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Getting Ready for Wal-Mart:
Do FMCG manufacturers understand the importance of GMROI and shelf space allocation?
A Research Report
presented to
The Graduate School of Business
University of Cape Town
In partial fulfilment of the requirements for the
Masters of Business Administration Degree
Prepared by:
Samantha M Jones
December 2010
Supervisor: Professor Steven Michael Burgess
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Table of Contents
Acknowledgements .................................................................................................................... 5
Abstract ...................................................................................................................................... 6
Introduction ................................................................................................................................ 7
Research Questions and Scope ................................................................................................ 10
Research Assumptions ......................................................................................................... 10
Research Ethics .................................................................................................................... 11
Literature Review..................................................................................................................... 12
About Wal-Mart ................................................................................................................... 13
GMROI and Shelf Space Allocation Metrics in FMCG Retailing ...................................... 15
The use of GMROI as a performance metric in FMCG retailing. ................................... 15
Advantages and limitations of GMROI as a performance metric. ................................... 17
Impact of retail shelf space allocation on GMROI. ......................................................... 20
Shelf Space Allocation Models That Can Lead to an Increase in GMROI ......................... 22
Advantages and limitations of shelf space allocation models ......................................... 27
FMCG Manufacturers, Retail Shelf Space Allocation and GMROI ................................... 28
Why FMCG manufacturers should care about retail shelf space allocation and GMROI.
.......................................................................................................................................... 28
How FMCG manufacturers demonstrate their understanding of retail shelf space
allocation and GMROI ..................................................................................................... 33
Summary of Literature Review ............................................................................................ 40
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Research Methodology ............................................................................................................ 41
Research Approach and Strategy ......................................................................................... 41
Research Design, Data Collection and Research Instruments ............................................. 42
Research design. .............................................................................................................. 42
Data collection methods. .................................................................................................. 42
Research instruments.. ..................................................................................................... 43
Sampling .............................................................................................................................. 43
Research Criteria .................................................................................................................. 44
Data Analysis Methods ........................................................................................................ 45
Results ...................................................................................................................................... 46
Retailer Private Brands ........................................................................................................ 46
GMROI ................................................................................................................................ 47
Retail Shelf Space Allocation .............................................................................................. 48
Communications and Relationship Management ................................................................ 53
Inventory Management ........................................................................................................ 54
Discussion ................................................................................................................................ 57
Shelf Space Allocation and GMROI .................................................................................... 58
Manufacturer Perceptions of Best Models for Managing GMROI ..................................... 61
Impact of GMROI and Shelf Space Allocation on FMCG Manufacturers ......................... 64
Demonstrating FMCG Manufacturer Perceptions of GMROI and Shelf Space Allocation 68
Research Limitations ........................................................................................................... 71
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Research Conclusions .............................................................................................................. 72
Future Research Directions ...................................................................................................... 74
Bibliography ............................................................................................................................ 75
Plagiarism Declaration ............................................................................................................. 83
Appendix 1 ............................................................................................................................... 84
Survey Results ..................................................................................................................... 84
Appendix 2 ............................................................................................................................. 119
Concept Map ...................................................................................................................... 119
Appendix 3 ............................................................................................................................. 120
Collage Analysis ................................................................................................................ 120
Appendix 4 ............................................................................................................................. 121
Participant Quotes .............................................................................................................. 121
Company A .................................................................................................................... 121
Company B .................................................................................................................... 121
Company C .................................................................................................................... 123
Company D .................................................................................................................... 124
Company E..................................................................................................................... 125
Company F ..................................................................................................................... 125
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Acknowledgements
I would like to thank Professor Steve Burgess for his assistance, supervision and
support throughout the process to preparing for and completing this research report. His
guidance, experience and input have been invaluable and have provided me with a well
rounded learning experience.
I would also like to thank each of the seven participants in the interview for their time,
their willingness to participate, and the openness of their responses that have allowed me to
conduct this research. Their contributions have provided me with a helpful and thorough
learning experience in a field that has been both fascinating and exciting to learn about.
Lastly, my parents and sister, Ernest, Anna and Christine Jones all deserve my thanks
and gratitude for their patience and support throughout this year while completing the MBA.
The identities of all participants have been kept confidential, and so this report will be
open to the University of Cape Town Graduate School of Business for future use, should it be
required.
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Abstract
Fast-moving consumer goods (FMCG) retailers operate in a dynamic and competitive
environment. Success requires careful management of sales revenues, costs and operating
efficiencies, and this is even more evident with the most competitive retailer in the world
(Wal-Mart) coming into the South African market. Careful management of inventory and
overall assets turnover, can be especially helpful in achieving financial performance goals
due to the razor-thin margins that characterise the industry. Because of this, it is important
for retailers to have the right mix of products, on the rights shelves, in the right quantities.
Retail shelf space allocation is critically important. Gross margin return on investment per
square meter (GMROI) is an important measure that captures buying and selling efficiencies,
and which is frequently used to determine shelf space allocation to specific products.
Competition today pits retail supply chain against retail supply chain. FMCG retailers
depend on FMCG manufacturers to provide products and to back them up with compelling
marketing programmes that help create retail sales. Manufacturers need the right quality and
quantity of shelf space for success and rely on retailers to support them, especially for new
products that may provide suboptimal GMROI during the initial launch period. When the
marketing their objectives diverge, retailers and manufacturers can come into conflict, which
often is triggered by shelf space allocation. Marketing metrics provide objective evidence
that helps retailers and manufacturers focus on supply chain objectives, thereby avoiding
unnecessary conflict and facilitating a better way to work together. This research focuses on
determining whether or not FMCG manufacturers understand the concepts of retail shelf
space allocation and GMROI, and how this affects their relationship with their retailers.
Keywords: retail shelf space allocation, GMROI, FMCG manufacturer, Wal-Mart
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Introduction
On the 27th
September 2010, Wal-Mart declared their intentions to enter into Africa by
announcing that they had made a proposal of a cash offer, which if accepted would lead to the
acquisition of Massmart Holdings Limited (Wal-Mart, 2010). Executive Vice President,
Andy Bond, said that “South Africa presents a compelling growth opportunity for Wal-Mart
and offers a platform for growth and expansion in other African countries” (Wal-Mart, 2010,
p.1). It became evident that Wal-Mart is coming, but are our FMCG manufacturers ready?
Gross margin return on investment per square meter of retail space (GMROI) is one of
the most common measures that retailers use to assess financial performance. The popularity
of GMROI as a marketing metric derives from practical constraints in retail marketing. Once
retail space has been acquired, retail space accessible to shoppers is relatively fixed. Within
the constraints of available space, achieving GMROI goals requires retailers to balance two
factors: gross profit margin and inventory turnover. GMROI has direct links to retail
merchandising and pricing strategies. Stocking wrong items reduces inventory turnover
when items don’t sell and gross margins when prices must be marked down to move
inappropriate stock. Suboptimal pricing, whether too high or low, reduces the combined
effects of inventory turnover and gross profit margins on GMROI. In practice, retailers
implement sales and inventory management strategies with the goal of achieving an
acceptable balance between inventory turnover and gross profit margins.
Fast-moving consumer goods (FMCG) manufacturers are motivated to achieve high
market share and profit margins. FMCG products typically are highly competitive and
require constant marketing management. FMCG manufacturers must develop and implement
innovative product, promotion and pricing strategies. However, these strategies will be
ineffective if retailers cannot be convinced to stock products and support promotion and
pricing strategies. Food retailing in South Africa is among the most highly concentrated
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retail industries in the world. Beneke comments on the “high retail concentration enjoyed by
the major supermarket chains” (2010, p.205), where just four major food retail chains account
for more than 70% of grocery market sales and only two these chains account for almost 50%
of the same market (see Table 1). To further illustrate this point, Euromonitor reports that
South Africa (80.1%) is second only to Chile (85.2%) in the concentration of soft drink sales
among 25 large economies studied (Ragmi and Gehlhar, 2005). South Africa was among
only five countries in which the concentration exceeded 65% in the study - and among only
nine in which the concentration exceeded 50%.
Retailers and FMCG manufacturers are linked in supply chains, in which they must
reach agreement on matters such as channel captaincy and share of total profits that
determine the nature of their relations (Boyer and Hult, 2005; Brown, Dant, Ingene and
Kaufmann, 2005). GMROI (which is influenced by retail shelf space allocation) is relevant
to both retailers and manufacturers, unfortunately, neither party agrees on the best method of
implementing shelf space allocation. For retailers, the gross margin that is earned from
providing a manufacturer with shelf space (particularly when products within a store compete
with each other) is most important. FMCG manufacturers are more concerned with getting
the best quality and quantity of space in order to ensure decent exposure of their products to
the public (Cairns, 1962). Elements such as retailer private brands and focal brands bring
new dimensions into the play for margins and shelf space.
It does not take much of a shift in thinking to understand that success in the contest for
consumer sales is a battle between supply chains, in which retailers and FMCG
manufacturers have an interest (Ballou, Gilbert and Mukherjee, 2000; Blackwell, 1997).
Although the parties may differ in their definitions of optimal shelf space allocation, the
performance of retailers and FMCG manufacturers relies on their ability to work together to
ensure that the right goods are brought to the customer at the right time, and in the right
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amount, as availability of products and convenience of supply will help keep the customers
going to the same stores.
Table 1
Estimated Grocery Market Share (%)
Chain 2005 2006 2007
Major food retail chains
Shoprite 22.9 24.2 23.8
Pick n’ Pay 24.2 24.3 23.8
Spar (SA) 15.2 15.3 14.9
Woolworths 8.0 8.5 9.0
Industry segment market share 70.3 72.3 71.5
Major wholesale/mass merchandisers
Massmart 12.1 12.0 11.8
Metcash 11.0 11.1 10.9
Industry segment market share 23.1 23.1 22.7
Independents and others
Independents and others 6.6 4.6 5.8
Source: http://www.fastmoving.co.za/retailers/woolworths
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Research Questions and Scope
The current research focuses on FMCG manufacturers understanding of the importance
of GMROI and shelf space allocation. This suggests several important questions:
1. Do FMCG manufacturers understand the relationship between shelf space
allocation and GMROI?
2. What shelf space allocation models do FMCG manufacturers believe are best
suited to increasing GMROI?
3. Why should FMCG manufacturers care about GMROI and retail shelf space
allocation?
4. How can a FMCG manufacturer demonstrate an understanding of GMROI and
retail shelf space allocation?
The current research focuses on GMROI, retail shelf space allocation, and elements
that drive or affect them. Notwithstanding the importance of Wal-Mart’s intended market
entry, the literature regarding GMROI and shelf space allocation can be applied to any
retailer that a manufacturer would deal with.
Research Assumptions
Temporal and monetary resources limited the research to the greater Cape Town area.
Cape Town is an important centre for retail firms. The current research requires several
assumptions in order to complete it within the timeframe available: First, I assume that there
will be enough marketing managers/category managers at FMCG manufacturers within the
Cape Town and surrounding areas that would be willing to partake in the research. There are
21 FMCG manufacturers within Cape Town and its surrounds, which although is not a large
enough number to facilitate a quantitative study, the number would be sufficient for a
qualitative study. Second, I assume that without the researcher having a personal network
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within the industry, potential participants would be willing to partake in the research when
approached. This was a very problematic area, as without the personal network, the research
had to rely on the willingness of the FMCG manufacturer to participate in the research. Not
all manufacturers were contactable, and with those that were, I found that a number of
manufacturers were not willing to participate, with no reasons given for this. The final
assumption is that the researcher will be able to establish a relationship with the participant
that will foster the divulgence of the information required for the research. This assumption
appeared to be correct. Each manufacturer that partook in the research was very willing to
share the information required and more.
Research Ethics
In order to ensure that the research undertaken was ethically sound, the identity of both
the participant and his/her company needed be kept confidential. This was done in order to
protect the reputation and position of the participant as well as any company’s competitive
advantage that could be evident from the research. Because of this, the context question
section of the survey has been left blank for the purposes of this report. This anonymity
allowed the participants to be more open and honest during the interview process.
The participants were informed of the fact that their identities would be kept
confidential, and that their identity would be given to no other party, including the research
supervisor.
Each participant signed a participation confirmation and ethical clearance document,
which stated the researcher’s commitment to uphold the standards as stated in the University
of Cape Town’s Graduate School of Business Ethics Policy. This document is held by the
researcher and not included in the report for the reasons of ensuring anonymity.
The researcher maintained that contact with participants was personal, through the form
of telephone calls and personalised letters submitted via email directly to the participant.
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Literature Review
“Look, this isn’t Sandton. Shoppers in this area want Iwisa mealie meal. If
I buy too much, I can’t get my price right. If I buy too little, then I sell out
during month end (shopping). Either way, if I get it wrong, my customers can
walk across the street and get it from Shoprite. I’ve got to buy right and then
build impactful displays that get shoppers excited. There’s not a lot of room for
error.” From an independent retailer interviewed in Soweto.
Fast-moving consumer goods (FMCG) retailers typically sell the same national brands
and consequently face stiff price competition. Success in this context requires careful
management of sales revenues, costs and operating efficiencies. Retail is detail. The faster
that inventory and overall assets turnover, the better return on investment that accrues from
the same razor-thin margins.
Among the many details that capture the attention of FMCG retailers, none is more
important than shelf space. Shelf space management directly affects a retailer’s financial
performance in several ways. Shelf displays can trigger increased sales by increasing sales of
multiple items (Urban, 2001). Allocating space and managing inventory levels in relation to
consumer demand helps ensure that stock is on hand when consumers want it, while
optimising inventory turnover and improving overall return on investment shelf space (Dreze,
Hoch and Purk, 1994). Alternatively, poor inventory control can motivate customers to shop
elsewhere or substitute an out-of-stock product with one yielding a lower margin (Corsten
and Gruen, 2003). Customers who shop elsewhere may be tempted to move their patronage
to the other retailer permanently. It follows that shelf space allocation is among the most
important core functions of modern retailing.
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For manufacturers, there is a big difference in dealing with the independent retailer from
Soweto to dealing with a global retailing giant like Wal-Mart, however the fundamental
principles remain the same.
This research focuses on FMCG manufacturers understanding of the relations of retailer
shelf space allocation and retailer’s use of GMROI [Gross Margin Return on Inventory
Investment (Sweeny, 1973, p.62)] as a performance measure, in preparation for Wal-Mart
entering the industry within South Africa. Retailers use GMROI to measure performance at
the level of stock keeping units (SKUs), stock keeping aggregates, departments and retail
outlets (Ring, Tigert and Serpkenci, 2002). This literature review is organised in the
following manner. First, I briefly discuss Wal-Mart and how it operates. Second, I focus on
GMROI, detailing the use of the metric in evaluating performance, discussing the benefits
and limitations of its use and the impact that it has on shelf space allocation within FMCG
retailing. Third, the advantages and limitations of shelf space allocation models that impact
GMROI are discussed. Fourth, reasons why manufacturers should care about the concept of
GMROI and retail shelf space allocation are detailed. Finally, I will review literature on what
manufacturers can do to demonstrate an understanding of the GMROI and retail shelf space
allocation concepts.
About Wal-Mart
Wal-Mart presents no set strategy for entering alternative markets, and adapts to the
needs of these markets individually. For instance, while it has grown organically in the USA,
it has expanded through acquisition in Germany and Canada and joint ventures in other
markets (Arnold and Fernie, 2000). Manufacturers should be aware that on average, forty to
fifty percent of smaller discount retailers are displaced as a result of Wal-Mart entering the
market in that area (Jia, 2008), and this could impact those who supply FMCG goods to
smaller retailers.
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As the world’s largest retailer, Wal-Mart can bring incredible economies of scale and
scope to bear. Their march to market leadership rests on astute management of information
that allows management and staff to identify and focus on important market metrics. This
allows Wal-Mart to manage GMROI very competently as a “low margin, high inventory
turnover, volume selling practice” (Arnold & Fernie, 2000, p.422).
In order to achieve operational and strategic objectives, Wal-Mart puts suppliers under
intense pressure to supply at the lowest possible price. Suppliers may be required to receive
Wal-Mart buyers on their premises, so that Wal-Mart can work with the manufacturer to
lower costs (Arnold and Fernie, 2000). Those who manage costs well can be rewarded with
more than an order. Wal-Mart appoints some manufacturers to manage a product category in
their stores, sharing available information and authority to manage the category to achieve
mutual objectives (Arnold and Fernie, 2000). If local manufacturers are unwilling or unable
to meet cost objectives, Wal-Mart may import goods at a lower price (Basker, 2007).
The 1990s saw the establishment of the “Wal-Mart Effect” - the rise of increased
competition amongst large retailers in the USA. This effect had multiple consequences, one
of them resulting in retail supply chains being overhauled, with a second being the growing
ability of Wal-Mart to specify rules and standards to their manufacturers (Petrovic and
Hamilton, 2005).
Wal-Mart’s vast capacity capabilities influence the retailer-manufacturer relationship to
the extent that manufacturers have voluntarily rearranged themselves internally in order to
fulfil the relationship requirements (Basker, 2007). Another side-effect of Wal-Mart’s size is
its ability to “squeeze” manufacturers to extract a better deal, which would usually be done
by forcing manufacturers to reduce profits, cut costs and utilise outsourcing measures. As
unappealing as this might appear, manufacturers are still drawn to Wal-Mart for the potential
exposure to a larger market, both locally and globally (Petrovic and Hamilton, 2005).
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Selecting manufacturers is a significant component of Wal-Mart’s success formula and
therefore have two main criteria that are considered when performing this task: first,
manufacturers must have the ability to offer an everyday low price; and second,
manufacturers must be compatible to Wal-Mart both operationally and technologically
(Petrivoc and Hamilton, 2005).
GMROI and Shelf Space Allocation Metrics in FMCG Retailing
The use of GMROI as a performance metric in FMCG retailing. Gunasekaran
and Kobu (2007) determine that performance measurements [process of quantifying the
efficiency and effectiveness of an action (Gunasekaran and Kobu, 2007, p.2821)] are
necessary to show management what decisions and actions are required based on the
information that they provide. Not only are performance measurements representative of
actual performance, but they are part of a company’s culture, politics and behaviour. The
purpose of performance measurement are to: measure success; measure the extent to which
customer needs are met; assist the company in understanding its processes; identify problems
and waste; ensure that decisions are based on the correct factors; and to prove whether or not
planned improvements have actually taken place.
Overall store performance is generally measured by ratios, but GMROI is specifically
a function of evaluating the merchandising decisions that are being made within the stores
(Grewal, Gopalkrishnan and Levy, 2004). It is frequently assumed that GMROI is a measure
of return on investment, but rather it is a measure of return on inventory (Sweeny, 1973), or
the amount of money that is generated per Rand invested in inventory (Archibald, Karabakal
and Karlsson, 1999; Matilla, King and Ojala, 2002).
Levy and Ingene (1984) define GMROI as:
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where GM = gross margin;
NS = net sales;
AIC = average inventory evaluated at cost.
GM is calculated by subtracting cost of goods sold and workroom expenses from the
sum of net sales and cash discounts on purchases. Workroom expenses include alterations
and/or setup costs;
GM/NS is the gross margin percentage, which represents the profitability of sales
(Graham & Winfield, 2007, p.55). Webster (2006) discusses gross margin in more detail by
recommending that it should be calculated at each level starting from the store level,
proceeding down until the gross margin for each product is calculated.
NS/AIC is the stock-to-stock ratio, which is similar to inventory turnover except that
average inventory is used at the cost price and not at the retail price, and represents the speed
at which inventory is sold (Graham & Winfield, 2007, p.60), or the number of times that
goods need to be restocked in order to generate sales (Webster, 2006). According to Webster
(2006), the high turnover rates represent low carrying costs, and low turnover rates represent
slow moving merchandise. This slow moving merchandise means that carrying costs will be
high, thereby reducing profits. Levy and Ingene (1984) use stock-to-stock in place of
inventory turnover as AIC is a return on investment should be calculated using the cost of the
investment itself.
Levy and Ingene’s (1984) equation can be translated into what Archibald et al (1999)
define GMROI as:
Levy and Ingene’s (1984) equation above shows that GMROI is made up from the
profitability of sales and the rate at which inventory is sold, and from this it is evident that a
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good GMROI is as a result of a good profit margin and good inventory management. Because
of this relationship, GMROI has been a commonly used measure to evaluate retail
performance (Matilla et al, 2002; Rogers, 1989), which is one of the main functions of
GMROI. Webster (2006) agrees with this when stating that GMROI is a measure of the
expenses and costs associated with inventory that are used to increase profits. In their
research, Fairhurst and Fiorito (1990) discuss how GMROI identifies inefficiencies in the
investment of funds in inventory, and is a useful way to determine whether or not a buyer is
selecting products that produce an adequate gross margin compared to the inventory
investment. Even though there are variables outside of the buyer’s control that will impact
GMROI, it is still able to deliver an understanding on the variables used in the decision-
making process of the buyer, which is in turn used in the evaluation of that buyer. The
second main function of GMROI is that it acts as a planning device, affecting managers
decisions based on objectives that are set for sales goals, mark-ups, turnover, etc. Once the
actual results are available for product lines, retailers are able to establish a standard that will
be used in future plans (Rogers, 1989). However, it is important for retailers to remember that
GMROI is a decision support tool, rather than a decision making tool (Levy and Ingene,
1984).
Advantages and limitations of GMROI as a performance metric. There are seven
principles that should be considered when designing a performance measurement metric:
related to a firm’s strategy; nonfinancial measures should be used; usable within different
departments, etc; flexible according to circumstances; simple; feedback should be near
instantaneous; provoke improvement on a continual basis (Maskell in Gunasekaran et al,
2007). Should a performance metric be designed that is broad in nature (such as financial
metrics like GMROI), it will be able to provide managers with a birds-eye view of
performance but fail to provide any strategic guidance.
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Sweeny (1973) proceeded to discuss the benefits of using GMROI as a merchandising
decision criterion. Firstly, GMROI provides a meaningful measure of how well managers are
performing their task of using inventories to generate profits. Secondly, GMROI is consistent
with corporate ROI (return on investment) goals as the figures are developed from the
investment goals of the firm as a whole. Thirdly, GMROI provides management with a
starting point for developing merchandising activities towards a specific goal. Fourthly,
GMROI is an effective tool for comparing the performance of departments or merchandise
categories in terms of gross margins, sales volumes, etc. Lastly, GMROI data can be easily
calculated from gross margin and inventory turnover data that is available within the stores.
Mattila et al (2002) define one of the benefits of GMROI as that it allows retailers to see
whether the correct quantities of products have been bought in line with the demand. Should
an excessive quantity of one type of product be bought, these products would need to be sold
at a discounted rate, reducing overall profitability. The simplicity of this metric also leads
itself to being particularly useful in organisations with multiple divisions and product lines
that differ from each other (Rogers, 1989).
To balance Sweeny’s benefits, Levy and Ingene (1984) discuss the shortcomings of
GMROI in its use as a merchandising decision tool. They discuss that even in its support
function, GMROI can either present incorrect information or even be misinterpreted. Levy
and Ingene (1984) listed two essential weaknesses. The first weakness is substantive
weakness, which is that of inaccurate information. GMROI does not take accounts
receivable, accounts payable and inventory carrying costs into account, and as these costs are
derived directly from inventory itself, and not taking them into account provides inaccurate
information regarding the actual investment made. The second weakness is that of a
conceptual weakness, where managers deliberately misuse the GMROI measurement to
makes decisions against the organisation wide goal of maximising profits, for the short-term
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benefit. There is a predisposition to try to maximise GMROI, while the longer term benefit
of accepting a product with a lower GMROI is ignored. Another weakness of GMROI is its
inability to “differentiate between products that have the same margins and turnover”
(Rogers, 1989, p.13) in a space scarcity situation, additionally, the costs of limiting the
resources are also not accounted for within GMROI.
Ring et al (2002), discuss GMROI as part of their SRM (Strategic Resource
Management) model which states that GMROI is easy to calculate, even down to a single
SKU in a single store. This then makes GMROI a “key indicator” (p.560) for the
performance of, as well as a “critical measurement tool for assortment planning and analysis”
(p.559) for, a single SKU. Furthermore, when using GMROI comparatively, it is important
for there to be awareness of the operating principles and context of the environment in which
the product line exists in order to develop a meaningful performance metric.
The successful implementation of GMROI requires that it be rolled-out throughout the
entire organisation. Buy-in from top management is necessary in order to filter the concept
through to the rest of the organisation (Sweeny, 1973). The correct implementation of
GMROI to manage inventories within a specific category can result in improvements in the
financial performance of the category being monitored, and it can also result in the increase
of the overall profitability of the organisation (Sweeny, 1973). GMROI might be easy to use
and useful in determining the profitability of a specific category, however the profitability of
an individual item is not as easily reflected, according to McGoldrick in Davies and Rands
(1992). This has then lead to a number of alternative metrics, such as DPP (Direct Product
Profitability) and RIA (Residual Income Analysis) (Davies and Rands, 1992). RIA was
favoured as it was supposed to take better account of space costs, while DPP “is a method
that to refine and item’s gross margin into a contribution to profit” (Bookbinder and Zarour,
2001, p.183) of a specific SKU, by looking beyond gross margin and accounting for
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promotions, discounts, etc, that are applicable to that SKU. DPP has been criticised as being
a static measure, a measure that does not account for demand effects (Bookbinder and Zarour,
2001), and is also highly complex (Davies and Rands, 1992). Rogers (1989) states that RIA
incorporates all the elements of GMROI but also includes operating expenses and carrying
costs, and while RIA is purported to correct the weaknesses in GMROI, it has limitations of
its own.
All metrics have benefits that they are able to provide, but they also have limitations to
their capabilities. Retailers must choose a metric that is easy to use, will have all the required
information available for use, and be flexible enough to use used in different departments and
in multiple levels (from store wide to individual SKU) within those departments. Even
though it has limitations, GMROI is a fundamental metric and is still a valuable tool,
particularly when it is incorporated within other models (such as the SRM).
Impact of retail shelf space allocation on GMROI. “Retail success can be defined
as achieving high gross margins and customer service levels (i.e. being in-stock) with as little
inventory as possible” (Mattila et al, 2002, p.340). High gross margins are realised through
the correct combinations of product mix, store positioning (which influences customer
pricing) and competitor pricing (Webster, 2006). However, gross margins and inventory
turnover are negatively correlated, and so brands with a higher margin would generally be
given a lower inventory turns than those with lower margins. The main drivers of these ratios
are known to be price, product variety and the product lifecycle length (Gaur, Fisher and
Raman, 2004).
Retail shelf space allocation is vital to the success of any retailer, as it shows the
ability of the retailer to know what, where, and when to supply products that are in demand at
each point in time (Hansen, Raut and Swami, 2010). The efficient management of shelf
space can lead to a reduction in inventory and display costs, and an increase in customer
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satisfaction. Efficiently managing shelf space entails the allocation of products with high
profitability to the shelf space available, however some products regardless of their
profitability, cannot be missing from the shelves. Should these products be missing, either
through not being allocated or being out-of-stock, customers could choose substitute
products, thereby harming future sales of the original product (Hariga, Al-Ahmari and
Mohamed, 2007).
According to Wang and Gerchak (2001), sales volumes of a product can be affected by
the level of shelf space allocated to it, while Hwang et al (2005) state in their research on
shelf space allocation that retailers are able to both increase their profits and reduce their
costs with the implementation of a proper shelf space management model. Yang (2001)
agrees, and comments that the purpose of shelf space allocation itself is to increase finances
within the store.
Shelf space allocation itself is important, but positioning also plays a critical role in
increasing the performance of that brand. Based on this Hansen et al. (2010) observes that
the horizontal position, the vertical position and the number of facings used in the placement
of an item on a shelf directly affect its performance and profitability, however, Curhan (1973)
states that changes to shelf space on mass-merchandised products does not impact the unit
sales as much as what other variables would effect it. The other variables would be ones such
as promotions and intra-store display locations.
Curhan’s (1973) also states that shelf space is manipulated by retailers to favour
products that yield a high gross margin, resulting in an increase in profitability as the space
allocated to products with a low margin are either reduced or replaced by the higher margin
products. He believes that, from a retailers perspective, shelf space allocation would only aid
to reduce stock-out situations, thereby reducing restocking periods, and that it will have no
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impact on unit sales, and therefore increasing the margin per shelf is the only way to increase
profitability.
Similarly, Corstjens and Doyle (1981) state that retailers need to carefully consider
their shelf space allocation, as the choice of selling one particular brand within a product
class will result in the retailer having to sell less of another brand, and the amount of space
allocated will affect out-of-stock and reshelving frequencies, thereby either increasing or
decreasing costs. These factors affect the profitability of a store, and so retailers need to
ensure that in order to increase profitability, the amount of space allocated to a brand must be
sufficient enough so as to reduce handling costs, and when one brand replaces another, it
needs to produce a higher margin than the brand being replaced.
Shelf Space Allocation Models That Can Lead to an Increase in GMROI
As reasoned above, the effective use of shelf space allocation has a significant impact
on GMROI. In saying that, it is important to determine what the most appropriate shelf space
allocation models are that are able to lead to this increase, because even though “Wal-Mart
prefers to have plentiful shelf space” (Marx & Shaffer, 2004, p.20), understanding shelf space
allocation can have an impact on both businesses.
Shelf space allocation is primarily a marketing decision, whereby it is determined
which category a product belongs to and how many facings the product will be allocated
(Broekmeulen, van Donselaar, Fransoo and van Woensel, 2004). Shelf space is generally
allocated to SKU’s that maximise profits. This allocation is determined by the stores product
assortment, the location of the display, and how much of the space available will be allocated
to that specific SKU. Retailers need to remember that where a brand is positioned is more
important than the number of facings allocated to it (Dreze et al’s, 1994), which agrees with
Urban’s (1998, 2001) claim that the positioning of a product has an impact on the sales of
other items too.
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The effects of space elasticity [ratio of the relative change in unit sales to the relative
change in shelf space (Curhan, 1973; Hwang, Choi and Lee, 2005; Chen and Lin, 2007)] also
have to be taken into account when planning shelf space allocation (Dreze et al, 1994). Chen
and Lin (2007) listed two major limitations with space elasticities which reduce the
effectiveness of models that use the function. The first is that space elasticity is non-linear
and complicated, and therefore each model requires specific solutions to be developed for it.
The second limitation is that it requires the estimation of a large number of parameters.
Corstjens and Doyle (1983) describe three types of shelf space allocation models. The
first type is the commercial models. These are simple, easy to use models that are usually
developed by consultants for immediate use. Commercial models usually only focus on
allocating space to products with high gross profits, average sales or both. The second type is
experimental design models that focus on measuring shelf space elasticities. Experimental
design models are usually limited to a single or small number of products in one store. The
third and last type is that of optimisation models. Programming capabilities have allowed
these models, initially too complex to be solved analytically, to be developed in order to
provide an effective solution.
Corstjens and Doyle (1983) further detail the life cycle of retail stores, which appear to
be similar to the life cycle of the products they sell, and describe the three stages of this cycle
as early growth, maturity and decline. During the early growth stage, retailers need to
concern themselves with shelf space profit maximisation to ensure that they will be able to
proceed to the next stage. Esparcia-Alcazar et al (2006) present a model that allows retailers
to allocate shelf space to high margin products for the duration of this phase. Their tool is
useful for both new stores in the design phase, and for existing stores that experience the
introduction of new product categories, thereby having to be reorganised (Esparcia-Alcazar et
al, 2006).
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Corstjens and Doyle (1981) present a static model that allows the retailer to optimise
shelf space allocation among a range of products, thereby increasing group profitability. This
model was then built on by Bultez and Naert in 1988, resulting in the development of
SH.A.R.P. (Shelf Allocation for Retailer Profit) model, which took into account handling
costs, replenishment cost, and price elasticities. . SH.A.R.P facilitated improved modelling of
“assortment depth and interactions between substitute items within a product class” (Bultez
and Naert, 1988, p216), rather than that of Corstjens and Doyle’s research of assortment
width (product categories) and the interactions between product classes.
Corstjens and Doyle (1983) also enhanced their research on the static model described
above, by incorporating dynamic market issues such as product life cycles and changing
customer tastes. Three years later, Zufryden (1986) proposed a dynamic programming model
that allows for the selection and optimal shelf space allocation of products within a store.
This model provided retailers with an electronic system that would allow for sales
measurement and shelf space allocations (Zufryden, 1986).
In 2001, Yang proposed a heuristic that allocated shelf space to items depending on
sales profit for each item per display area/length. He argued that well managed shelf space
can assist in decreasing inventory levels, improve relationships with vendors, reduce out-of-
stock occurrences, and most importantly (for the purposes of this paper) improve the return
on investment, increase sales and profit margins. In Urban’s 1994 article in the Journal of
Retailing, he proposes a displayed-inventory model, which states that the demand for a
product will remain constant as long as the retailer has inventory that exceeds its shelf space
allocation, and that as the inventory levels decreases, so will the demand rate. Urban proposes
that retailers should integrate this into their shelf space allocation models to as to maximise
the full earning potential of their shelf space allocations (1994). Urban (2001) then explored
the interdependence of inventory and retail shelf space. His findings show that as the demand
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for an item increases, so should the amount of space allocated too it, which will then cause
the rate at which retailers order inventory from manufacturers.
In 2007, Chen and Lin proposed a data mining approach that used association rule
mining to replace models that relied on space elasticity. This model allowed for the
relationships between product categories and products to be further explored and functioned
by allocating products according to average profits, category association and the shelf’s profit
weight. Fadiloglu, Karasan and Pinar (2007) propose a model that will increase assortment
efficiency by dividing up the shelf space among the product assortment in such a way that
will prevent product pollution. This model is based on the assumption that when a SKU
disappears from a retailer’s shelves (either due to replacement or discontinuation), the
customer demand still remains. Because this demand is still there, customers are forced to
find a substitute within the same category, among the range that is available, of the missing
SKU. The benefits of the model are that it can be used for any product category, and as it
requires minimal data, can be used at any retailer that tracks sales.
Yang (2001) suggested a simple method for managing retail shelf space allocation that
can be used in retailers POS (point-of-sales) systems. This method requires the consideration
of three decision elements that need to be considered when allocating shelf space: decision
variables, decision objectives (cost, sales or profit) and decision constraints. The decision
variable would be what the model is attempting to determine, Yang (2001, p.110) uses “the
allocated amount of facing of a product on different shelves” in his study. The decision
objective are classed as cost, sales and profit, with “total profit of the store’s entire products”
(Yang, 2001, p.110) being used in Yang’s study. Decision constraints have three sets of
equations: store capacity constraint, control constraints and integer and non-negativity
constraints (Yang, 2001). Yang’s (2001) algorithm is a three phase algorithm. The first
phase is the preparatory phase, where the feasibility of a problem is checked, and a priority
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index is built. The second phase is the allocation phase, where available space is allocated to
each item, following the order on the priority index. The third and last phase is the
termination phase, where the total profit of the solution proposed is calculated (Yang, 2001).
Yang was able to conclude that the proposed model was efficient in processing and practical
in implementation.
Hansen et al. (2010) set out to determine the best and most efficient method for
determining the quantity, quality and duration of shelf space allocation that a specific product
should receive. In doing so, they conducted research to compare the performance of a meta-
heuristic (covers a wider range of solutions in less time) approach to a modified heuristic
(close to optimal solution) approach of a shelf space allocation model that takes into account
a nonlinear profit function, location effects and product cross-elasticity, in order see which
method took less time to produce a near optimal shelf space configuration. The results of this
research showed that the meta-heuristic approach outperformed the heuristic approach.
Due to the extensive costs and price constraints of more commercial systems, a
“Category Management Decisions Support Tool (CMDST)” (Ramashan, 2008, p. 547) was
developed for smaller, independent retailers. Two models are used in the development of the
CMDST: the optimal review period model that produces the optimal number of facings and
review period per product; and the multi-period planning model that produces the optimal
number of facings, order quantities and other procurement cost related decisions, for all
periods. The CMDST’s purpose is to provide retail managers with a tool that will assist with
decision-making in terms of inventory planning, product assortment and shelf space
allocation (Ramashan, 2008).
According to Borin and Farris (1995), even though many models exist to assist retailers
in effectively allocating shelf space, the data that is used to input into the models is not error
free data, resulting in poor allocations. The likelihood of this occurring advocates the use of
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a merchandising rule of thumb method of allocating shelf space: “share-of-shelf = share of
sales” (p.153).
Advantages and limitations of shelf space allocation models. The theme that runs
through most models listed above is that the right mix of retail shelf space allocation must
lead to an increase in profits by allocating high margin products to the space available, and a
decrease in costs by reducing out-of-stock and reshelving scenarios. , Should shelf space
allocation be used efficiently, it can assist retailers in increasing profit margins through
improved return on inventory and increased sales (Yang in Chen and Lin, 2007). Shelf space
allocation is a vital part of running a store and requires thorough and proper planning in order
to be effective. This planning is necessary because: retailers cannot hold more stock of a
specific product than they have capacity for; they cannot simply replace existing items on the
shelves with the new product they are attempting to introduce onto the shelves; and the costs
involved in reallocating shelf space are substantial, so it is important for the initial allocation
to be correct (Cachon, 2001).
Fornari, Grandi and Fornari (2009) discussed the implications of new product adoption
on shelf space management and on a retailers existing product portfolio. They have found
that this introduction has a positive impact if it sales are increased due to the creation of new
consumption patterns and customer targets, and if the per unit retail margin is higher than the
product it will replace. However, the lack of historical performance data means that the
retailer needs to risk allocating space to the product, and the manufacturers therefore pay
slotting/listing fees to have the products allocated on the shelves. The problem with these
fees is that in reality they tend to be driven more by the retailer’s market power rather the
actual risk involved, and that they also have the potential to damage competition amongst
manufacturers as smaller manufacturers could be driven out due to high fee requirements
(Fornari et al, 2009). Fortunately, shelf space allocation models cater for these problems.
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Wal-Mart discourages expensive trade promotions and the payment of slotting fees for
obtaining shelf space, and would prefer that the supplier reduce the price of their product.
This bodes well for the retailer who can see the product for a low price, but not well for the
supplier who would like to draw consumer attention to their product in order to gain market
share (Petrovic and Hamilton, 2005).
FMCG Manufacturers, Retail Shelf Space Allocation and GMROI
Why FMCG manufacturers should care about retail shelf space allocation and
GMROI. It is believed that should manufacturers understand the concept of GMROI, they
should be able to help distributors/retailers increase profits through driving the ratio
(Benfield, 2010) and so it can be said that it is important for FMCG manufacturers to
understand both the concepts of retail shelf space allocation and GMROI, and the impact that
these concepts can have on their business.
Large retailers such as Wal-Mart use GMROI to measure performance (Srinivas, 2007),
and should a manufacturer understand the importance of this metric, it could help build their
relationship with the retailer.
As both manufacturers and retailers are determined to make a profit, manufacturers
who are pushing their products into retail stores need to be concerned about the location of
their product, as well as the amount of space that will be allocated to that product within that
location (Bultez and Naert, 1988). Manufacturers need to be aware of that fact that retailers
must position products so that their profits can be maximised, and retailers need to be aware
that manufacturers need to have their products sold.
Oubina, Rubio and Yugue (2006) describe the relationship between the manufacturer
and the retailer as being two-fold: that of client when the manufacturer produces products for
the retailer (called private brands); and that of competitor when the retailer positions their
private brand in direct competition to the manufacturers national brand. This relationship is
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also investigated by Cairns (1962). Over time, manufacturers have built up brand equity,
which can be defined as the relationship between customers and the brand produced by the
manufacturer (Wood, 2000) or benefits that are realised from the brand less the investment
required in creating the brand (Campbell, 2002; Ailawadi, Lehmann and Nelsin, 2003).
Brand equity gives the brand strength through customer awareness and perceived quality
(Campbell, 2002). Retailers attempt to create demand for their private labels by leveraging
off the brand equity that is created by the manufacturers; however, there are consequences to
this attempted leveraging that retailers need to be aware of.
All brands need to be positioned in order to maximise sales, as the incorrect allocation
of the private brands can lead to an erosion of the product category as a whole and increase
manufacturer costs as the attempt to retain customer loyalty (Suarez, 2005). Suarez (2005)
suggests that the optimal allocation of private brand shelf space should be based on four
elements: their market share; the price gap between private and national brands; the
promotion of the brands; and the assortment of the brands. Based on these elements, it was
proven that the lower the market share, the greater the price gap, the greater the assortment
and the greater the number of brands, the lower the space that private brands occupy (Suarez,
2005).
Woodside and Ozcan (2009) studied the effect of price changes on customer purchase
behaviour in the FMCG market for retailer and manufacturer brands, for instance, should a
change in price result in both brands having the same price rather than the manufacturer
brand having a higher price, elasticity will increase. Customers would then prefer the
manufacturer brand, as it tends to be associated with higher quality.
Oubina et al (2006) explores the extent to which retail private brands impact the
relationship between the manufacturer and the retailer. Manufacturers who produce private
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brands generally do so because they have a weak competitive position within the market, or
are attempting to enter it (Oubina et al, 2006).
Manufacturers need to be aware that on the basis of shelf space allocation, retailers will
assign their private brands with optimal space over national brands, as profits can be higher
for the retailer by giving their own brand preference, thereby increasing margins. A
manufacturers understanding of what a retailer’s priority is regarding shelf space allocation of
their retail private brand, will aid the manufacturer in being more competitive in this
particular environment.
Wal-Mart’s own private/store brands play a critical role in their global expansion due to
the poor availability and high marketing costs of most manufacturers brands in this arena.
Wal-Mart’s store brands are advantageous over manufacturer’s brands for two main reasons:
the store brand can be established as a low price product regardless of the area in which they
operate; and Wal-Mart is increasing their range of low-priced consumable products that are
available to consumers around the world (Petrovic and Hamilton, 2005).
In conjunction with increasing gross margins, inventory management is also a vital
function for retailers who are attempting to increase GMROI. High inventory turn promotes
GMROI, however, should a retailer’s inventory management result in an out-of-stock
situation, the overall long-term impact on GMROI will be negative. Corsten and Gruen
(2003) investigated the impact that out-of-stock situations could have on retailers and
manufacturers. They state that consumers will either switch either brands or stores should
they not be able to find the brand that they are looking for (due to it being out-of-stock).
Brand switching can take place either in terms of a manufacturer sales loss risk [“consumers
substitute a competitor’s item or cancel a purchase” (Corsten and Gruen, 2003, p.608)] or a
manufacturer shopper loss risk [“Consumers switch to a competitor’s brand within a
category” (Corsten and Gruen, 2003, p.608)]. Store switching occurs in terms of retailer
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sales loss risk [“Customers buying the OOS item at another store, consumers cancelling their
purchase of the items, and consumers substituting a smaller and/or lower priced item”
(Corsten and Gruen, 2003, p.608)] or retailer shopper loss risk [“Shoppers permanently
switch stores due to OOS situations” (Corsten and Gruen, 2003, p.608)]. In this situation is it
clear that both the retailer and the manufacturer will suffer as a consequence, and so
preventing out-of-stock situations should be a priority.
Manufacturers should seek to build a relationship with Wal-Mart as this can lead to:
entry into new markets, improved supply chains and international exposure of their brands
(Freemantle and Thompson, 2000). Manufacturers that have an understanding of what is
important to a retailer are in a better position to build the relationship between the two
parties. This relationship has a major influence on decisions that are made on the basis retail
shelf space allocation, however manufacturers should be aware that just because they form a
business relationship with Wal-Mart, there is no guarantee that the relationship will last
indefinitely. Wal-Mart has implemented a “Plus One” principle that sees suppliers having to
either reduce the price or increase the quality of a product on an annual basis (Petrovic and
Hamilton, 2005).
Wal-Mart continually attempts to be efficient and aggressive in their methods to attract
new consumers to their stores. Manufacturers who form a close working relationship with
Wal-Mart should be able to benefit from these actions. Furthermore, this close business
relationship could form a barrier to new suppliers who are attempting to enter Wal-Mart and
gain access to their customers by being allocated shelf space within a Wal-Mart store.
Manufacturers might also realise financial benefits when dealing with Wal-Mart as they will
be moving volumes of their brands that might not necessarily be moved through another
retailer. The increased movement of volumes can lead to the manufacturer gaining more
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market share, which will reduce the amount of shelf space allocated to its competitors
(Bloom and Perry, 2001).
The power aspect of the relationship between retailers and manufacturers impact
retailer’s shelf space allocation decisions too, and Wal-Mart has a high level of bargaining
power even if it might be bargaining with large manufacturers who wield a high power base
of their own (Marx and Shaffer, 2004). Corstjens and Steele (2007) further explored the
power within the retailer and manufacturer relationship. Their analysis concluded that even
though retailers have more power than manufacturers, they have not been able to outperform
the manufacturers as of yet. The increase of retailer power can be attributed to an increase in
retail concentration, the introduction of retailer private labels, the advent of information
technology and an increase in shelf space scarcity. This increase in power has lead to
retailers making more financial demands on manufacturers, thereby increasing a
manufacturer’s costs of doing business with retailers. Even though retailers have this
increased power and financial gain, they still underperform manufacturers. Corstjens and
Steele (2007) discuss two possible explanations for retailer underperformance. The first
being that the retail sector is not at the same stage of maturity as what the manufacturers are,
not seeing signs of consolidation and internationalisation. The second is that the retail sector
is more affected by price competition, whereas manufacturers are able to focus on
differentiation. Hingley (2005) takes this further in discussing the imbalance in the
relationships between suppliers and retailers, stating that power (which is not always
negative) will always exist within business-to-business interactions and that the formation of
a relationship does not remove any elements of friction and power-play between the two
parties. Because of this struggle for power, there will be a continuous effort from both
parties “to gain the upper hand” (p.855). This, however, does not prevent effective business
relationships from being created and maintained, as the power advantage fluxes between the
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two parties allowing for both parties to be at the stronger in the relationship at some point in
the future.
Although many shelf space allocation models exist, most of them ignore the impact that
they have on manufacturers as well as how much of a part they can play in the decision
making process, however, retailers and manufacturers tend not to agree on what is best
regarding shelf space allocation (Martin-Herran, Taboubi and Zaccour, 2006). It appears
that should manufacturers and retailers communicate and agree on models and methods to
increase GMROI in a manner that will benefit both parties, much of this disagreement will
disappear. But, in studies regarding shelf space allocation performed by Martin-Herran et al
(2006) it was determined that manufacturers who are most efficient will receive the highest
share of shelf space. Martin-Herran et al (2006) state that manufacturers have two major
factors impacting on their potential shelf space: higher competition among manufacturers can
lead to a decrease in profits for the manufacturer, but not necessarily for the retailer; and
higher priced brands have less demand, and therefore require less shelf space.
How FMCG manufacturers demonstrate their understanding of retail shelf
space allocation and GMROI. Manufacturers can prove their understanding of the concepts
by actively participating in improving inventory management and preventing out-of-stock
situations This occurs by retailers and manufacturers working together in order to improve
the availability of the brand according to demand levels (Corsten and Gruen, 2003). This is
assisted by the introduction of VMI (Vendor Managed Inventory) systems, which increase
overall supply chain profits, providing benefits to all (Kulp, 2002). Mishra and Raghunathan
(2004) state that VMI is commonly used to increase the fluidity of information flow and
collaboration within the supply chain and “is part of the trend in supply chains that
encourages collaboration and information sharing between trading partners” (p.445). This
system predominantly benefits the retailer, as manufacturers now have both the management
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and financial burdens of ensuring inventory levels remain at a level that will prevent out-of-
stock situations. It is in the manufacturer’s best interest to ensure that his product remains in
stock, else they could lose sales to their competitors who have the competing brand in stock
(Mishra and Raghunathan, 2004). VMI systems provide the manufacturer with real time
information as to the stock levels held by the retailer. This will then allow the manufacturer
to determine when the retailer needs to be re-stocked and with how much, which is based on
the shelf space allocated to the manufacturer (Mishra and Raghunathan, 2004). Wal-Mart has
millions of products in thousands of stores throughout the world, and the inventory levels of
these products are adjusted to the local demand forecast throughout the different areas. In
order to ensure that the right quantity of the right product is delivered at the right time,
manufacturers need to fully cooperate with Wal-Mart on a logistical level (Petrovic and
Hamilton, 2005). Wal-Mart has been using VMI systems for some time (Mishra and
Raghunathan, 2004). In the 1990’s, Wal-Mart’s relationship with its manufacturers evolved
to include tasks such as product development and inventory management through their Rail
Link system.. This required manufacturers to become more actively involved in inventory
management on a store level, and to maintain a good standing with both technology and
logistics compliance as the demand changed over time (Petrovic and Hamilton, 2005). Wal-
Mart manufacturers are responsible for managing warehouse inventories and are assisted with
the use of VMI systems. Because inventory management is solely in the hands on
manufacturers, Wal-Mart expects an order fulfillment are of near 100 percent (Lummus and
Vokurka, 1999).
GMROI improvement is achieved through a combination of an increase profit
margins and inventory turn. Vandermark (2002) suggests that reducing inventory will assist
in improving GMROI, and that having suppliers with minimal to no ordering requirements is
optimal for inventory management. Optimal inventory management can be seen as a process
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of effective supply chain coordination, which requires extensive monitoring and
management. Desiraju and Moorthy (1997) performed research focused on the impact of
imposed performance requirements on the channel (manufacturer and retailer). They
discussed the channel coordination problem, where channel players are independent decision-
makers and tend to ignore the impact that the individual decisions can have on the system as
a whole, and then focused their attention on performance requirements contracts. These
contracts give the manufacturer power to directly control retailer prices and service levels,
which are monitored by information systems that have been accepted by both parties. Should
both parties be dedicated to this process, problems within the channel should be easily
diagnosed and dealt with. However, should there be no performance requirements, the
manufacturer has no control of price and service levels within the channel. This study was
followed by Kulp, Lee and Ofek (2004), who describe the integration of information between
manufacturers and retailers as leading to multiple benefits, with the greatest of these being
the pair (manufacturer and retailer) working as partners. Although the scope of information
integration is vast, the best results in having the information of inventory levels integrated on
a store-by-store basis, resulting on increased profits as this collaboration allows for a
reduction in stock-out situations.
Advertising, promotions and the creation of focal brands gives manufacturers an
opportunity to be competitive, not only against other manufacturers, but against retailers and
their private brands too.
Retailer private brands are positioned as competitors to FMCG manufacturers. Because
of this increased competition, optimal retail shelf space allocation is vital in order to maintain
a competitive edge (Cairns, 1962). One method of doing this is by increasing spending on
advertising to create a demand for the product. Manufacturers need to ensure that the
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advertising results in an increase in gross profit for the national brand so that it exceeds that
which would be derived from the retailer’s private brand.
General advertising and the creation of a focal brand [a brand that has a higher share
without increased advertising; the higher share can possibly be attributed to positioning,
superior quality, packaging or branding (Lal and Narasimhan, 1996)] assists manufacturers
in gaining leverage when negotiating retail shelf space allocation. Through these activities,
manufacturers can gain optimal shelf space, plus retailers can realise benefits too. Lal and
Narasimhan (1996) state that retailers can gain profits from two different sources; the first is
the focal brand which is advertised often, and the second being all other goods sold within the
store. The concept of Lal and Narasimhan’s (1996) focal brand is important to both retailers
and manufacturers as focal brands bring with it increased profits. This brand has a higher
market share, and therefore higher profits. It is a product that is in great demand from
consumers and is therefore important to retailers. Increasing spending on advertising does
not create a focal brand. The positive aspect of carrying the popular product at a zero margin
is that it could impact the sale of other products in the store, opening consumers to other
products advertised (Lal & Narasimhan, 1996). For manufacturers, the focal brand creates a
market power, allowing them to gain on the channel surplus from the retailers.
Lal and Narasimhan (1996) studied the impact of manufacturer advertising on the
margins of retailers. The profits that retailers see are a combination of sales from both
advertised and unadvertised products, thereby driving competition between retailers’
unadvertised products up. Due to the increased demand (and therefore lower margins) of an
advertised product, retailers are then reliant on the higher margins of unadvertised products to
increase their profits. Because of the success of manufacturer advertising on demand,
thereby reducing the bid price for retail shelf space, manufacturers directly use this as a tool
to bolster consumer demand. The effect of manufacturer advertising can either be positive or
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negative. Should the advertising lead to an increase in market power (through differentiation)
then the retailer price will increase, however, should the advertising lead to an increase in
price sensitivity (due to a reduced perception of differentiation) then the retailer price will fall
(Lal and Narasimhan, 1996). When the prices increase, margins increase, and when prices
fall, so do margins. Retailers need to aim to keep prices up in order to realise reasonable
margins.
The application of the techniques listed above can go a long way to ensuring that both
the quality and quantity of the shelf space that they desire is obtained (Cairns, 1962). Just as
advertising a product can have an impact on both retailers and manufacturers, so can
promotions. Srinivasan, Pauwels, Hanssens and Dekimpe (2004) discuss the impact that
promotions can have on both parties. Their research concludes that although the effect of
promotions is not lasting, they do benefit the manufacturer and not the retailer. In light of
this, manufacturers must be cautious when promoting their brands in order to preserve the
relationship with the retailer.
The manufacturer must entice the retailer to take on their product. Cairns (1962) goes
on to describe methods that manufacturers use to entice retailers to accept their offer, for
instance, they increase percentage margins or change packaging to reduce the space required
per unit with the same selling price and percentage margin. Manufacturers can also
implement consumer advertising of their product to create a demand for it amongst
consumers, so much so that the retailer has no choice but to have the product on the shelves.
Should a product become an essential part of a retailer’s product assortment, the
manufacturer has the opportunity to purchase shelf space at a zero retail margin. In this
situation retailers essentially have no choice but to allocate the product the required shelf
space as should they not, they would lose out to competition that stock the popular product.
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As with advertising, the relationship between the retailer and manufacturer, and how
they communicate with each other, can impact the amount and position of shelf space
allocated by the retailer to the manufacturer. Wittreich (1962) discovered twin dimensions
that lead to a breakdown in communication between retailers and manufacturers. The
dimensions he identified are “the problem of crossed purposes” (Wittreich, 1962, p.147) and
the “problem of confused languages” (Wittreich, 1962, p.147). Cross purposes was
elaborated as being the difference between the perception of corporate management and that
of retail owner-operations and confused languages suggests that communication between
retailers and manufacturers is hindered by the fact that the language used by one in
incomprehensible to the other (Wittreich, 1962). One can assume that should retailers and
manufacturers not be able to communicate, then the importance of issues such as retailer
shelf space allocation and GMROI are not being translated to the manufacturers.
In a 1962 Harvard Review article, Wittreich described the relationship between retailer
and manufacturer: “the people who manufacture the goods and the people who move the
goods into the hands of the ultimate consumer do not share the same business philosophy and
do not talk essentially the same language” (p.147). Things have changed considerably in
intervening years, due primarily to the advent of new technologies and widespread adoption
of the interactive marketing/customer relationship marketing approach.
Manufacturers need to strive to acquire an increase in quality and quantity of shelf
space, particularly should the brand not be a focal brand or high in demand due to
advertising. In order for manufacturers to be in a position of consideration for shelf space
allocation quantity and quality they need to buy the shelf space from retailers. Cairns
(1962) states that a retailer is a seller of space to suppliers, and this space is valuable to
manufacturers as it is generally the only access that they have to the public.
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Cairns (1962) explains that in exchange for the retailer providing access to a
concentration of potential customers, suppliers offer retailers a price for the opportunity to
have their products displayed to these potential customers. The price offered is normally the
gross profit that the retailer can earn by allocating space to the supplier. In order for the
retailer to accept this price the offer must exceed the opportunity cost of the space, that is, the
most profitable item that will now no longer be in the mix due to the acceptance of the
manufacturer’s product, or the most profitable combination of products already stocked.
When a manufacturer offers a price for a certain number of units of space, the following
factors need to be considered: the retail selling price of the product; the percentage margin;
the number of units that might be sold in a certain period of time and the amount of space
required to sell that number of products. In accepting the price offered, the retailer should
know the expected price that the product should receive, but also be aware that the price that
a product is expected to sell for and the price that it might actually sell for may differ.
Retailers will generally reject an offer from manufacturers should the price be deemed too
low, or be less than the opportunity cost of the space.
Cairns (1962) mentions that manufacturers are able to increase their bids by increasing
the gross profit of their product, which will in turn increase the gross profit for the space it
should occupy when sold. This increased profit for the product can be administered either by
reducing the price of the product for wholesalers, on the condition that the same reduction in
price of offered to retailers, or the reduction in price can be offered to selected buyers,
generally those from the larger retail stores who control large amounts of selling space.
The introduction of retailer private brands provides and additional dynamic that needs
to be considered. The increased competition of a retailer’s private brand goes to increase
gross profits as manufacturers are now forced to increase the gross profit of their products in
order to ensure shelf space allocation (Cairns, 1962).
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Summary of Literature Review
With Wal-Mart preparing to make an entry into South Africa, some FMCG manufacturers
might have to change the way that they operate if they wish to build long-term, successful
business relationships with the global retail giant.
Even though retail shelf space allocation is important to retailers (and Wal-Mart has
plenty of it; Marx and Shaffer, 2004), manufacturers need to understand it in order to be able
to reap benefits themselves.
Wal-Mart uses GMROI as a performance metric (Srinivas, 2007), and although it has
its flaws, it still has its benefits, and it is important for both retailers and manufacturers to
have an understanding of the approach for it to be truly effective. GMROI is driven by
inventory turn and gross margins, therefore opting for high gross margin products with the
correct placement and volume of shelf space will be an important factor in attempting to
increase gross margins and inventory turn, and thereby GMROI. In attempting to achieve
this, it is important then for retailers to use the most appropriate retail shelf space allocation
model, and also for manufacturers to understand the model used in order to be able to derive
benefit from it themselves. It is evident that the retailer-manufacturer relationship is not one-
sided, and that both parties have the ability to flex power given the right circumstances. For
instance, in order for retailers to fulfil their GMROI requirements, their shelves need to be
filled with high margin products. Because of this, retailers are able to have manufacturers bid
for the space that they want on the shelves, resulting in a considerable cost to the
manufacturer. Manufacturers, however, also have the ability to increase demand for their
products through advertising. This forces the retailer to provide shelf space, possibly even
without a bid, and with a low or zero margin. This will result in the retailer losing on the bid
price as well as the higher margin product that could be used in place, but the effects are not
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hard felt due to consumer purchasing behaviours. This appears to be a constant “game” that
is played between the retailer and the manufacturer.
The most important aspect in this relationship is the fact that manufacturers and
retailers work together (through a system such as the VMI) in order to create an efficient
supply chain that will benefit all parties involved. Wal-Mart has been using these VMI
systems for some time (Mishra and Raghunathan, 2004), and South African FMCG
manufacturers need to be willing to use these systems.
Essentially, should a manufacturer have a full understanding of what the retailer is
trying to achieve and how the retailer is trying to achieve it, it leaves open the possibility for
both parties to benefit as they will be working towards a common goal. If South African
FMCG manufacturers are willing to play by the rules that Wal-Mart have in place, they
should be able to build a long-lasting relationship, providing growth and other benefits for
both parties.
Research Methodology
Research Approach and Strategy
For the purposes of this research, the researcher decided that an inductive approach and
the use of a qualitative research strategy would be most appropriate. The use of qualitative
research provided the researcher with an opportunity to better understand the complexities of
the relationships between retailer and FMCG manufacturers (Leedy and Ormrod, 2010, p.95),
as understanding these relationships allowed the researcher an opportunity to provide an
answer as to whether or not FMCG manufacturers understand the concepts of retailer shelf
space allocation and GMROI.
This approach facilitates tentative conclusions about the readiness of South African
FMCG manufacturers for Wal-Mart’s intended market entry.
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Research Design, Data Collection and Research Instruments
Research design. The research design consisted of semi-structured qualitative
interviews. A survey was compiled in order to provide structure to a one-on-one discussion
that was held with each participant. The survey provided structure, but also allowed for the
participants to provide further information when they deemed it necessary. The survey acted
as a guideline to the more detailed answers that have provided the evidence for this research.
The use of a survey also assisted in “getting a foot in the door” with some of the participants,
as they were able to see what questions were to be asked, and it also gives the impression of
being less time-consuming than an in-depth interview, even though that is not necessarily the
case. Care was taken to avoid bias in reporting the results of the interviews, taking care to
avoid subjectivity, and enhance objectivity at all times (Patton, 2006).
Data collection methods. The design of the survey was the most important part of
the data collection as an entire research project can be jeopardised due to ill constructed
surveys (Leedy and Ormrod, 2010). Careful consideration was taken when designing the
survey to ensure that the questions were, as Iarossi (2006) suggested: brief, objective, simple,
and specific. Based on this, the researcher ensured that the questions posed in the survey
were kept relevant by being solely based on the literature discussed above. The researcher
assumed that the survey participants had an understanding of basic concepts and definitions
of terms that were used in the survey.
Personal interviews were conducted with marketing managers, trade channel specialists
and category managers from FMCG manufacturers of a many different types of products
ranging from alcohol to dairy. The in-depth interviews were exploratory in nature, so that
concepts and relations could emerge naturally and in the respondents’ own words (see
Oppenheim, 2003). The interviews varied in length from fifty minutes to two and a half
hours, depending on the openness and willingness of the participant to share ideas and
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information. Most participants seemed very interested in the topic and were very willing to
spend the extra time talking about the subject. Following the flow of the survey, the
interview was semi-structured, allowing the researcher to gain deeper insight into a
participant with open-ended questions. Ethical clearance was obtained from the University of
Cape Town Graduate School of Business.
Research instruments. The following instruments were used while conducting this
research: cover letter/participation request letter, participation confirmation letter and the
survey questionnaire itself. To ensure full disclosure, to protect the positions of the
participants and the companies that they represent and to take into consideration the
competition within the industry, the identity of the participants and their companies have
been kept confidential. In order to maintain this confidentially, the “industry type” questions
has been excluded from this report.
The cover letter/participation request letter outlined the purpose of the research and the
level of involvement that was required by the participant. This letter was endorsed by the
research supervisor, Professor Steve Burgess, in order to give backing and validity to the
request for participation made by the researcher. This letter also detailed the necessary
ethical clearance that was required to be detailed to the participant, part of this being the
level of anonymity that would be provided to the participant and his/her company should they
be willing to participate. Signed copies of these letters were obtained at the time of the
interview, and are not included in this report in order to maintain their confidentiality.
Each participant was forwarded a copy of the questionnaire prior to the interview to
ensure that they had ample time to prepare. The responses can be seen in Appendix 1.
Sampling
Sample identification was dependent on the research question that the researcher was
trying to answer (Leedy and Ormrod, 2010). The sample that was selected was a
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convenience sample, with participants being selected based on the fact that they are situated
in Cape Town and its surrounding areas. Convenience sampling was used because it allowed
the researcher to keep the research costs to a minimum as it removed the need to travel to
other parts of the country in order to perform the interviews.
The population applicable to this research was comprised of marketing managers, trade
channel specialists and category managers of FMCG manufacturers.
The ideal sample was identified by the following characteristics:
The FMCG manufacturer must be located in Cape Town or the surrounding
areas,
The participant must be employed at the FMCG manufacturer on a permanent
basis,
The participant must have the relevant experience required in order to
competently complete the survey.
In order to entice the FMCG manufacturers to partake in the research, access to the
final report was offered, and accepted by all willing participants. Unfortunately, the research
took place during a particularly busy time of the year for FMCG manufacturers, when many
senior executives were focused on current and upcoming budgets in a particularly difficult
operating environment. Of the 21 FMCG manufacturers with major offices in Cape Town,
seven did not return repeated calls requesting an interview and seven more indicated that they
did not think that GMROI was an important topic for research or discussion. Seven
manufacturers (32%) agreed to participate in the study.
Research Criteria
Reliability and validity are important considerations in any research project. Leedy and
Ormrod (2010) discuss the validity of qualitative research, describing internal and external
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validity. Internal validity is the extent to which the design of the research and the data that
has been acquired allow the researcher to draw meaningful conclusions from the data, and
external validity is the extent to which conclusions drawn from the research are able to be
used outside of the study. This research should have internal validity, however the external
validity of this research could be questioned as the results from the research are based on a
small sample size and are specific to South African FMCG manufacturers based on Cape
Town and its surrounding areas. This may not be applicable to other types of FMCG
manufacturers that are not located in South Africa. To ensure validity, the researcher spent
extensive time in the field and will distribute the research findings to the participants. This
should allow the research to be confirmable and trustworthy.
Data Analysis Methods
The data analysis method that was used needed to marry the results of the surveys and
interviews with the themes and underlying questions that have emerged from the literature
review above.
The global analysis method was used in analysing the data for this research. Henning
(2004) detailed global analysis as “an integrated view of the data and the way in which main
themes are identified because of a holistic reading and accompanying notes, and not just as a
preparation for coding” (p.109). The process of global analysis is that of intensively studying
the data to find themes or concepts and then connecting these themes or concepts together in
the form of a connect map. These connect maps allowed for the organisation of data into a
form that would not visible in the raw data itself (Henning, 2004).
The technique that was used was as suggested by Henning (2004): The research
studied the set of data and form this developed a concept map which allowed for the linking
of information within the data set without individualising items. Any data items what were
not used were noted with the reasons why. These data items were then drawn up in a collage
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analysis tool which reveals the reasons for this data not fitting the concept map, and generally
assist in revealing the research limitations.
The arrangement of the data that was collected was fairly simplistic due to the manner
in which the data was collected. The survey responses and other interesting and relevant
quotes that were noted during the interview were captured into a Microsoft Excel document.
Microsoft Excel was useful because it allowed for the easy movement of data into themes
that emerged through the process of analysing the data. Both the concept map and collage
analysis were done in Microsoft Excel, and can be found in Appendix 2 and 3 respectively.
Results
The findings of the surveys and interviews conducted with the seven FMCG
manufacturer participants are reported in this section. See also Appendix 1 for detailed
responses and the summary of useful quotes per company in Appendix 4.
The results of the survey will be broken down into the main sections that the survey
was categorised into, namely retailer private bands, GMROI, retailer shelf space allocation,
communications and inventory management. Identifying questions in the context section
have been left blank in order to ensure the anonymity of the participants. Other context
questions will not be discussed as there were not enough participants to make the data
relevant. Relevant quotes that were taken from the interview will be interspersed among the
five categories below.
Retailer Private Brands
From the responses, 3 out of the 7 participants produce private brands for their
retailers, however it appears that the manufacturers do not feel that these private brands pose
as greater competition to their own national brand compared to other competitor
manufacturer brands.
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GMROI
From the results of the survey, it can be seen that although 5 out of 7 manufacturers
understand the role of GMROI and believe that it is a useful decision making tool, it does not
appear to be a metric that is used by their retailers to measure performance. Rather, rate of
sale appears to be the most popular (5 out of 7) form of measuring the performance of the
manufacturers brands, suggesting that volume sold is more important than the margin that
any particular brand may provide. Other metrics that were listed were DPP and margin per
square meter.
The use of performance metrics is not solely limited to retailers, and can provide for a
very useful tool for manufacturers who have many different brands in their portfolio:
"we look at [performance] from a total portfolio point of view,
but we also look at it from an individual brand basis, which
helps us to clean out some of the muck".
This view, however, is not supported all manufacturers, as one clearly states:
“From a retailer perspective you can use [GMROI], but from a
manufacturer perspective, you can't really use [GMROI]”.
The metric that is used to monitor brand performance does appear to influence the
relationship that the respondents have with their retailers (6 out of 7), and provides the
manufacturers with opportunities to further facilitate the negotiation process:
“[We can] show the retailer what he can get out of this
[relationship]”
“Most shelf space is given to the highest volume movers - this
is where we try to negotiate with retailers in order to get as
much space as possible”.
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This demonstrates the impact that the performance metric has on both shelf space
allocation and the business relationship between the manufacturer and the retailer. It also
plays a negative role when the manufacturer is trying to launch a new product as there is no
past data to measure the new product’s performance on, and therefore
“incentives need to be given to merchandisers to place the
new product”.
The manufacturer that did not agree to the fact that performance metrics influence the
business relationship stated that
“the relationship that sales people have with the retailers are
very important”.
This implies that regardless of the performance of the brand, should the relationship
between the sales people and the retailer be strong enough, the brand will remain on the
shelves.
Retail Shelf Space Allocation
It was evident when interviewing the participants that this was an area was that most
interesting to talk about, and it is safe to say that the participants’ interest in this topic was the
main reason for their participation. Because of this it was no surprise all seven respondents
understood the role of shelf space allocation in the retail industry.
Perhaps the main reason for this is that some of the manufacturers take on the role of
category leader and perform the task of shelf space allocation themselves:
“Space management is driven by the manufacturer”
"Neither of us really believes that any of the retailers
actually sit down and think about where they want
one brand versus another. We kind of drive that from
our side”
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It appears that because of the fact that this role is performed by the manufacturers and
not the retailers, that rate of sale is used as a model to base allocation on:
“Space allocation is 99% based on rate of sale,
regardless of profit margins”
Wal-Mart makes use of category leaders to manage the shelf space allocation within
their stores (Arnold and Fernie, 2000), which is not dissimilar to the way that some of the
larger retailers work in South Africa. Manufacturers, however, perceive several
disadvantages when category leaders perform the task of shelf space allocation:
“We have to keep them honest... they allocate themselves more
shelf space... if we pick up a problem, more often than not they
will change it”
“If you are a relatively small company and you don't have your
own category management department to look after your
interests, you will lose out”
“If a manufacturer doesn't have a category manager or a trade
manager to check on the planogram allocations, yes, they are
going to get shafted because they don't have someone who is
checking the data all the time”.
Planograms are pictorial/graphical depictions of the planned allocation of shelf space,
by item by shelf, for a particular retail shelf space. It is the favoured method for allocating
and managing shelf space. Planograms are produced by retailers. In cases where
manufacturers are powerful category leaders, they may produce a suggested planogram for
acceptance by the retail trade and then work with individual retail outlet managers to
implement the plan. Planograms are used in store to ensure that shelf space allocations are
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managed to achieve optimal results. Even when manufacturers drive space management,
retailers retain final approval of shelf space allocation planograms.
Shelf space allocation is calculated on rate of sale because “there is no margin
consideration or profitability consideration taken into account in terms of shelf space
allocation” and “retailers are not prepared to share their profit margins with us, so we
cannot calculate space allocation based on what they are going to make” and “Retailer X
does not like to share information”. One manufacturer mentioned that
“If space planning or category management was driven by the
retailer, it would be very different from what it currently is…if
this was a process driven by retailers, it would be far more
accurate--and certainly more beneficial to the retailer at the
end of the day--because they would be able to base their space
allocations on profit”
Wal-Mart’s success with the use of category leaders suggests that retailers have much
to gain from sharing more information. If the experiences of these manufacturers is
indicative of the industry, poor information sharing with manufacturers responsible for
category planning in South Africa may be resulting in suboptimal space allocation, with
adverse implications for manufacturers, retailers and consumers.
Even though the manufacturers perform the shelf space allocation role, not all of them
were aware as to why they have a specific position on the retailer’s shelves, with 6 out of the
7 manufacturers knowing why they had a particular position on a retailer’s shelves. Even
though there was not a full consensus on why manufacturers had specific positions on a
retailer’s shelves, there was consensus on what they can do to improve their position – and
the results were along the lines of increasing rate of sale predominantly through the use of
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promotional techniques, for example: in-store promotions, use of gondolas or aisle ends,
Christmas promotions, etc. Negotiating for more shelf space was another technique listed for
improving shelf space allocation.
Negotiating for shelf space had another interesting result. Only 4 of the 7
manufacturers wished to change the manner in which they negotiate with retailers for more
shelf space. One manufacturer wanting to keep their negotiation methods the same stated
that “I can't see how else we would do it differently, it's a fair and transparent way of doing
it, however those who were interested in changing the method predominantly wanted more
data to be made available from the manufacturers, but they also wanted shelf space allocation
to be based on more recent data as currently “historical data from previous 6 months is used,
and because of this someone will lose out”. One manufacturer also suggested that a reduction
in promotion costs (in-store promotions, gondolas and broad sheet costs) would allow the
manufacturers to more actively increase rate of sale. Manufacturers have also taken a
number of actions to try to increase their brand’s attractiveness and gain more shelf space.
As can be seen in Figure 1, 5 out of 7 manufacturers have attempted, and most have
succeeded, to create a focal brand, with the same amount of manufacturers using advertising
to create awareness and demand for the brand amongst consumers; 2 out of 7 manufacturers
have changed packaging to either attract new customers or to “fit” better on the shelves; 2 out
of 7 retailers have tried to use combined inventory management with the same amount
increasing retailer profit margins; and every manufacturer (7 out of 7) have used “other”
methods in an attempt to increase shelf space allocation. These methods include permanent
display merchandising, intensive promotions (e.g. gondola displays and in-store stands),
increase presence in the key account stores, and find gaps in the market in order to extend the
product range.
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Figure 1 - Actions taken to increase space allocation
These actions are taken in an attempt to increase manufacturer power which is useful
when negotiating shelf space, however this would be of no use with Wal-Mart’s bargaining
power remains high, regardless of the manufacturer that they are negotiation with (Marx and
Shaffer, 2004). Even so, manufacturers still try to negotiate the best deal for themselves
using the following methods, as described by the 7 participants. Some manufacturers rely
heavily on data such as AC Nielsen results, stock turn levels and sales figures to try to
acquire more shelf space. One even states that:
“we take every brand in a category, and based on its rate of sale in each
outlet, we argue for a certain amount of space. If a brand turns 100 times
in a week, and it ends up contributing 50% of your profits, we then try to
motivate for 50% of the space”.
Others try to negotiate for more promotional space which will increase their rate of
sale, thereby increasing shelf space allocation. Many of these negotiations take place at a key
account level (mostly at the retailer’s regional head offices), however some manufacturers
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have stated that the relationship that they have with retailers at a store level can influence the
overarching shelf space allocation decision made at the retailer’s head office.
The effects of performance metrics on shelf space allocation have been discussed in
the preceding section.
Communications and Relationship Management
The communications aspect of the relationship is important because it is what builds the
relationship between the retailer and the manufacturer. The manufacturers’ opinion is that
communications are open between them and their retailers, although some feel that this is
more with the national and regional key accounts managers in the regional offices and
communication with the in-store managers is generally maintained by a merchandising
company. One retailer describes the relationship with their retailer as being segmented
depending on the account:
“each account has different needs, we try and fit in as best as we can
with those, while at the same time driving our strategies forward--we
know what we want to achieve, we try and get an understanding of
what they want to achieve, and try to get a marriage between the
two”.
From this it could follow that this manufacturer deems their relationship with each
retailer as unique and one that is symbiotic, being beneficial to both parties. However, it is
also important that the manufacturer places the correct people in place to maintain the
relationship, which in the case of one manufacturer, the relationship is maintained by the
sales department:
“relationships are vitally important, but they come from a different
department [sales]” and “the primary point of contact is our sales
person and the retailer's buyer”.
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In this case it is important that the sales department and marketing/category
management departments work together. These relationships are especially important if
there are many competitors in the market, and for those with few competitors, the
relationship can be seen as slightly different:
“We are in a unique position because there are so few suppliers,
retailers need to keep us in the store”.
This gives the manufacturer power which will aid in negotiations, however this
power might not be sufficient against the likes of Wal-Mart who hold a power of their own,
and should they not get the lowest price locally, are willing to import goods from
international suppliers in order to secure the best price (Basker, 2007).
A part of communications is the ability for manufacturers to monitor their brands. 5
out of the 7 manufacturers said that they were able to monitor their brands, however it
appears that the data is not “live” data, and that it is generally a week to a month old. This
does not allow the manufacturer to know at any specific point in time how their stock is
moving. Should the retailer allow the manufacturer the ability to view point-of-sale data as it
is being captured, then better monitoring of brand movements can be achieved. Currently
the information that is being shared from a retailer’s perspective is that which is available for
purchase from either AC Nielsen or Synovate Aztec, but this data is generally at least a week
old. Manufacturers appear to be much more forthcoming with the information that they give
to retailers, some even sharing costing information with the retailer should it be requested.
Other forms of information shared is planogram advice, geographic performance data, stock
levels, above-the-line activities regarding brands in their stores and brand management plans.
Inventory Management
Some manufacturers see inventory management as an opportunity to gain an upper
hand over their competitors:
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“we try to get the best share of the retailers money,...retailers are
always trying to tie down their stock holding, and the more of their
money we can tie up in their brands, the better off we are, because
then there is less to spend on competitor's brands”.
Most manufacturers work with their retailers to manage inventory levels (5/6 out of 7)
however only 3 of the 7 manufacturers have claimed to make use of a VMI system. For one
manufacturer, an inventory management system/process is not as important as the
relationship that exists between the two parties. The manufacturers that have used a VMI
system claim that it has been successful, however they are all in agreement that it requires
people on the shop floor who are competent, knowledgeable about the supply channel and
willing to work the system. Some manufacturers have a different opinion regarding
inventory management with retailers:
“we like to have stock in retailer's stores, it's up to them to bring it
down, and up to us to bring it up”.
When discussing out-of-stock situations (OOS), most participants reacted to the
questions with nervous laughs. When discussing this matter with the final participant, their
comment was that it is because it is such an undesirable scenario that invokes and unusual
reaction. The participants’ response to whether OOS situations had helped forge a closer
relationship with their suppliers resulted in a majority positive (5/6 out of 7) with one
qualifying the answer stating that the relationship was improved in the short term but not the
long term, and the other stating that the relationship with their merchandiser was improved,
and not with the retailer. One manufacturer confirmed this by stating that “brings the
retailer and manufacturer closer” and went on to comment that OOS situations “gives the
retailer better understanding of suppliers, as they need to understand the supply chain and
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logistics”. Further discussion regarding OOS situations revealed that they managed them in
as many different was as there were different participants. The bluntest of these being:
“the best way to manage it is by avoiding them”,
with further explanation being correct forecasting and alternative brand availability
should provide enough stock to ensure that OOS situations are avoided. Another
manufacturer claimed that operational management and the use of watchmen in-store to
physically monitor the levels was their method, while for a third, proper distribution channels
and distribution centre management was key to preventing OOS situations. Another
manufacturer incentivises their sales department to keep stock levels at 95% at all times,
which creates a good brand impression with the consumer, and another relies on open
communications channels to keep stock levels up. This manufacturer clarified this comment
by stating that the “pressure is placed on the supplier in every way logistically” and that “the
channel needs to flow, or it won't work”. While these methods appear to be effective for the
manufacturers at this point in time, they will not be sufficient for inventory management
within the Wal-Mart domain.
Finally the long-term impact of and OOS situation was discussed with the
manufacturers, with most of them responding similarly: loss of sales and profits, brand
switching, reduction in shelf space due to a lower rate of sales, and negative/angry customers.
The most drastic of these impacts being the “death of the brand”, as was eloquently stated by
one manufacturer. Other possible impacts on these manufacturers could be delisting and the
corruption of the supply chain. In light of these possible consequences, it is clearly beneficial
to the manufacturer to have a system in place that will easily help them to prevent such a
situation. As was stated above, the current OOS prevention systems might be sufficient at
this point in time, however another system might be demanded when dealing with Wal-Mart.
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Discussion
The purpose of this research was to determine whether South African FMCG
manufacturers are ready for Wal-Mart’s entrance into the country in terms of their
understanding of the importance of GMROI and shelf space allocation. The aim was to gain
insight into the manner in which South African FMCG manufacturers currently deal with
their retailers, the relationships that they share, and their current views on the two issues at
hand – GMROI and shelf space management – and then determine based on this data,
whether they are ready for Wal-Mart.
The data for this research was collected through the use of a survey and semi-structured
interview with each participant. The participants consisted of 7 marketing mangers/category
managers/trade channel specialists of FMCG manufacturers that produce a variety of
products. These manufacturers were restricted to Cape Town and its surrounding areas due
to budget and time constraints.
The findings, which were discussed in the previous section, were broken down into the
main survey categories: retail private brands, GMROI, retail shelf space allocation,
communications and inventory management, with the context section being excluded from
the research due to the small sample size.
The analysis was performed using a global analysis technique of concept mapping. To
prepare the data for the concept map, the survey responses and interview notes were tabulated
in an Excel worksheet, and then read through a number of times in order to determine the
main themes that existed in the data. These themes were then carried across into the concept
map (see Appendix 2) and connected through a combination of the findings and relevant
literature. Any data items that did not fall within a general theme were inserted into a collage
map (see Appendix 3), which were then used to determine the research limitations. The
analysis was then grouped into the 4 research questions:
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1. Do FMCG manufacturers understand the relationship between shelf space allocation
and GMROI?
2. What shelf space allocation models do FMCG manufacturers believe are best suited to
increasing GMROI?
3. Why should FMCG manufacturers care about GMROI and retail shelf space
allocation?
4. How can a FMCG manufacturer demonstrate an understanding of GMROI and retail
shelf space allocation?
With these research questions as the basis, the relationships in the concept map were
discussed with the use of the relevant findings and literature.
The subsequent section will provide a discussion for each question listed above.
Shelf Space Allocation and GMROI
Research question 1 asked if FMCG manufacturers understand the relationship
between shelf space allocation and GMROI. Its purpose is to determine whether FMCG
manufacturers understand the role and inter-relationship of GMROI and shelf space
allocation. The results suggest that the answer is that although these seven manufacturers
relate performance metrics to shelf space allocation, they focus on inventory turnover. This
suggests that they are managing based on only part of the GMROI equation (see Levy and
Ingene, 1984).
The use of GMROI is longstanding, specifically by Wal-Mart to measure performance
(Srinivas, 2007). It is because Wal-Mart uses this metric that it is important for South
African FMCG manufacturers to understand the role of GMROI in the retail industry, and
what its effect can be on their businesses. Failing to focus on GMROI has several
undesirable consequences for the manufacturer and retailer. For the manufacturer, their
brand/s might not get the quality and quantity of shelf space that it actually deserves,
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reducing both profits and market share as poor brand placement can affect sales volumes
(Wang and Gerchak, 2001). Market share is affected due to the fact that another brand is
more prominent and available in terms of the space that is allocated to it, this at the expense
of the manufacturers brand. For the retailer, brands are not positioned where profits will be
maximised, causing an unnecessary reduction in profits. The performance of the products
on a retailer’s shelves also shows the quality of the decisions that are being made the by
management team, and so failing to focus on the performance of the products can represent
poor decision making, in particular merchandising decisions, by a retailers management staff.
Making poor merchandising decisions is detrimental to profits, however the effect could be
far worse with Wal-Mart’s proposed entry into the South African market, as it has been
accounted that up to fifty percent of smaller retailers can be displaced due to the fact that they
are unable to compete with this new, lean, expertly-managed retailer (Jia, 2008). Not
considering GMROI can also lead to an increase in handling costs for the retailer and thereby
affect profitability, as placing brands without a good margin on return that turnover at a high
rate could reduce profits due to the ordering, inventory and reshelving costs that accompany
this brand.
Focussing on GMROI leads to a circular process, as high sales volumes increase shelf
space allocation, and as Wang and Gerchak (2001) state, sales volumes increase based on the
level of shelf space allocated to that product. Basically, the more a product sells, the better
quality and quality of shelf space it is given, thereby increasing sales volumes further, leading
to a better quality and quantity of shelf space. This appears to be apparent to one
manufacturer confirms this by stating: “You can see the direct correlation to sales when you
cut back on retail shelf space to how the sales perform”, which displays the effect of space
elasticity in retailing (Dreze et al, 1994). It is possible that this correlation is the reason why
one of the manufacturers uses GMROI to “clean out some of the muck” that might exist
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within their product portfolio. This function is performed in order to open up shelf space for
products that provide both better margins and higher turnover rates. However the perceptions
are quite varying as another manufacturer can see no benefit in the use of GMROI for them,
and believe that the metric is only beneficial to a retailer. These differing opinions show that
there is a division in the understanding that manufacturers have of the scope of the metric,
and the potential benefits that it can provide.
The issue of new product placement was mentioned by a few of the manufacturers
during the interview process. They found that a major problem with introducing a new
product is the lack of historical data, which GMROI relies on in order to produce a figure.
This, however, is not solely a GMROI problem, as this is currently experienced with the rate
of sale metric that is presently used to measure performance. Manufacturers have found the
need to incentivise the retailers in order to place these products on the shelves. This is a
process that will most likely change when Wal-Mart enters the market as they prefer to not
accept listing/slotting fees, but would rather have the manufacturer reduce their price in place
the product on their shelves (Petrovic and Hamilton, 2005). The topic of shelf space
allocation and the “predictive” performance metric that will be used for the introduction of a
new brand is an area that needs to be further researched, as it has not been focused on in this
research.
Because Wal-Mart uses GMROI as a preferred performance metric (Srinivas, 2007), it
is a positive sign that most manufacturers understand the role that GMROI performs in the
retail industry, although, for some manufacturers the performance metric that retailers use is
not as important as the relationship that their sales people have with the retailer. While this
might be true for some South African retailers, it is not true for Wal-Mart, as there is no
certainty that this relationship will last indefinitely (Petrovic and Hamilton, 2005), therefore
the manufacturers have to rely on performance metrics, specifically GMROI, to remain on
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Wal-Mart’s shelves. While some manufacturers believe that the relationship is more
important than the metric, others are of the opinion that the results of the metric itself can
help improve that relationship. The relationship is improved through the retailer being able
to quantitatively see the benefit of a giving a particular brand more or better shelf space, and
it also gives the manufacturer an ace card to use at the negotiation table when discussing shelf
space allocation with the retailer. Even though Wal-Mart strives to have a plethora of shelf
space available (Marx and Shaffer, 2004), it is important for manufacturers to understand the
workings of shelf space allocation not only to ensure that they stay on the retailer’s shelves,
but also to strive for a better quality and larger amount of that shelf space, and understanding
how a specific retailer manages their shelf space allocation is also key to building the right
kind of relationship.
Thus, it appears that these seven manufacturers do not fully appreciate the relationship
between GMROI and shelf space allocation, which appears to be due to exposure to the
metric.
Manufacturer Perceptions of Best Models for Managing GMROI
Research question 2 probed FMCG manufacturers’ beliefs about the space allocation
models best suited to increasing GMROI. This questions purpose was to determine what
shelf space allocation models the South African FMCG manufacturers believe are most
appropriate for the role of increasing GMROI. Several manufacturers who declined to
participate in the research indicated that GMROI was not an important measure that they use.
Study participants are knowledgeable about, and involved in, the shelf space allocation
process. They clearly understand the role that retail shelf space plays within the industry, yet
awareness of GMROI appears to be low and not central to their thinking. Low information
sharing does complicate the use of GMROI but it does not preclude its estimation. Taken
together, this suggests that even when manufacturers are aware of how to increase shelf space
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allocation based on inventory turnover, GMROI is not influential in their thinking.
Consequently, they are not in a position to answer this question.
This is unfortunate for several reasons. From the retailer’s perspective, although
proper management of shelf space can lead to an increase in gross margins, a reduction in
inventory and display costs, and an increase in customer satisfaction (due to the reduction of
out-of-stock situations and the retailer’s ability to better provide for customer demand at any
point in time), retailers do not seem to be willing to share gross margin information with the
manufacturers who assist with the allocation duties:
“Retailers are not prepared to share their profit margins with us, so
we cannot calculate space allocation based on what they are going to
make”.
Shelf space allocation in Wal-Mart is handled in a similar fashion to that of the South
African retailer’s, however Wal-Mart appears to be more forthcoming with disseminating the
appropriate information to the category leaders who assist in making the shelf space allocated
to brands a “win-win” allocation for both the manufacturer and the retailer. Their manner of
allocating shelf space makes the most effective use of shelf space in their stores. From the
manufacturer’s perspective, they are able to retain brand equity and possibly even market
share through the appropriate use of shelf space allocation, as it promotes improved inventory
management thereby reducing out-of-stock situations, loss of sales and even reduction of
market share. Currently shelf space is allocated based on rate of sale with market share also
being taken into account, and this means that the actual margin that a retailer is making is not
taken into account, and excessive shelf space could be allocated to a brand that does not
produce profits. However should shelf space allocation be manipulated to allocate more space
to items that produce a higher gross margin, then items could be placed on shelves that do not
move fast enough to produce a reasonable profit for the retailer. Allocating shelf space based
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on both gross margin and rate of sales combined (GMROI) should give the balance of a
product that has a reasonable enough margin for the frequency that the stock turns, thereby
giving the retailer shelves that are stocked in the most profitable manner. This however is not
always possible as sometimes
“a retailer is committed to a range of products--more often than not
there are products that sit on shelves that take a long time to sell out,
and that's just because they fall within the suppliers range of
products”.
This is contrary to Broekmeulen et al’s (2004) comment that shelf space is allocated to
those products that are able to maximise profits, however reality does not always appear to
align with the literature. Although it appears that this might be a positive situation for the
manufacturers, it hinders them from removing the brands from their portfolios that are no
longer profitable for them. Some manufacturers are using a shelf space planning system
(JDA Intactix) which has many capabilities, one of them being GMROI, however they are
unable to unlock the full functionality of the system due to the lack of available information:
“[JDA Intactix has] the ability to provide GMROI data, but the input
data is not available to manufacturers”.
The JDA Intactix system (which appears to be similar to Costjens and Doyle’s (1983)
commercial model) appears to take all relevant information as inputs and produces a
planogram that assigns different brands to different sections of the shelf facing based on rate
of sale. These planograms appear to be a favourite option among the participants, although
they are produced based on a metric other than GMROI. From the consumer perspective,
customer pricing –inventory and display cost savings filtered through customer to produce
lower customer prices; The improved inventory management that was discussed above also
leads to increased customer satisfaction because then loyal consumers have their choice of
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brand available for purchase and are not forced into making brand switching decisions, and
new customers are exposed to a variety of brands that will enhance the shopping experience.
This process should also assist the retailer in better catering for current demands, thereby also
increasing consumer satisfaction. Customers should find that as their demand for a specific
brand increases, so too should it’s presence on the shelves (Urban, 2001). After this, Urban
then studied the demand and inventory level relationship further, and his research then found
that the demand for a product was related to the level of inventory in stock - more inventory,
more demand (2004). Consumers should also be able to benefit from better pricing because
proper shelf space allocation should lead to a reduction in inventory and handling costs. Wal-
Mart functions on this principle, and should Wal-Mart enter the market, the South African
consumer will be able to obtain good quality brands and save significantly on costs.
Even though shelf space allocation is handled in the same manner as it is in Wal-Mart,
the actual driver for allocating that shelf space does not appear to be the same. While this
may be true, it could be debated that the reasons for the manufacturers not driving GMROI
during shelf space planning is due to the fact that the retailers are not willing to share the
information that is required, however there also does not appear to be a reason for the
manufacturers to push to get this data. It appears that the capability exists within some of the
participants to use the necessary models to increase GMROI, but the incentive and
information will most likely have to be provided before this will happen.
Impact of GMROI and Shelf Space Allocation on FMCG Manufacturers
Research question 3 enquired as to why FMCG manufacturers should care about the
concepts of GMROI and retail shelf space allocation. The purpose of this question was to
determine the impact that not understanding the GMROI and shelf space allocation concepts
could have on South African FMCG manufacturers in the areas of retailer private brands,
power, negotiations and the relationships that they have with their retailers.
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This relationship should endeavour to increase the profits of both the retailer and the
manufacturer through the proper placement of the manufacturer’s brands on the retailer’s
shelves (Bultez and Naert, 1988). The FMCG manufacturers’ responses to the survey
questions have revealed how important the relationship is that they have with their retailers,
however these relationships either influence or are influenced by the manufacturing and
placement of a retailer’s private brand, the power base that exists between the two parties,
and the manner in which negations take place.
Retailer private brands that are manufactured by some of the participants do not
appear to be bigger competitors than that of other manufacturers’ national brands. This
would help to reinforce the relationship that the manufacturers have with their retailer as they
do not appear to see them as direct competition. Wal-Mart provides their own private brands,
and does so when the product that they wish to supply is either not easily available or it is too
expensive to procure a manufacturer’s national brand (Petrovic and Hamilton, 2005). In light
of this, South African FMCG manufacturers will need to keep their costs low in order to
provide their national brand to Wal-Mart at a price that will dissuade them from replacing it
with their private brand. However, although brand replacement is a possible problem that
should be considered, it is not the only possible threat that these brands can pose. For
instance, manufacturers build up brand equity over a period of time (Wood, 2000) and
retailers are eager to use this to promote their brands. The problem however is when the
private brand is allocated shelf space based on the performance of a popular national brand,
and not on the actual performance of the private brand. This positioning could cause the
brand equity to deplete and confidence in the category as a whole to erode, an action that can
cause considerable extra cost to the manufacturer (Suarez, 2005). This could be a potential
problem within the industry at the moment, as retailers tend to inform the category leaders
who are allocation shelf space that “they want house brands positioned in a specific place”.
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To avoid the possibility of brand equity erosion, the FMCG manufacturers need to ensure that
a retailer’s private brands are allocated the shelf space that is earned through its performance
and not through the retailer’s attempts to promote the brand based on the manufacturers more
popular brand. If the manufacturers have a solid relationship with their retailers they will
have more of an opportunity to discuss the pitfalls of such an action and try to dissuade the
retailers from putting it into action. Perhaps this solid relationship could lead the
manufacturer to realise why the retailer is willing to take such action, and promote a joint
effort in order to realise the increase in profits for both parties.
As the control of retailer private brands is influenced by the retailer-manufacturer
relationship, the relationship is influenced by the power base that exists between the two
parties. Retailers tend to wield more power in the relationship (Corstjens and Steele, 2007),
as does Wal-Mart, whose bargaining power will be higher than any manufacturer, regardless
of their size and power (Marx and Shaffer, 2004). This can be seen through the information
sharing that takes place between the retailers and manufacturers. From the survey results it
appears that manufacturers tend to provide more information to the retailers than what
retailers provide to manufacturers. Retailer information does seem to be available however it
does not seem to come from the retailer, but from third parties such as AC Nielsen and
Synovate Azetc. Retailer power leads to increased manufacturer costs due to extras demands
made by the retailer (Corstjens and Steele, 2007), which is evident with the increased
financial burden of Wal-Mart’s insistence of the use of VMI systems (Mishra and
Raghunathan, 2004), as well as the costs involved in retrieving retailer information from AC
Nielsen and Synovate Azetc. Aside from increased costs, this power base also causes an
imbalance in the retailer-manufacturer relationship as the two will constantly battle for the
stronger position (Hingley, 2005). It appears that retailers tend to be on the receiving end of
the relationship, and the manufacturers on the giving end. Although the manufacturers do not
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appear to wield more power than the retailers, they do appear to have more control over their
brands. It is possible that the current relationship state is satisfactory at present, which this
level of control is maintained. Possible future research could further investigate the
relationship between the two parties and determine whether or not it is symbiotic and
beneficial to both parties. It is unclear whether the participants are unhappy with the state of
this current relationship or not, however there does not appear to be current or future plans in
place to modify this relationship state. There are, however, numerous interests that the
manufacturers have shared in wanting to change the way that they negotiate for shelf space
with their retailers.
It appears that the negotiations held are primarily for promotional space, with regular
shelf space allocation being based on rate of sale performance and the relationship with the
retailer. The way that manufacturers are able to negotiate for both promotional space and
shelf space is one aspect of the retailer-manufacturer relationship that they would like to
change. As far as promotional space is concerned, Wal-Mart discourages expensive
promotions and prefer the manufacturer to rather reduce the price of the product, which they
believe will have the same effect as the promotion (Petrovic and Hamilton, 2005), and
therefore this negotiation issue will most likely not be an issue with Wal-Mart, however the
problem will still remain with the other South African retailers. While some manufacturers
are content with the current methods of negotiating for shelf space:
“I can't see how else we would do it differently, it's a fair and
transparent way of doing it”,
there are still some that feel that the process can be improved upon. While content
manufacturers feel that there is no better way to negotiate for shelf space, the others feel that
the method is currently outdate and requires up-to-date information to ensure that the
negotiation is carried out with the most recent data that could significantly change the
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outcome of the negotiation. The maturity and health of the relationship that exists between
these two parties could lead to these concerns being addressed, and perhaps to a more
satisfactory negotiation outcome. Manufacturers should then possibly look at focusing on
attempting to foster these relationships and grow their strength in order to facilitate these
outcomes.
Thus, the results suggest the answer to the third question is that manufacturers should
care about GMROI and shelf space allocation because of the impact that it can have on other
aspects of the business. For instance, increased awareness of GMROI and shelf space
allocation will assist in the facilitation of negotiations for both shelf space and promotional
space, additionally, knowledge of the two concepts will also arm the manufacturer with
sufficient knowledge to try to prevent category and brand equity erosion from poor placement
of retailer private brands. The power that exists between the two parties has a major effect on
their relationship, which in turn affects both negotiations and retailer private brand
management. From this, it appears that an understanding of GMROI and shelf space
allocation plays a similar role to that of the relationship that exists between the two parties,
and therefore explains the importance of the relationship as we have seen the importance of
GMROI and shelf space allocation.
Demonstrating FMCG Manufacturer Perceptions of GMROI and Shelf Space
Allocation
Research question 4 asked how FMCG manufacturers could demonstrate their
understanding of GMROI and retail shelf space allocation. Its purpose was to determine
whether or not FMCG manufacturers were currently displaying and understanding of
GMROI and retail shelf space allocation, based on their views on brand promotion,
communications, and inventory management (including VMI and the prevention of out-of-
stock situations).
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From the results, it can be determined that the answer to this question is that in
general the seven manufacturers show an understanding of shelf space allocation through
their brand promotion activities, open communications and information sharing with the
retailers, and some even with the use of a VMI, however not all manufacturers perform
similarly in all the areas. Additionally, as was demonstrated in question one, the
manufacturers have limited exposure to GMROI and are therefore unable to show their
understanding of the concept without the assistance of the retailers. This assistance can come
in the form of increased communication and information availability.
Brand promotion activities, which appear to be fairly well performed by the
manufacturers, can have a number of different affects on both the retailer and the
manufacturer. The retailers can suffer, from a margin perspective, from focal brand presence
in their stores, however they will benefit from the other basket purchases that consumers will
buy when in the store. Without this focal brand, the consumer will go to another store to
shop, so it is imperative for the retailers to stock it, regardless of the margin that they get for
the brand. The manufacturers benefit by brand promotion activities such as advertising, as
this will increase demand for their products, thereby increasing inventory turnover.
Manufacturers are also benefiting from the brand promotions that they frequently use in order
to increase rate of sale, and from this increase shelf space allocation, which is the main reason
for the brand promotion activities that manufacturers undertake.
Information flow from the retailer to the manufacturer does not appear to be very
functional, as it seems that it does not go beyond monthly or quarterly meetings that are had
at a management level and the manufacturer purchasing redundant information from third
party sources. This is unnecessary as communication is no longer restricted to the traditional
conversation form, but has extended into the technological era, with computer systems
forming a large part of modern communications. Wal-Mart is a technologically strong
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company (Basker, 2007), and it is believed that this is one of the reasons that they have
grown to the extent that they have. Wal-Mart wishes their manufacturers to be on the same
technological level that they are at in order to aid with communications and increase the flow
of information between the two parties (Petrovic and Hamilton, 2005). It appears that
manufacturers should get a taste of the desired information flow should Wal-Mart proceed
with entering the South African market.
Inventory management is important as out-of-stock situations can have a harmful
effect on both the retailer and the manufacturer. For retailers, there is the possible loss of
sales when the consumers are “buying the OOS item at another store, consumers cancelling
their purchase of the items, and consumers substituting a smaller and/or lower priced item”
(Corsten and Gruen, 2003, p.608) or a possible loss of the consumer when the “shoppers
permanently switch stores due to OOS situations” (Corsten and Gruen, 2003, p.608). For
manufacturers , there is the possible loss of a sale when “consumers substitute a competitor’s
item or cancel a purchase” (Corsten and Gruen, 2003, p.608) or a possible longer-term loss of
a consumer when “consumers switch to a competitor’s brand within a category” (Corsten and
Gruen, 2003, p.608). Manufacturers realise that and out of stock situation and also influence
the brands shelf space allocation (as it is currently modelled), as being out-of-stock would
also lead to a reduction in rate of sale. It appears that these out-of-stock situations are very
well managed by the manufacturers through a variety of methods, such as planning or
increasing communications, however the use of a VMI system should assist in fully
eradicating these situations (Mishra and Raghunathan, 2004). Manufacturers currently
manage their out-of-stock situations in a manner that displays their understanding of the
GMROI and shelf space allocation concepts, however further inventory management
methods, such as VMI could further improve this demonstration. While some of the
manufacturers currently use this system, it would be beneficial to the others to adopt the use
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of the system too, especially with the possible entry of Wal-Mart into the South African
Market. Wal-Mart places the responsibility of inventory management is placed solely in the
hands of the manufacturer (Lummus and Vokurka, 1999), and through this encourages supply
chain collaboration through the implementation of a VMI system (Mishra and Raghunathan,
2004). Having a supply chain that functions smoothly will improve inventory management
and further reduce out-of-stock situations, as is confirmed by one manufacturer who states
that: “the channel needs to flow, or it won’t work”.
The FMCG manufacturers have the ability to demonstrate that they have an
understanding of the retail shelf space allocation concept, however they, possibly due to lack
of exposure, are not able to display understanding of GMROI. It is in the best interests of the
manufacturers to be able to demonstrate this understanding with the possible entry of Wal-
Mart into the South African market. Wal-Mart uses GMROI as a performance metric and
requires that their category leaders to assist in shelf space allocation activities, and should a
manufacturer be able to demonstrate their understanding of these concepts, it can go a long
way to forging a relationship with the retail giant.
Research Limitations
The following limitations of the research were discovered:
Not having confirmation of participation from FMCG manufacturers prior to
commencing with the research created uncertainty as to the sample size and
extended the time required in the field, making the research run overtime by one
month,
Concentrating on FMCG manufacturers based only in Cape Town and the
surrounding areas might have provided biased results, and future research in the
Johannesburg and Kwazulu Natal areas might provide different insights,
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Because the sample size was not large enough, any industry specific conclusions
were not able to be made,
No conclusions could be drawn from the number and type of retailer that the
FMCG manufacturers supply to due to the small sample size.
In this research, any quantitative-type conclusions could not be drawn due to the
small sample size.
Research Conclusions
“Wal-Mart will certainly change the face of retail”, was the comment from one of the
participants in the research, and it is because of such a comment that this research was
conducted. Because of this, it is important for the South African FMCG manufacturer to be
prepared, as the way in which they may have to sell their brands to the Wal-Mart could differ
from the way that they sell to other South African retailers. In terms of the impending entry
of Wal-Mart into the South African market, it was important to ensure that the FMCG
manufacturers understood the role of concepts and tools such as GMROI and shelf space
allocation. Without this understanding, the manufacturer will not be able to adequately
prepare for the retail giant’s entry into the market. In looking at this topic, four research
questions were posed in an attempt to determine whether or not South African FMCG
manufacturers are ready for Wal-Mart’s entrance into the country, and these questions were
discussed in detail in the preceding section, however their answers will be briefly
summarised. The first question asked was: Do FMCG manufacturers understand the
relationship between shelf space allocation and GMROI? From the discussion, it appears
that these seven manufacturers do not fully appreciate the relationship between GMROI and
shelf space allocation. This appears to be due to exposure to the metric. The manufacturers
seem to be aware of what the metric is, but the manufacturers are restricted in their exposure
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to the metric as it appears that the retailers predominantly use rate of sale to monitor brand
performance. The second question asked was: What shelf space allocation models do FMCG
manufacturers believe are best suited to increasing GMROI? As could be seen in the
discussion, the manufacturers are not able to answer this question as even thought they have
the knowledge of how to increase shelf space allocation based on rate of sale, they have
limited exposure to GMROI and therefore are not knowledgeable in methods of increasing
shelf space based on GMROI. The third questions asked was: Why should FMCG
manufacturers care about GMROI and retail shelf space allocation? The discussion details
that manufacturers should care about GMROI and shelf space allocation because of the
impact that it can have on their negotiations for both promotional space and retail shelf space,
it can assist in preventing category and brand equity erosion as a result of poor private brand
shelf space placement and it can also help determine the level of power within the
relationship, which influences the manner in which a manufacturer deals with a retailer.
These would be particularly important should Wal-Mart enter the South African market.
The fourth question asked was: How can a FMCG manufacturer demonstrate an
understanding of GMROI and retail shelf space allocation? The discussion shows that the
FMCG manufacturers are able to demonstrate an understanding of the retail shelf space
allocation concept however they are not able to display understanding of GMROI, possibly
due to poor exposure to the metric. Should Wal-Mart enter the South African market, a
demonstration of the GMROI and shelf space allocation concepts should stand the
manufacturers in good stead as Wal-Mart uses GMROI as a performance metric and requires
their category leaders to assist in shelf space allocation activities., and should a manufacturer
be able to demonstrate their understanding of these concepts, it can go a long way to forging
a relationship with the retail giant.
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The South African FMCG manufacturers who participated in the research appear to
lack the capability and knowledge to cater for GMROI in terms of retail shelf space
allocation, however it does not appear as if the need has arisen for this capability and
knowledge to be applied. This will most likely change with the introduction of Wal-Mart
into the South African market, so the manufacturers should do their best to foresee the need
to acquire the necessary skills before the retail giant enters the market.
Future Research Directions
The following have been determined to be possible future research directions:
Future research should include the expansion of the sample size, possibly expanding to
Kwazulu Natal and Gauteng for further insights, however time and cost constraints of
any research undertaking must also be considered,
Should a larger pool of participants be available, future research could look at
comparing different industries relationships and manners in dealing with their retailers.
For example, compare industries such as dairy, beverage, food, alcohol, etc to
determine how different they are from each other in terms of dealing with their
retailers. The current sample size was not large enough to draw such conclusions,
Attention was only given to the management of existing brands, however it should be
considered how a South African FMCG manufacturer will be able to introduce a new
brand into retailers, and specifically Wal-Mart’s, shelves,
The research only focused on GMROI and retail shelf space allocation as well as the
factors that most influence them – future research could broaden the scope to determine
what other aspects will be different , and how prepared South African FMCG
manufacturers are for these differences.
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Plagiarism Declaration
1. I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend that it is
one’s own.
2. I have used a recognised convention for citation and referencing. Each significant
contribution and quotation from the works of other people has been attributed, cited and
referenced.
3. I certify that this submission is all my own work.
4. I have not allowed and will not allow anyone to copy this essay with the intention of
passing it off as his or her own work.
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Appendix 1
Survey Results
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Appendix 2
Concept Map
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Appendix 3
Collage Analysis
Type of Retailer Supply To
Competition
Industry Type
Actions to Increase Shelf Space Allocation
Performance Contracts
Ordering Requirements
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Appendix 4
Participant Quotes
Company A
"[GMROI] doesn't seem foreign [as a model] to retailers when we present it to them."
"We take every brand in a category, and based on its rate of sale in each outlet, we
argue for a certain amount of space. If a brand turns 100 times in a week, and it ends up
contributing 50% of your profits, we then try to motivate for 50% of the space."
"We look at [performance] from a total portfolio point of view, but we also look at it
from an individual brand basis, which helps us to clean out some of the muck"
Company B
"Space management is driven by the manufacturer"
"Always try to get the best share of retailer’s money"
"We like to have stock in retailer's stores, it's up to then to bring it down, and up to us
to bring it up"
"It depends on who your buyer is, it depends on what their views are and what the
category should look like"
"Each account has different needs, we try and fit in as best as we can with those, while
at the same time driving our strategies forward."
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"We know what we want to achieve, we try and get an understanding of what they want
to achieve, and try to get a marriage between the two"
"Wal-mart will certainly change the face of retail"
"Food and dairy are way ahead in category management than what liquor is"
"Our approach is very basic"
"Space allocation is 99% based on rate of sale, regardless of profit margins"
"Retailers are not prepared to share their profit margins with us, so we cannot calculate
space allocation based on what they are going to make"
"If space planning or category management was driven by the retailer, it would be very
different from what it currently is"
"If this was a process driven by retailers, it would be far more accurate, and certainly
more beneficial to the retailer at the end of the day, because they would be able to base their
space allocations on profit"
"Some of the retailers rely on the category captains (manufacturers) to dictate"
"Shoprite does not like to share information"
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"From a retailer perspective you can use [GMROI], but from a manufacturer
perspective, you can't really use [GMROI]"
"Relationships are vitally important, but they come from a different department [sales]"
"The primary point of contact is our sales person and the retailer's buyer"
"If you are a relatively small company and you don't have your own category
management department o look after your interests, you will lose out"
"JDA is a very ethical way of allocating shelf space"
"Neither of us really believe that any of the retailers actually sit down and think about
where they want one brand versus another. We kind of drive that from our side"
"There are very few retailers who will say that they don't want those brands together"
“we try to get the best share of the retailers money,...retailers are always trying to tie
down their stock holding, and the more of their money we can tie up in their brands, the
better off we are, because then there is less to spend on competitor's brands”
Company C
When discussing retail shelf space allocation - "Historical data from previous 6 months
is used, and because of this someone will lose out."
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"There is no margin consideration or profitability consideration taken into account in
terms of shelf space allocation"
When discussing category captains - "We have to keep them honest" ... "they allocate
themselves more shelf space" ... "if we pick up a problem, more often than not they will
change it"
"You can see the direct correlation to sales when you cut back on retail shelf space to
how the sales perform"
"More often than not there are products that sit on shelves that take a long time to sell
out, and that's just because they fall within the suppliers range of products"
"More often than not, a retailer is committed to a range of products"
"You can't just buy space from retailers - I think it's their way of keeping things fair"
"If a manufacturer doesn't have a category manager or a trade manager to check on the
planogram allocations, yes, they are going to get shafted because they don't have someone
who is checking the data all the time"
"Planograms are so important because it enforces it, they are based on factual rate of
sale data and then it doesn't change, so everyone has to adhere to that planogram"
Company D
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"We are in a unique position because there are so few suppliers, retailers need to keep
us in the store"
When discussing the preventions of out-of-stock situations "brings the retailer and
manufacturer closer"
When discussing the preventions of out-of-stock situations "gives the retailer better
understanding of suppliers, as they need to understand the supply chain and logistics"
"Fortunate because buyers know the industry"
Company E
"Look at the category holistically, look at trends in the market, rate of sales and see
what opportunities can be created from this data"
Company F
"Pressure is placed on the supplier in every way logistically"
"The channel needs to flow, or it won't work"