Efficient Retail Floor Space Management 2.0 (Macroplanning)

(First published on Feb 15, 2021 – latest update May 14, 2023)

For every physical retailer, the store space is a highly valuable limited resource. Efficient use of this valuable and very often highly expensive variable is crucial for store profitability, and overall retail success.

The article provides insights into this “royal discipline” of retail space management by showcasing two real store space remodelings.

Why “royal” discipline? Because here at the retail floor space all the variables meet: from inventory management, assortment strategies, price and space elasticity, to a good design, visual appeal, and possibly innovative approaches that make a retailer stand out from the competition.

But before we deep dive into figures, mechanics of category positions, store profitability, sales-to-space algorithms, data science, etc, just a reminder.

Yes, store space efficiency is highly data-driven discipline, dependent on mathematically sound algorithms, and often gets additional boost with implementation of good space management software.
BUT one thing precedes all the rest → how store space meets your customer needs and expectations.

For succesful arrangement of product categories in stores, retailers must never skip the following basic questions:

• how customers search, select, and buy in your store?
• what do your customers expect from your retail brand?
• why do customers come to your store and not to the competitors at first place?

This is also the root of our methodology #levers for successful store spaces.

I’ve started building #levers back in 1999 while working on a space management project for Coca-Cola. A succesful pilot was later expanded into a complete macroplanning solution for a convenience store chain. Also, my clients – national retailers – needed a good framework while developing different store formats. I’ve constantly added insights from industry best practices, and research findings. Parts of #levers definitely owe its debt to key published documents of the field. From Paco Underhill’s Why We Buy to Steve Dennis’s Remarkable Retail which I covered in an article How to Win in the Age of Disruption.

#Levers have developed over time. In the article, you will get insights from 2 fresh store remodeling cases. Namely, in 2022, a commisioned project gave us opportunity to test bolder hypotheses for store layouts of national supermarkets. We combined data science & workshops specially designed for store remodeling.

Result? The pilot grocery store became the most rapidly growing store in the whole network of our partner retailer.

I invite you to see how efficiency of store spaces could be increased and used for better stores that will satisfy customers and stimulate repeat purchases.

The following article focuses on the macroplanning side of space management (more on planograms and microplanning you can find in article: Planograms Meet Inventory Management).

— THE CONTENTS

• SPACE MANAGEMENT POWER: POSITION AND SHELF SPACE
• EXAMPLE: HOW PRODUCT CATEGORY POSITION IMPACTS THE SALES
• IMPORTANCE OF CATEGORY SPACE ELASTICITY
• KEY RULES FOR THE ORGANISATION OF PRODUCT CATEGORIES
• THE GOAL OF EFFICIENT STORE SPACES
• CATEGORY-BASED FLOOR SPACE MANAGEMENT
• REMARKABLE RETAILING: ADVANCED FLOOR SPACE MANAGEMENT
• DIFFERENT SPACE-ORGANIZING PRINCIPLES
  
  • Category-based
  • Experience-based
  • Mission-based
  • Theme-based
• (©) LEVERS: METHOD FOR SUCCESSFUL RETAIL STORE SPACES
• SUCCESSFUL CASE: COMPLETE STORE REMODELING

— RETAIL SPACE MANAGEMENT POWER: POSITION AND SHELF SPACE

For the sake of understanding the basic mechanics of store space management, let’s start with two instructive examples.

(1) category repositioning and (2) shelf space effect.

— CATEGORY REPOSITIONING IMPACTS SALES

Store operators intuitively know how positioning of product categories might influence the sales.

Imagine you have are a convenience store with an ice cream refrigerator somewhere in a barely visible corner.

Then bring the refrigerator in front of the customers, say closer to highly frequented cash registers.

As ice cream is highly impulse category this move will imediately reflect in big increase of sales.  Especially, when done at the right season!

— SHELF SPACE EFFECT IMPACTS SALES

Another critical factor is the shelf space or the assigned size for particular categories.

What happens when you add another ice-cream refrigerator to the grocery store? The category sales will certainly get two-digit increase.

— SYSTEMATIC APPROACH TO STORE SPACE MANAGEMENT

But there is much more to macro space management – macroplanning – than the immediate increase in sales.

Efficient space management works on many levels:

• eases up customer store navigation
• accelerates inventory turnover
• increases sales and shopping basket size
• guarantees store profitability
• raises overall customer satisfaction.

It’s also important to add another characteristic of efficient macroplanning: shelf space flexibility over time. Fixed and for years cemented store layouts are thing of the past. Of course, in physical retailing the flexibility needs different approach then in online environment. But adjustments for seasonality, special occasions and increasingly important time-limited offers should be enabled.

Knowing the impact of store space management, successful retailers and suppliers take a systematical approach.

They carefully

• study shopper profiles,
• analyze sales and space data,
• predict future development

and then incorporate their findings into store layouts by playing with the following elements:

• choosing the principles of store space organizaation,
• assigning placement and shelf space of brands and product categories,
• leading the customer traffic flow around the store

If you’d like to learn more on the topic: key elements of such a systematic approach are described in another article “Succesful Retail Store Spaces in 5 Steps“.

— EXAMPLE: HOW PRODUCT CATEGORY POSITION IMPACTS THE SALES

The example illustrated below gives an insight into the mechanics of repositioning.

One important grocery category has been moved around the supermarket store space.

4 different positions have been tested: A, B, C, D.

Analysis: The same category at 4 different store positions (A – D)

Let’s look at position D first: Category has plenty of allocated space. But in the long inner aisle, away from the eyes of the shoppers, the category makes up only 13% of shopping basket incidence.

When we move the observed category to a strikingly visible position A – also closer to the cash registers – that changed the basket incidence to 31%. Not to be overlooked: shoppers approach the category frontally (which is the main difference from position B where the access to the category is from the side).

Huge basket incidence impact is linked directly to a position of a category.

The impact varies from category to category – based on their category space elasticity.

— IMPORTANCE OF CATEGORY SPACE ELASTICITY

Here we’ll emphasize the importance of category space elasticity as a key tactical instrument for influencing the basket size.

Category space elasticity is a measure of change in category sales due to a percentage change in the shelf space.

When you increase the space for a category with high space elasticity, the sales will rise above average.

Elasticity is a function of a store size. The bigger the store size, the higher the elasticity. But careful here – also smaller convenience stores make critical improvements with proper space management!

The space elasticity is closely linked to the impulse or planned “nature” of the categories.

— IMPULSE CATEGORY

Impulse categories are those where customers make more unplanned or spontaneous purchases.

Buyers usually don’t deliberately plan to buy them, but exposed to their immediate presence it’s hard to stop the urge to have them!

In grocery, typical impulse categories are beverages, confectionery, beer,  snacks, candies, biscuits etc.

Impulse categories have high space elasticity.

In our case, we are clearly dealing with an impulse category.

— PLANNED CATEGORY

In contrast, planned categories are those in which customers make more deliberate purchases.

The shopping basket impact for the planned category would be considerably smaller.

An example of planned category is household cleaning products. Do you need them or not? They are often items on the customers’ shopping lists.

— KEY RULES FOR ORGANISATION OF PRODUCT CATEGORIES

When you move one category to a more favourable position, this usually impacts all the others. It’s a bit like a game of sliding puzzle – the one with one piece missing.

The goal of the space management game should follow some rules:

• move the space elastic, impulse categories near the areas of higher shopper frequency
• move the space inelastic, planned categories to the areas of lower shopper frequency
• move the “browsing intensive” categories like fruit, vegetables, or seasonal products to the front
• store corners are sensitive areas where you should allocate chosen frequently bought categories that attract core shoppers (eg. milk or bread in grocery stores)

More on this tactical game with the variables of inventory, demand elasticity, and shelf space assigned you can find in the article “Decrease Inventory Level by 50%, Increase Store Sales & Profitability”

— THE GOAL OF EFFICIENT STORE SPACES

What is the measure of the efficient retail space management game?

Out of many definitions, we’ll quote the one working well for our retail projects.

Efficient store space management is the such spatial layout of retail merchandise and services that fulfills the listed conditions:

1. convincingly satisfies the basic shopping intention / goal of a customer
2. guarantees profitability to a retailer by tactical proficiency
3. ensures fast stock turnover supported by a balanced flow of input and output quantities of products.

As an upgrade, we can add two further conditions for efficient floor space management:

4. stimulates up-sells by leveraging unplanned purchases in a non-intruding way

5. ensures space flexibility over time as customers’ intentions are dependent on seasons (capability of adjusting shelves and other elements in a floorplan).

— CASE ONE – OUR SUCCESS STORY: COMPLETE STORE REMODELING

The 5 points listed above served as a guiding principle in our remodeling of a partner’s supermarket store.

Together with the retailer’s team, we made the following steps:

(1) store visit

(2) thorough space-to-sales and key competitor analysis

(3) leveraging insights on customer store behaviour (more on the important role of destination categories in the article → “Leverage Destination Categories To Increase Store Traffic“)

(4) resized the categories according to the bold tactical hypotheses

(5) moved the categories to new positions around the store, and also reduced gondolas with shelves to accelerate inventory and open up the space a little.

And the results of a new retail store layout implementation?

Inventory stock decreased by 8%, store profitability increased by 5%, and space profitability increased by 20%. 

As other variables – like assortment, price level, logistics, and promotions – were left mostly intact, the result is directly linked to the floor space management decisions.

— CATEGORY-BASED FLOOR SPACE MANAGEMENT

In the case described above, we’ve made space management decisions and optimization based on the following elements:

(1) past sales,

(2) category space elasticity,

(3) Trend analysis & future potential of categories, and

(4) other attributes of categories.

As categories are the primary organizing unit, the practice might be called category-based floor space management.

A brief explanation:

Product categories are usually defined as discrete groups that consumers perceive as similar or related. What is “something that protects and comforts the human foot?” Yes, a shoe. And this shoe makes a typical category within a larger segment of clothing etc. The hierarchy of such product categories is called Consumer Decision Tree (CDT).

An example of a Customer Decision Tree. Hierarchy is seen on the left. For learning purposes only.

The more CDT reflects the shopping habits the better.

We can also say that this principle is very aligned with traditional category management. Raised in the 1990s, category management as a native computer-aided discipline highly excels in analytical capabilities particular to this area of retail management. In the hands of a capable floor space manager Heatmaps, frequency of category buying, space-to-sales analysis, and all sorts of retail mathematics for each particular store are reachable within hours, if not minutes.

— REMARKABLE RETAIL DEMANDS ADVANCED FLOOR SPACE MANAGEMENT

Up to a point category-based floor space management provides many business benefits:

• easier store navigation,
• lower inventory levels,
• less time for filling the shelves,
• sales effects

But space organization based on categories is especially efficient when the retailers have clear tactical deficiencies and the market is growing, not saturated.

In advanced markets with huge competitive pressure, category-based store space management should be upgraded.

— APPROACH FOR SATURATED MARKETS WITH HIGHER PURCHASING POWER

The reasons for the upgrade stem from the fundamentals of human psychology.

When the purchasing power is still relatively low, and the market is developing, customers’ expectations are lower. Proper category-based arrangement satisfies the customers in itself. It also brings other documented benefits.

But in saturated markets, the customer expectations are higher. Logically organized stores, solely using the engineering principles of arrangement are not meeting the increased expectations anymore.

Retailers should move in the direction of better design and increased emotional involvement of customers.

Shoppers are not only buying with brains but with all 5 senses. The higher the purchasing power of the market the more important the emotional elements are. 

The above imperative of successful retailing is gaining importance. Especially now, when the digital revolution and the internet thoroughly overhauled shopping habits and changed shopper expectations.

Successful retailers search for a particular excellence that will differentiate them from the competition.

To be remarkable and stand out for customers they seek their own formula that combines category-based store organization with advanced organizing principles.

— DIFFERENT SPACE-ORGANIZING PRINCIPLES

Just take your regular grocery supermarket store into focus. You might find different levels of product arrangement:

CATEGORY-BASED

Might be a prevailing arrangement principle – you get all the dairy products or non-alcohol beverages in one place. This makes it easier for a buyer to stock up on routinely bought categories.

EXPERIENCE-BASED

But there is a part of the store where you expect products from different categories put together as pleasantly as possible. In the deli you expect cheeses to be placed close to sliced meat, and vegetable spreads. Oh, yes, and maybe some local wine or a bottle of chianti. How about homemade biscuits? Also. So here we exit a plain category-based arrangement. We better call it an experience-based arrangement. Visual merchandising gains importance in these areas.

MISSION-BASED

From here to mission-based is just a step. Heat & Eat department, On-the-go, Ready for Dinner, etc. Here we can find smoothies, sliced fruit, sandwiches, dips, salads, etc. all placed together. Higher added value for the customer – if we have a base of customers that’s big enough.

THEME-BASED

An even higher level of arrangement, based on seasonality (Summer Party) or specific societal rituals (Back To School), or even attitudes or ethical shopping. The Fair Trade section could be a confirmation of the latter.

The same principles apply also to specialty stores. In consumer electronics, the gaming section means much more than ordering recently published games into racks. Gaming could start with gaming chairs, and special equipment, provide experience, build community, etc.

Illustration: Category-based is moving towards theme-based store space organization

Not to mention, the one and only, IKEA. Their categories are connected on a higher level. It’s far from putting all the sofas together, all the wardrobes together, and all the beds together, which was the regular arrangement principle in furniture stores before IKEA turned furniture selling into home design. A bit overlooked power of Ikea is organically inscribed in the DNA of the company as we know it. It gives that special “IKEA feel”.

— CASE 2: LEVERS FOR SUCCESSFUL RETAIL SPACES

In 2022, a commissioned project gave us the opportunity to test new and bolder hypotheses for store layouts.

We combined data science with team project workshops for store remodeling.

Expanding the category-based layout in the direction of experience-, mission- and theme-based gave us even more wind in the sails of the sales success.

Results?

The remodeled pilot store once again decreased stock inventory levels. Only this time, the sales increased up to 25% vs the previous year. The pilot grocery store became the most rapidly growing grocery store in the whole network of our partner retailer.

We have to emphasize the methodology of growth measurement is sound. Apples to apples. Trend values before the project started subtracted, corona effects cleaned up and devaluated. The actual rise on the yearly level was thus 40%! Also, the relative measures were put to use: remodeled store KPIs were checked against all the other similar stores in the network (against cluster). Plus, against a total of all the stores in the chain.

After we recuperated from a little shock, we deep-dived into before / after analysis to dig out more valuable insights.

LEVERS: METHOD FOR SUCCESSFUL RETAIL STORE SPACES

The key takeaways from above cases and more than 100 retail projects before were combined into a wholesome, self-standing product #levers for successful store spaces.

The basic framework of #levers is shown below. At the heart of space management efficiency are customer decision tree & space hypotheses based on customer shopping behaviour aligned with advanced retail space organizing principles. Not only category- but also experience-, mission-, and theme-based space management!

Schematic: The system of Omnibus #levers for successful store spaces

Advanced space management suitable for digital times supports different hierarchies of product arrangement as described above.

Architects and interior designers get the inputs for drawing more creative store spaces, and the layouts could be supported through machine learning processes.

Machine learning will add more and more momentum when properly balanced with expert insight!

That’s what Omnibus’s retail store layout proposal method #levers is at its core. Combining full flexibility and firm guidelines in the area of efficient store space organization.

If you want to know more and see how #levers for successful store spaces can fit your case – don’t hesitate to contact us!

Or you might set questions commentaries or your own experiences in the form below. Appreciated!