supermarkets – The OM Blog by Heizer, Render, & Munson

OM in the News: Fighting for Shelf Space

The contest for supermarket and grocery shelf space is heating up as brands—including more lower-cost offerings from grocery stores themselves—vie for a shrinking number of spots in the aisles. Grocers are trimming both the number of items they stock and their overall physical space, reports The Wall Street Journal (Aug. 16, 2024).

Which products are placed where on shelves can move sales up or down significantly.

U.S. consumers are looking for ways to cut grocery bills that have soared. In response, supermarkets and grocery stores are becoming more selective as they stock their shelves with an eye toward reining in prices for shoppers. Between 2009 and 2023, square footage in supermarkets decreased 3.3%. Meanwhile, between 2020 and last year, retailers cut unique products by nearly 9%.

A confluence of factors influences which brands make the cut. Among them are brand recognition and whether brands’ products are selling, or are expected to. Retailers also charge slotting fees, a topic in Chapter 9 of your Heizer/Render/Munson text, for aisle space.

The fees, which food companies pay retailers in exchange for shelf space for their goods (and a topic of negotiation), depend on the retailers and brands, as well as on categories. Most companies think of slotting fees as a cost of entry for shelf space. The fees can add up quickly, on average ranging anywhere from around $100 per item per store to five or even six figures. Leading brands may also influence what is on shelves as so-called “category captains,” which are generally a retailer’s top sellers of goods such as coffee, snacks and cheese.

The aim behind these actions isn’t to get just any shelf space—it is to be in a prime location, which is around eye level. Having the choice placement, referred to with descriptors such as the “strike zone” or the “bull’s-eye,” can be significant for sales. “We want to be right there in your sightline…because that really drives consumption,” said one product exec. “If you’re up in the gutter or down in the crack, it’s harder to get the consumer to know you’re even there.”

Once on a shelf, major shelf resets generally follow a strict schedule. Stores usually assess their shelves to determine whether they have the right mix of products and brands just once a year. Minor product changes happen midyear. If a product doesn’t get its space, then it must wait for the next reset.

Classroom discussion questions::

Slotting fees put small and local companies at a disadvantage. Are they ethical?
What are the sellers options in getting shelf space?

Guest Post: Electronic Shelf Labels, Dynamic Pricing and OM

Prof. Howard Weiss shares his insights with us monthly.

Disney, sports arenas, hotels and airlines have been using dynamic pricing (see Chapter 13) to increase revenue for years. Now it has come to supermarkets and is being implemented using Electronic Shelf Labels (ESLs).

ESLs allow retailers to use a computer or other electronic device to change the displayed price of an item rather than having to go to the shelf, remove the old price display and put up the new display. They have been widely used in Europe and now are being installed and experimented with in U.S stores including Kroger, Schnucks, Walmart and Whole Foods. But supermarkets are not the only stores that could benefit from digital pricing. Each Best Buy store devotes an estimated 40 labor hours per week to change price tags. With over 1,000 Best Buys, this could save 2 million labor hours per year.

While for Disney and airlines the major advantage is to increase revenue, for supermarkets the major advantage is operational. Rather than having employees go up and down aisles to manually change prices, the prices can be changed much more quickly from a console. In theory, the price of an item could change while you are shopping, although most changes are more prone to be weekly.

Some stores stock over 100,000 items (called stock keeping units, or SKUs), so having to change prices on even 10% of the items would take a great deal of time if done manually. The reduction in time with ESLs obviously leads to more efficiency and productivity. Another savings is on the cost of the printed price tags themselves. Digital price tags can include information in addition to the price itself. For example, it can show the current inventory level of the item or shoppers could use an app to easily find products in a store.

There are downsides to ESLs. They cost money and a store would need to purchase one ESL for each SKU. Also, an error in the listed price this could have repercussions at checkout lines. Another concern is how long the battery in an ESL will last. Still, within the next few years, millions of customers will be seeing digital pricing.

Classroom discussion questions:
1. List the items you would want for a financial analysis of implementing ESLs. Would breakeven be appropriate?
2. Have you been in any stores with digital pricing?

Video Tip: Self-Checkout Lines–Growing or Shrinking?

Is the honeymoon period with the self-checkout register officially over? What once was a convenient alternative, quickly became the only option in many retail stores, as it was sold as an efficient, cost cutting solution meant to move customers in and out of stores quickly.

No doubt the age of the self-checkout register, which began in the 1980’s but exploded in the 2000’s in supermarkets and convenience stores is here to stay. But now even some of the largest retailers are re-evaluating the actual use of them. This includes chains like Booths supermarkets in the United Kingdom as well as Walmart, Wegman’s, Five Below, and Costco in the U.S.

Coping with criticisms from annoyed customers is one key reason. Another one is theft by way of checking oneself out of the store. This is occurring, either directly or indirectly, as thieves know exactly how to use checkouts. For example, Costco had discovered that customers who were not members of the club were using membership cards that were not theirs to ring up their own purchases.

Costing large retailers and small retailers their profits is typically the trigger for stores to change their ways. In the case of the big box stores like Costco, they can absorb the “shrink,” known as the loss of inventory. They still have the bandwidth to figure out a better approach to utilizing self-checkout registers.

A study of stores in the U.S., Britain, and some other European countries, discovered that shops that offered self-checkout suffered a 4% loss, which is more than twice the rate in the retail industry. This type of loss is the reason Booth supermarkets announced “that it is going back to old-fashioned human beings to check people out,” according to CNN Business in this 2.5 minute video. It is also the reason Walmart removed these registers from some stores in New Mexico as well as modified the self-checkout lanes in other stores to accommodate more employee attendees.

Classroom discussion questions:

What are the advantages and disadvantages of retail self-checkout?
How does this differ from self-checkout in restaurants and hotels?

OM in the News: Grocers Stockpile “Pandemic Pallets” Ahead of Winter

Grocery stores and food companies are preparing for a possible surge in sales amid a new rise in Covid-19 cases. Supermarkets are stockpiling groceries and storing them early to prepare for the coming months, when some health experts warn the country could see another widespread outbreak of virus cases and new restrictions. Food companies are accelerating production of their most popular items. These changes, a reaction to the sudden and massive shortages grocers experienced in the spring, amount to a shift from the JIT inventory management practices that have guided the retail business for decades, writes The Wall Street Journal (Sept 27, 2020).

Now, food sellers are stockpiling months, rather than weeks, worth of staples such as pasta sauce and paper products to better prepare for this winter, when people are expected to hunker down at home. Retailers are expanding distribution capacity, augmenting warehouse space and modifying shifts.

Associated Food Stores (a coop of over 400 stores) recently started building “pandemic pallets” of cleaning and sanitizing products so it always has some inventory in warehouses. The Giant and Food Lion chains already have holiday inventory in their warehouses. Those chains are also storing 10-15% more inventory than they did before the pandemic to ensure they won’t run out of fast-selling items. Still, some products such as cleaning wipes and canned vegetables remain hard for stores to obtain, partly because of continued high demand and because manufacturers are still trying to keep up.

General Mills said it hasn’t caught up with demand for Progresso soup, Betty Crocker cake mixes and Pillsbury refrigerated dough. It is increasing its production capacity, but the entire industry is still struggling to rebuild inventory on similar items. Manufacturers have given priority to making their fastest-selling products, which has helped some items recover inventory in recent months. Walmart is overriding its grocery-ordering algorithms to build up extra inventory now, after decades of becoming increasingly lean. Coke is still making fewer varieties of drinks to meet demand for its top beverages.

Classroom discussion questions:

Why a change from the JIT inventory approach?
Why is there still a shortage of some inventory items?

OM in the News: The Changing Technology in Supermarket Layout

The biggest U.S. food makers are finding that supermarkets are taking away prime shelf space, writes The Wall Street Journal (Feb. 19, 2020).

Grocers are now relying on their own proprietary research to decide how and where to shelve certain products, rather than counting on companies that sell well-known brands to tell them what to put on what shelf at what price. Kroger and Walmart, for example, are using increasingly sophisticated software to decide where to place items and which products to shelve next to one another—factors that can move sales up or down several percentage points. As we note in Chapter 9, Layout Strategies, “the objective of retail layout is to maximize profitability per linear foot of shelf space.”

Large chains have invested in beefing up their ability to collect and analyze data from customers. That is changing the grocer’s relationships with suppliers and the way it lays out stores. The diminished power of “category captains”—the top sellers of products such as soup or cereal—is the biggest change to the way food is sold in the past 30 years. Retailers once relied on big consumer-goods companies when making decisions about allocating shelf space because the companies were the experts in their respective food categories. Grocers also didn’t want to invest in consumer insights, and they were happy to take the hefty slotting fees (also noted in Ch.9) big brands pay for prime space.

Now, retailers are more focused on doing what it takes to maximize sales growth even if it means giving up some of those fees by stocking more of their store-branded products. Supermarkets are also gaining leverage over retailers with generic products sold under their own brands at cheaper prices than name-brand goods. Kroger owns 33 manufacturing plants to make various store-branded products, which make up a growing share of its sales and shelf space.

Classroom discussion questions:

Explain the tradeoff between slotting fees and the new data analytics approach?
How does supermarket layout differ from department store layout?

OM in the News: No More Lines in the Supermarket?

A woman scans the bar code of an item she is buying at a Tesco store

A man recently strolled down the candy aisle of a grocery store in England, picked up a bar of chocolate and stashed it in his back pocket. He wasn’t stealing. Specially equipped surveillance cameras were tracking both his body and the products he was taking off the shelves, to help him pay for them. The giant supermarket chain Tesco wants to make shopping at its stores more convenient. Tesco is one of several grocers testing cashierless stores with cameras that track what shoppers pick, so they pay by simply walking out the door.

The retailers hope the technology will allow them to cut costs and alleviate lines as they face an evolving threat from e-commerce giant Amazon, reports The Wall Street Journal (July 8, 2019). European efforts to scale up the technology in traditional stores—economically and without privacy issues—will likely be closely watched in the U.S. Grocers in the U.K. often pioneer new technology like online delivery and self-payment kiosks that their American peers eventually adopt.

Tesco plans to open its self-styled “pick and go” or “frictionless shopping” store to the public next year after testing with employees. It then wants to use the technology, developed by Israel’s Trigo Vision, in more stores. The test store uses 150 ceiling-mounted cameras to generate a 3-dimensional view of products as they are taken off shelves. Israel’s biggest supermarket chain, Shufersal, plans to deploy similar technology across all its stores. “The whole notion of waiting in line will vanish,” the company said.

U.S. retailers face concerns about excluding low-income shoppers who tend to pay with cash. Lawmakers in several cities, including San Francisco, have been considering bans on cashless stores. U.S. retailers also operate many large stores, where tracking thousands of products all day long would be expensive.

Classroom discussion questions:

How does this compare to Amazon Go stores? (See our Jan. 28, 2018 blog).
What are the difficulties in implementing the technology in huge supermarkets?

OM in the News and Video Tip: The Pros and Cons of Slotting Fees

Ice cream can be one of the most expensive slotting fees areas because of the expense of freezer dispays — Ice cream can be one of the most costly slotting fees areas because of expensive freezer displays

When considering a late-night carton of ice cream, most people aren’t thinking about how it got on the shelf. But behind each freezer door is a secondary market that determines what you have the option to buy. “Slotting fees” (see Chapter 9) are fees that manufacturers pay retailers to appear on their scarce shelves. It can cost millions of dollars to launch a product in the nation’s groceries, and through that cost, these fees shape our supermarkets and diets.

“It’s easy to think that these fees show supermarkets are ‘rigged’ — against both consumers and smaller manufacturers that can’t afford the fees,” reports vox.com (Nov. 22, 2016). But as this 7 minute video shows, the debate is an intense one, with decent arguments on both sides.

Cons: Supermarkets charge significant fees before retailers see their products on shelves. A discount fee to introduce a new product might be as high as $30,000 to appear in just 350 stores. These fees exist for a wide range of products, from ice creams to chips and soda, not to mention the scarce space near the checkouts. The implication is clear: Retail power reduces competition and makes it harder for small businesses to compete against big buyers. These advantages for large companies are only compounded by their ability to buy up enough shelf space that they can effectively design a store’s layout.

Pros: Slotting fees emerged in the 1980s, as retailers began to introduce dramatically more products to shelves. Thanks to technological improvements like scanners, it became easier to create many more SKUs without a lot of extra effort. So manufacturers threw numerous extra products at retailers. That created a problem, as 80-90% of new products fail. And despite the availability of all these new products, shelf space was just as scarce. Fees helped remove some of the risk for retailers, signaled to them that a new product might be successful, and helped limit product proliferation.

Classroom discussion questions:

Why are slotting fees an important issue in retail layout?
What are the pros and cons of these fees?

OM in the News and Video Tip: The Psychology and Math of Queuing in Supermarkets

You dash into the supermarket for a few quick items. But when you get to the checkout lanes, they are full. Your plan for a quick exit evaporates. For anyone who has ever had to stand in line at a supermarket, here are some tips from The New York Times (Sept.8, 2016) for picking the line that will move the fastest.

Get behind a shopper that has a full cart. That may seem counterintuitive, but every person requires a fixed amount of time to say hello, pay, say goodbye and clear out. That takes an average of 41 seconds per person and items to be rung up take about 3 seconds each. So getting in line with many people who have fewer things can be a poor choice. (One person with 100 items will take an average of 6 minutes to process. A line with 4 people who each have 20 items will take an average of 7 minutes).
Study the customers ahead of you. It is not just the number, but their age and what they are buying. Older people will take a bit longer because they can have technical difficulties that delay the process. Also consider the number of different items they are buying. Six bottles of the same soda will go faster than 6 totally different items, some of which cannot be scanned, such as vegetables.
Choose a line that leads to several cashiers. In Module D of the text, we show that this approach, known as a serpentine line, is the fastest. The person at the head of the line goes to the first available server in a system often seen at airports or banks. Getting into a single line also provides psychological relief because it eliminates the choice of where to go and second-guessing about the best line to choose. Your students will love this 90 second queuing video.
The psychology of queuing has also found that waits seem shorter when you are distracted. Try talking to the person next to you or reading the magazines in the store’s racks.

Classroom discussion questions:

Why is the “serpentine” line faster on average?
What does Disney do to keep visitors happy during 45-minute lines?

OM in the News: Perception vs. Reality in the Supermarket Checkout Queue

Standing in the supermarket queue, you note that other customers are seamlessly drifting forward in their appealingly shorter lines. Should you should stay put, switch lanes, or just head home empty-handed? One research study found that reduction in wait times for express-lane customers didn’t offset the overall increase in wait times for everyone (Five Thirty Eight, Oct. 16, 2014). So would it be better if the supermarket didn’t have an express lane — or, better yet, if it got rid of multiple lines altogether and had all customers join a single long line where there were no winners and losers. Our math in Module D shows that the single line is the best approach. But is it really?

If single lines reduce wait times by so much, why do stores queue us in separate lines for each cashier? One reason is that models overestimate the difference between single and multiple lines because they don’t take into account some human behaviors. Maybe you know who the fastest cashier is. Maybe you switch lanes (“jockeying”) or simply ditch your items and leave (“reneging”). Those behaviors reduce the average wait time in a multiple-line queueing system and bring it a little closer to a single-line system.

In addition, perceptions don’t always match up with reality. The longer we stand in line, the more the gap between perceived and actual wait time grows. By the time we’ve been in line for 5 minutes, we think we’ve been waiting for 10. (See “Why We Buy,” by P. Underhill). So rather than simply shoving us all into one line, supermarkets are exploring three alternatives to reduce both our actual and perceived wait times. First, customers waiting in line can have their items scanned by roaming tellers with hand-held machines, to reduce their service time once they finally reach the cashier. Second, customers can register their place in line, go away, and come back once it’s their turn (like grabbing a ticket from the deli counter). The 3rd strategy: distraction. You can try to entertain customers with videos and in-line merchandising.

Classroom discussion questions:

1. What is the main reason supermarkets do not use a single checkout line?

2. What other alternatives can stores use to speed up the lines?

OM in the News: Wal-Mart Ramps Up Global E-Commerce

A worker at Wal-Mart's "dark store" in Mexico City — A worker at Wal-Mart’s “dark store” in Mexico City

Wal-Mart says it has cracked the code for speedy, same-day grocery delivery—in Mexico. As retailers like Wal-Mart and Amazon.com rush to expand home delivery in the U.S. to groceries, the retail giant is looking across the border for help: Its high-end Mexican grocery chain, Superama, already delivers groceries in as little as 3 hours.

Wal-Mart has ramped up its global e-commerce operations over the past few years, writes The Wall Street Journal (Feb. 19, 2014), in hopes of catching up to online rival Amazon.com. The company vowed to match Amazon’s service offerings within 2 years. Currently, only about 2% of Wal-Mart’s sales come from the Web.

The company has been testing home-grocery delivery in Colorado and California, but it hasn’t announced a timeline for taking the service nationwide. It is also experimenting with grocery delivery in such cities as Buenos Aires and Santiago, Chile. Wal-Mart says it is “committed to being the online global leader in grocery delivery.”

Mexico provides $27 billion in sales and contributes 6% of the company’s global sales. Superama helped Wal-Mart achieve a 92% market share in the home delivery of groceries in Mexico. A fifth of its grocery orders arrive via mobile-phone apps, computers and tablets. The service is strongest in Mexico City, where much of Mexico’s wealth is concentrated. The capital’s snarled traffic and cramped grocery stores make delivery from Superama appealing for the well-to-do.

The majority of the grocery deliveries in Mexico come from supermarkets that are open to the public. But in the future, Wal-Mart de México plans to deploy more “dark stores”— spaces used exclusively to fulfill online orders. Such “closed” stores are more efficient: Wal-Mart’s inaugural dark store in Mexico City handles the same volume of orders as 5 stores open to the public.

Classroom discussion questions:
1. Why is Wal-Mart pursuing this global strategy?
2. What has happened to previous firms who entered the on-line grocery business in the US?

OM in the News: The Disappearing Supermarket Self Check-Out

Self checkout machines at supermarkets require a lot of human intervention

Computers seem to be replacing humans across many industries, and successfully so in the service sectors such as bank and hotel lobby ATMs and airport kiosks, reports The Wall Street Journal (Oct. 6, 2013). But these tasks—along with more routine computerized skills like robotic assembly lines—share a common feature: they’re very narrow, specific, repeatable problems, ones that require little physical labor and not much cognitive flexibility. In supermarkets, self-checkout machines’ deficiencies illustrate the limits of computers’ abilities to mimic human skills.

The human supermarket checker is superior to the self-checkout machine in almost every way. The human is faster. The human has a more pleasing interface. The human doesn’t expect us to remember or look up codes for produce, she bags the groceries.

Self check-out works well enough when you want just a handful of items, when you don’t have much produce, when you aren’t loaded down with coupons. What’s so cognitively demanding about supermarket checkout? Checkout people all point to the same skill: identifying fruits and vegetables. Some supermarket produce is tagged with small stickers carrying product-lookup codes, but a lot isn’t. It’s the human checker’s job to tell the difference between green leaf lettuce and green bell peppers, and then to remember the proper code. “It took me about three or four weeks to get to the point where I wouldn’t have to look up most items that came by”, said one clerk.

National supermarket chain Jewel-Osco is getting rid of self-checkout lanes from some of its stores. The firm said it’s an effort to reconnect personally with all of its customers despite the higher costs the shift entails. Theft is also a concern driving some grocers away the unmanned check-outs, as are hassles such as liquor and other purchases that require an employee to step in. Self check-outs generally have one staff member assisting customers at 4-6 stations at once.

Classroom discussion questions:

1. Why are some stores eliminating self check-out?

2. Why is this an OM issue?

OM in the News: Reversing Self-Service Technology in Supermarkets

Supermarket chains started introducing self-service lanes about 10 years ago, touting them as an easy way for shoppers to scan their own items’ bar codes, pay, bag their bounty and head on their way. Retailers also anticipated labor savings, potentially reducing the number of cashiers as they encouraged shoppers to use the do-it-yourself technology (one of our topics in Ch.7, Process Strategy). But Forbes (Sept. 26, 2011) is reporting that some grocery chains nationwide are bagging this “wave of the future” option by eliminating self-serve lanes.

Big Y, a Northeast US chain, just announced it was phasing out self-checkout lanes. Albertsons is also reducing its unstaffed lanes and adding more clerks to traditional lines. Why? Because a recent Food Marketing Institute study found that only 16% of supermarket transactions in 2010 were done at self-checkout lines in stores providing that option–down from a high of 22% three years ago. Overall, people reported being much more satisfied with their shopping experience when they used cashiers. Big Y found that its self-service lines caused delays because of coupons and payments. Intentional and accidental theft and misidentifying products also helped reach the tipping point.

Other chains plan to keep the self-service option in place because they think giving shoppers that choice is an important part of customer service. “People shop in different ways”, says a Stop & Shop spokeswoman. Home Depot and some other businesses that cater to a do-it-yourself mentality, have had more success with their self-service lanes. And it may all come down to demographics–such as whether the store is in a tech-savvy region. “It is a match between technology and the customer base”, says a St. Joseph U. prof.

Discussion questions:

1. What other businesses have reversed direction in terms of new technology?

2. Why have ATMs succeeded at airports and banks?