Space Management

Within the finite boundaries of their stores, retailers seek to increase sales, offer wider variety, reduce inventories and associated carrying costs, and reduce incidences of stock outs. Space management’s goal is to achieve the best trade-off between these diverse and somewhat competing objectives. It is a key imperative — space, after all, is the most valuable physical asset that brick-and-mortar retailers possess. How well they utilize it is key to their success.

Space management addresses three functional areas — assortment, merchandising and inventory management. For each category, it seeks answers to the following questions:

• Where to locate category in store?
• Adjacent to what other categories?
• How much space is to be given to the category?
• Which items to stock?
• How much space is to be given to each brand, each item (SKU)?
• Where on the shelf, should the products be placed?

Chapter Sales and Distribution addressed the question which items to stock? As mentioned in that chapter, what the retailer chooses to stock is a function of several size factors — size of the store, size and importance of the category, size and importance of the brand and size of item. The chapter covers a wide range of metrics that can help retailers decide how many items to stock and which items to stock.

Specialized software packages such as NielsenIQ SpaceMan, JDA Intactix and SAS’ Store Layout and Mapping  help category management teams plan the shelf layout in a manner that optimizes the amount of space given to each item, and the placement of the items on the shelf.

These packages use a computer-aided visual representation of the shelves called a planogram. As the items are placed on the virtual shelves the planogram keeps count of the number of facing (i.e., the number of faces of a product that are visible from the front of a store shelf).

The items on a planogram are colour coded to indicate different characteristics such as brand name, segment, or stock level. For example the planogram in Exhibit 32.10 uses colour codes to indicate which items are overstocked (light and dark green) and which are understocked (light and dark red).

The algorithms can re-adjust the number of item facings on the planogram so that stock levels are in proportion to variables such sales rate. Analysts can also merchandise products moving them around the virtual shelves and blocking them in a manner that is aligned with how people shop the category.

Consumer decision trees, which map out the sequence of choices and considerations that shoppers go through when making a purchase, play a key role in effective merchandising strategies. They help retailers understand the various factors that influence consumer behaviour, enabling them to tailor their merchandising efforts accordingly. For instance, if the analysis of consumer decision trees for a category indicates that consumers prioritize their decision-making process based on segments, followed by brands, and then pack sizes, the retailer should accordingly group products based on consumer segments or specific needs, then organize them by brands, and finally by pack sizes.

To optimize forward stock, shelf space is typically allotted in proportion to demand (i.e., share of space is approximately equal to share of sales). However, in order to maintain wider range of products and accommodate small brands, the big brands tend to get less than their sales share of space. Merchandising considerations come into play too and retailers also make adjustments based on segment and brand strategies.

Product placement has an important bearing on the performance of a product. When shoppers face a gondola (i.e., the freestanding fixture of shelves used to display merchandise), their peripheral vision covers about 12 feet, and they tend to look firstly at products placed at eye level, then to their left and right, and lastly from top to bottom. In view of this, big brands, and brands that the retailer wishes to prioritize, are kept at eye level.

As mentioned earlier, space management’s goal is to achieve the best trade-off between competing objectives. If well executed, the improved space allocation would lift sales, reduce inventory holding costs and working capital, and minimize the incidence of stockouts. Merchandising of the products would be better aligned with shopping behaviours. It could make shopping at the chain’s stores a much-improved experience.