By Bubba Cooper and Gene Lewis
An enduring reality in the traditional grocery world is the constant quest to maintain and drive bottom line profit. Everyone reading this probably knows that retail grocery has one of the thinnest net margin structures in business commerce.
Now consider that today’s competitive landscape is more crowded, fragmented and innovative. The battle for the consumer food dollar has more options today than we could have imagined 15 or 20 years ago. Just some of the options include:
- Online shopping;
- Boutique outlets;
- Subscription-based meal kit delivery;
- Expanding club store presence; and
- Upscale C-stores.
A look at the data shows traditional grocery owning about half the share it did in 1998. And the competition shows no signs of slowing.
“The pressure to maintain profitability in the face of increasing pressure is something every retailer faces,” said Jesse Lewis, an industry expert and former operator of multiple retailer chains. “Finding a way to impact profitability without the cost of investing in sales programs or reducing prices is an avenue that all supermarkets should explore.”
Clearly, the grocery category isn’t the only business sector facing new and growing threats to top- and bottom-line health. While margins are not typically as thin in other verticals, there is a constant battle to grow profitability from both stakeholder and shareholder pressure.
To help deliver against this need, many major corporations in various categories—healthcare, hospitality, restaurant and manufacturing, among others—are turning to what’s been termed “accounts payable automation.” This initiative involves automating the process for paying invoices across all invoice types—check, ACH, wire transfer, etc. The result is a seamless and much less labor intensive and time-consuming process than current non-automated approaches.
A key element of payment automation is paying vendors with a virtual credit card. Managed by Visa or MasterCard, a virtual credit card is a one-time use electronic payment method that offers several benefits over other payment forms. It provides a guaranteed receipt of payment for the vendor, is less costly than check or ACH payment methods and can virtually eliminate the growing problem of credit card fraud. In addition, it provides an incremental revenue stream through vendor paid rebates to the payer.
This combination of process cost savings and rebate revenue can have a dramatic impact on profitably. In the hospitality category, for example, a well-known chain is realizing nearly $1.5 million in total annual savings. And similar savings through lower processing costs and vendor rebates are common in a wide range of business segments outside the supermarket category.
There are a number of firms that offer this AP solution. It is estimated that more than 20,000 companies are using the service, while some 1 million suppliers accept this form of payment.
More than 25 percent of Fortune 100 companies were using virtual cards as a payment method in 2016 and that number is rapidly growing. Yahoo Finance estimates that virtual card payments grew to $160 billion at the end of 2018 and likely will reach $500 billion by 2024.
Most AP automation providers offer the service at no cost to their clients and are compensated externally in shared interchange fees with the credit card entity. But the benefits of virtual cards are not limited to those companies paying vendors.
Suppliers enjoy advantages of accepting virtual card payments such as elimination of paper checks, bank deposits and processing fees. Other vendors cite more timely payment, ease of reconciliation and preferred vendor status as the value they experience in receiving virtual card payments.
While adoption rates in other business categories are high and continue to grow, the grocery segment has been slow to adopt this change. Is it missing out on a step change opportunity?
AP automation technology is surprisingly simple to implement and has become a best practice for many industries. In the grocery arena, where the majority of suppliers accept credit cards, it would seem wise for those managing accounts payables to seriously consider the positive impact this practice can have on their company’s top- and bottom-line health.