Merchandising and space planning is a vital component of sales and profit management, writes David Gilroy.
Row upon row of plastic storage boxes as far as the eye can see. Let me explain. As you know economics can be a dense subject. David Smith of The Sunday Times likes to lighten the load by referring to his “builders’ skip” index to give a fun insight into the health of the economy. No skips in his road equal flat output. Skips numbering four or more equate to a buoyant economy in rude health with various points in between. My “plastic storage” box scale determines the health of retailers, and it has proved to be uncannily accurate.
Retailers are acutely aware of the need to use shelf space productively. Underused shelf space is a criminal act. Every square foot of floor space is a selling opportunity and must be optimised. Therefore, when you see a retailer padding out shelf space with large low value plastic storage boxes you can be sure something is wrong. I first noted this in Makro UK around 2007. Sure, enough it wasn’t long before they quit the market. I clocked it again in Wilko and later in Homebase – the rest is history. I’ve seen other products being used the same way, pillows, watering cans, buckets, toilet rolls all fit the bill nicely. You get the picture.
I can’t overemphasise the importance of effective merchandising. It is both a science and an art. Given the limited physical space available, how products are displayed and organised can significantly influence consumer purchasing behaviour, inventory management, and overall profitability.
Sales, Profit and Customers
Shelf space allocation directly affects product visibility and accessibility, which in turn influences customer purchasing decisions. Research indicates that products given more shelf space tend to experience higher sales. This phenomenon is attributed to the fact that customers are more likely to notice and select products that are prominently displayed. A study by Curhan (1973) found that increasing the shelf space for a product led to a significant rise in its sales volume, highlighting the direct correlation between shelf space and consumer demand. This plays to cash & carry displays where bulk pallet displays are used to great effect, and it works particularly well with seasonal merchandise. The strategic placement of products can capitalise on customer buying patterns, such as impulse categories. Sales can be boosted without additional marketing expenditures.
Merchandising can also boost profit margins. In the early 1990s supermarkets began to site fresh produce at the front of the store. Counter intuitive to placing vulnerable goods first at the bottom of the shopping basket this change proved to be a serious sales driver and was widely adopted by all the major retailers. Fresh produce sends out a strong fresh message and happens to be a very profitable department. Smaller on-shelf adjustments can also be highly influential. A purchasing shift to own labels can be achieved by merchandising adjacent to their brand equivalent thus underlining the value comparison. Visual impact, on-shelf features and breakouts drive sales, and simplicity is important, making it easy for customers to navigate and make product selections by grouping products in logical categories.
Space Management
Effective shelf space management requires a commercial approach that balances various factors, including product demand, profit margins, and inventory levels. This brings the ranging, replenishment and distribution cycle into play. Shelf capacities must be relevant to the sales rates and support the stock level requirements of the business while at the same time ensuring that they are visually credible. Over-ranging will result in cluttered appearances, confuse customers and depress sales. Way back in retail stone age times we would construct planograms by using the physical goods and the best indicative sales figures we could glean. In today’s world the use of mathematical models and algorithms to optimise shelf space is now common and improved data and AI will turbo-charge this. There are a whole range of space planning tools available which factor in multiple attributes, sales, profit by sku, product dimensions, shelf capacities and graphics et al which enable the user to create scenarios and visuals to fit any set of requirements. Additionally, understanding the concept of shelf space elasticity is crucial. This refers to the responsiveness of product sales to changes in the amount of shelf space allocated.
Suppliers and Operators
The allocation of shelf space also plays a pivotal role in the relationship between brand owners and operators. Manufacturers often vie for premium shelf positions and may offer financial incentives to retailers to secure favourable placement or greater visibility for their products. This competition can lead to complex negotiations involving favourable pricing, terms and bonusses. Martínez-de-Albéniz and Roels (2011) examined the competitive dynamics arising from the scarcity of shelf space, demonstrating that suppliers might offer lower wholesale prices to retailers in exchange for more prominent shelf placement. This strategy aims to increase product visibility and sales, benefiting both the manufacturer and the retailer. However, it can sometimes be at odds with what is best for the customer and necessitates careful consideration of profit-sharing arrangements to ensure mutual benefit.
Challenges and Considerations
While optimising shelf space is beneficial, it presents several challenges. Retailers must navigate the constraints of limited physical space, the diverse demands of different product categories, and the varying preferences of customers. Furthermore, the dynamic nature of consumer behaviour necessitates continuous monitoring and adjustment of shelf space allocations. The practice of manufacturers paying for shelf space has raised ethical and competitive concerns. Critics argue that it can disadvantage smaller manufacturers who may lack the financial resources to secure premium shelf positions, potentially limiting consumer choice and stifling competition.
Merchandising makes a real contribution to sales and profit and there is no place for padding out with excessive displays of plastic storage boxes.
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