The Impact of Planogram Design and Display Fees on Retail Category Management

We study the impact of planogram design (i.e., placement of products on shelves) and display fees (i.e., fees manufacturers pay retailers for prime shelf space) on a retailer’s category management strategy and interactions with national brand manufacturers (NBMs). We consider a game-theoretic model with one retailer and multiple NBMs. Each NBM offers one product. In addition, the retailer has the option to introduce a store brand (SB) product. If the retailer decides to introduce its SB, it needs to drop one of the national brand (NB) products from its assortment because it has limited shelf space. The retailer’s planogram has one prime shelf space and multiple nonprime shelf spaces. The prime shelf space has a demand-stimulating impact. The NBMs determine their wholesale prices and how much they are willing to pay for the prime shelf space. The retailer makes SB introduction and planogram decisions. It also sets the quantities for each product in its assortment, resulting in market-clearing retail prices. Our analysis leads to three key findings: first, the presence of a prime shelf space may not only prevent the retailer from introducing its SB but also lead to sizable changes in the retail and wholesale prices in the category. For example, an extensive numerical study reveals that receiving the prime shelf space increases an NB product’s retail price by 5.48%, on average. The average increase in the same product’s wholesale price is 2.52%, as the prospect of charging a higher wholesale price incentivizes its manufacturer to pay a display fee for securing the prime shelf space. Second, there are cases in which the retailer uses SB introduction as a strategic lever to intensify the competition for the prime shelf space and thereby increase its revenue from display fees. Third, despite being an additional expense, display fees can increase the NBMs’ profits by allowing them to influence the retailer’s assortment and planogram decisions in their favor. We discuss the implications of these findings for managers and researchers.