Space Elasticity: A Significant Retail Metric

 

Every retailer faces a predicament….only if there was more space to sell, he could sell to the world. But that’s not to be, as the single largest  constraint on a retailer’s business model is the space available for selling – which will is be much less than the total store size, which obviously hurts margins and morale. Space is the asset that the retailer deploys and leverages to achieve growth and success. And modern day retail space is costly, especially if it is one that can generate sales, for instance, a CBD or a high-end mall.

The million-dollar question, literally, is : how much space to allocate to a particular merchandise category? The metric used to measure the profitability of space as an asset is termed as space elasticity.

One of the aspects of managing space is managing shelf space. Retail managers are required to ensure quantifiable and measurable results of a decision – in this case, allocating a specified amount of shelf space to a product category or brand. The winners are obviously those brands or products which ‘consume’ the least space and generate maximum incomes. Diamonds are the clear winners I guess, as the relative space occupied by them would be the least compared to their contribution to store sales, profits and gross margins. Thus, diamonds are more space elastic than say, collapsible ladders.

Space elasticity, thus is the increment in sales with and additional allocation of space to a product SKU / category or brand.

Modern day retail formats have an enhanced level of strategic thinking to do. Apart from the space to be dedicated on each shelf, the total area committed to a category proves to be a more significant determinant of the GMROI – Gross Margin Returns on Inventory Investments. A multi-thousand square feet store with a lakh+ SKUs, and the task moves beyond any human calculations. Delay in decisions of adding or deleting space to profitable or loser categories can prove disastrous for a retailer’s fortunes. Within a product category, different brands vary differently on space elasticity. So, if I were to allocate around 250 sq. feet of retail floor area to a category – luggage, ‘Luggage’ would first have to justify that it deserves so much space – by generating sales, profitable sales and better margins. This would obviously be impacted upon by everything from whether people want to travel, to the marketing efforts of the store to convince a consumer to purchase luggage.

Within ‘Luggage’ there is a tussle between Samsonite, Aristocrat and V.I.P. Lack of forecasting and trend identification can lead to overall losses or reduced margins. Thus, it is obvious to state that each brand may not enjoy the same resources at its disposal – least of all space. Space elasticity after all works on the fundamental principle of economics – marginal returns.

How, then, does a retailer ensure that he leverages his available space to the maximum? There are retail space optimizer available in the marketplace. These would be intensive, algorithm based software packages, that would throw up a space elasticity number from 0 to 1. These are DSS – Decision Support Systems, that take in store level parameters and subject them to regression or optimization techniques. Suffice to say that, the relation between space and sales cannot be presumed to be a linear one, thus, non-linear modeling would be deployed. Consultants and giant IT companies like SAP and TCS have dedicated retail solutions development ventures, whereby among others, solutions for space optimization are also provided. Academicians too have developed conceptual theories to address the issue of space elasticity – evident from the work of F´abio Pinto and Carlos Soares.

As space gets more valuable, the pressures on profitability across multiple metrics increases, and as retailers innovate to find the best possible ways to satisfy consumer demand, the space in the retail store is going to garner a lot of attraction in the coming days. Space Elasticity is going to ensure dynamic retail space allocation, merchandise planning and demand management.

 

 

I am Ravi Vaidya, a management educator by profession. This is where I intend to be myself, where I can ‘I’deate.

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