Space Allocation Case Study (E)
How can space allocation influence the sales and profit? Learn about relation of shelf turnover, brand profitability and shelf profitability.
Posted: Sep 2011
Space allocation for different product categories and individual products was always challenging for the trade. Space allocation and layout of product setting is directly impacting the product sellout, revenue, profit, stock levels, retailer working capital, stock-out, customer satisfaction, extra workload, etc. For example, if the slow moving product is given too large stock and shelf space, than we have situation where the working capital is frozen, due to low rate of return on investment. Also, this is generating the opportunity cost, since some more profitable products could have been sold with the same resources. Finally, slow movers can became obsolete and written off.
On the other side, if the narrow space is given to the fast mover product, then the brand strength is not utilized. The shelving requires additional physical effort through frequent filling of small quantities. The product is stock out more frequent. The customer dissatisfaction grows. The retailers are sometimes uneducated or they simply try to push the product that does not sell, just to get rid of the stock. But why the high stock is there in first place at all? The answer for this is the (im)proper space allocation.
In the following example we will see three different perspectives of space allocation. The shelf within a certain category should be according the Market Share. Why? The answer is in following three rules:
1.) Shelf Turnover – all brands should have the same turnover ( space to sales )
2.) Shelf Brand Profitability – Profitable Brands First
3.) Shelf Space Profitability – Delist dead weight Brands
In the following example we see that share in market share and share in the shelf in specific outlet is not balanced. The B Brands are given more space:
As we see, the Brand 1 has the biggest sales, but proportionally low space. As a result, the high turnover in a small space is creating frequent stock out at specific point of sales, and requires a frequent shelving.
In this case Brand 1 is losing, but the Retailer as well. B Brands may have profit a little bit out of oversized exposure to the shopper.
Brand Profitability – Value Share
Retailers sometimes do not know where the money really comes from. A several analytical steps can show the where the money lies. The following example shows that the sales share is not the only fact that should be taken into consideration.
In this case the Brand A is the obvious category leader, since the sales share is 60%. But considering the fact that the net margin of Brand A per unit is higher than other product, it turns that the Value Share of Brand A is 73%.
We see that Sales Share is important, but Value Share is important indicator as well. The value share profit story model can be used during negotiation with retailer regarding the positioning and space allocation of profitable brands.
The retailer should be concerned how profitable his shelves in the outlet are. Simply, the sales outlet has the running costs ( e.g. rent, utilities, etc. ) that need to be covered with the profit from the sales of different products. Basically, every meter within the store cost the certain amount that need to be paid by the sales of products. On top of that, the extra earning is expected as well.
Since every meter within store cost the money, the products that are occupying that space should earn the money. If we multiply the space that every brand occupies with the unit monthly cost, we will get how much every product cost. It is expected that every product is covering the cost of the space it occupies, with some extra profit. Proper space allocation will bring the proper balance.
In the above example we see that the Brand A is repaying the space that occupies by 6x within the period. The Brand B is struggling to bearely cover the running costs. The X-Brands cannot even cover the cost of the space that they occupy.
In this situation, the proper space allocation should be done, considering the market share, value share, and shelf profitability of different products. The Brand A need more space, since obviously it has the potential. More space could even increase the sales. The space for X-Brands should be decreased, since they do not justify the space given. The Brand B could keep the current space allocation.
We see that space allocation should not be something that is done without planning. The bad space allocation can really hurt the business on the long run. The proper space allocation can greatly increase the profit and sustainability of the retail business on the long run.
Range and Space Management
Stock out Effects
6 Steps of Range Assortment
Space Allocation and Layout Setting
Space Allocation Case Study