The Front End Checkout: A Micro-Economic Model Of The Store

An untapped growth opportunity exists in this often underused area.

Accomplishing real economic gain in sales and profits requires flexibility and change, and yet there's often resistance to change in an established corporate culture accustomed to the status quo. Setting an agenda and inspiring corporate momentum to leave behind the mental and emotional comfort zone of “business as usual” are formidable management tasks, but ones that are necessary for businesses to grow and adapt in response to today's fast-changing marketplace.

The front end checkout is a perfect example of this resistance to change, and those retailers willing to challenge their current thinking about this area of the store will realize that an untapped opportunity for growth currently exists there.

Historically, the checkout area has often been underused by retailers, which have ceded control of this strategically important area of the store to the suppliers whose products have traditionally occupied checkout displays for years. Since the late 1960s, publishers, confectioners, and their suppliers and distributors (and, later, beverage companies) have all been as effective as Washington lobbyists in persuading retailers that their interests are aligned and that their product mix will create the most satisfying experience for retail customers.

Over time, the vendor community trained retailers to focus on the checkouts in a minimum three-year repetitive cycle revolving around refreshing hardware to create a modest profit center, all the while preserving and maintaining a conservative status quo that primarily served the vendor's sales and distribution agenda.

This strategy is incapable of addressing the comprehensive sales growth requirements of the retailer, however. Unfortunately, the consequence of vendor cooption over the front end business has been an over-spacing of limited inventory, a flat and unchanging market profile, and significantly undeveloped planograms, resulting in a lost opportunity to increase retailers' sales and profits.

The Checkout as Micro-economy

When the checkout is viewed as a micro-economic model of the store, its true power as an engine for growth is revealed. Its lanes and end caps are conceptually equivalent to gondola aisles and end displays, but the volume of foot traffic here is unmatched, making it the most desirable real estate in the store.

A comprehensive, sophisticated marketing strategy that encompasses multicategory inclusion, responsive and expert market research, and constant reinvention can plumb the rich marketing opportunities available at the critical point of purchase. The rewards for the retailer willing to invest in a new program designed to serve its own sales model have been spectacular.

As with any other area of the store, the efficiency of the retail space should be evaluated and driven by merchandising. Checkout merchandising equipment should be adaptable to adjust to changing market needs, and new planograms should be closely monitored to adjust product selection for maximum sales velocity in the changing marketplace.

When the front end checkout is managed from an objective merchandising perspective, management is able to make timely and informed decisions divorced from category politics. As a result, the checkout merchandising equipment evolves into a planogram delivery vehicle whose design is modular and durable beyond the historical three-year cycle, and whose function is to continually drive the velocity of sales and margins for the benefit of the retailer.

Harnessing the power of the checkout has proved elusive to many retailers for a variety of reasons. For one thing, there's often an inherent resistance to new ideas and initiatives in an entrenched corporate environment, which is challenging to overcome. In addition, interdepartmental rivalry and territorial friction in traditional categories have often hampered the implementation of a balanced best practices strategy in the focused area of the checkout.

Two things are needed to make this happen:

• A new and enlightened understanding of the design elements of the physical hardware needs to be cultivated, in addition to a flexible approach to reinventing the product mix from year to year. All categories are components of a business model that must be refined in a top-down, instead of a bottom-up, program.

• A strong management presence to lead this paradigm shift is crucial to overcoming such structural challenges and realizing success. Once an organization has stepped outside the comfort zone of the historical business model (one that ultimately doesn't serve its best interests), it's rewarded with unparalleled sales and profitability, often exceeding the vendor-driven model by more than 50 percent year over year.

As a point of fact, when the checkout area is actively managed from year to year as a micro-economic model of the store, it can add 1.5 percent to 1.8 percent to gross overall company revenue, with profit margins up to 20 times higher than the store's average profit.

Case Study

Here's a real-life example: A Northeastern grocery chain we work with had a traditional program as far back as it could remember: Magazines and candy dominated, with some beverage coolers at the checkout, and a limited assortment of general merchandise. There was no evolved category management, and no opportunity for category expansion at this grocer's front end. As with most in the industry, the grocer's checkout model was vendor-driven.

Following several unsuccessful attempts to develop a disciplined strategy at the front end that it controlled, senior management explored and then embraced the practices outlined above. We reinvented the grocer's front end checklane program from the ground up, strictly applying the science of economics to each element. The results exceeded expectations. Although a profit center was created, the true value in growth in sales from a collaborative and managed merchandising program dwarfed the old way of doing business.

After just 12 months with the new program, total front end sales increased 53.3 percent, which drove an increase of 62.7 percent in profit dollars. These were all pure incremental sales and profit increases — pretty good in the middle of a recession. We have since remerchandised the plan for 2010 and expect to stay on an equally aggressive upward trend for the next 12 months as well.

Furthermore, based on our disciplined approach to real category management for better-balanced planograms, SKU justification and cross-merchandising, the traditional in-lane categories benefited, too. Confectionery sales increased 55.7 percent, with a profit surge of 61.7 percent, and publications (a nationally declining category) increased by 10.5 percent, with profit increasing 11.3 percent.

Hiller's Adds M-Dot Digital Coupon Platform

With coupon redemption rates at all-time recent highs, Southfield, Mich.-based Hiller's Markets has successfully launched the first digital coupon platform that doesn't rely on any additional in-store infrastructure or front end hardware.

Powered by M-Dot Network — a digital incentive processing company that provides retailers with an enterprise platform for managing the issuance, precision marketing and real-time redemption of digital coupons and offers — Hiller's new POS digital coupon platform “removes the pain points for retailers by providing a single point of integration, centralized security and compliance, and a common method of redeeming incentives that simplifies the shopping experience for our customers,” notes Jim Hiller, CEO of the eponymous seven-store grocer, whose locations are located throughout metro Detroit and Ann Arbor, Mich.

Marketed as “Click and Save at Hiller's” (“C.A.S.H.”), the program enables shoppers to receive digital coupons via the retailer's website or by mobile phone. Coupons are made available from Hiller's and multiple third-party coupon issuers, including AOL ShortCuts.com, Valassis' RedPlum.com, News America's SmartSource.com, CellFire and OnlX. Shoppers register for service online or on their mobile phones. Just about any mobile phone with data service can be used.

Once registered, Hiller's shoppers can find and select coupons via the grocer's website or their mobile phones. Selected coupons are stored in a digital wallet and can be viewed at any time. At checkout, a Hiller's shopper can instantly redeem coupons just by entering her home or mobile phone number into the credit card payment device. No loyalty card is needed.

Coupons are then electronically matched against the shopper's purchases and automatically deducted from her bill. M-Dot Network's round-trip transaction speed is 200 to 700 milliseconds on large-scale national implementations, a number achieved in a recent test by IBM Retail Services. Seamlessly integrated on the Retalix ISS45 Version 8 POS base code, the M-Dot Network platform is completely unique in its ability to quickly process digital coupons in subsecond response time without requiring additional hardware, networks or other infrastructure to be installed in a retailer's store or headquarters.

According to Bill Catania, CEO of Erie, Pa.-based M-Dot: “Hiller's did not have to create any custom code or integration points whatsoever. M-Dot offers a secure, real-time transaction network connecting Internet and mobile-based applications to retail point-of-sale systems.”

To learn more about M-Dot Network, visit mdotnetwork.com.

An evolved understanding that the checkout area should be managed as a micro-economic model of the store fulfills the retail objective of growing the velocity of sales and margins. Achieving this often requires challenging the corporate culture, embracing expertise in both the market and design elements of the hardware, and delivering managed and ever-evolving planograms. Using this model, real documented growth and significant financial reward are well within the grasp of all visionary retailers.

Edward Novick is the president of Dorset Industries Inc., a vertically integrated company that leverages its intellectual property to fulfill its mission statement to maximize the overall velocity of sales for its retail customers. Albertson, N.Y.-based Dorset is the original equipment manufacturer of all of the equipment it supplies to support its retail programs.