Allocation of Shelf Space (Forward Stock)

Retailers place great importance to the allocation of shelf space, as poor allocation can lead to stockouts and excessive inventory. This results in lost sales and increased holding costs. To optimize forward stock, shelf space is typically allocated in proportion to demand, where the share of space roughly corresponds to the share of sales. However, merchandising considerations also play a role in the allocation process.

Stock to Sales Ratio

Retailers strive to maintain a wider range of products and accommodate both big and small brands. As a result, big brands may receive slightly less space than their sales share, while strategically important brands may be allocated more space.

Additionally, retailers have merchandising norms that impact space allocation, such as maintaining a minimum of two facings for most items. This benefits small brands that may not have high sales but still deserve visibility.

The relationship between stock and sales follows a pattern illustrated in Exhibit 31.13, where the share of space is lower than the share of the market for big brands, and the share of space is higher than the share of the market for small brands to meet the minimum facing requirements set by the retailer.

The stock to sales ratio, calculated by dividing the stock share by the sales share, is used to review stock allocation. For example, in Exhibit 31.14, Item 1 is receiving less space than its fair share, while Item 3 is allocated more space than it deserves.

Stock Turns

Shelf space is the most valuable physical asset that retailers own, and its effective utilization directly impacts their profitability. The retail business model is therefore centred on the notion of stock turns and return on inventory. “Stock turns” is the number of times per year that the shelf inventory is replenished. It can be calculated as follows: $$ Stock \,turns = \frac{Annual\,Sales\,(Units)}{Average\,Inventory\,on\,Shelf\,(Units)}$$

For instance, if an item has a full-year sales of 1,200 units and an average stock on the shelf of 24 units, its stock turns would be 50. This means that the forward stock in is replenished 50 times per year, or approximately once a week.

By focusing on optimizing stock turns, retailers can maximize their use of valuable shelf space and improve their overall profitability.