BrainTrust Query: How important is localization of assortment to customer centricity?
By Doug Erickson, executive
vice president of global sales and marketing, Galleria
Many retailers talk about
customer-centric initiatives, but are they actually practicing them? It
could be argued, for example, that a retailer who bases assortments on
enterprise averages can never truly be customer-centric. Most would agree
that the average customer and average store do not exist. Consumer buying
patterns vary substantially based on variables such as location and customer
demographics.
According to a recent
Retail Systems Research report titled Holistic Localization: The Value
of Integrated Assortment and Space Planning, Paula Rosenblum said, "When
it comes to assortments, customer-centric means localized. The old notion
of average is no longer adequate, especially for the largest, most geographically
disbursed retailers. Just as assortment plans must become more finely tuned
and local, physical space allocation must match this granularity to make
these assortment plans executable."
However, many retailers
are hesitant to incorporate localized assortments because they feel such
an initiative will be intrusive to their IT infrastructure. This is especially
true for larger retailers who often employ separate planning processes
for their merchandising, buying and replenishing departments.
Nonetheless, some leading
retailers are generating customer-centric merchandise plans by integrating
their assortment and space planning business processes. By using an automated
merchandising solution, retailers can utilize store-specific fixture, space
and product performance data on a store-by-store basis in order to create
merchandise plans that meet localized demand and space requirements. The
objective is to ensure the best performing products are always available
on the shelf. By implementing this practice, users reporting back to Galleria, a
provider of customer-centric merchandising solutions, say they have
improved customer satisfaction and optimized inventory.
One retailer synchronizing
assortment and space planning processes reported to Galleria an average
inventory reduction of 5.37 percent. The bottom line result was $10,029,486 in
savings across the enterprise. Another retailer who created customer-centric
merchandise plans during a pilot across four categories achieved an average
sales increase of 8.80 percent.
Discussion Questions:
What is your view on automated merchandising solutions for localizing
assortments? Do you agree that assortment and space planning business
processes should be synchronized in order to achieve greater customer
centricity? Do you have any other recommendations for retailers moving
to customer centricity?
I have commented on this subject in the past and I can’t stress how important it is to know your local market. I learned early on the value of localized marketing. I’ve implemented solutions as simple as a foreign language sign to as complicated as re plaongraming an entire store and they all work. Merchants will see bigger baskets and more transactions almost immediately. Word of mouth is so strong in this demographic.
On the ops side, I suggest wresting control on the store level. No business unit can observe and respond quicker than at store level. Store managers and directors should be given the tools to move on an opportunity quickly.
Most retailers have implemented local store marketing and at the store level so competition will be there. Competition and community walks should be a weekly to-do for managers and supervisors. Hence the importance of being able to respond at store level.
Tailoring assortments to the local community might become a key opportunity for national retailers to differentiate themselves from competition and create a sustainable competitive advantage. It is amazing how many times retail stores in Florida get winter apparel in August when the temperature is 90 degrees with 90% humidity. But localization should go way beyond climate. For example, national retailers need to recognize that consumers in Jacksonville, Orlando, Tampa, and Miami/Ft. Lauderdale have significantly different needs and tastes. In addition, the customers patronizing stores in snowbird areas need different merchandise than stores frequented by permanent residences. Also size distributions can vary greatly across stores.
Automated solutions certainly help in localizing merchandise assortments, but I doubt they are the complete solution. These systems typical use analytical techniques on past sales and thus can only provide insights on merchandise that has been offered in different locations in the past. The automated solutions needed to be complimented with input from local store managers that have a better understand of their local customers.
This is an important topic. Galleria is representative of a new breed of approaches to merchandise planning that ultimately yield a store assortment more closely mapped to shopper demand within each local trading area. This is extraordinarily desirable, however the concept is also at odds with the pressures of centralization and standardization that have traditionally driven mass merchandising.
The conundrum manifests at the point where the demand chain meets the supply chain – in the stores of course. This is where performance visibility is lowest while executional complexity is highest. Finely tuned merchandising plans face long odds on compliance, unless an in-store implementation discipline is in place at store level.
In-store implementation advocates welcome the new consciousness that is emerging from experience with Galleria and similar merchandising planning tools. This is a trigger for better store-level compliance methods – a huge industry opportunity.
A local consumer’s feeling of comfort always precedes the commitment to attend and purchase. If the customer-centric initiatives mentioned can produce such comfort for the local customer, go for it.
Automating store-specific, customer-centric assortments is one thing; where is the solution that actually handles the planograms–in all their variations and fixture types? The retail world is more than “open shelves.”
Also, has the retailer audited their fixture assets lately? The store as it was on the day it opened is not necessarily the store as it exists today. What’s needed is a way to dynamically and continually report on changes to the layout, a way to assess the current macro-space allocation and make adjustments, and a manner in which to get the right planograms to the right stores.
Look for holistic solutions that encompass the needed data–historical, geographic, demographic and physical–and look for expertise in harmonizing and integrating such data into the work-stream. Employ experts in the field of data-driven assortment and space allocation, who have access to the entire gamut of necessary tools and information.
There is absolutely no reason why integrating merchandise and space planning systems runs contrary to benefits generated by centralized processes. The devil is always in the details, and I do not know enough about Galleria to really evaluate. My experience in working with retail executives on a similar initiative points toward a lack of understanding as the key obstacle. Complex systems require complex inputs, and often create outputs which are very difficult to encompass with the amount of attention a senior executive often allocates to the job.
In all seriousness, these systems work as well as the thought and analysis put into creating the business rules which drive them. Otherwise, they are expensive toys. At the end of the day, localized assortments MUST be integrated with localized space planning. And localized assortments are absolutely best practices in managing merchandise. Within all of those absolutes, however, lies the power of finding the rules which protect you from bad decisions. As an example: brand equity and corporate investments in exclusive brands may require that an override be created to automatically populate with product the system would otherwise eliminate.
Ironically, given other comments, this type of software, in my experience, is one that really CAN generate an incredible ROI.
Many questions. Obviously, ALL processes should be synchronized within a retailer’s operations.
The big question surrounding many automated merchandising solutions is that slow-moving products, which may appeal to a store’s sub-segment of shoppers or may add to the variety or positioning of a retailer get chopped in these systems. When decisions are made at a high level of aggregation of stores, it’s easy to force these back in. As you move towards more and more localization, it is harder to inspect each planogram for the positioning it implies.
No clear answer here–perhaps it is searching for that middle ground where similar stores are grouped together for localized merchandising.
The reason companies have not been more aggressive with localized assortment and shelf allocation is because they have not been shown the overall benefit.
There are three perspectives to the process…the manufacturer wants to emphasize their brand, the retailer wants to emphasize their merchandising objective for the category (destination, fill, profit), and store operations wants to minimize the servicing (stocking) costs. These objectives can often be at odds with one another and too often the store operations perspective is missed completely.
Store personnel have the same objective today that they had 80 years ago (or ever since “self serve” came into existence)–“keep the shelves full.” Retailers need to understand that all of their out-of-stock, damaged goods, and excessive markdowns begin by having too much inventory on the shelf (too much inventory is a factor in out-of-stocks because it pushes needed items out). By being more aggressive with their shelf planning, by targeting the assortment and shelf alignment to their local market, they not only improve sales but they also reduce store operation costs.
To really take advantage of this, retailers have to reconsider which categories are handled by DSD and Jobbers. They also have to consider using more repack or piece picking operations outside the HBA and GM areas. To truly target the assortment they need to eliminate case pack as the determinant of minimum order quantity and recognize that some categories need hands-on attention. By considering the replenishment requirements they can reduce store and warehouse labor expense.
By looking at targeted assortments not just as merchandising tool, but also as a tool for reducing shrink, out of stocks, markdowns, and replenishment costs, I believe more retailers can be convinced that it is beneficial.
So the point is to continue to allow local action. Enterprise does need the system to keep order and this is a great way to work. Walmart and its best vendors use systems like this all the time, but if one adds the ability of local stores to customize results then the best of both worlds can be enacted.
As an earlier writer noted, the danger of full automation is that it may chop the iconic, the aspirational or unique item that can influence at the local level due to math alone. However, without a start point, chaos will erupt along with a black hole of inventory.
So, making the merchandise selection feel like it is for the local customer is always a winner and it is the management’s deployment of these systems that matters. Whenever one simply “relies” on automated systems the results can be spotty, but if that intelligence is combined with on-the-ground input, we usually see improvements
This is a subject very near and dear to my heart. Every Cat Man principle whether Space Management, Inventory Management, Assortment Management, Pricing, or Merchandising starts with the local knowledge of the consumer. However, it is not simply demographics. There is a whole process we go through, starting with the Consumer/Shopper profile and executed at points of differentiation (pre-purchase, in-store and post purchase). One critical point across this process is the consumer’s/shopper’s category determining factors.
The reason this is a critical point is there is a lot of variation at this point across consumers/shoppers based on many things including regionality. From this point in the process you develop the fact-based strategies that you will implement and if the facts drive the strategy, naturally there will be localization of assortment.
All of our clients have come to embrace this concept. After all, it drives productivity in terms of GMROI and Sales. Isn’t that the bottom line for retail?
Thank you everyone for commenting and providing great feedback. While reading some of the responses, I noticed that there is a perception that utilizing automated solutions transforms the assortment and space planning process into a strict mathematical equation. Many may feel this causes retailers to lose the ability to control the items ultimately placed on the shelf, especially at the local level.
However, it is critical that today’s automated solutions consider a variety of factors to ensure that products aren’t deleted from assortments solely based on historical performance data. Solutions must provide retailers with the ability to make strategic decisions by using decision trees and rules to meet localized demand. For example, if the organic products in a yogurt category aren’t performing well but still demand a presence, retailers can set up a decision tree which ensures that a specific amount of space is always set aside for organic products. Further, rules can be set to make sure that a minimum number of organic yogurts will consistently be included in the assortment to guarantee that the category always has a credible offering for customers.
Also, leading systems today do not focus solely on historical data. Solutions need to accept a variety of feeds including historical sales data as well as forecast data and/or rest of market data to determine future trends and create the optimal product mix. When these factors are considered, retailers can create automated, customer-centric merchandise plans that meet localized demand and optimize inventory on the shelf.
I work primarily with small and independent retailers, and I know all of them are perfectly happy with the way their much larger competitors send the same assortments to all of their stores.