Retailers, responding to competitive pressures, have used perimeter departments to enhance the shopping experience and to differentiate their banner in a crowded marketplace. While the perimeter was useful for branding and driving store traffic, it was seldom profitable once all related costs were properly allocated. However, profits earned in center store more than compensated for these losses. In fact center-store delivers over 73% of a typical store’s true profit, according to the Willard Bishop Total Store SuperStudy, making the investment fiscally sustainable. (True profit is sales less cost of goods and trade monies and less activity-based costs.)
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This model worked well for shoppers, as well as for trading partners, until consumer purchasing behaviors took a dramatic shift away from traditional processed foods. CPG manufacturers, those with products merchandised in the retailer’s center store, were slow to respond to these attitudinal dynamics. But this reluctance to change was somewhat normal. Any segment leader, whether it’s a company, department, brand or service, prefers the status quo.
Retailers and manufacturers were pleased with center store’s financial contribution, but many shoppers’ needs were no longer being satisfied. Consumers clearly wanted healthier alternatives at better price points, and they were willing to shop multiple formats and channels in order to have their needs met. Center store began declining and could no longer support the traditional model.
But center store is not dying. It’s being reshaped. It’s evolving to accommodate a new consumer — one that is digitally engaged, prefers natural and organic products, seeks locally produced goods, is community minded, and wants to buy products from companies employing sustainable business practices.
Kroger is forcing center store changes
Kroger, with its phenomenal performance record, is not waiting for CPG manufacturers to see the light. It is already realigning center store to accommodate healthier lifestyles. It is also filling in product gaps in categories where manufacturers have missed the mark.
Kroger’s own label, Simple Truth, has become a billion-dollar brand in less than three years. The Simple Truth product line is clearly filling in the gaps. Today the brand offers more than 300 SKUs, with approximately 50% of them merchandised in center store.
Kroger is also using advanced analytics to understand purchase behaviors from a total store perspective. This helps it optimize space allocations while creating cross-merchandising strategies that encourage consumers to shop their stores more intensively.
Manufacturers, particularly those with center store product lines, must quickly shore up their brand portfolios, expand their understanding of their trading partners’ objectives, and ramp up their innovation engines to meet the needs of the new consumer.
What other retailers are responding well to center store challenges? What other changes need to be made for center store to continue to be successful?