How much money are you leaving on the shopfloor?

Do yo know your Space Allocation Index?

One simple thing to do in a multi-category store (and it is even somewhat relevant when you have several sub-classes in a single category) is to balance your store in terms of merchandise allocation.

The core idea is that percentage contribution that a category/class makes to your overall gross margin should be proportionate to percentage of floor space that the product category occupies.

If product A contributes 10% of your GM$ then it should occupy 10% of your floor space.

You calculate the index as follows:

%Category Contribution to Margin 

%Category Allocation of Floor Space (sqm)

The idea is that if the resulting index < 1 then the category occupies more space than it should and if it scores > 1 then you have category that over-performs.

In theory you will increase the space allocation (and stock) when a category is productive and vice versa for low-scoring categories.

But the exceptions to this rule are many and varied of course:

  • Some products will have a physical advantage of simply requiring less space than other products by virtue of what it is (e.g. accessories/jewelry)
  • Some products will not increase its sales if you increase stock/allocate more space because you are already selling as much of it as possible.
  • Some products won’t require more space even if you increase the stock holding (e.g. you can simply stack it higher in the existing space like newspapers bundles)
  • Some product categories will be new/ experimental and have not reached their full sales potential yet.
  • Some categories will be stocked to manage competitive threats

But the key point remains valid:

You don’t want to be under or over represented in a merchandise category, and calculating your SAI is an excellent starting point. Once you have done the calculations, you can then make some rational decisions about whether the misalignment has nay merits – and if not take action.

In my experience, for example, a typical newsagent can increase sales by 15% by getting this right.

How much money are you leaving on the floor?

PS: Happy to discuss simple ways to calculate the floor space allocation for a category - because in practice that can prove to a lot harder than you may think at first.