Getting Ready for Wal-Mart: Do FMCG manufacturers...

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Running head: GETTING READY FOR WAL-MART

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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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GETTING READY FOR WAL-MART 2

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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"

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