Retail consumer food product and consumer packaged goods (CPG) stores design their shelf space to maximize space profitability for their quick-selling, relatively low-cost, high-margin products.
They locate higher-margin products with high-velocity turns at or around a standard shopper’s eye-level and factor in store traffic flow, ease of location and accessibility and product groupings.
While most retailers traditionally using what’s known as a plan-o-gram, which provides heuristics for shelf layout of products and employs a form of trial and error iteration, they also use “shelf-space allocation” or “category management” technology to efficiently manage the assortment or merchandise and provide a framework for evaluating the selection, arrangement, promotion and pricing of individual items to achieve the optimum product mix.
Category management technology enables them to organize products into distinct groups or groups of related products ( i.e., detergents, health and beauty aids, organics, etc.) Each group is recognized as a product category and is run like a mini business. Retailers monitor a category’s sales, gross margins, and whether or not that category is adding to the bottom line or not, using measurements like:
- Profit margin density, $/cubic space
- Velocity of number of turns per. demand
- Price elasticity, which drives shelf optimization
- Ease of replenishment to avoid stock-outs and minimize labor
- The ability to maximize “ring” values, bundle products etc. to increase item sales values
What to Do if You Want Really Accurate Total Shelf Costs
But however ubiquitous it is, the science of category management is still evolving slowly, lacking the use of current data and as a predictor of future direction for maximum profitability. And it rarely factors other important supply chain cost drivers into the total profitability equation.
Retailers who want to get the most from their shelf space “real estate” will do better by taking a look at additional factors that can impact their overall profitability and product turns such as:
- The logistics costs per cube for shipment to the stores, including freight and fuel costs required for shipping from a distribution center or warehouse to a store
- The cost of non-sales related packaging needed for transport, storage and protection, including secondary and tertiary packaging, pallets, etc.
- Labor needed for shelf stocking and replenishment
- Costs of culling damaged and outdated or slow selling products
- Shrinkage due to theft, mis-rings and pricing errors
- Stock-out lost sales
- Restocking or returning non-purchased picked goods
- Package density on the shelf, which involves direct tradeoffs between package density and other packaging functions:
Our packaging optimization engagements have show us that a thorough review of supply chain packaging related issues can ensure even better metrics and profitability. One of the greatest supply chain improvement opportunities still remains increasing product and package densities. And, one of the best ways to do this is to right-size your packaging to eliminate air space and fit more product on the shelves. Customers want to pay for, use and consume products–not the packaging encasing their products or the space that only partially filled packaging, warehouses and trailers cost.
Bob Fiedler is a principal associate of Chainalytics’ Packaging Optimization competency and Packaging Fellow with the Institute of Packaging Professionals (IoPP). He earned a lifetime achievement award from ASTM D10 Packaging Committee in September 2014 and worked closely with Alfred H. McKinlay to create and establish ASTM D4169 as the leading global package testing protocol.
Read more about the many packaging factors that impact profitability and supply chain performance:
