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Are you using your store space wisely?

Tips for achieving optimized macro space optimization

By Mike Humphreys, mike.humphreys@galleria-rts.com

Retail is a continuously evolving, competitive industry driven by consumer demand. To succeed, it’s critical to allocate the correct amount of space to products to be profitable and provide a satisfying shopping experience. In many store formats, the reallocation of space at the department, category or sub-category level can be both time consuming and expensive. Therefore, it’s vital to make sure to allocate space right in the first place. If you don’t, you run the risk of losing substantial business to competitors.

Macro space optimization is the practice of ensuring category and departmental space is allocated appropriately in store to enable retailers to achieve maximum profit. Today, many retailers are using computer-aided design (CAD) systems or manual spreadsheets to attempt macro space optimization. These methods only provide a top-down view of the store, which enables a retailer to allocate space, but does not take consumer demand in account. Also, these methods cannot advise the optimal amount of space or product mix that will provide the most profit. This leads a retailer to overlook profitable opportunities.

To use all store space wisely, it’s important to factor in space recommendations for categories and departments. This can be done by taking your current CAD system to the next level by incorporating automated technology that incorporates a science-based approach. Combining science with art will ensure stores are profitable and aesthetically pleasing. Below are top tips to begin the journey to efficient macro space optimization:

Say goodbye to spreadsheets.
The days of allocating macro space on spreadsheets are over. At the moment, many retailers are attempting to achieve macro space optimization using labor-intensive spreadsheet practices. Retailers crudely lay out all of the categories they have across the chain and build a theoretical store on a spreadsheet. Unfortunately, using chain averages does not enable a retailer to optimize sales for each category in every store. For example, if the soft drinks category provides a retailer with 3% of its sales value, it will likely give that category 3% of store space in each store using the spreadsheet methodology. However, buying patterns differ greatly from store to store based on many variables. Although it may be a chain-wide average, many stores will end of having too much or too little soft drinks available to achieve maximum profit. It’s critical to be able to test space options on a store-specific or cluster basis to make educated space decisions.

Forecast for success. By forecasting future store needs based on historical information and trends, retailers can understand the return and benefit a category will achieve from the space before implementing it. In addition, using a forecasting method enables retailers to perform a “what-if” analysis to determine the financial impact of in-store changes that affect store space. By being able to test situations before execution, retailers can ensure they achieve a return on investment without any surprises. Further, retailers can easily review the success of past projects to incorporate into new projects without having to reinvent the wheel.

Organize inventory. All retailers know what it takes to maximize sales -- having the right products available to buy in the right store, in the right quantity. However, if a merchandising strategy fails to provide customers with the desired product mix, the retailer will continue to experience lost sales, lost customers and either an excess or shortage in inventory.

When optimizing macro space, it’s important for retailers to have visibility into inventory holding. If a retailer does not have additional products to stock or is not currently stocking products in an optimal way, it will not increase sales or benefit from providing more space to a category.

Treat each department differently. Many retailers use the same strategy to allocate space in every department. However, it’s important to assign space and design each category based on its individual needs. For example, some categories such as dairy products have short shelf lives, while other categories such as clothing need to be purchased in advance and last throughout an entire season. A retailer can quickly assign additional space to a dairy category. However, if a retailer assigns more space to its clothing category, it will most likely run out of inventory since a fixed amount is bought at least 12 months in advance. Because each department within a store is unique and has different requirements, it is important to use a flexible macro space methodology that can meet the various needs of categories and help identify areas to trade space if needed.

Integrate macro and micro space.  Retailers must fully integrate assortment and space optimization at the macro and micro levels to truly be efficient. Currently, many retailers only review micro space at the product level on a routine basis.  In doing so, retailers check to ensure they have the right range of products and the right stock for each category. However, they aren’t testing to ensure the space allocated to it in the first place is optimal.

To maximize profits, retailers need to test categories at the macro and micro level to ensure the optimal amount and range of products is available for purchase. In addition, by looking at space separately by department it’s easier to give and take space with related items rather than trying to flex space across different departments. In addition, integrating the processes is critical to fulfill consumer demand. If the right product range is not available, loyal customers will shop elsewhere.

Utilize a semi-automated solution.
To achieve the best return on investment, it’s important to use a macro space solution that is semi-automated. This enables a retailer to make changes quickly and efficiently. This can equate to significant time savings for stores with more than a hundred stores. Many CAD solutions on the market require retailers to open up hundreds of plans for one minor change such as adding a bay of cat food to every single store. This process can be time consuming and labor intensive. By utilizing a semi-automated solution, the retailer can still make the decisions, but automatically update all the plans to reflect any changes in minutes.

By incorporating all of the necessary steps to optimize macro space, retailers will have complete visibility to how space is being used and will be able to identify profitable opportunities that would otherwise go unnoticed. In addition, by using an automated solution that utilizes both science and art to meet customer demand, retailers will achieve the ultimate return on inventory and space.

Mike Humphreys is chief technology officer for Galleria and has more than 11 years of industry experience. He can be reached at mike.humphreys@galleria-rts.com. For more information visit galleria-rts.com.

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