A multi-category demand model incorporating inter-product proximity

Grocery stores typically contain hundreds of product categories. Physically arranging these product categories among a limited number of store aisles and shelves is a challenging task. We propose a multi-category demand model that considers physical locations of product categories to be important determinants of consumers’ purchase incidence decisions in these categories at the store, and examine two issues: (1) to what extent does store layout influence shopping basket decisions? (2) how should the store layout be re-designed to achieve optimal profit? Our analyses suggest the retailer can significantly increase store profitability by re-organizing retail layout configurations.