The Missing Metric: Measuring Shelf-Space Profitability

The shelf may well be the most precious real estate in the consumer-retail value chain: In some categories, as much as 80 percent of all purchase decisions are made at the point of sale. Regardless of how much effort went into promotion or product design, the shelf is the point where the consumer meets the retailer, the brand, and the product. The outcome of all those relationships and the buying decision depends entirely on what happens halfway down Aisle 2.

Yet surprisingly little is known about that interaction. In fact, many crucial shelf-space questions are still surprisingly difficult for retailers and manufacturers to answer on the basis of anything but gut instinct. How much is this store’s shelf space worth? What products and brands would make the most profitable use of my space? What products and assortments drive the greatest growth at the shelf? How do I make sure that these are the products my customer wants? These essential questions are still very difficult for retailers and manufacturers to answer.

It doesn’t have to be this way. If retailers and manufacturers had an objective and easily duplicated metric for shelf-space profitability, they could craft better decisions about which products to stock and how to best make use of all that space. Retailers would know which products to carry and which brands to push. Manufacturers would know which promotions were working and which products were underperforming.

The idea isn’t new. In fact, a number of companies have tried to develop ways to find this missing benchmark but have never been able to create a solution simple enough to make the measurement useful. Technological approaches to measuring shelf profitability, such as the use of data from RFID tags, have turned out to be too expensive and complex to serve the purpose. Furthermore, the high level of distrust that typically exists between retailer and manufacturer has made it difficult for the two parties to collaborate deeply on anything, including data sharing.

Fortunately, there are relatively simple ways to measure shelf-space profitability (SSP). The first step is to calculate the cost per linear foot of space in the store network, including all product-related costs: for instance, total store costs, internally funded marketing support, distribution, and servicing and repairs. Next, to understand the overall costs associated with selling a particular product across the store network, apply these total costs to the space allocated to the product in a store. Apply this shelf-space cost to the net cash margin that the product or brand generates across the network to find the SSP for a given manufacturer, category, brand, or set of products and thus better understand growth and profit contribution. By using this metric, retailers and manufacturers are able to learn not only which items are most profitable, but which are most profitable given the amount of space each item uses.

Better information about product performance enables retailers to make better stocking decisions. Better stocking decisions, in turn, make it easier to build a strong relationship not only with manufacturers but with consumers as well. Stocking the right products in the right places is a good way to engender consumer loyalty toward both the store and the brand. Everyone wins with good shelf-space profitability metrics: The store earns a reputation for carrying a strong assortment of goods that are always available, and the manufacturer
can focus on stocking product lines that are recognized as winners.

Source: Booz Allen

Consumers’ Paradigms: A Challenge for Retailers

Source: Booz Allen Hamilton: Retail Innovation in Latin America

Consumers know that they can’t have it all, in terms of getting the best of everything, all the time. Most purchasing decisions involve some form of trade-off in light of constraints such as price, distance, time to shop, or credit.

Our study revealed that consumers have preconceived notions of how to address these trade-offs in the retail world. Whether these notions reflect negative experiences or simply consumers’ perceptions, they often hide frustrations and desires in equal measure. We call these preconceived notions “consumers’ paradigms” and they are associated with the trade-offs that need to be made with respect to products, services, design, quality, assortment, and location.
Although not exhaustive, the following paradigms are based on our fieldwork and reflect the most relevant information at the time of this research. While the concept of trade-offs is applicable to most income classes, our analysis and examples are focused on emerging consumers.

1. “Access to high-ticket items requires a long term-sacrifice.” As shown in our previous study, emerging consumers dedicate a proportionally higher portion of their income to household purchases: In Latin America, they spend approximately 50 percent to 75 percent of their budget on consumer products.

As a general rule, daily needs are the top priority for emerging consumers, followed by emergency purchases and large purchases to stock up. As a result, savings are very limited and so is the emerging consumer’s ability to acquire high-ticket items, such as cars, computers, and household appliances like freezers and microwaves. As an illustration, a 42-inch plasma TV can cost as much as 20 percent to 25 percent of the annual salary of an emerging consumer in Brazil.

The purchase of high-ticket items is made even more challenging for emerging consumers as access to financing is limited. The primary reason for this limitation is clear: Only about 45 percent4 of emerging consumers possess bank accounts in Brazil, for example. Yet even for the “bankable” consumers, obtaining credit can be a challenge, since financial institutions require extensive documentation, such as proof of income, which the vast majority of emerging consumers do not have. Furthermore, even when consumers are able to obtain credit, there is little or no room for debt renegotiating, which impacts the consumers’ credit history,
another important factor in the financial institutions’ decision to grant credit.
In the context of their limited savings capability and financing options, the key question for emerging consumers is, “Can I possibly buy a personal computer or a car?” Our discussion groups indicate that emerging consumers do not believe this is the case, unless they are willing to make a long-term sacrifice: They have to save for an extended period of time and pay relatively high installments, thus giving up on shorter-term consumption. A C-class consumer in Mexico characterizes this situation very well: “Before Elektra, I remember how hard it was to have the discipline and the sacrifice to save to get us our first color TV.”

2. “Better quality must be more expensive.”
“Can I find trendy, quality furniture at a reasonable price? Are my choices limited to traditional, unfashionable staple products if my budget is limited? Can I get higher-quality products at competitive prices?” In the minds of emerging consumers, the answers to these questions are, “No, yes, and no.” They believe superior quality, which they generally associate with intermediate or leading brands, carries a premium in price. This belief can drive the purchasing process to the point where emerging consumers don’t even compare prices and limit the number and type of stores that they visit. A D-class consumer in Chile stated, “I buy my clothes in La Polar or in Lider, because Falabella is not for me.” The same belief holds when emerging consumers shop for other products, such as furniture and electronics.

3. “If a store is nice and trendy, its products must be expensive.”
Emerging consumers take for granted that a modern, trendy shopping environment, carrying
stylish products, also carries a premium price. “C&A stores are really nice and chic; it is not for people like me,” stated a Brazilian C-class consumer. Alternatively, as a B-class Mexican consumer said, “Palacio is expensive, but you find better things, more modern, exclusive; they get the products before other stores, and they run the best brands.” The perception is clear: If a store is trendy, the products must be trendy as well, and therefore expensive.

4. “If the store is small, the assortment must be very limited.”
Emerging consumers believe the store area is an indication of the available assortment. Consequently, they believe that if the store is small, one has to shop around in many other stores or commute to a larger store to access greater variety and, in certain cases, feel comfortable about making the “right choice.”
It is important to note that emerging consumers have often stated their preference for shopping at small stores nearby, as going to larger stores a distance
away requires more time and more expensive transportation, which is significant in the context of their limited budgets.
In the case of mid- to high-ticket items, this paradigm of a clear trade-off between store size and assortment has a much greater impact, as lower-income consumers usually do more research to purchase. As a D-class consumer in a small town in Brazil said: “I bought a new washing machine last month to replace the old one. But it took me five months to have my husband take me to Campinas, where there was a store with broad variety.”

5. “Better service and sales assistance must be more expensive.”
Our study identified service as a highly valued attribute for emerging consumers.
Nonetheless, they usually do not have positive experiences in this respect. It is common for them to find sales assistants too “sophisticated” to understand lower-income consumers, or believe that assistants have a cold and snobbish attitude toward them.

Accustomed to not having technical assistance and good service, emerging consumers believe that complimentary services can only be obtained with higher prices. When one C-class consumer in Colombia commented, “I like K-tronix; they have good products, nice people to help, and they even installed the refrigerator I bought for free,” another consumer responded, ”Nothing is for free, my friend. The cost is somewhere inside the price you paid.”

CMO Thought Leaders: A Snapshot

The book explores how leading marketers are grappling with and surmounting the challenges of heightened customization demands, fragmentation of media and markets, growing pressure for returns on marketing investments, and other crucial issues.

Key Challenges	What the CMOs Are Talking About
Put the Consumer at the Heart of Marketing	􀀗Knowing what consumers are actually thinking & doing 􀀗Changing research and knowledge management practices 􀀗Transitioning the mind-set of a whole organization	“HP knows the top 10 factors that drive customer loyalty, and it measures them constantly. Corporate marketing can then go back to each business and say, ‘Here’s where you’re falling behind in terms of the customer experience you’re providing, and here’s how it relates to market share and margin growth.’” -- Cathy Lyons, CMO Hewlett-Packard
Make Marketing Accountable	􀀗Marketing accountability on two levels 􀀗ROI metrics and the marketing dashboard 􀀗Measuring the impact of new media 􀀗Developing the measurement capability	“The most important thing that’s changed in the last 10 years is measurability of what we do… New channels are regularly emerging that allow us to understand what it is we’re doing as it related to acceptability with the marketplace. And we can do it with much faster turnaround.” - John Hayes, CMO, American Express
Embrace the Challenges of New Media	􀀗Openness to experimentation 􀀗Balancing the new and the old 􀀗Pull vs. push	“ …consumers are in control. It’s more than just click the remote capabilities or the ability to do a browse/search on the Internet. Consumers are telling us that they want to be in control of the storytelling. And as part of that desire, they want to engage in advertising in different ways.” - Beth Comstock, President, Integrated Media, NBC Universal
Live a New Agency Paradigm	􀀗Identifying the right agency partners to meet marketing’s needs 􀀗Creating a new kind of partnership between marketers and agencies 􀀗Balancing cooperation and competition to get the best ideas	“[Agencies] need to get more integrated. They need to collapse structures. They need to go digital. Those that are making those changes are turning away business. Those that haven’t adjusted are struggling.” - Jim Stengel, Global Mktg Officer, P&G
Recognize the New Organizational Imperative	􀀗Balancing generalist and specialist skills 􀀗Driving the training agenda 􀀗Integrating with other functions	“ In marketing, you need to use both halves of your brain…You need to have the analytics. You also need to have the intuition. And you have to be quite flexible at using and leveraging both parts of your brain” - Rob Malcolm, CMO, Diageo
Remain Adaptable	􀀗Making adaptability an inherent part of the marketing agenda 􀀗Raising senior leadership awareness of issues and implications 􀀗Driving marketing as an integral, integrated part of the enterprise	“ I’ve never worked for the same company for more than two years in a row, because FedEx keeps changing. We have new marketing challenges every day.” - Mike Glenn, CMO, FedEx