Allocating Shelf Space

Corbett Gifts operates over 400 retail stores in malls throughout the United States. For each
of these stores, Corbett must decide how to allocate scarce shelf space among product categories.
This is a complex problem because not only do products differ in their profit margins, but the
amount of shelf space occupied by a product can affect that products sales. The direct impact of
shelf space on sales is called space elasticity. In addition, some products have significant cross
elasticity because they may be substitutes or complements.
Consider the area of each Corbett Gifts that is dedicated to three categories: (1) cards for
birthdays, anniversaries, condolence, etc. (2) small gifts such as chocolates and balloons, and (3)
novelties such as snow globes and rubber chickens. We might expect that the cards category
would be complementary with gifts, because more sales of one might lead to more sales of the
other. Cards and gifts, therefore, may be complements and might have positive cross elasticities.
The relationship between these two categories and novelties, however, is more difficult to predict.
To quantify the relationship between shelf space and sales, marketing experts often use the
following function:1
,
where the large indicates multiplication of the terms that follow,
qi = sales of product i (units)
ai = base sales value for product i
si = shelf space dedicated to product i

= product is space elasticity,

= cross elasticity between products i and j
n = number of products.

To apply this to Corbetts three categories, the unit sales for cards (i = 1) can be represented as
sales for cards

card shelf space)

gift shelf space)

novelty shelf space)

Similar equations describe the sales of gifts (with i = 2) and novelties (i = 3).
The intuition behind this formula is that more shelf space for a product such as cards should
lead to more demand for cards. Therefore, the formula includes the card shelf space) term.
In addition, the terms gift shelf space) and novelty shelf space) in this equation rep
1
We will assume throughout this case that each store always has sufficient inventory to satisfy demand. That is,
sales of a product and demand for that product are identical.

resent the impact of gift and novelty shelf space on demand for cards. Studies of such crosselasticities have found that they may be positive or negative, and that their absolute values are
usually smaller than the values of the space elasticities .
To use these equations for making decisions, however, we must know the particular values of
at Corbett Gifts. To estimate these parameters, marketing analysts
the parameters ai, , and
at Corbett Gifts have collected sales data from recent years and calculated the average annual
unit sales for each of these categories from 50 stores. They have also collected the length of
shelf space (in feet) dedicated to each category in each store. The results are in the folder Shelf
Space in the DecSci course folder: file Corbett.sav is formatted for SPSS and Corbett.xlsx for
Excel (the numbers in these two files are identical). At Corbett, space allocation decisions have
been delegated to individual store managers. As we can see in the data, the store managers vary
in the proportion of space allocated to each of the categories.
This variation is not due to differing category profit margins among the stores. All stores
saw the same average margins for these products:

1
2
3

Category
Cards
Gifts
Novelties

Unit
Contribution
Margin
$ 3.60
$ 4.00
$ 5.40

The Marketing Director at Corbett headquarters suspects that the variation in allocation
among their stores is driven by the gut feelings of each manager, rather than by analysis. The
Director has hired mild-mannered statistics and modeling consultant Ms. Moreau to provide their
managers with guidance on their allocation decisions. Your job is to help Ms. Moreau develop a
recommendation for Corbett.
Ms. Moreau has selected store #20 for a pilot experiment. Store #20 has 50 feet of shelf
space available for the three categories, which is currently allocated with 10 feet for cards, 10
feet for gifts, and 30 feet for the higher-margin novelties. After discussions with the manager of
store #20, Ms. Moreau believes that at least 6 feet must be allocated to each category to maintain
the stores image.

Assignment
Your first step is to use the data to estimate the base demands and elasticities. The next page
provides more information on how to estimate the parameters. Then, formulate an optimization
problem to determine the shelf space allocated to cards, gifts and novelties. The objective is to
maximize the total contribution, given the demand functions, constraints, and estimated parameters. Generate an allocation recommendation along with a supporting presentation.

Using Regression for Modeling the Shelf Space Sales Function

Recall that the regression model we have studied in Statistics for Managers assumed a linear relationship between dependent and independent variables. The sales equation on the first
page of this case, however, is non-linear: sales and shelf-space have an exponential relationship.
But there is a simple way to transform the equation into a linear one. We begin by taking the
logarithm of both sides of the equation: 2
log

log

Using the properties of the logarithm, this is equivalent to,

log

log

log

log

The good news is that the log of sales log(qi) is therefore linearly related to the log of the
shelf space decisions log(sj).
When applied to Corbett Gifts, this transformation produces three separate linear equations to
estimate:
log (demand for cards)
log
log card shelf space)

log gift shelf space)

log (demand for gifts)

log
log gift shelf space)

log card shelf space)

log (demand for novelties)

log
novelty shelf space)

card shelf space)

novelty shelf space)

novelty shelf space)

gift shelf space)

A linear regression based on these equations would provide you with parameter estimates for
and . Note, however, that the regression gives you an estimate for log , not . For example, if your regression produces the estimate, log
= 3.5, and the logarithm is base-10, then
.
the actual parameter
10
3,162.
Finally, remember that in your optimization model you should predict sales using the original
exponential (non-log) sales equations described on page 1 of the case.

The base of the logarithm does not matter. In the discussion below, we will assume that our logarithms are base
10, so that in SPSS the logarithms would be found using the LG10() function and in Excel using LOG10().