Retail – Is Shelf Space Wasted?

Every shop selling items to consumers has the same set of problems. The visible problem is surpluses of products clients apparently don’t really want. These will sooner or later result in steep discounts and write-offs. The invisible one is shortages of products that clients do want but have to find in a competitor’s shop. Both problems send consumers consciously or unconsciously to those shops where consumers have the highest chance to find what they desire.

The Retailer’s Limiting Factor (Constraint)

The number of clients that want to buy products from the retailer’s shop determine his sales and income. The limiting factor or constraint of every retailer is the number of clients he manages to entice into his store.

The more potential clients, in other words the higher the traffic, a shop has the higher sales and profits will be. Store traffic is what drives profits and every store manager and retailer’s primary concern is how to get more people into his store(s). The choice of products, the best possible location, promotions, advertising and window dressing are all designed to entice consumers into the shop. Every one of these tactics is a way to “exploit” the constraint – the number of customers that enter the store.

The limiting factor (constraint) of every retailer and shop is therefore the consumer traffic in the store(s).

Get the Most from Consumer Traffic in your Shop

Merchandisers spend a great deal of time and effort developing what the hope will be attractive products and offers for consumers. Since they have to decide well in advance they must forecast or guess what will actually attract the consumer – what products, what prices, what colours what sizes and many other parameters. Particularly fashion products (those that change from season to season) are difficult to forecast. Orders for fashion products are placed well before the first sale will be made. A good merchandiser, one that makes good decisions year in and year out is worth his or her weight in gold.

Most retailers and their merchandisers are not fully aware of the penalties of product surpluses and product shortages.

Surpluses take away shelf space from popular items, which damages sales. Surpluses must be discounted to recoup at least the investment made in the stock. Discounting blocks full price sales in three ways – a discounted sale removes the need for the article, discounts and the associated promotions tend to block popular items from view and consumers learn from experience that it is worth it to wait until discounting begins.

Shortages are not usually measured – a sold out item is celebrated as a success while the associated missed sales are often forgotten.  Every extra 100€ of full price sales brings around 50€ to the bottom line. If shortages are about the same quantity as surpluses (say 30% of sales) they represent an enormous loss to the retailer and, at the same time, an enormous potential for bottom line improvement.

Decisions on product, style, price etc. will all remain very important. The decision to have the right products in the right place has already been made by every retailer. How to do this is the concern of every retailer and their merchandisers. So far, from all the evidence of discounts and factory outlets the problem has not been solved. It looks as big a problem as it always was.

Subordinate the Organisation to the above Decision

(The decision is: to have the right products in the right place has already been made by every retailer)

The retailer’s organization, including their suppliers, should take those actions necessary to ensure the right products are in the right place at the right time. This is where most retailers seem to get it wrong. Local optimisation is the culprit. Merchandisers are measured by the prices they achieve. The supply chain is measured by the cost of shipping. Suppliers are under pressure to deliver at the lowest possible cost. It is easy to see how operating decisions are based on cost leading the biggest possible production and shipping batches. Products are often bought to cover the entire season in order to achieve the lowest possible delivered cost. This thinking forgets all about the cost of surpluses and shortages.

This focus on delivered cost is the source of the huge penalties in shortages and surpluses. These penalties are a big multiple of the costs savings due to big batches.

Shouldn’t the supply chain must be charged with minimizing shortages and surpluses first and production and shipping costs second.

Expand

Once the supply chain has reduced shortages and surpluses customers will soon learn that the retailer’s shop is a good place to visit. There is a high chance the consumer will find what he is looking for. Customer loyalty will increase – more clients will be gained than lost. Traffic in shops increases.

Consumers talk to each other. If performance is maintained word of mouth will bring more and more clients to the store. The shop has exploited and expanded its constraint – traffic in the store.

Since profits are so dependent on store traffic the retailer’s returns should soon be far beyond the usual industry returns.

Will the Limiting factor (Constraint) Ever Move?

It is unlikely the supply chain will ever become the constraint. The retailer’s job remains the same – what should be the next step to draw even more clients into his shops.

Maybe a closer partnership with his suppliers – to be able to decide production plans much later and much closer to the real consumer demand.

A shop’s space is limited. It can stock only whatever actually fits comfortably into that space. It is essential that every meter of space produce the highest possible turnover (or sales). Is there a way to partner with suppliers to make sure every shelf has only fast moving popular items on it? How close can a shop get to such an ideal?

How much can shelf returns be improved by thinking just a little bit differently?

 

 

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