An Empirical Comparison of Direct Product Profit and Existing Measures of SKU Productivity

Abstract

DPP (direct product profitability) has been heralded as one of the more important advances in supermarket shelf management, yet its acceptance by managers in the industry has been slow. Not only is DPP complex and expensive to calculate, but some question exists about whether decisions based on DPP are different from those based on traditional criteria such as gross margin and movement. A data base of nine dry-grocery categories is used here to compare DPP with other SKU indices. DPP is shown to lead to significantly different rankings in some categories, but not all. A Merchandising Attractiveness Index (MAl) is devised, based on a linear regression of gross margin, dollar sales, unit sales, and shelf area occupied, which yields predicted values of DPP that are virtually identical to DPP in the nine categories studied. This MAl may be a far less expensive way to implement the basic concept of DPP. It may also be more transparent to managers for basic merchandising decisions (price, space allocation, promotions).

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