Displaying and Discounting Perishables: Impact on Retail Profits and Waste

Empirical studies have shown that consumers' purchasing behavior depends on product display, i.e., how products are organized on store shelves. We explore how a retailer selling a perishable product with deteriorating quality over time can optimize product display and the discounting of soon-to-expire units to maximize profit and reduce waste. Specifically, we consider a product with a finite shelf life which is replenished periodically. The retailer optimizes the product display setting, the discount rate and timing, as well as the order quantity in each replenishment cycle. We assume that the length of the replenishment cycle is such that, at most, two different product ages can co-exist on the store shelves, and we refer to these two groups of products as the fresh batch and the old batch. We show that, when the store traffic is deterministic, only the following two policies can be optimal: (i) discarding unsold units at each replenishment epoch, so that there is only one product batch on the shelves at all times or (ii) keeping and discounting unsold old batch units but making the fresh batch units more accessible to consumers. In contrast, when the store traffic is stochastic, all possible strategies can be optimal, as waste becomes unavoidable. In particular, the optimal strategy depends on the characteristics of the product, store, and consumers. Our numerical results indicate that, compared to a benchmark where units from the fresh and old batch are equally accessible and no discount is offered, optimizing the display and the discount results in an average increase in profit of 6.01% and a decrease in (relative) waste of 21.24%.