Optimizing Retail Space: The Shift from Sales to Gross Margin Focus

Optimizing Retail Space: The Shift from Sales to Gross Margin Focus

November 29, 2023 | By HIVERY

Retail is changing. There's a shift from sales-based strategies to focus on gross margin through space optimization. This affects how CPG companies and retailers allocate their valuable shelf space. This blog explores this trend, its implications, and how HIVERY Curate can help businesses navigate this new terrain.

Understanding the Shift

Retail space allocation has traditionally been driven by a single metric: sales per square foot. The primary goal was to maximize the sales generated from each foot of shelf space. While this approach certainly has its merits, it often overlooks a critical aspect of retail success: profitability.

The new focus on gross margin takes a more nuanced view. It's not just about selling the most units, but about maximizing the profit from each unit sold. This approach recognizes that not all sales are equally valuable and that a product contributing more to the bottom line might deserve more shelf space, even if it sells in lower quantities.

Why the Shift Matters

  1. Enhanced Profitability: By focusing on gross margin, retailers can ensure that the products occupying their shelves contribute more significantly to overall profitability, not just driving volume.
  2. Balanced Assortment: This shift encourages a more balanced product assortment, giving space to high-volume, low-margin products and lower-volume, high-margin items.
  3. Adaptability to Market Trends & Local Needs: Gross margin focus allows more agility in responding to market trends and locality. Products that align with consumer preferences at the store level can yield higher incremental margins..

The Role of Advanced Analytics and AI

In this new paradigm, tools like HIVERY Curate have become indispensable. These AI-driven solutions provide retailers and CPG companies with the data analytics they need to make informed decisions about space allocation. Here’s how:

  1. Predictive Analysis: By leveraging AI, tools like HIVERY Curate can predict the potential gross margin impact of different assortment decisions, considering factors like consumer behavior, market trends, and product life cycles.
  2. Scenario Simulation: Retailers can simulate various assortment scenarios to see how changes might affect their gross margin. This ability to "test before investing" is invaluable in a margin-focused approach.
  3. Hyper-local Insights: Understanding local market nuances is key to maximizing gross margin. AI tools can analyze data granularly, providing insights tailored to specific store locations and demographics.

Challenges and Considerations

While the shift to a gross margin focus presents many opportunities, it’s not without its challenges:

  1. Data Quality and Integration: Reliable and integrated data is crucial. Retailers must ensure that their data sources are robust and cohesive.
  2. Balancing Innovation with Core Products: While innovating is essential, retailers must carefully balance the space for new, potentially higher-margin products with the space allocated to established, steady-selling items.
  3. Training and Adaptation: Staff and stakeholders must be trained to effectively understand and utilize new tools and metrics.

The shift from a sales-centric to a gross margin-focused approach in retail space optimization represents a significant advancement in retail strategy. By leveraging the power of AI and analytics tools like HIVERY Curate, retailers, and CPG companies can navigate this shift effectively, ensuring that each square foot of shelf space generates sales and, more importantly, drives profitability. This transition is not just about adapting to a new metric; it's about embracing a more sophisticated, data-driven approach to retail success in the 21st century.

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