Retail Displays - Front End Merchandising Trend 2011
- 1. The Impending Revolution in Front-End Merchandising After more than 50 years of indisputable stagnation, the retail industry stands poised for a major revolution in front-end merchandising. In our view, front- end merchandising represents the single greatest opportunity for performance improvement in retailing today. To date, many retailers have underperformed at the front-end, thereby failing to capitalize on a significant opportunity to increase customer satisfaction and achieve incremental shareholder value. However, a unique confluence of underlying forces at work within the industry is creating the conditions necessary to fundamentally transform historical approaches to front-end merchandising. Retailers who make revitalizing front-end merchandising a categorical strategic imperative will be best positioned to capture sustainable performance improvements while enhancing their competitive position as the battle for customer loyalty and retention increasingly separates winners and losers.
- 2. Front-End Merchandising Today: The Sleeping Giant Over the last few decades, our lives have been forever changed by a remarkable period of technological innovation- a period in which we have seen the advent of personal computing, the birth and the evolution of the Internet, the proliferation of smart phones and social networking, the commercialization of the space shuttle, the sequencing of the human genome, and rapid advances in clean energy. It is almost unimaginable to consider that during this same period, front-end merchandising has continued to be marked by the same stale product mix,uninspired merchandising,monolithic fixtures,and environmental insensitivity that characterized the retail industry in the 1950s. Traditionally, the front end has played a relatively modest but incrementally important role in overall store economics. While checkouts, on average, account for only 1.1% of overall supermarket store sales (Figures 1 and 2), they represent 1.5% of store profit with a gross margin of over 31% vs. a store average of 23%. This gross margin differential is significant, particularly given that retailers have to generate 35% more sales in other parts of the store to realize the same gross profit contribution that can be achieved by increasing sales at the front end. Although it plays only a supporting role in a retailer’s overall financial performance, the front end is of enormous strategic importance when it comes to impacting customer satisfaction and loyalty.While less than 50% of shoppers visit other departments, 100% of shoppers visit the checkout area (Figure 3), and shoppers spend an average of 25% of their time in the store at the checkout area (Figure 4). Figure 1 Percent of Store Sales Source: Supermarket Business, 1998, Dechert-Hampe & Co. M&M Mars/TDS Study Source: Supermarket Business, 1998, Dechert-Hampe & Co. M&M Mars/TDS Study Source: 2003 Front-End Focus 2% 1.1% % Sales 1.5% 1% 0% 3% 0.7% Laundy Detergents Canned Vegetables Checkstand Pharmacy Bakery 0.8% 1.1% 1.5% 2.9% 2% 1% 0% Figure 2 Percent of Store Economics Figure 3 Where They Shop by Department Figure 4 Checkout Time (minutes) vs. Rest of Store Checkout 25% Rest of Store 75% 7 21 100 % by Dept. 80 60 40 20 0 HBC GM Dry Grocery Frozen Dairy Checkout
- 3. Relative to other departments, the checkout area has the greatest potential for what Jan Carlzon,former Chairman of SAS Airlines,calls “Moments of Truth, “ or opportunities to interact with customers in a way that will either create satisfaction and loyalty or result in dissatisfaction. A recent study by Meridian Consulting Group in which 1,000 shoppers were interviewed found that 80% said their checkout experience would make them “much more likely” to shop the store again, while 75% stated that the checkout experience makes their “overall opinion of the store much better.” (Figure 5) Historical Barriers to Change So why is that while the world continues to benefit from an extraordinary pace of innovation, front-end merchandising remains stuck in a time warp? How can this stagnation have persisted for so long? The answer should not surprise you. Front-end retailing has been largely controlled by a small group of suppliers who for decades have successfully exerted sufficient power and influence over retailers to protect their interests and maintain their dominating presence at the front end. These suppliers are well-respected companies such as Mars,Time Warner, Wrigley, and Coca-Cola- companies who recognized a long time ago that the front end was the most strategically valuable area of the store.They understood that, despite its relatively small contribution to revenue and profit, the front end was the only in-store battlefield that really mattered with respect to winning customers and securing brand loyalty. Having multi- year, fixed and predictable product placement may be bad for retailing, but it is great for building a brand. Key front-end suppliers have maintained their stronghold on the checkout area by doing three things particularly well. First, they have sponsored and participated in some of the most widely recognized market research in the industry. Three of the four sponsors of the most recent “Front-End Focus: Best Practices for Superior Checkout Merchandising” were MasterfoodsUSA (A Division of Mars, Incorporated), TDS (A Time Warner Company), and Wrigley. Needless to say, it is difficult to conduct an independent market research study when the sponsors and participants are so hugely vested in the outcome. It’s like a consortium of cell phone companies leading a study on the health effects of cell phone radiation and reaching the shocking conclusion that there is no evidence that cell phone usage causes brain cancer. Yet, in planning the future of their front ends,many of the leading supermarket chains continue to rely heavily on the “Front-End Focus” study and their collaborative work with these suppliers. Source: Meridian Consulting Group Figure 5 Survey of 1000 grocery store shoppers 80% 75% The front end represents a retailer’s best chance for maximizing impulse purchases and achieving incremental sales. In contrast to other areas of a store which are often destination sites for shoppers, the front end holds the greatest promise for adding purchases of unplanned items and delighting shoppers with merchandise they might not otherwise expect to see. Aside from the lack of innovation,perhaps the most striking observation about today’s front-end merchandising is the lack of differentiation in the industry. With few exceptions, major supermarket retailers have the same or nearly the same product mix and merchandising approach. In an industry where survival is highly dependent on standing out from the crowd and capturing shopper attention, it is ironic that front-end homogeneity has continued to prevail. Check out experience would make me “much more likely”to shop here again Checkoutexperiencemakesoverallopinion of the store much better
- 4. Figure 6 Forces at Work Second, front-end suppliers have controlled the economics. By paying retailers “placement fees” or “slotting fees,” front-end suppliers have been able to provide retailers with a predictable, recurring revenue stream sufficient to fund the front-end equipment and contribute to the bottom line. From a retailer’s perspective, this appears to be a great deal, which is the very reason many retailers have gotten hooked on slotting fees like a drug addict gets hooked on crack. It provides an immediate fix, and the outcome is predictable and measureable. But, as we will see later, slotting fees, as traditionally structured, might not be as meaningful in achieving overall performance improvement as retailers have been led to believe. Third,front-end suppliers have managed to get locked into multi-year programs that enable them to maintain their positions of control and influence for years at a time. Most front-end programs run for 3 years, but with “pay to stay” extensions they can run much longer. Because placement fees are typically tied to specific locations on front-end merchandisers, it virtually guarantees that the supplier’s product will maintain its position on the merchandiser for an extended period of time. Although powerful front-end suppliers have contributed to stifling innovation, retailers have also played a role. Many retailers have a poor understanding of front-end economics and fail to grasp the importance that marginal improvements in front-end merchandising can have on their bottom line. In addition, most retailers have failed to focus on the key drivers of shopper behavior at the front-end and have not executed well on merchandising programs that captivate shoppers and drive impulse purchasing.The prevailing tendency among retailers is to take a tactical vs. a strategic approach to front- end retailing. Even for retailers who attempt to be disciplined about plan- o-gramming their front-ends, all too frequently the result might be better described as “random retailing,” as execution at the store-level fails to follow through on corporate directives. Emerging Forces at Work A set of underlying forces at work are coming together to create the conditions necessary to overcome the traditional barriers to change in the industry, laying the groundwork for a revolution in front-end merchandising (Figure 6).Among the most important of these forces is an inevitable shift away from traditional front-endproducts.Forexample,magazines,whichhavetraditionallyaccounted for the largest percentage of front-end sales and have commanded the highest placement fees, are becoming increasingly irrelevant. The precipitous and irreversible decline in single-copy magazine sales has been well documented as readers’ preferences shift toward digital media, thereby placing retailers in a precarious position. Similarly, the confection category has come under assault in recent years for its role in contributing to the alarming increase in diet- related, preventable health issues. Today 31% of American adults are obese, and an additional 34% are overweight. Nearly two-thirds of the U.S. adult population is at increased risk for developing diabetes, heart disease, cancer, and other health problems,which in turn,is placing a significant burden on the Forces at Work Environmental Sustainability Confection Health Concerns Decline in Magazine Sales Low-Cost Manufacturing
- 5. U.S. health care system. With economic, social, and perhaps future legislative pressure impacting traditional front-end products, a change in product mix is inevitable. A second force at work that is helping to create the conditions for change is the availability of low-cost overseas equipment manufacturing and supporting trends in fixture design that not only improve merchandising effectiveness but also better accommodate a global sourcing model. To date, retailer front-end equipment needs have been met by manufacturers who have provided large, monolithic fixtures which are entirely welded,inflexible,and costly to ship.These fixtures, while generally not aesthetically pleasing or cost effective, have met the basic requirements of fixed placement programs where merchandising sets remained unchanged for 3 or more years. “Traditional” fixture manufacturers would like nothing more than to keep their 50-year-old programs in place and sell all new fixtures to retailers every 3 years. However, with the emergence of reliable low-cost overseas manufacturing and the imminent shift toward more flexible front-end merchandising, front-end equipment will necessarily become more modular and configurable. Ultimately, these more affordable knock-down fixtures will be manufactured overseas, replacing the monolithic U.S. manufactured units. Finally, the growing trend toward environmental sustainability and corporate social responsibility will begin to erode support for programs in which retailers purchase environmentally unfriendly fixtures and then dispose of them after 3 or 4 years. As this trend gains momentum,retailers will require that equipment manufacturers use sustainable materials wherever possible.This is likely to have an impact on the design and construction of these fixtures. Furthermore, as retailers adopt modular and configurable designs, fixtures will have longer lives, as sections and parts are replaced and recycled as needed, rather than the current approach of destroying and replacing the entire piece of equipment. Revitalizing Front-End Merchandising: A Strategic Imperative With the forces at work breaking down historical barriers to change,revitalizing front-end merchandising should be a strategic imperative for any enlightened retailer seeking sustainable performance improvement. While this clearly applies to supermarkets,an opportunity also exists for non-supermarket retailers who have yet to make a serious effort at improving their front end. Achieving excellence at the front end will ultimately separate winners from losers in the industry, particularly given the increase in competitive intensity and associated
- 6. fight for customer loyalty and retention that characterizes consolidating,highly mature industries. Given the lack of innovation in front-end merchandising across the industry,there is a substantial “first-mover advantage”that aggressive retailers can capture and leverage to grow market share and achieve market share and industry leadership. In addition to the highly compelling benefits associated with customer retention and loyalty, taking a strategic approach to front-end merchandising can yield significant financial benefits while maximizing shareholder value. More specifically, achieving success in front-end merchandising can: Increase revenue and profitabilityzz Provide an attractive return on investmentzz Improve levels of service and customer satisfactionzz Improve performance across key financial and store productivityzz metrics such as sales per square foot, return on assets, return on sales, and return on equity. To illustrate the financial impact of an effective front-end merchandising program, let’s consider a supermarket in Latin America operating under the traditional model in which the retailer receives placement fees and suppliers share the cost of the equipment. Under this model, suppliers charge varying amounts per lineal shelf inch or peg, as well as for cooler space. Although these rates are usually negotiable, rates differ by category and merchandising location. For a typical 72” merchandiser, retailers will receive placement fees for confection, snacks/health and beauty, front end cap shelves, pegged general merchandise, flat snack top above candy and general merchandise, topper shelf for snacks, clip strips, and gift cards. If the merchandiser has a beverage cooler, retailers would receive placement fees for the cooler and for magazine shelves perhaps instead of the front end cap shelves and the snacks/health and beauty section. Figure 7 below summarizes partial first-year economics for a representative Latin American retailer for a single front-end merchandiser. After an initial equipment investment of $1,135, the retailer collects total placement fees of $1,485 for a total Year 1 net profit after investment of $350. That is a nice return on the retailer’s initial investment, but it is only part of the story. Figure 8 shows that in a typical 3-year program,the retailer continues to collect placement fees of $1,485 in the second and the third years so that over the course of the program, the retailer collects $4,455 in placement fees on an initial equipment investment of $1,135. That represents an impressive return of 293%. But, there is more good news for the retailer. The estimated gross profit (assuming a 35% gross margin) on the incremental sales of front-end merchandise is $9300 per front-end merchandiser per year,or a total of $27,900 for the 3-year program. The resulting total 3-year profit contribution after the equipment investment is $31,220 per merchandiser. That represents an eye- popping 27.5X return on the original equipment investment or a Return on Investment of 2,751%. And, the projected payback on the equipment is less than two months. -$1135 Equipment Investment Pegged Merchandise Confection Shelves $520 $281 $225 $189 $126 $62 $42 $40 $350 Topper Shelves For Snacks Snacks, Health & Beauty Front End Cap Shelves Flat Snack Topper Above Candy & GM Topper for Gift Cards Clip Strips $1485 Figure 7 Year 1 – Supplier Fees Only – Not Including Gross Profit on Incremental Front-End Sales
- 7. An important point to consider in our analysis of the economics above is that placement fees represent only 14% of the program’s profit contribution before investment. The reason this is significant, as explained earlier, is that retailers have historically structured and measured front-end merchandising programs with a focus on placement fees. The logic was that the placement fees could more than cover equipment costs, and anything else would just be considered incremental profit. However, this flawed logic misses the point that, relative to placement fees, there is multiple times the leverage in incremental product sales.Therefore,retailers who have the freedom to select the best product mix by rotating products, taking advantage of seasonal and promotional opportunities and introducing new and innovative products are likely to be able to achieve more gross profit through incremental sales than might have been possible with a fixed merchandising program built around placement fees. Extrapolating the above per unit economics to a chain-wide rollout of 1350 merchandisers shows the extent to which a successful front-end merchandising program can have a material impact on a retail chain’s financial performance (Figure 9). In the first year the revenue from suppliers less the cost of the merchandisers is $472,500. When the placement fee revenue is added to the gross profit on incremental sales of $35,872,000, the Year 1 profit contribution is $13,028,000. Over the course of the 3-year program, the revenue from suppliers less the cost of the merchandisers is $4,482,000, and the total gross profit for the 3-year incremental sales of $107,617,000 would be $37,666,000. The total 3-year profit contribution for the program is $42,148,000. Without even considering the positive effects on customer satisfaction and retention, the net profit contribution of the program would have a very significant impact on shareholder value. The financial impact could be even greater if the retailer had the freedom to increase product sales through flexible merchandising that is not possible through guaranteed placement programs. The time has come for leaders within the retail industry to rise up and drive the front-end merchandising revolution. The front end as a category is ripe for transformation.The historical barriers to change are falling.The economics are extraordinarily compelling.The risk is low, and the rewards for winners are significant. Now is the time for change. Total 3-Year Profit Contribution after Equipment Investment $31,220 27.5 X original investment• ROI = 2,751%• Projected Payback = < 2 months• Supplier Placement Fees Year 1 Year 2 Year 3 $9300 $1485 $9300 $1485 $9300 $1485 $27,900 $4455 Figure 8 Figure 9 Initial Investment-$1.5M $42.1M75%
- 8. An Interview with Jim Hollen on Front End Merchandising Why do you think there is such a big opportunity to revolutionize the front end of the stores? We think that Front End Merchandising (FEM) is the single greatest opportunity for improved performance in retailing today. If there’s any one single thing where there’s been little or no innovation in the past 50 years, it’s FEM. Think about stores back in the 50’s and 60’s, the front end of today is pretty much the front end of then. At the same time, it’s the front end of the store that can have the most significant impact, either positive or negative, on customer satisfaction and loyalty than any other area. That’s the area where people get frustrated by standing in line or have a pleasant experience in checking out. It’s one of those “moment of truth” areas of the store and it’s also the best chance for retailers to maximize impulse purchases and achieve incremental sales more than any other area of the store. “I think that the lack of differentiation in the industry creates an opportunity for top performing retailers to achieve a significant competitive advantage over their rivals.” When you go to stores likeVons and Ralphs and other large supermarket chains, what they are doing on the front end is almost exactly the same everywhere. There’s just no differentiation. The lack of attention in this area is one of the reasons why we think there is such a great opportunity. The problem is that the retail industry in general has largely underperformed on the front end and they have failed to capitalize on this opportunity to improve their stores. Retailers have a poor understanding of front end economics. They don’t really understand how this could work to their advantage and part of our job is to educate them on how it could work and why it makes sense to pay attention to. We don’t think they have the proper focus on the key drivers of shopper behavior at the front end. They don’t understand the emotional side of the shopper and what the shopper is feeling when they are at the front end of the store. In general, they tend to treat this in a tactical rather than in a strategic way. We’ve coined the term called ‘random retailing’at the front end which basically means that even if the retailer has the sophistication to have a planogram at the front end, in a lot of cases, the stores who have local control will just do what they want to do and they won’t really pay attention to the planogram. There tends to be a lot of junk going on at the front and its not very well thought through. “Therefore we think that revitalizing FEM should be a strategic imperative for any retailer that’s seeking sustainable performance improvement.”
- 9. When I say any retailer, a lot of focus of FEM is in the grocery segment which makes a lot of sense since there’s an awful lot of traffic that goes to those stores. At the same time, we think that these basic principles can be applied to other retailers as well. If you take for example, Ross Dress for Less or West Marine, these stores that aren’t in the supermarket business still have an opportunity to capture the attention of the shopper at the front end. We’ve not seen people outside the grocery industry think about it carefully. Some retailers, like Blockbuster, have made an attempt at the front end-- in that particular case they walk the customer through a designed pattern of low wall of mostly food and batteries and stuff like that but a lot of people just don’t have anything at the front end. When it gets down to pure economics, there’s a very compelling story that can be told with respect to increase revenue and profitability, return of investment, improved performance in a whole range of key financial metrics such as the basic store metrics such sales per square foot, return of assets, return of equity. “When I look at the economics at the front end, it’s really interesting and that’s why it makes sense for us to do this with other relative areas that we play in.” To give you an example, we’ve been looking at the economics of front end merchandising in South America. If you take a look at putting in a single 72-inch non-cooler Front End Merchandiser, the initial investment for the retailer is something around $1135 -- that’s what they have to pay to put the equipment in. The retailers are able to collect slotting fees from various suppliers who have merchandise that are sitting on those front end spots.For general merchandisers that’s pegged, confection shelves, topper shelves for snacks, shelves for health and beauty, front end cap shelves with magazines, snack shelf for candy and general merchandise, gift card topper, clip strips, etc. If you add up the revenue that the retailer can collect from those various product suppliers after the first year, the retailer can more than pay for the cost of the rack and then these programs generally run for 3 years. That means years 2 and 3 all drop to the bottom line because the rack has already been paid for. If you look at it over a 3 year period, what’s interesting is on the first year there’s a positive because you have the slotting fees. If you add to that the gross profit on incremental sales that the store is able to generate, all of a sudden the numbers get huge because remember they get slotting fees on year 1, year 2 and year 3, but they’ll also get the gross profit on the incremental sales of the products up at the front end. “Ifyoulookata3-yearmodel just for a single checkout lane for a single retailer, the numbers look something like a 27.5 times return of the original investment. So the ROI could be something like 2750% while the projected payback for the retailer could be less than 2 months.” Retailers have been focused on the slotting fees and one of the reasons why there hasn’t been any innovation
- 10. is because the front end has largely been controlled by a set of retailers like Wrigley, Mars, Frito-Lay and media companies. Retailers sign up for slotting fees which locks them in to a 3-year program and removes their control of merchandising decisions at the front end. “These retailers get addicted to these slotting fees and it’s hard to move off of them... they really need to step back and look at the economics.” The slotting fees that they can get over a 3-year period are dwarfed by the gross profit contribution that they are able to collect on incremental product sales. To me, that says that we shouldn’t focus on the slotting fees but focus on the product mix that will drive the most incremental gross profit. We think that breaking out of that mold or at least scale them back to have the flexibility to change product out on a weekly basis.You start to look at the front end as more of a promotional area. One example of somebody doing a great job in this area would be Costco. Every time you go to Costco and plan on spending $100, you walk out there having spent $200 and that’s because they do a great job of getting you to buy through impulse buying. Supermarket chains can do the exact same thing and drive more product sales at the front end and if they have the flexibility to get away from these slotting fees where the product set is fixed for 3 years and the customer walks through the line and basically doesn’t look anymore on what’s there because it’s the same stuff as last week and the week before. We’re designing a rack that is highly configurable and modular so that they can change out the accessories, pegs and shelves and all those kind of stuff. The industry has largely had these huge, welded fixtures that are inflexible and won’t meet the needs of the evolving marketplace. We’re focused on creating something that is attractive-- we’re adding lighting and sprucing it up to make it configurable and modular so that they can, for example, wheel away an end cap that they have on one aisle and then put something else maybe by time of day or week. We were just unveiling our first prototype at the FMI show May 10th - 13th in Las Vegas. About RICH LTD. RICH LTD. is a point-of-purchase display, store fixture, and merchandising solutions company with overseas and domestic design and production capa- bilities. The company serves more than 4,000 customers world-wide, includ- ing numerous leading retailers and brands.Creating results-oriented front-end merchandising programs that maximize profitability and customer satisfaction is one of the company’s core competencies. Company Contact Information: Jim Hollen President RICH LTD. 3809 Ocean Ranch Blvd., Suite 110 Oceanside, CA 92056 760-722-2300 ext. 229 jhollen@richltd.com www.richltd.com