Fitting More Square Feet into a Small Hole: Leading Retailers Test New Ideas to Increase Sales per Square Foot

Rent prices and demand for retail space continue to climb, forcing retailers to find ways to increase sales given their limited store space.

The key to success with these stores is maximizing space productivity. It may seem easy at first: retailers can simply increase prices and quantities of merchandise available, while decreasing store size. However, lessons from leading retailers such as Apple, Tiffany & Co., Lululemon, and Coach, measured by sales per square foot would say otherwise.

These retailers, which also are noted among USA Today's top 9 retailers, are all noted for their sleek, uncluttered store formats. What sets these companies apart from all others, and keeps them atop this list, is their unwillingness to accept the status quo. Retailers like these have been rewarded for their sales per square foot and owe their successful profit margins to their willingness to accept trial and error. These top retailers have continued to test the limit by implementing new initiatives that help to analyze and leverage data on consumer purchasing behaviors. 

Even after topping Tiffany & Co.'s sales per square foot, Apple continued to reinvent and test new store formats. Their latest in-store experience includes the iPad sales station, called “smart signs," which enable customers to tap a button to ask for help. The constant drive to increase space productivity has propelled Apple, which now generates more than $6,000 in sales per square foot, to the top of USA Today's list. For reference, big box stores traditionally generate sales of $250-\ to $350 in sales per square foot per year.

While Apple puts all of its products on display to increase ease and accessibility, another retailer, though off the USA Today list, takes a different, yet effective approach. Some True Religion stores display different styles of jeans on a single wall or shelf with extremely limited sizes. This leads to an increase in interaction within the store, leading many customers to turn to associates for help in finding their preferred style in the right size.

Of course, there is no single formula to successfully increase space productivity; however, there are multiple levers retailers can pull in order to do so. Retailers can adjust their pricing strategy, increase transaction size or numbers, or test new store layouts to increase sales per square foot. No matter which approach they take, retailers must be open to doing a trial and error with these new initiatives to determine whether new business programs have the desired effects on their customers.

First, retailers can determine how to optimize promotions, pricing, and product placement in order to influence consumer purchase behaviors.  Retailers often test different promotional strategies and levels of discount in order to see which offers customers best respond to and ultimately which ones will be most profitable for the store.  Others decrease initial price points in order to find ways to sell high-ticket items without being as promotional.  For example, Tiffany's sells more than $13 million per store annually by maintaining a focus on high-ticket items. 

Transaction Size
Retailers are also finding the most effective ways to increase customer basket size. Leading retailers are promoting products with high loyalty or those associated with larger basket sizes. Stores like Lululemon are demonstrating that you do not have to sell big-ticket items, such as computers or jewelry, to maximize sales per square foot. Instead, Lululemon has instituted programs to increase the number of transactions and items purchased by focusing on customer loyalty. For example, they provide free yoga classes during traditionally slow business hours to bring customers back into their stores. Their focus on yoga accessories and product placement increases basket size as well. 

Coach has increased space productivity by selling new types of merchandise, like shoes and accessories, as add-ons to their famous handbag collections. Additionally, eliminating under-performing products can focus attention on higher-value products. Transaction-level insights can identify products with lower productivity, low customer loyalty, or low attachment rates. 

Store Layout
Store layout can also impact purchase behavior; optimizing layout and signage can maximize attachment rates and add-on purchases.  Basket-level data can identify items commonly sold together, and retailers can leverage that data by maximizing adjacencies in stores.  Retailers, especially those in mall locations, can leverage front-of–store signage to take advantage of highly trafficked locations to get new customers into their stores.  Once in the store, product placement and in-store signage can influence a customer's path through a store and encourage add-ons of high-margin items, like accessories.

Whether by refining pricing and promotions, store layouts, or signage, retailers have a great opportunity to leverage historical data in order to learn more about their customers' purchasing patterns.  Although it may not be as simple as initially believed to be, retailers can continually find ways to improve their in-store productivity with enhanced customer and transaction level insights.

Leah McFarlane is a Principal Consultant with Applied Predictive Technologies (APT) and has extensive experience applying Test & Learn principles across a broad variety of functional topics and industries.
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