Some grocers are using AI to cut food waste and boost profit margins

As grocery chains face mounting pressure from inflation-weary shoppers and growing competition, some in the industry are starting to rely on AI to protect margins without losing customers.

Traditional levers to protect profits or drive sales, like raising prices or running blanket promotions, are becoming less effective as shoppers split trips across multiple retailers in search of value. That dynamic has helped drive market share gains for discounters like Dollar General and warehouse clubs like Costco, forcing traditional grocers to rethink how they compete.

Many are turning to more targeted, tech-enabled strategies to balance affordability with profitability. One emerging approach is using data and AI to adjust pricing on perishable inventory, especially items nearing their "best-by" dates. Historically, about 30% of food in American grocery stores is thrown away each year, and some experts estimate that translates to nearly $18.2 billion in lost value.

Now with years of high inflation and a recent spike in gas prices making it harder for households to afford food, companies are trying to assume less of that loss, otherwise referred to as "shrink".

"We see AI as a meaningful opportunity to both improve the customer experience and drive productivity across our business," said Kroger Chairman Ronald Sargent on the company's most recent quarterly earnings call. "We're already seeing results from more competitive pricing."

According to a Deloitte study, 89% of people are shopping for discounts and deals. Numerator data shows that shoppers are visiting 23% more retailers to purchase their groceries.

That makes setting the right prices at the right time more crucial than ever.

Still, making the right real-time pricing decision requires a break from traditional playbooks. Platforms like Flashfood are helping grocers dynamically price those items, which could aid them in limiting losses from food waste.

"Not only is everyone now a value shopper, but shoppers have the information and resources available to find the best deal," said Flashfood CEO Jordan Schenck. "This raises the stakes in terms of competition between grocers, because they're now competing with value-specific retailers."

This has created a unique paradigm shift for grocers who have seen increased competition from other retailers, Schenck said, and a pressure to figure out how to create value without eroding their brands through yellow sticker markdowns and discounting.

Flashfood connects shoppers with local grocery stores to purchase food nearing its best-by date at a discount. Users browse, purchase, and pay for items directly through the app, then pick up orders from a designated "Flashfood zone" fridge in-store.

Flashfood says it helps grocers to sell fresh food by converting what would have been shrink into incremental revenue. The company is expanding to more than 100 additional Kroger stores this month, building on a footprint that already spans more than 2,000 locations across North America.

The pitch is that retailers don't have to choose between offering affordability to shoppers and boosting their margins. By using AI to target discounts precisely, rather than marking down an entire category, Flashfood says stores can improve sell-through while reducing waste. The end goal is more sales of perishable food and less product ending up in landfills.

Flashfood says its partners, which include Kroger but also regional chains like Piggly Wiggly, Loblaws and Gelson's, and have reduced shrink by an average of 27% while also driving incremental traffic. Shoppers using the app make nearly four additional trips per month on average and spend about $28 more per visit on full-priced items beyond their discounted purchases, according to the company.

At the same time, the data generated from these systems is giving retailers deeper insight into consumer behavior by identifying what products will sell, at what price and at what point in their shelf lives. That's especially important in categories like fresh foods and bakery, where margins are tighter and spoilage risk is higher.

"Grocery stores have some of the best personalized data, but not all grocery stores know what to do with the data," said Roth Capital Partners analyst Bill Kirk. "Kroger has been at the forefront of recognizing the importance of their data and the insights that can be derived."

Kirk has a buy rating on the stock and $78 price target, higher than its Thursday closing price of $67.77.

Bridging that gap between surplus inventory and value-seeking shoppers is emerging as one of the clearest opportunities grocers are trying to cash in on to improve profitability.