Grocery stores and hidden business models

Rent the shelves

At some point almost everyone has been an unwitting participant in the anthropological experiment that is the modern grocery store. From bountiful displays of fresh produce at the entrance that entice with healthy greenery, to staples like milk that are tucked away in the farthest corners, sending shoppers past every aisle to find them, the layout has been carefully designed to extract maximum revenue. Managers place profitable items in eye-catching positions to ensure that impulses overwhelm any carefully-considered lists a customer may have entered with.1

The business model for these stores seems straightforward: source goods from manufacturers or farms, merchandise them in compelling ways, and apply whatever markup the market will bear. This seems simple enough until you realize how low the margins are in the grocery sector. Profits of 1 to 3% are the norm, leaving little buffer for any lean times or stock that fails to move.2 But this overall figure masks the parallel economy that bolsters much of the supermarket industry and is expanding into other areas of retail. Stores are increasingly making money not from selling products, but from charging fees to suppliers who want access to prime spots on their shelves.

This is possible because food manufacturers come up with thousands of new concepts every year, of which the overwhelming majority fail. There isn’t a store big enough to present all of these options to the public. Further the window to get traction is short, before antsy investors or category managers eyeing their annual bonuses bail out.3 As a result, instead of selecting goods on their own, retailers can capitalize on their scarce commodity, shelf space. They rent it out to the highest bidder in exchange for what are known as slotting fees.

The next time you encounter a new brand of ice cream, recognize that the dairy probably paid for you to see it. In some instances grocery chains can make more money from these fees than actual product sales. The physical retail environment is quietly functioning as another venue for paid marketing.

New ways to win

The grocery market isn’t the only sector where it happens. In electronics, the U.S. giant Best Buy rode the technology boom of the late 1990s and early 2000s to new levels of prominence. The rise of online shopping eventually led to the phenomenon known as showrooming, where prospective buyers would test out merchandise in the store and then promptly purchase it online for a lower price.

Part of Best Buy’s strategy to combat this is to rent out space to consumer technology brands that want to introduce their gadgets to its audience of interested buyers. Its stores are now dotted with small boutiques showcasing the latest from Apple, Google, and the like. Even millennials are still wary of making large, expensive purchases sight unseen, so Best Buy has found another role as a trialing location for vendors of pricey gear.

The service these retailers provide has expanded from selling products to providing large companies with a platform to reach consumers. From the outside they may appear unchanged, but the hidden business model uses assets in new and more profitable ways. Other notable instances across industries where this has happened:

• The rows of shiny new vehicles on the lot at your local car dealership suggest that Ford, General Motors, et al., make their money by convincing the public to drive off in one. In general that’s true, but at times the finance arms of these manufacturers actually generated more income than what they made retailing cars. In essence these companies became large lending operations, convincing buyers to take on hefty loans at rates that were favorable to the car maker.4 The collateral just happened to be vehicles.
• Amazon began its legendary run selling books and has since grown to become the “everything” store, a one-stop shop with a range from household supplies to high-end fashion. Yet it actually makes more than 50% of its profits not from overnighting the latest gadget to Prime customers who got a little too careless with the “1-Click” button but from renting back-end hosting infrastructure to other companies, under its Amazon Web Services banner. The massive technology investments that supported its growing operations turned out to be quite valuable for other industries.
• As air travel became more prevalent airlines needed more efficient ways to manage the ticketing and reservations process across widely-distributed offices. In the 1960s American Airlines invested the equivalent of $325 million in an electronic system that could perform the function of clerical workers, leading to the first major travel data system. Eventually known as Sabre, the system was rolled out to partners and competitors across the industry in the ensuing decades. It accounted for a large share of the airline’s net income for years until it was spun off as its own company.

Changing the game

Over time organizations can discover that their main business concept isn’t the only one. Their parallel activities can turn out to have value that even eclipses their primary model.

What’s more, these hidden business models can both leverage and reinforce existing activities. American Airlines could ensure Sabre stayed at the cutting edge by drawing on its deep knowledge of running a growing airline. In return the system provided a significant boost to its ticket sales. Supermarkets learn from slotting fees which innovations are likely to change shopping patterns, and can adapt their merchandising strategies accordingly. The economies of scale created by Amazon’s Web Services provide it with even more efficient infrastructure to run its e-commerce operations.

Retail stores are not limited to selling products for more than they paid for them. Car manufacturers don’t have to make their profits primarily from moving vehicles off the lot. A beverage company might find its real distinctiveness not in creating drinks that people want but in obtaining cans cheaply, which allows it to compete in the market at price points that others can’t match. A chain of cafes might find that its real estate in densely-populated areas is actually more attractive than its unremarkable Americanos. A magazine might hold more value in its subscriber lists than in the advertising pages it sells. The variations on the theme are numerous, and each can unlock a hidden business model.

Through its regular operations, what expertise has your organization developed that could be useful by itself? What resources do you possess that might have alternate applications? How could you leverage these to create additional value?

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References

“Best Buy’s Secrets for Thriving in the Digital Age,” The New York Times

“The hidden war over grocery shelf space,” Vox

Additional company info found in various public sources and annual reports, including those of Ford (2017) and American Airlines (1997, pre-Sabre spinoff).