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DIRECT PRODUCT PROFIT: A VIEW FROM THE SUPERMARKET INDUSTRY

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Direct Product Profit (DPP) is a decision making tool that helps the food merchandiser by providing a better indication of the profitability of products on the supermarket shelves. Direct Product Profit allocates Direct Product Costs (DPC) to individual products. These DPCs are subtracted from gross margin to derive DPP. This paper reports on the use of DPP in the syrup product section of a chain of supermarkets. Implications for managerial action are also discussed.
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Direct Product Profit:
AView from the Supermarket Industry
by
Glenn T. Stoops
Assistant Professor of Marketing
Bowling Green State University
Bowling Green, Ohio
Michael M. Pearson
Professor of Marketing
Bowling Green State University
Bowling Green, Ohio
Abstract
Direct Product Profit (DPP) is adecision
making tool that helps the food merchandiser by
providing abetter indication of the profitability
of products on the supermarket shelves. Direct
Product Profit allocates Direct Product Costs
(DPC) to individual products. These DPCS are
subtracted from gross margin to derive DPP.
This paper reports on the use of DPP in the
syrup product section of achain of supermar-
kets. Implications for managerial action are also
discussed.
Introduction
The supermarket industry has received a
boost in efficiency and effectiveness with the
introduction of Direct Product Profit (DPP)
analysis. Direct Product Profit analysis promotes
efflcwncy by investigating the revenues and
costs associated with every individual stock
keeping unit. Effectiveness is addressed by the
acceptance of DPP as anew strategic tool used
in the manufacture and merchandising of prod-
ucts in the supermarket industry. The purpose
of this paper is to outline the basics of DPP and
provide an example of its use,
Direct Product Profit is adecision making
tool that defines the profitability of individual
products at afiner level than gross margin. The
concept of DPP has been in existence for about
twenty years, However, it was not available in
ausable form until recently, The Food Market-
ing Institute (FMI) coordinated the development
of the Unified DPP Method (1986), aLotus
1-2-3 based program. Asimple representation
of the concept of DPP is presented in Figure 1.
‘I%etwo compor~ents added by the DPP analysis
are Adjustments and Direct Product Costs
(DPC). The adjustments inch~de revenue items
that are added to the gross margin of an indivi-
dual product. These adjustments may represent
manufacturer deals, promotions, allowances,
payment discounts, and Imckhau] revenues. The
Direct Product Costs represent three distinct
areas of cost allocation. These include ware-
house costs, transportation costs, and store costs.
These costs are also calculated per individual
unit. The warehouse costs inciude receiving the
September 88/page 10 Journal of Food Distribution Research
product, putting the product in the picking slot,
selecting the order, loading the truck, warehouse
occupancy costs and warehouse inventory costs.
There are also provisions for products shipped
direct store delivery (DSD). The transportation
costs include the costs of movement of the prod-
uct from warehouse to store. The store costs
include placing an order, receiving the product,
moving the product to the aisle, positioning and
opening cases, pricing if necessary, placing the
product on the shelf, cleanup, checkout and
bagging, proportional cost of the bag, store oc-
cupancy and inventory costs. These three main
categories of cost represent the total DPC.
The allocation of costs is afunction of
several factors. These factors include the cubic
volume of the unit and case, the case weight, the
delivery schedule, the cost of the product and
the inventory turn.
Several authors (Callison [1987], Fletcher
[1987], McLaughlin and Hawkes [1987],
Friedman [1986], and Montgomery [1986]) have
mentioned DPP. Several of these studies discuss
the use of scanner information and Direct Prod-
uct Profit. DPP has gained wide acceptance by
not only grocery retailers, but also by the manu-
facturers of products that are supplied to the
supermarket industry. There have been numer-
ous articles in the trade literature (Discount Store
News, Supermarket News, Convenience Store
News, Progressive Grocer, and Supermarket
Business). Some of the products studied include
cheese, baby food, hosiery, frozen foods and
audio cassettes.
Data
The product category used for this study
was the maple flavored syrup products, A
regional chain of supermarkets located in alarge
Midwestern SMSA participated in the study.
The results were an average based on the 70
stores used for data collection. The brand names
of the products have been eliminated to maintain
confidentialityy.
Results
The basic results of the DPP analysis are
presented in Table 1. The standard measure of
profitability, gross margin, is determined for
each of the syrup products. The Direct Product
Costs (DPC) and resulting DPP for each of the
products are also reported.
Abreakdown of DPC by category is pre-
sented in Table 2. The three categories of ware-
house, transportation, and store costs that total
DPC are given for each product. The costs will
be different for each product based upon the
factors discussed earlier. Heavier or bulkier
products may require greater costs in shipping or
allocations of space costs due to their volume.
An example of these products would be Items I,
O, and Pwhich are larger sizes and heavier
packages. Low turn items may incur higher
store costs because they occupy the shelf space
longer or may have an amount of inventory
backstock that cannot be shelved (Items Land
N).
Acomparison of ranking by profitability
measures is reported in Table 3. The gross mar-
gin, DPP per unit, and DPP per week (DPP per
unit times units sold per week) were calculated
for each product and then ranked in descending
order. The major implication is that different
measures of profitability result in different rank
ordering for the products. The efficient mer-
chandising of grocery shelves is imperative to
maximize profitability. The industry is moving
toward DPP as the new measure of profit. DPP
serves as adecision tool to aid in the shelf allo-
cation decision of supermarket merchandisers.
The DPP Merchandising Matrix was
developed to aid in the decision making process.
The matrix related two factors, DPP/unit and
Unit sales, in agrid framework. The DPP
matrix and individual product summary are pre-
sented in Figure 2and Table 4, respectively.
There are many strategies that are
recommended for the different products in each
quadrant, FMI DPP Primer (1987, p. 10) and
Convenience Store News (1986, p. 181) report
that the following actions are available to effec-
tively merchandise the products in different
quadrants.
Table 5
Merchandising Strategies
Sleepers Winners
Stimulate Movement Heavily Advertise and Promote
Sekctivety Display Aggreeeively Display
Advertise Maintein Shelf Stock
Add Shelf Facinge Protect Position in Trtilc Flow
Upgrede Shelf Poeition
Reconsider Price
Losers Traffic Builders
Reduce Shelf Allocation Reconsider Price
Shift to Outside Supplier Downgrade Shelf Position
Poeeibly DieContinue Review Handling Methods and
cost
Leee Promotion
Journal of Food Distribution Research September 88/page 11
Table 1
Retail, Cost, and Profit
Unit Adj. Adj. Total
Retail Price Unit Cost Gross Margin DPC/Unit
product oz.
Item A
Item B
Item C
Item D
Item E
Item F
Item G
Item H
Item I
Item J
Item K
Item L
Item M
Item N
Item O
Item P
Item Q
Item R
Item S
24
24
24
24
24
24
24
24
36
12
12
36
12
::
36
12
12
12
2.59
2.59
2.59
2.47
2.37
2.29
2.59
2,18
2,79
1.47
1.47
3.47
1.47
2.99
3.39
3.37
1.48
1.49
1.57
1.728
1.826
1.826
1.785
1.785
1.372
1.156
1.826
2.375
1.154
1.154
1.781
1.154
1.781
2.461
2.461
1.154
0.902
1.134
0.862
0.764
0.764
0.685
0.585
0.918
1.434
0.354
0.415
0.316
0.316
1.689
0.316
1.209
0.929
0,909
0.326
0.588
0.436
0.099
0.100
0.104
0.119
0.134
0.141
0.174
0.110
0.143
0.101
0.119
0.484
0.125
0.444
0.423
0.423
0.155
0.273
0.261
Product oz.
Item A
Item B
Item C
Item D
Item E
Item F
Item G
Item H
Item I
Item J
Item K
Item L
Item M
Item N
Item O
Item P
Item Q
Item R
Item S
24
24
24
24
;:
24
24
36
12
::
12
;:
36
12
12
12
Table 2
Direct Product Costs by Category
DPP
Per Unit
0.76
0.66
0.66
0.57
0.45
0.78
1.26
0.24
0.27
0.22
0.20
1.20
0.19
0.76
0.51
0.49
0.17
0.32
0.18
Wholesale Transportation Store Total
DPC/Unit DPC/Unit DPC/Unit DPC/Unit
0.024 0.015 0.060 0.099
0.024 0.015 0.061 0.100
0.026 0.016 0.062 0.104
0.031 0.019 0.069 0.119
0.033 0.019 0.083 0.134
0.029 0.016 0.096 0.141
0.031 0.015 0.128 0.174
0.026 0.016 0.067 0.110
0.034 0.021 0.087 0.143
0.021 0.009 0.071 0,101
0.018 0.009 0.092 0.119
0.053 0.016 0.415 0.484
0.019 0.009 0.098 0.125
0.050 0.016 0.378 0.444
0.068 0.026 0.330 0.423
0.068 0.026 0.330 0.423
0.025 0.010 0.120 0.155
0.030 0.008 0.234 0.273
0.033 0.010 0.219 0.261
September 88/page 12 Journal of Food Distribution Research
Table 3
Profitability Results of Syrup Study
Adj. DPP DPP Gross DPP Per DPP Per
Product oz. Gross Mar~in Per Unit M~nk Umt Ran
..keek R@L
Item A
Item B
Item C
Item D
Item E
Item F
Item G
Item H
Item I
Item J
Item K
Item L
Item M
Item N
Item O
Item P
Item Q
Item R
Item S
24
:
24
24
;:
24
36
12
::
;:
36
36
12
12
12
0.862
0.764
0.764
0.685
0.585
0.918
1.434
0.354
0.415
0.316
0.316
1.689
0.316
1.209
0.929
0.909
0.326
0.588
0.436
0.76
0.66
0.66
0.57
0.45
0.78
1.26
0.24
0.27
0.22
0.20
1.20
0.19
0.76
0.51
0.49
0.17
0.32
0.18
39.79
33.23
29,25
20.60
%
6.26
4.81
4.38
2.41
2.21
2.17
1.95
1.53
1.01
0.97
0.89
0.57
0.40
:
9
10
12
5
2
15
14
17
19
1
18
3
:
16
11
13
i!
:
11
3
1
14
13
15
16
2
17
4
9
10
19
12
18
;
:
:
;
9
:!
12
13
14
15
16
17
18
19
Product
Item A
Item B
Item C
Item D
Item E
Item F
Item G
Item H
Item I
Item J
Item K
Item L
Item M
Item N
Item O
Item P
Item Q
Item R
Item S
Table 4
DPP Matrix Strategy
Units/ DPP
DPP Store/ Per Unit
oz. Matrix eek
24 Winner 52.2 0.76
Winner 50.1 0.66
;: Winner 44.3 0.66
24 Winner 36.4 0.57
24 Traffic 15.8 0.45
Sleeper 8.5 0.78
:: Sleeper 5.0 1,26
24 Traffic .19.7 0.24
36 Traffic 16.1 0.27
12 Loser 11.2 0.22
Loser 11.2 0.20
;: Sleeper 1.8 1.20
Loser 10.2 0.19
;: Sleeper 2.0 0.76
Loser 2.0 0.51
!2 Loser 2.0 0.49
12 Loser 5.2 0.17
12 Loser 0.32
12 Loser ;:: 0.18
DPP
Per Week
39.79
33.23
29,25
20.60
7.09
6.63
6.26
4.81
4.38
2.41
2.21
2,17
1.95
1.53
1.01
0.97
0.89
0.57
0.40
Journal of Food Distribution Research September 88/page 13
This paper has presented anew method of
profitability analysis that is being implemented
in the supermarket industry. DPP analysis is not
apanacea. It is amerchandising tool that helps
in the maximization of profit in supermarkets.
There are limitations to the use of DPP. Since
DPP is acost oriented approach to merchandis-
ing decision making, it does not take into
account the consumer’s changing tastes or atti-
tudes. This requires the merchandiser’s input.
The analysis also does not report how
much shelf space should be changed. This
problem is being addressed by the shelf space
allocation systems such as Accuspace which use
different measures to optimize shelf space. One
of these measures is the DPP of individual prod-
ucts. The integration of DPP and shelf alloca-
tion systems opens many possibilities for the
effective management of grocery merchandising.
References
Callison, Lynn, “Perspectives on the
‘Supermarket’ Revolution,” Journal of
Food Distribution Research, Proceedings of
the 27th Annual Meeting, Vol. 18, No. 1,
February 1987, pp. 36-39.
Convenience Store News, “DPP Part 111 The
Supplier Side,” November 3-November 20,
1986, pp. 172-181.
Fletcher, Stanley, “scan Data Research The
Food
Food
Status,” Journal of Food Distribution
Research, Proceedings of the 27th Annual
Meeting, Vol. 18, No. 1, February 1987,
pp. 41-45.
Marketing Institute, Direct Product
Profit--A Primer, 1987, p. 10.
Marketing Institute. The Unified DPP
Method, 1986. -
Friedman, Mike, “Total System Efficiency,”
Journal of Food Distribution Research,
Proceedings of the 26th Annual Meeting,
Vol. 17, No. 1, February i986, pp. 9-10.
McI.aughlin, Edward and Gerard Hawkes, “A
Forecast for the Grocery Industry in the
1990’s,” Journal of Food Distribution
Research, Proceedings of the 27th Annual
Meeting, Vol. 18, No. 1, February 1987,
pp. 77-86.
Montgomery, Nevin, “Economics of the Frozen
Food Distribution System,W Journal of
Food Distribution Research, Proceedings
of the 26th Annual Meeting, Vol. 17, No.
1, February 1986, pp. 11-14.
September 88/page 14 Journal of’Food Distribution Research
... We will use the two-by-two classification of products according to their popularities and margins shown in Table 1, which is similar to a classification used by Stoops et al. (1988). For any two products 1 and 2 in a category, we either have a "winner" and a "loser" if Y 1 ≥ Y 2 and m 1 ≥ m 2 , or a "traffic builder" and a "sleeper" if Y 1 > Y 2 and m 1 < m 2 . ...
... We will use the two-by-two classification of products according to their popularities and margins shown in Table 1, which is similar to a classification used by Stoops et al. (1988). For any two products 1 and 2 in a category, we either have a "winner" and a "loser" if Y 1 ≥ Y 2 and m 1 ≥ m 2 , or a "traffic builder" and a "sleeper" if Y 1 > Y 2 and m 1 < m 2 . ...
... 30-32). Since DPP is a cost oriented approach to profitability it does not consider additional factors that must be addressed when making merchandising decisions (Stoops and Pearson, 1988, p. 14). Management should also consider factors such as variety, consumer demand, competition, and the firm's goals before such decisions are made. ...
Article
Full-text available
Direct product profit (DPP) is a retailing tool used to analyze product sales performance. Although the concept is over 20 years old, its widespread use in grocery stores is a fairly recent phenomena. A product's DPP is calculated as its adjusted gross margin less its direct selling costs, which normally include transportation, warehousing, and retailing or store costs. A product's DPP and sales volume classifies it in one of four categories to assist in merchandising options. Fifteen small and intermediate size grocery retailers cooperated with a study of produce DPP. Based on weekly produce sales, the stores were separated into three groups. As store group produce sales increased, produce adjusted gross margin and DPP increased. Based on produce sales volume and DPP level, various merchandising strategies are suggested.
Chapter
Direct Product Profit (DPP) is a cost allocation tool that many supermarket retailers and manufacturers are using to study the profitability of products. This paper investigates the use of DPP on selected syrup products and examines the sensitivity of DPP to changes in movement, case pack, cube, and cases per pallet.
Perspectives on the 'Supermarket' Revolution
  • Lynn Callison
Callison, Lynn, "Perspectives on the 'Supermarket' Revolution," Journal of