Allocation of Shelf Space (Forward Stock)

Exhibit 30.11   Relationship between share of market and share of space.

Forward Stock %Sales%Ratio
Item 15.07.567
Item 25.07.5100
Item 35.07.5143

Exhibit 30.12   Stock to sales ratio.

It is of prime interest to retailers that the allocation of shelf space is well planned and well implemented. Poor allocation will lead to stockouts for some items and excessive stocks for others, resulting in lost sales and high inventory holding costs.

To optimize forward stock, shelf space is allotted approximately in proportion to demand (i.e. share of space is roughly equal to share of sales), though merchandising considerations also come into play.

Stock to Sales Ratio

In order to maintain wider range of products and accommodate small brands, the big brands tend to get somewhat less than their sales share of space. Chains also allocate more space to brands that are strategically important to them.

Retailers usually maintain norms for merchandising that impact on space allocation. For instance, many supermarkets maintain a minimum of at least two facings (i.e. the number of units of an item that are visible at the front of a store shelf) for most of their items. This benefits small brands that on the basis of sales might not deserve as much as two facings.

Stock to sales relationship therefore follows the pattern depicted in Exhibit 30.11, where the share of space is lower than the share of market for the bigger brands. On the other hand, the share of space for small brands exceeds their share of market as they get no less than the minimum number of facings stipulated by the retailer.

Stock to sales ratio, which is simply stock share divided by sales share is the measure usually adopted for comparison across products. In Exhibit 30.12, for instance, Item 1 is getting far less than its fair share of space, whereas Item 3 is getting substantially more space.

Stock Turns

Shelf space is the most valuable physical asset that retailers own. How well they utilize it ultimately determines the profitability of retail chains. Their business model therefore revolves around the notion of stock turns and return on inventory.

“Stock turns” is the number of times per year that the shelf inventory is turned over in relation to the sales revenue of a given product.

$$ Stock \,turns = \frac{Annual\,Sales\,Volume}{Average\,Volume\,of\,Stock\,on\,Shelf}$$

If for example, the full year sale of an item in one store is 1,200 units and its average stock is 24 units, then its stock turns is equal to 50. This means that on a yearly basis the stock in the selling area is being replenished 50 times, or about once a week.

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