Interdependence of Demand and Supply

A mousetrap, irrespective of how good it is, will not sell if consumers cannot find it. And irrespective of how widely it is distributed, consumers would not buy it if they do not want it. It takes both demand and supply to achieve sales.

Supply, the push factor, is largely driven by sales efforts, including the management of distribution channels and trade marketing. Yet it is also strongly influenced by the demand for the product.

Demand for a brand generates a pull in sales. It yields a return on inventory for the retailer. As a brand’s turns × earns improve, more retailers want to list it, and they are willing to allot it more shelf space. On the other hand if demand is declining, the brand’s stock turnover deteriorates, retailers reduce its shelf space, trim its range and ultimately de-list it.

While it is predominantly created through marketing efforts, demand is also influenced by availability and retailer support, and the impact of in-stores activities is growing. The consolidation in retail coupled with fragmentation of media, makes the store an attractive place to market products. Manufacturers are increasingly using in-store displays and in-store media to engage with their consumers.

In-store activities including displays, price-offs, sampling and in-store launches, raise brand awareness, shape perceptions and generate the desire among consumers, to purchase the brand.

The use of in-store media on shelves (shelf talkers or shelf stoppers), floors, carts, chillers, as well as walls and ceiling is quite extensive. In-store presence of digital has been growing. Beyond signage and touch screen kiosks, we are now witnessing hectic growth in the use of mobile devices as a means to engage with shoppers.

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Right Assortment

Conventional wisdom suggests that consumers prefer greater variety. This is relevant especially within the realms of a physical brick and mortar world where shelf space is finite and limited.

Yet sometimes consumers are overwhelmed by the profusion of choices that confront them. They may appreciate a wide selection of movies, songs, books, breads and soups, and juices. But do they need to choose from 20 different brands of pineapple juice?

In a natural experiment using data from nearly 800,000 employees, Sheena Iyengar concluded that participation rates for a retirement savings plan fall as the number of fund options increase (Iyengar et al, 2005). The team’s results confirmed that participation in the retirement savings plans is higher in plans offering a handful of funds, as compared to plans offering ten or more options.

In another study on the benefits and detriments of variety, Vries-van Ketel (2005) concluded that “an optimal level of assortment size seems to exist for simple grocery products … more variety is more appealing to consumers, but that variety also has its limits.” Based on her empirical findings, consumers find it harder to cope with variety in assortments of complex products. For these products, optimal assortment level is lower than that for simpler products.

For instance the task of purchasing a digital camera is complex because it entails the understanding and trade-off of a large number of attributes, some of which an average buyer might not fully comprehend. In this case great variety becomes a burden for consumers confronted with the difficult task of selecting a complex product.

There also exists in people’s mind, the fear for later regret, i.e., what if I choose the wrong product? The potential for regret is greater for products that are complex and long lasting, and it increases with increase in choice.

Expertise of the buyer too has a bearing on her preference for variety. Experts are able to better cope with the complexity of choice. They presumably are more inclined to learning more about the product, and prefer large assortments so that they may choose exactly what they want.

Vries-van Ketel’s study also stresses the importance of merchandising. Her research suggests that products should be placed on the shelves in an organized manner, so that consumers find it easier to choose what they want. This reduces the “cost” of variety to consumers.

As regards costs, from the manufacturer’s perspective, adding brands and variants reduces the economy of scale per item, heightening manufacturing, marketing, sales, logistics and inventory costs.

From the retailer’s perspective too, greater variety translates to higher costs. The increase in assortment and consequently the reduction in turns per item, adversely affects inventory, delivery, merchandising, administration and purchasing costs.

It is important to stress that while some research studies have shown too much choice is not good, in majority of sectors and product categories, retailers are well below the optimum levels of assortment. Rather than too much choice, physical constraints such as finite shelf space are the prime limitations. Thus, the majority of research studies have concluded that increasing assortment will increase store traffic as well as spend levels.

In view of this, the challenges confronting retailers in most consumer goods industries are as follows:

• Shelf space is limited — retailers are unable to accommodate the wide selection of brands and products offered by suppliers.
• Consumers want more variety. (Though there are upper limits, current levels of assortment, for most categories, are far below these levels.)
• Consumers expect products to remain in-stock. Accordingly retailers need to ensure that products are stocked on shelves in adequate quantities, so that they are unlikely to run out-of-stock.

The limited shelf space that is available in a store must be optimized so that consumer may benefit from a wide range of choices, with minimum incidence of stockouts.

Managing Assortment

Nowadays items on sale in retail stores are usually distinguished by a bar code that is scanned at the checkout. Every book for instance has a unique International Standard Book Number (ISBN). In FMCG an item’s bar code is referred to by various abbreviations — stock keeping unit (SKU) number, Universal Product Code (UPC) in the US, European Article Number (EAN), Global Trade Item Number (GTIN), Japanese Article Number (JAN) etc.

The average supermarket has roughly 10,000 to 20,000 SKUs in stock. That sounds like a large number of items, but it is small compared to what the suppliers have to offer.

To gain some understanding of the scale, some time back I asked for a count of the number of active items on Nielsen’s item master in Singapore. I was told that there were 2,137 shampoos, 4,714 facial products, 3,441 biscuits, 2,376 chocolates and 2,110 soft drinks. Besides wondering what all you can do to your face these days, there is the question of how retailers cope with this glut.

Brick and mortar stores can stock only a small fraction of the items that manufacturers have to offer. They need to manage this carefully because assortment is a key driver of store choice. It impacts consumers’ perception of their chain, their store loyalty and the amount they spend in store. The limited shelf space that is available in a store must be optimized so that consumers may benefit from a wide range of choices, with minimum incidence of stockouts.

From the manufacturer’s perspective, the brand’s range and its distribution is aligned to its marketing strategy. In trade channels however it is faced with a battle for shelf space. Ultimately how much of the brand’s range is stocked by a retailer is a function of several size factors:

• Size of the store.
• Size of the category. Importance of the category. Destination categories, for instance, would get higher priority on space.
• Size of the brand. Importance of the brand. Brands that are better aligned with the identity of the retailer get greater priority.
• Size of item.

Bigger stores accommodate more categories and offer more space for each category. For instance supermarkets stock over 30 SKUs of Campbell’s soup, whereas provision stores on average stock less than 5. Campbell’s management team needs to take a decision on which items it will sell through which store in each of the channels, and ensure that these items remain in stock.

Battle for Shelf Space

During a presentation to a cat food manufacturer, I observed the interesting trend depicted in the Exhibit shown above. The number of SKUs for the client’s brand A was trimmed from 28 to 22, as part of a cost cutting initiative. The retailer responded by sourcing more items from the competitor, and brand B’s range expanded from 15 to 20 variants.

This led to very substantial sales gains for brand B. A year by year comparison revealed a 30% growth for brand B, whereas brand A’s volume dipped by about 2%. Brand B’s market share went up from 42% to 49%.

Cat food is one among a number of categories where a brand’s share of space has a strong bearing on market share. Brand A’s margins may have improved a little over the two year time frame, yet, by trimming its range, it yielded some competitive advantage to brand B.

The battle for shelf space stems from the relationship between share of space, share of mind and share of sales. By expanding its range on the shelf, a brand is able to offer consumers greater choice. It usually gets more facings to accommodate the additional items. This gives it greater visibility, i.e., more mind space. At the same time the incremental shelf space must be relinquished by some other brand. As a result of all these factors the brand usually gains market share.

Needless to say that though the temptation may be there to grab space, each item in a brand’s range must earn its place on the shelf. If it fails to do so, it will erode the retailer’s and the manufacturer’s margins, and reflect poorly on the brand and the manufacturer. Ultimately, if it fails to perform, it will get de-listed.

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