New Expert Column: The Front-End Checkout: A Micro-Economic Model of the Store
Accomplishing real economic gain in sales and profits requires flexibility and change. And yet there is often resistance to change in an established corporate culture that is 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” is a formidable management task, but one that is necessary for business 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 of this area of the store will realize that an untapped opportunity for growth currently exists there.
Historically, the checkout area has often been under-utilized by retailers who have ceded control of this strategically important area of the store to the suppliers whose products have traditionally occupied the checkout displays for years. Since the late 1960’s, publishers, confectioners, their suppliers and distributors (and later beverage companies) all have been as effective as Washington lobbyists in convincing retailers that their interests are aligned and that their product mix will create the most satisfying experience for the retail customer.
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.
However, this strategy is incapable of addressing the comprehensive sales growth requirements of the retailer.
Unfortunately, the consequence of vendor co-option over the front-end business has been an over-spacing of limited inventory, a flat and unchanging market profile and significantly undeveloped plan-o-grams resulting in a lost opportunity to increase the retailer’s 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 the 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 includes multi-category 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 that is designed to serve their 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 plan-o-grams 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 of category politics. As a result, the checkout merchandising equipment evolves into a plan-o-gram 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 is often an inherent resistance to new ideas and initiatives in an entrenched corporate environment that is challenging to overcome. In addition, interdepartmental rivalry and territorial friction in traditional categories has 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, as does 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 which ultimately does not serve its best interests), it is 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.
Here’s a real-life example: A Northeastern grocery chain we work with had a traditional program as far back as they 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 checkout model was vendor driven.
Following several unsuccessful attempts to develop a disciplined strategy at the front end which it controlled, senior management explored and then embraced the practices I 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. This was all pure incremental sales and profit increases -- pretty good in the middle of a recession. We have since re-merchandised 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 plan-o-grams, SKU justification and cross merchandising, the traditional in-lane categories benefited as well. 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.
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 plan-o-grams. Using this model, real documented growth and significant financial reward is well within the grasp of all visionary retailers.
Edward Novick is the President of Dorset Industries, Inc., a vertically integrated company which leverages its intellectual property to fulfill its mission statement to maximize the overall velocity of sales for its Retail Customers. Dorset is the original equipment manufacturer of all the equipment it supplies to support its retail Programs.