In 2008 we wrote a white paper entitled “The Impending Transformation of Front-End Merchandising.” In the paper we constructed what we thought was a compelling argument for why a fundamental transformation was imminent in the merchandising approach retailers were taking at the front-end of their stores. We pointed out that other areas of the store had changed over the years, but the check-out area and surrounding front-end of stores have largely remained unchanged over the last 50 years. Well, since the time we wrote the article not much has changed in the world of front-end merchandising. Perhaps we were slightly ahead of our time. We still believe the argument holds, and for the first time we are starting to see some progress to suggest we might have been on to something back in 2008.
In our white paper we argued that front-end merchandising represents the single greatest opportunity for performance improvement in the retail industry. We supported this assertion with a number of key arguments:
• The front-ends of stores suffer from a stale product mix, uninspired merchandising, monolithic fixtures, and the same environmental insensitivity that characterized the retail industry in the 1950s.
• Despite the fact that the sales contribution of the front-end is small relative to overall store sales, gross margins are 35% higher than the store-wide average. Furthermore, the front-end is of enormous strategic importance given its potential to impact customer satisfaction and loyalty.
• Front-end innovation has been stifled by misguided front-end programs in which retailers are locked into multi-year programs which generate recurring revenue in the form slotting fees paid by large consumer product and media companies that sell gum, candy, magazines, and similar products. Retailers get addicted to these placement fees which seem like a good deal since they cover the front-end equipment cost while still enabling the retailer to earn incremental profits through product sales.
• However, given the decline in magazine and gum sales and growing health concerns related to confection products, the incremental profit associated with sales of these products is dwarfed by the incremental profit retailers could be generating from products that actually sell, even after considering the benefit of slotting fees. In short, retailers are continuing to make poor economic decisions at the front-end of their stores.
Download the White Paper now, Click here.
• Revitalizing the front-end should be a strategic imperative for retailers. Breaking the chains of historical front-end programs, focusing on the true economics of incremental product sales vs. placement fees, introducing new products that captivate shoppers and drive impulse purchasing, rotating product mix regularly, and leveraging seasonal and promotional programs can all have a meaningful impact on a retailer’s bottom line and competitive position in the market.
Shortly after publishing our white paper in 2008, we met with Kroger to discuss our findings. While intrigued, Kroger seemed to be locked into the historical model and appeared to be constrained by operational and system issues that prevented any real change. However, recently CVS announced that it would repurpose 25% of its merchandising space in its checkout areas. The 25% of space traditionally filled with candy products will be replaced with healthy snacks like Larabars, KIND bars, and Vega One bars. After testing the change in 500 stores last year, CVS made the decision to roll out the program to 2900 of its 9600 stores.
Maybe grocery retailers will follow suit. Maybe retailers will wake up and realize that front-end merchandising truly is the next frontier.