Spatial Awareness: How Can Retailers Maximise the Profitability of Store Space?

Spatial Awareness: How Can Retailers Maximise the Profitability of Store Space?
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You walk into a store. You look around, you spot a few things that you like the look of but, at the end of the day, you can’t find what you want… Why?

Because the brand doesn’t have what you’re looking for? Because that particular store doesn’t stock it?

Or because the store did not have what you wanted at the time that you wanted it?

If your answer was the former then you were probably in the wrong shop all together!

But, if it was either of the latter then it may be a missed opportunity for the retailer. With experiential retail becoming more and more important, how can retailers meet their customers’ needs?

This is where space optimisation comes into play. Space optimisation seeks to have the right product, in the right place at the right time for the consumer. By doing so retailers can maximise customer satisfaction, conversion, and ultimately sales/cash margin.

While retailers have been using space planning in a number of ways to get their customers to buy more, in a lot of cases, it hasn’t been optimised or the strategy hasn’t been thought through properly.

There are several different ways of looking at space optimisation, the what, the where and the how.

  • What do I put on the shop floor?
  • Where should I put it?
  • How do I best present products in store?

What do I put on the shop floor?

When it comes to the ‘what,’ more often than not, merchandisers will be planning their ranges within a particular category. Each category will seek to stock a ‘competent range’ that appeals to their target customer. The issue with this is that the two expectations of what the customer’s choice set should be are not necessarily aligned. By failing to look at the product offering across all product types retailers don’t approach the problem holistically. One way to address this is to see if there is any perceived relationship between the space a particular product type takes up and the sales it receives in response. But how can retailers do this?

Taking a simple model as an example, we would seek to maximise sales based upon the percentage of store space a particular product type maintains. Now, I know what you’ll be thinking – any optimisation will surely side with the most profitable product type.  But that is not necessarily true.

Optimisations instead look at the marginal improvements one can expect from changing allocations from their current position rather than overall profitability of a product type. To give an example, we’ve plotted dummy sales curves for an imaginary store below. Taking all possible data for store A, the curves below dictate where sales have been maximised in the past. This of course changes month on month but the benefit essentially derives from any discrepancy between where the store currently sits and the optimal point on the product sales curves.

Taking the product sales curve for Jackets, if we were to move more towards the peak of the curve, the marginal returns from doing so diminish as this opportunity is increasingly undertaken.  As this diminishes, it may then become more beneficial to move towards another product type that will yield greater marginal returns per % allocation assigned to it.

Equally, some product types may well benefit from reducing the amount of space assigned. Take shorts as the example, we can see from below that the sales yielded from this product type peaks much earlier than most. even by tackling solely the ‘what?’ element of space optimisation, retailers will have a much better grasp on what works well in different stores and can ensure store space is being used effectively.

Where should I put it? 

The ‘where’ seeks to optimise the use of certain spaces for particular products. This kind of optimisation is seen most commonly in grocery.  How many times have you been in the supermarket only to fall victim to the offers at the end of the aisle that were never even considered for your shopping list? Grocers can even go to the lengths of placing products at eye-level with children’s products lower down in the hope they convince their parents to buy the product. By looking at a combination of each products propensity to sell in particular store locations and the ‘shoppability’ of a certain space, we can maximise the overall store layout.

Even simple touches such as keeping complimentary categories near one another, moving smaller ticket ‘add-on’ items towards the counter all contribute to increasing average basket sizes. This simple modification to store layouts saw a 1% increase in bottom line sales at one of our clients, for next to no effort. It all goes to show that when a retailer has a solid understanding of what works well where, they can truly maximise profitability per square meter.

How do I best present products in store? 

Retailers are continuing to broaden their horizons with how the store is presented. Whether it be using technology, with Tommy Hilfiger introducing a virtual store, or introducing a totally new shopping experience, with Bonobos ‘guideshops,’ the retail store of the future is becoming a reality.  Optimising the ‘how’ focuses on the ergonomics and aesthetics of the store. It is important that the customer has a seamless shopping experience and can easily find what they’re looking for.

By ensuring clear line of sight within store, you increase the accessibility of products for customers.  By also understanding the customer journey, each retailer can understand the pain points within the store layout and move towards making the process as fluid as possible. Other small touches such as splitting till points to reduce the appearance of queues and being transparent about wait times all reduce the risk of an abandoned purchase.

Though getting it right is important, simply avoiding getting it wrong is a must. Walmart famously fixated on ‘de-cluttering’ it’s store in the belief it would improve the shopping experience and increase sales in a plan coined “Project Impact”. What they failed to consider was the impact of exclusivity, whereby some shoppers stay loyal to particular products to the point of shopping elsewhere if it is no longer stocked. This was estimated to have cost them $2 billion in sales over the course of 2 years.

So why aren’t many retailers ceasing this opportunity? 

This all sounds great in theory, but the practical application of such solution comes with a few challenges. Though retailers are showing strides forward in the ‘where?’ and the ‘how?’ it’s the ‘what?’ that tends to fall short. The most prominent reason being data capture. Without RFID, retailers don’t realistically have the data to say with 99% accuracy what is and isn’t on the shop floor. The first step to answering the ‘what?’ of space optimisation is to ensure that we can say with some level of confidence what was on the shop floor at any moment in time. But even with this, there’s only so far the maths can get you. You still need the merchandising know-how to keep any optimisation within sensible boundaries, after all – how well would a department store do with 99% space attributed to one product type?

Final thoughts

The opportunities and benefits that come with space optimisation are obvious, but it’s still up to retailers to utilise data and find what works best for them and their customers. By considering the ‘what?’, ‘why?’ and ‘how?’ retailers can optimise the available space they have at each store and provide their customers with the shopping experience they’re looking for.

Author

Adam Hobbs is a Business Consultant at Thought Provoking Consulting, who holds a BSc in Economics from the University of Bath. Adam has worked both in Finance and Consulting, starting his career at HSBC Global Research before moving over to TPC.