Driving product profitability in grocery requires a bespoke approach to the sector’s nuances.

In our latest retail-focused point of view, ‘Five tried and tested operational principles for retail resilience’ , we explored the key challenges facing today’s UK retailers and the mindset shift needed to maximise profit, reduce costs, enable all-channel growth, and connect with customers.

Though these operational principles are relevant and actionable across the industry, grocery stands apart in the world of retail, with its own set of challenges. It’s fast-moving, margin-tight, operationally complex, and considered one of the most competitive markets in the world. While other sectors can afford to hold stock, test pricing strategies, or absorb inefficiencies, grocery retailers operate in an environment where every decision – from supplier negotiations to shelf placement – can make or break profitability.

At a time when retail price inflation is at its highest in over a year and consumers are tightening their belts on discretionary spending, the pressure on grocery retailers has never been greater. Navigating this landscape requires more than just experience – it demands bespoke, data-driven solutions tailored to the sector’s unique challenges.

Grappling with a grocery price war

Consumers are demanding lower prices but delivering them sustainably is a high-wire act. A third of all grocery spending now comes via promotions, with tactics like discounter price matching becoming the norm. But while promotions drive volume, they often erode profitability. The challenge? Planning pricing strategies that are both effective and sustainable.

Meanwhile, shrinkage – from theft, spoilage, or errors – continues to eat into margins. Retailers are investing heavily to get it under control, but without the right data and tools, it’s difficult to pinpoint where losses are occurring and how to prevent them.

Asda’s recent, aggressive pricing strategy sent shockwaves through the market in its aim to make Asda 5-10% cheaper than competitors. Their statement of intent impacted the share prices of Tesco, Sainsbury’s, and M&S – illustrating how a bold pricing move by one player in a highly competitive market can trigger a chain reaction, affecting not just pricing strategies but also investor confidence and company valuations.

Retailers must now walk a tightrope: invest in price to win market share, but without sacrificing profitability. This is where strategic pricing, granular cost modelling, and end-to-end visibility become critical. Can grocers identify and invest in “hero products” that shape price perception, while balancing margins across the rest of the range?

Channel mix: growth vs. Margin

Tesco’s latest figures show online grocery sales have surpassed their pandemic peak, now accounting for 13.5% of UK revenue. While this channel is a growth engine, it comes with a cost: online fulfilment is significantly more expensive, eroding margins. Retailers must align on a margin measure that surfaces the true cost of omnichannel operations. This will provide the business case required to invest in technologies that optimise fulfilment efficiency and help inform ranging decisions in the online assortment.

The double-edged sword of QuickCommerce

A survey by Retail Gazette found that over 65% of major retailers have partnered with at least one quick commerce delivery service provider to meet the growing demand for quick deliveries. This trend allows customers to receive their groceries within minutes, enhancing the overall shopping experience and catering to the modern consumer’s preference for speed and convenience.

But with this boom comes a dilemma. Retailers know they must partner with these quick commerce platforms to be seen as a convenience brand, but not only does it disrupt traditional operations – pulling staff away from tills, demanding rapid fulfilment, and driving higher item pricing to cover platform margins – it’s also through these channels that they lose key customer information. As soon as a customer opts for an Uber Eats or Deliveroo delivery option, they are no longer a customer of the grocer. Which results in a fragmented customer journey and patchy data – making it harder to drive personalised, cohesive experiences and, ultimately, revenue.

The key is implementing the right tools and using that data effectively, to:

• Personalise promotions
• Inform assortment decisions
• Drive long-term customer value

Discover how to master data & AI to power the next generation of retail here.

The most forward-thinking retailers are already years ahead with this – leveraging data (and AI) to drive efficiency, profitability, and customer satisfaction. But how can those whose data & AI strategies aren’t quite as mature catch up? Read all about mastering your data & AI strategy in this detailed blog from our colleague Conor McGovern, Lead Enterprise Data & Analytics in the UK and globally, and global lead for Generative AI Strategy.

Is the EU trade deal a supply chain silver lining?

Amid the challenges, there’s a glimmer of good news. The recent UK/EU trade deal promises to reduce the bureaucratic burden of importing goods, lowering costs and friction in the supply chain. Retailers with deep supply chain visibility and agile pricing models will be best positioned to capitalise – seizing first-mover advantages and capturing market share before competitors can react.

Navigating the profitability puzzle

To thrive in this environment, grocery retailers must master the art of profitability across multiple dimensions:

• Gross Margin Management: Lowering COGS through supplier partnerships and dynamic pricing tools like electronic shelf labels.
• Inventory Turnover: Reducing waste and optimising stock levels, especially for perishables.
• Product Mix: Balancing loss leaders with high-margin private label and premium products.
• Shrinkage Control: Minimising theft and errors through better systems and training.
• Operational Efficiency: Leveraging automation and just-in-time logistics to reduce overheads.
• Data-Driven Decisions: Applying AI and analytics to optimise assortment, pricing, and promotions.

Introducing bespoke tools to a bespoke challenge

Whether it’s optimising assortment, adjusting pricing, or forecasting demand, data-driven decision making is the key to unlocking profitability in grocery. With the right tools, you can move from reactive firefighting to proactive strategy.

In our point of view, we highlighted the product profitability tool we built for a leading grocer to bring to life key operational cost data in a tailored, interactive dashboard.

This BI platform:

• Calculates net margin – including operational, overhead, shrinkage, and pricing costs – at the product and category level
• Visualises margin variation across categories and suppliers
• Supports better-informed assortment planning decisions
• Models the impact of changes to pack size, supply routes, shelf space, and ranging decisions – i.e. removing product X and replacing with product Y
• Supports AI-driven forecasting and planogram optimisation

And most importantly, it’s tailored to your operation. We can modify the tool to reflect your unique business model & supply chain and tackle your challenges & goals.

Let’s talk

The grocery sector in 2025 is a battlefield of price, perception, and performance. Retailers who succeed will be those who can balance short-term competitive tactics with long-term strategic resilience—investing in digital infrastructure, mastering cost control, and using data to drive smarter decisions.

The winners won’t just be the cheapest. They’ll be the most agile, the most insightful, and the most resilient.

If you’re interested in learning more about our product profitability tool – or if you’re facing any of the challenges mentioned above – get in touch. We’d love to explore how we can help you build a smarter, more resilient business.