An article published in the CSCMP Supply Chain Quarterly emphasizes that there is a nonlinear relationship between backroom space and the profitability of the retailer.
The authors note that initially profits increase because more space allows more inventory to be carried and reduces the cost of labor that a retailer might incur in a congested backroom space. However, after a threshold size since it potentially cuts into the amount of square footage devoted to the front room. Previous research indicates that backroom operations can have a significant impact on a store's costs.
In-store operations can account for up to 50 percent of total costs in a retail supply chain; a substantial portion of these costs is incurred in the backroom. These costs could manifest in different forms such as the cost of organizing and managing the backroom, inventory holding cost, and the cost of equipping backrooms (especially relevant in the case of perishable products).
The authors note that pack size, the revenue yield of each individual item, and the importance of the item to the store's operation are three key factors that need to be considered so as to influence store profitability.
Based on the insights gained from studying the backroom operations in 126 stores of a major U.S. food retailer, the authors emphasize that reducing the storable pack size by 15 percent for 30 percent of the top-performing SKUs (that is, those that contribute the most to store revenue) increases profit per unit of refrigerated, freezer, and ambient equipment by 4 to 10 percent.
Source: Caplice, C., Das, L. 2017. How back-of-mind backrooms rob retailers of profits. CSCMP Supply Chain Quarterly, Quarter 3.