modern grocery stores must reassess their product strategy continuously to balance variety, customer preferences, inventory costs, and shelf space utilization.

 Selecting the Right Product Mix

A product mix (or product assortment) is the total range of products that a store offers. In grocery retail, this includes categories like grains, spices, snacks, dairy, frozen food, beverages, personal care, and cleaning products.

Steps to select the right product mix:

1. Understand Target Customer Needs: A local kirana store in a residential colony may focus on essentials and quick-moving items, while a supermarket in a metro can afford premium and imported lines.
2. Sales Data Analysis: Identify high-turnover products and eliminate dead stock using POS data or simple ledger analysis.
3. Market Trends: Add trending products (e.g., millet-based snacks, organic goods, sugar-free items) seasonally or experimentally.
4. Balance Essentials and Impulse Buys: Keep 70% core demand items, 20% medium-frequency purchases, and 10% new/impulse/seasonal items.

 

Product System and Mixes

• A product system refers to a group of related items that function in a coordinated way. For example, a cleaning product system includes floor cleaner, dishwashing gel, bathroom cleaner, and mop sets.
• These systems create cross-selling opportunities (e.g., pairing poha with peanuts and sev).
• Ensure product depth (different variants of the same item) in high-demand categories (e.g., 5 brands of tea, 3 sizes of oil pouches).

 Product Line Analysis

A product line is a group of closely related products (e.g., all brands and sizes of edible oils). Product line analysis involves:

• Profitability per SKU
• Customer preference patterns
• Shelf performance (product visibility vs. sales)

Using the ABC Analysis:

• A-items: Top 20% items giving 80% revenue (must stock).
• B-items: Mid-range items (can promote).
• C-items: Low movement (can rotate out or discount).

 

Product Line Length

Product line length refers to the number of items in a product line. A longer line offers more choices but increases inventory costs. A shorter line reduces holding costs but may lose customers seeking variety.

Ideal Strategy:

• For staples (atta, rice, sugar): maintain longer lines with local and branded options.
• For niche or low-margin items: limit line length to fast-selling SKUs only.

Managing Local vs Branded Goods

In the fiercely competitive grocery market, a store’s product offering must strike a careful balance between local products and branded goods. Each category has its own strengths, profit margins, and customer base. A well-managed combination not only improves profitability but also builds strong customer loyalty.

Local Goods: High Margins, Personalized Trust

Local products—such as namkeen, pickles, flour, pulses, papad, spices, and even household cleaners—often come from regional suppliers or cottage industries. These goods are usually more affordable for customers and yield higher margins for the retailer.

·         Advantages:
• Higher profit margin (15–30%) compared to big brands (5–10%)
• Flexibility in pricing and stocking
• Quick restocking due to nearby sourcing
• Products can be sold on trust or credit, especially in smaller towns

·         Challenges:
• Lack of packaging standards or expiry labels
• Customer perception of lower quality in urban areas
• No marketing support or return policy from suppliers

Despite the risks, local goods allow grocery retailers to develop their own "private labels" over time, helping them differentiate in the market.

Branded Goods: Customer Pull and Assurance

Branded products (e.g., Tata Salt, Parle-G, Surf Excel, Maggi, Amul, etc.) are driven by national advertising and wide acceptance. Customers often enter the store specifically asking for a known brand, making these goods necessary for footfall.

·         Advantages:
• Brand loyalty and trust ensures repeat customers
• Standardized packaging and quality
• Schemes and offers from manufacturers improve competitiveness
• POS materials and marketing support can be provided

·         Challenges:
• Lower retailer margin
• Price rigidity—unable to change rates freely
• Stocking pressure due to offers with conditions

Smart Inventory Mix Strategy

A successful retailer ensures:

·         60–70% shelf space is for fast-moving branded goods to maintain customer loyalty.

·         30–40% is for local and high-margin goods, especially for regular or bulk buyers.

·         Use bundle strategies (e.g., local sev + branded poha) to combine both categories.

·         Monitor customer feedback to adjust the mix regularly.

In metro cities, the trend is shifting towards premium and branded goods, but in semi-urban and rural areas, local products create identity and trust. The right balance depends on your store's location, customer profile, and purchasing trends.

Private Labels: How to Launch Your Own Store Brand

Launching a private label—a product line sold under your store’s brand name—can be a game-changing strategy for grocery retailers. In India, private labels account for 8–10% of FMCG sales, but in organized retail chains like D-Mart and Big Bazaar, they contribute over 20–25% of sales, particularly in categories like staples, snacks, and cleaning products.

Why Launch a Private Label?

·         Higher profit margins: Typically 25–40%, compared to 5–10% for national brands.

·         Customer loyalty: Shoppers often return for store-exclusive items.

·         Control over pricing and quality: You determine the sourcing and presentation.

·         Brand recognition: Builds your store's identity and differentiates it from competitors.

Steps to Launch Your Own Private Label

1.      Identify High-Margin, High-Demand Products: Start with staples like atta, pulses, tea, poha, or detergents, where customer sensitivity to branding is lower but quality is crucial.

2.      Find Reliable Local Manufacturers: Tie up with small-scale units or FSSAI-certified processors who can supply in bulk and allow co-branding.

3.      Invest in Packaging & Labeling: Even basic but clean, printed packaging with MRP, weight, and branding gives your product a professional feel.

4.      Pilot Launch with Loyalty Customers: Offer trial packs or discounts to regulars and collect feedback. Aim for a 5–7% conversion rate in the first month.

5.      Track Sales vs. Branded Goods: Use POS or ledger to compare. If private label items cross 30% of shelf sales, expand the category.

6.      Reinvest in Branding: Use in-store displays, combo offers (e.g., “Buy 2 kg rice, get 1 detergent free”), and seasonal packaging.

 

A well-executed private label strategy can turn your kirana or mini-mart into a powerful independent retail brand.

Packaging, Labeling, and Expiry Dates: Essentials for Building Trust and Compliance

In the grocery business, packaging, labeling, and expiry date management are not just regulatory requirements—they are powerful tools to build customer trust, brand reputation, and operational efficiency. Especially in a time when customers are increasingly health-conscious and selective, these elements directly influence purchase decisions.

 

1. The Role of Packaging

Packaging serves multiple functions—protection, preservation, and promotion. A well-packaged product:

• Prevents contamination and spoilage, especially for items like flour, pulses, and spices.
• Enhances shelf appeal through attractive design and clean presentation.
• Provides ease of storage and transportation for both seller and consumer.

Example:
A transparent, sealed 1 kg dal packet with branding, MRP, and nutritional value mentioned can outsell loosely stored dal in an open box by 3:1 ratio, even at a slightly higher price.

 

2. Labeling: Inform, Assure, and Differentiate

As per the Legal Metrology (Packaged Commodities) Rules, 2011 and FSSAI norms, proper labeling must include:

• Product name
• Net weight or volume
• MRP (inclusive of all taxes)
• Batch number and manufacturing/expiry date
• FSSAI license number (for food items)
• Name and address of manufacturer/packer

For private label products, labeling offers an opportunity to promote your store’s brand identity. Adding details like “Packed by: XYZ Supermart, Indore” builds local brand recall.

 

3. Managing Expiry Dates and Stock Rotation

Efficient expiry date management reduces losses due to unsold stock and avoids penalties during inspections.

Best practices:

• Follow FIFO (First In, First Out) method on shelves.
• Use color-coded labels or stickers to highlight near-expiry stock.
• Offer discounts on items nearing expiry (within 15–30 days).
• Maintain a simple expiry calendar register or use POS alerts.

Statistically, stores that track expiry dates properly reduce food wastage by 15–20% annually and increase customer retention by ensuring fresh stock.

 

Investing in neat packaging, informative labeling, and transparent expiry practices not only ensures legal compliance but also positions your store as responsible and customer-friendly. In a competitive market, these seemingly small practices become the backbone of brand trust and repeat sales.

Law of Production and Product Strategy for Grocery Shops

Understanding the Law of Production

The Law of Production in economics explains how output changes when the quantity of one input is varied while others remain constant. It is commonly explained through:

1.      Law of Variable Proportions (short-run)

2.      Returns to Scale (long-run)

In the short run, where capital (like shop space and infrastructure) is fixed, increasing labor or stock may yield:

·         Increasing Returns: Output (sales/profit) increases at an increasing rate.

·         Diminishing Returns: After a certain point, each additional input adds less to output.

·         Negative Returns: Too much input causes inefficiency, losses, or spoilage.

 

Application in Grocery Retail

1. Optimal Product Range (Law of Variable Proportions)

·         Example: A shop adds new varieties of biscuits. Initially, sales grow rapidly (increasing returns).

·         Later, more biscuit types confuse customers and reduce turnover per item (diminishing returns).

·         Excess stock leads to wastage and expired goods (negative returns).

Thus, understanding the limit of productive capacity is essential. Stock only as much as your shop space, capital, and local demand can support.

 

2. Store Expansion (Returns to Scale)

In the long run, if a grocery store increases all inputs (space, manpower, capital):

·         Increasing Returns to Scale: A new outlet or warehouse leads to lower per-unit cost due to bulk buying, better logistics, and branding.

·         Constant Returns: Costs and output rise in the same proportion.

·         Decreasing Returns: Operational complexity rises faster than output—common in poorly managed multi-store chains.

Product Strategy must align with your production scale. A single kirana store can focus on:

·         Fast-moving essentials (atta, tea, oil)

·         Private labels with high margins

·         Controlled variety to avoid clutter

A supermarket or chain store, with higher capacity, can handle:

·         Wide product mix (imported, gourmet, frozen)

·         Seasonal products

·         In-house bakery, dairy, or cleaning product lines

 

Strategic Integration

Understanding production laws helps grocery retailers:

·         Avoid overstocking and underperformance.

·         Align product mix with scale of operation.

·         Decide when to scale up, diversify, or consolidate.

 

Conclusion: “Smart product strategy is not about adding more—it’s about knowing how much more is still productive.”

 

Graph: Law of Variable Proportions in Grocery Store Inventory

Title: Effect of Product Variety on Profit in a Grocery Shop

Profit ↑

  |

  |                     * Increasing Returns

  |                   *

  |                *           ← Optimum Variety Range

  |             *

  |          *

  |       *                       * Diminishing Returns

  |    *

  | *

  |                                 * Negative Returns (Overload)

  |_____________________________________________→

                 Product Variety (SKU Count)

Explanation:

·         Initially, adding more product types increases sales and profit (increasing returns).

·         After a certain SKU range, returns per new product diminish.

·         Beyond this, excess variety causes confusion, increased inventory costs, and wastage.

 

📋 Table: 25 Situational Examples – Grocery Shop Product Strategy

S.No	Situation	Product Strategy Aligned with Production Law
1	200 sq. ft kirana in residential area	Stock 2–3 brands per item; focus on daily essentials
2	Expanding shelf space from 3 to 5 racks	Add high-margin dry snacks and pulses
3	Poor turnover on flavored noodles	Limit to top 2 variants only
4	Too many detergent brands unsold	Retain 2 fast-moving SKUs; drop others
5	Customer demand for more organic products	Pilot 5 items; monitor rotation
6	Festival season approaching	Add seasonal products temporarily (sweets, pooja items)
7	Inventory holding cost rising	Reduce SKU length in slow-moving categories
8	Launch of private label namkeen	Drop 1 national brand to make shelf space
9	Competing with nearby supermarket	Stock exclusive local products + essentials
10	Daily wastage of unsold bread	Shift to made-to-order supply model
11	2-store chain setup	Standardize top 100 SKUs; regional items by location
12	Rural area customer base	Prefer local packaging, unbranded pulses
13	Urban shop with student population	Add ready-to-eat meals, instant coffee
14	Small freezer installed	Add 5 SKUs of frozen peas, fries
15	High electricity bills	Reduce cold drink variety; focus on fast-sellers
16	Dairy items near expiry daily	Shift from bulk to smaller pack inventory
17	Space shortage	Remove items with <5% monthly turnover
18	Local customer feedback suggests adding ayurvedic soap	Test 2 SKUs under private label
19	Many sachet packets cluttering counter	Create hanging display strips to organize
20	Own-brand flour selling well	Add branded rice under store label
21	Customer trust on open pulses declining	Move to semi-packaged 500g and 1kg packs
22	Nearby shop started deep discounts	Bundle products with fixed savings (combo packs)
23	Shop facing theft in lower-shelf items	Shift costly items to monitored shelves
24	Feedback: limited baby care products	Add 2 diapers, 1 baby powder brand only
25	Targeting online orders for nearby societies	Stock items with longer shelf life + UPC barcode

  

Case Study: D-Mart’s Product Strategy – Winning with Less Variety and More Volume

Company: Avenue Supermarts Ltd. (Brand Name: D-Mart)
Founded: 2002 by Radhakishan Damani
Stores: 330+ across India (as of 2024)
FY 2023-24 Revenue: ₹44,800 crore
Average Daily Footfall: 3.2 lakh+ customers

 

D-Mart has become a leader in India’s grocery and FMCG retail market not by offering premium ambience, but by executing a disciplined and data-backed product strategy. Its stock turn ratio is among the highest in the sector—over 10x annually, compared to 6–7x for many other large retailers.

 

Key Product Strategy Statistics

1. With
• Only 2-3 top-selling SKUs p (e.g., 3 variants of detergent vs. 12 in a typical supermarket).
• 80% of store area dedicated to high-frequency essentials: groceries, personal care, cleaning, and packaged food.
2. Private Labels – A Margin Multiplier
• D-Mart’s own brands (like D-Mart Awards, D-Mart Minimax) contribute23% or up to in select categories.
• Private label gross margins: 25–40%, compared to 8–12% for national FMCG brands.
3. Efficient Shelf Strategy
• Average shelf space per product: 18–22 inches, managed using plan.
• Dead stock ratio: <1.5%, well below the retail average of 3–5%.
4. Regional Customization
• 75% of stores stock region-specific staples (e.g., poha in Madhya Pradesh, coconut oil in South India).
• This boosts customer retention and reduces product returns.

 ✅ Teaching Notes

Learning Goals:

• To understand how limiting product variety can increase efficiency.
• To analyze the impact of product line depth and length on profitability.

Discussion Questions:

1. How does D-Mart’s SKU selection drive faster turnover and higher margin?
2. Why does focusing on essentials outperform fancy, low-turnover items?
3. What lessons can a 500 sq. ft. kirana shop learn from D-Mart’s product strategy?

 

🔜 What’s Next?

D-Mart's success is not just about what it sells, but how it prices. In the next chapter/blog, we will uncover the pricing strategy of grocery shops—covering techniques like psychological pricing, discount bundling, price anchoring, and how local shops can compete with online and chain-store giants using smart, data-driven pricing tactics.

 

“Smart grocery retailers don’t just sell products, they sell the right combination of need, desire,

and value every day.”

Books & Academic References

1.      Kotler, P., & Keller, K. L. (2016). Marketing Management (15th ed.). Pearson.

o    Relevant for: Product mix, private labels, and consumer behavior in retail.

2.      Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W. W. Norton.

o    Relevant for: Law of production, marginal returns, and economies of scale.

3.      Ramaswamy, V. S., & Namakumari, S. (2017). Marketing Management: Global Perspective, Indian Context. McGraw Hill Education.

o    Useful for Indian market orientation and product strategies in FMCG retail.

4.      Chopra, S., & Meindl, P. (2019). Supply Chain Management: Strategy, Planning, and Operation. Pearson.

o    Relevant for: Stock rotation, private label sourcing, and product bundling.

5.      Schiffman, L. G., & Kanuk, L. L. (2009). Consumer Behavior. Pearson Education.

o    For understanding customer perception towards local vs branded goods.

 📊 Industry Reports and Government Sources

6.      NielsenIQ India Report (2023) – Private Label Trends in FMCG & Retail.

o    Highlights that private labels in India are growing at 13% CAGR in food and grocery retail.

7.      Retailers Association of India (RAI) Reports (2022–2024) – Modern Retail & Kirana Digitization Reports.

o    Offers insight into grocery formats, SKU rationalization, and profitability trends.

8.      FSSAI Guidelines – https://www.fssai.gov.in

o    For packaging, labeling, expiry date regulations for food products.

9.      Legal Metrology (Packaged Commodities) Rules, 2011 – Ministry of Consumer Affairs, Govt. of India.

o    Details on mandatory declarations for packaged goods.

10.  IBEF (India Brand Equity Foundation) – FMCG Sector Report (2023)

o    Provides data on rural vs urban consumption and emerging trends in grocery retail.

 📝 Other Resources

11.  D-Mart Annual Reports (Avenue Supermarts Ltd.)

o    Practical example of how private labels and lean product strategy increase retail profitability.

12.  RetailWire.com, Economic Times Retail, and YourStory articles (2022–2024)

o    Regular features on how kiranas and modern trade balance branded and local SKUs