Actionable Insights From APT's Retail Practice

Is It Time To Take Your Space Planning Beyond Average?

September 2nd, 2014 | Posted by CCorman in Uncategorized

When Isaac Newton famously created his third law – “for every action, there is an equal and opposite reaction” – he may not have known he was also talking about allocating space within a store. Space planning involves a series of trade-offs whereby when one category receives additional space, another category loses space. Newton was only partially right, though. Yes, when one foot is given to Category A, Category B must lose one foot of space. However, the sales impact is not usually equal and opposite. Every category generates different sales per unit of space. Even more importantly, every category generates different marginal sales, that is, the amount of sales it generates for each additional foot of space it receives.

Traditional space planning approaches recommend giving more space to categories that sell more per unit of space on average. For example, let’s consider a retailer that is deciding how to optimize space between Cards and Candy. Analysis of space and sales data might reveal that Cards generate $600 per foot and Candy generates $450 per foot, indicating that more space should be given to Cards. However, this analysis does not reveal what will happen when one additional foot of space is given to Cards while Candy loses one foot of space.

This consideration is critical, since the concept of diminishing marginal returns almost always holds true in space allocation: each additional unit of space generates less sales (and profit) than the last. To continue with the previous example, a retailer may find that allocating one more foot of space to Cards generates $250 while allocating one more foot of space to Candy generates $300. Despite having lower sales per foot on average, Candy has higher marginal sales productivity and thus should be the recipient of additional space (in this case, it will generate an additional $50 per foot vs. Cards).

Why would Candy generate higher marginal sales than Cards? The elasticity of sales to space is highly dependent on the product category, type of store, location, format, and a broad range of other factors. For example, if the store already has a broad selection of Cards for all occasions (e.g. birthday, anniversary, etc.), adding more variety may not have a significant impact on whether a consumer buys a $3.99 card or not (e.g. they aren’t going to buy an anniversary card without occasion to do so). On the other hand, if giving more space to Candy means the retailer can introduce a new type of Candy bar, a consumer may be more likely to add some (or more) Candy to her basket.

Is it time to take your space planning beyond average?

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