Direct Product Profit:

A View 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 ing Institute (FMI) coordinated the development

of the Unified DPP Method (1986), a Lotus
Direct Product Profit (DPP) is a decision 1-2-3 based program. A simple representation
making tool that helps the food merchandiser by of the concept of DPP is presented in Figure 1.
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 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 a new strategic tool used ‘I%etwo compor~ents added by the DPP analysis
in the manufacture and merchandising of prod- are Adjustments and Direct Product Costs
ucts in the supermarket industry. The purpose (DPC). The adjustments inch~de revenue items
of this paper is to outline the basics of DPP and that are added to the gross margin of an indivi-
provide an example of its use, dual product. These adjustments may represent
manufacturer deals, promotions, allowances,
Direct Product Profit is a decision making payment discounts, and Imckhau] revenues. The
tool that defines the profitability of individual Direct Product Costs represent three distinct
products at a finer level than gross margin. The areas of cost allocation. These include ware-
concept of DPP has been in existence for about house costs, transportation costs, and store costs.
twenty years, However, it was not available in These costs are also calculated per individual
a usable form until recently, The Food Market- unit. The warehouse costs inciude receiving the

September 88/page 10 Journal of Food Distribution Research

product, putting the product in the picking slot, DPC are given for each product. The costs will
selecting the order, loading the truck, warehouse be different for each product based upon the
occupancy costs and warehouse inventory costs. factors discussed earlier. Heavier or bulkier
There are also provisions for products shipped products may require greater costs in shipping or
direct store delivery (DSD). The transportation allocations of space costs due to their volume.
costs include the costs of movement of the prod- An example of these products would be Items I,
uct from warehouse to store. The store costs O, and P which are larger sizes and heavier
include placing an order, receiving the product, packages. Low turn items may incur higher
moving the product to the aisle, positioning and store costs because they occupy the shelf space
opening cases, pricing if necessary, placing the longer or may have an amount of inventory
product on the shelf, cleanup, checkout and backstock that cannot be shelved (Items L and
bagging, proportional cost of the bag, store oc- N).
cupancy and inventory costs. These three main
categories of cost represent the total DPC. A comparison of ranking by profitability
measures is reported in Table 3. The gross mar-
The allocation of costs is a function of gin, DPP per unit, and DPP per week (DPP per
several factors. These factors include the cubic unit times units sold per week) were calculated
volume of the unit and case, the case weight, the for each product and then ranked in descending
delivery schedule, the cost of the product and order. The major implication is that different
the inventory turn. measures of profitability result in different rank
ordering for the products. The efficient mer-
Several authors (Callison [1987], Fletcher chandising of grocery shelves is imperative to
[1987], McLaughlin and Hawkes [1987], maximize profitability. The industry is moving
Friedman [1986], and Montgomery [1986]) have toward DPP as the new measure of profit. DPP
mentioned DPP. Several of these studies discuss serves as a decision tool to aid in the shelf allo-
the use of scanner information and Direct Prod- cation decision of supermarket merchandisers.
uct Profit. DPP has gained wide acceptance by
not only grocery retailers, but also by the manu- The DPP Merchandising Matrix was
facturers of products that are supplied to the developed to aid in the decision making process.
supermarket industry. There have been numer- The matrix related two factors, DPP/unit and
ous articles in the trade literature (Discount Store Unit sales, in a grid framework. The DPP
News, Supermarket News, Convenience Store matrix and individual product summary are pre-
News, Progressive Grocer, and Supermarket sented in Figure 2 and Table 4, respectively.
Business). Some of the products studied include
cheese, baby food, hosiery, frozen foods and There are many strategies that are
audio cassettes. recommended for the different products in each
quadrant, FMI DPP Primer (1987, p. 10) and
Data Convenience Store News (1986, p. 181) report
that the following actions are available to effec-
The product category used for this study tively merchandise the products in different
was the maple flavored syrup products, A quadrants.
regional chain of supermarkets located in a large
Midwestern SMSA participated in the study.
The results were an average based on the 70 Table 5
stores used for data collection. The brand names Merchandising Strategies
of the products have been eliminated to maintain
confidentiality y. Sleepers Winners
Stimulate Movement Heavily Advertise and Promote
Sekctivety Display Aggreeeively Display
Results Advertise Maintein Shelf Stock
Add Shelf Facinge Protect Position in Trtilc Flow
The basic results of the DPP analysis are Upgrede Shelf Poeition
presented in Table 1. The standard measure of Reconsider Price
profitability, gross margin, is determined for
Losers Traffic Builders
each of the syrup products. The Direct Product Reduce Shelf Allocation Reconsider Price
Costs (DPC) and resulting DPP for each of the Shift to Outside Supplier Downgrade Shelf Position
products are also reported. Poeeibly DieContinue Review Handling Methods and
cost
Leee Promotion
A breakdown of DPC by category is pre-
sented in Table 2. The three categories of ware-
house, transportation, and store costs that total

Journal of Food Distribution Research September 88/page 11

 Table 1

Retail, Cost, and Profit

Unit Adj. Adj. Total DPP

Retail Price Unit Cost Gross Margin DPC/Unit Per Unit
product oz.

Item A 24 2.59 1.728 0.862 0.099 0.76

Item B 24 2.59 1.826 0.764 0.100 0.66
Item C 24 2.59 1.826 0.764 0.104 0.66
Item D 24 2.47 1.785 0.685 0.119 0.57
Item E 24 2.37 1.785 0.585 0.134 0.45
Item F 24 2.29 1.372 0.918 0.141 0.78
Item G 24 2.59 1.156 1.434 0.174 1.26
Item H 24 2,18 1.826 0.354 0.110 0.24
Item I 36 2,79 2.375 0.415 0.143 0.27
Item J 12 1.47 1.154 0.316 0.101 0.22
Item K 12 1.47 1.154 0.316 0.119 0.20
Item L 36 3.47 1.781 1.689 0.484 1.20
Item M 12 1.47 1.154 0.316 0.125 0.19
Item N 2.99 1.781 1.209 0.444 0.76
Item O :: 3.39 2.461 0.929 0.423 0.51
Item P 36 3.37 2.461 0,909 0.423 0.49
Item Q 12 1.48 1.154 0.326 0.155 0.17
Item R 12 1.49 0.902 0.588 0.273 0.32
Item S 12 1.57 1.134 0.436 0.261 0.18

Table 2

Direct Product Costs by Category

Wholesale Transportation Store Total

DPC/Unit DPC/Unit DPC/Unit DPC/Unit
Product oz.

Item A 24 0.024 0.015 0.060 0.099

Item B 24 0.024 0.015 0.061 0.100
Item C 24 0.026 0.016 0.062 0.104
Item D 24 0.031 0.019 0.069 0.119
Item E 0.033 0.019 0.083 0.134
Item F ;: 0.029 0.016 0.096 0.141
Item G 24 0.031 0.015 0.128 0.174
Item H 24 0.026 0.016 0.067 0.110
Item I 36 0.034 0.021 0.087 0.143
Item J 12 0.021 0.009 0.071 0,101
Item K 0.018 0.009 0.092 0.119
Item L :: 0.053 0.016 0.415 0.484
Item M 12 0.019 0.009 0.098 0.125
Item N 0.050 0.016 0.378 0.444
Item O ;: 0.068 0.026 0.330 0.423
Item P 36 0.068 0.026 0.330 0.423
Item Q 12 0.025 0.010 0.120 0.155
Item R 12 0.030 0.008 0.234 0.273
Item S 12 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 k eek R@L

Item A 24 0.862 0.76 39.79

Item
Item
B
C :
0.764
0.764
0.66
0.66
33.23
29,25
:
9
i! ;

Item D 24 0.685 0.57 20.60 10 : :

Item E 24 0.585 0.45 12 11
Item F 0.918 0.78 % 5 3 :
Item G ;: 1.434 1.26 6.26 2 1
Item H 24 0.354 0.24 4.81 15 14 ;
Item I 36 0.415 0.27 4.38 14 13 9
Item J 12 0.316 0.22 2.41 17 15
Item K 0.316 0.20 2.21 19 16 :!
Item L :: 1.689 1.20 2.17 1 2 12
Item M 0.316 0.19 1.95 18 17 13
Item N ;: 1.209 0.76 1.53 3 4 14
Item O 36 0.929 0.51 1.01 9 15
Item P 36 0.909 0.49 0.97 : 10 16
Item Q 12 0.326 0.17 0.89 16 19 17
Item R 12 0.588 0.32 0.57 11 12 18
Item S 12 0.436 0.18 0.40 13 18 19

Table 4

DPP Matrix Strategy

Units/ DPP DPP

DPP Store/ Per Unit Per Week
Product oz. Matrix eek

Item A 24 Winner 52.2 0.76 39.79

Item B Winner 50.1 0.66 33.23
Item C ;: Winner 44.3 0.66 29,25
Item D 24 Winner 36.4 0.57 20.60
Item E 24 Traffic 15.8 0.45 7.09
Item F Sleeper 8.5 0.78 6.63
Item G :: Sleeper 5.0 1,26 6.26
Item H 24 Traffic . 19.7 0.24 4.81
Item I 36 Traffic 16.1 0.27 4.38
Item J 12 Loser 11.2 0.22 2.41
Item K Loser 11.2 0.20 2.21
Item L ;: Sleeper 1.8 1.20 2,17
Item M Loser 10.2 0.19 1.95
Item N ;: Sleeper 2.0 0.76 1.53
Item O Loser 2.0 0.51 1.01
Item P !2 Loser 2.0 0.49 0.97
Item Q 12 Loser 5.2 0.17 0.89
Item R 12 Loser 0.32 0.57
Item S 12 Loser ;:: 0.18 0.40

Journal of Food Distribution Research September 88/page 13

 This paper has presented a new method of Fletcher, Stanley, “scan Data Research The
profitability analysis that is being implemented Status,” Journal of Food Distribution
in the supermarket industry. DPP analysis is not Research, Proceedings of the 27th Annual
a panacea. It is a merchandising tool that helps Meeting, Vol. 18, No. 1, February 1987,
in the maximization of profit in supermarkets. pp. 41-45.
There are limitations to the use of DPP. Since
DPP is a cost oriented approach to merchandis- Food Marketing Institute, Direct Product
ing decision making, it does not take into Profit--A Primer, 1987, p. 10.
account the consumer’s changing tastes or atti-
tudes. This requires the merchandiser’s input. Food Marketing Institute. The Unified DPP
Method, 1986. -
The analysis also does not report how
much shelf space should be changed. This Friedman, Mike, “Total System Efficiency,”
problem is being addressed by the shelf space Journal of Food Distribution Research,
allocation systems such as Accuspace which use Proceedings of the 26th Annual Meeting,
different measures to optimize shelf space. One Vol. 17, No. 1, February i986, pp. 9-10.
of these measures is the DPP of individual prod-
ucts. The integration of DPP and shelf alloca- McI.aughlin, Edward and Gerard Hawkes, “A
tion systems opens many possibilities for the Forecast for the Grocery Industry in the
effective management of grocery merchandising. 1990’s,” Journal of Food Distribution
Research, Proceedings of the 27th Annual
References Meeting, Vol. 18, No. 1, February 1987,
pp. 77-86.
Callison, Lynn, “Perspectives on the
‘Supermarket’ Revolution,” Journal of Montgomery, Nevin, “Economics of the Frozen
Food Distribution Research, Proceedings of Food Distribution System,W Journal of
the 27th Annual Meeting, Vol. 18, No. 1, Food Distribution Research, Proceedings
February 1987, pp. 36-39. of the 26th Annual Meeting, Vol. 17, No.
1, February 1986, pp. 11-14.
Convenience Store “DPP Part 111 The
News,
Supplier Side,” November 3-November 20,
1986, pp. 172-181.

September 88/page 14 Journal of’ Food Distribution Research