Data-Driven Business Decisions

CHAPTER 15

Describing the Effect of a Business Input: Linear Regression

DUO BEVERAGES: CASE BRIEFING

One important determinant of sales in supermarkets is where the product is displayed on the shelf. The impact on sales can be huge, sometimes resulting in a fivefold increase. Such positioning does not come free of course. Supermarkets are well aware of the effect on sales and charge for this preferential shelf space.

Simon Templeton is a product manager for General Foods. One of the many products Simon is responsible for is a lemon-flavored fizzy beverage called Duo. It is a popular beverage and average weekly sales for a typical-sized supermarket is around $20,000K. There is a 45% margin on the product, that is, every extra dollar of sales gives you an extra 45-¢ profit.

Wellmark, the largest supermarket chain, is your most important retail outlet. They have 270 stores across the country. Charges for product placement (PP) have recently increased. The charge for preferential PP is in increments of $10,000 from $0 right up to $50,000 per week, depending on the position and amount of the shelf.

If Simon chooses the maximum level of PP then he knows that sales will increase significantly. But paying $50K for a single store when typical sales are only $20K sounds like a bad deal. Even if sales did increase by five times to $100K, only 45% of extra $80K sales would be extra profit, so it would not be worth the $50K cost. But it really depends on what the effect of the shelf placement ...