Through a special arrangement, what follows is an excerpt of a recent article from Retail Paradox, RSR Research's weekly analysis on emerging issues facing retailers, presented here for discussion.
There's a business axiom that has been around so long, it's almost cliché: You get what you measure. And while Retail Paradox recently explored how same-store sales have become an inadequate measure of retail performance in light of the rise of multi-channel synergies, retailers may also have to redefine how they measure their people as well.
Most merchants that I know of are measured on some combination of gross margin and turns. But new tools and more sophisticated retailing strategies are starting to make it painfully clear that the decisions that merchant teams make have a far greater impact on other organizations (like supply chain and store operations) - and yet often have very little accountability for that impact.
Let's start with pricing. I recently attended the Retail Pricing Summit and moderated a panel of retailers who spoke about their experiences implementing pricing solutions. Their number one implementation challenge? Cultural barriers, both on the merchant side - who worry that some of the suggested prices will not drive enough volume to offset the margin loss - and on the store side, who resist the increased number of price changes that began to come their way.
Buying teams are measured and bonused on how they move inventory, and this limits the effectiveness of any pricing solution. In the status quo, merchant and pricing teams use price to drive demand, assuming that inventory is what it is. So pricing recommendations come down without taking into account whether a particular store has the inventory available to meet demand. In pure economic terms, price is a mechanism to match supply to demand. But merchants aren't measured against how efficiently they deliver supply, only how well they squeeze deals out of suppliers and how quickly they turn that inventory. With too much focus on demand, supply chain is left scrambling to try to achieve merchant volume objectives.
Perhaps it's not surprising that stores' number one internal challenge are merchants, according to the results of RSR's upcoming workforce management benchmark study.
Pricing alone provides an example of the problem, which is that merchants don't have visibility into, or have accountability for, the costs of implementing their various pricing and promotional programs in stores. I've been victim of this thinking myself - store labor to a merchant is a "sunk cost": they have to be there anyway, so what difference does it make if they're standing around doing nothing, or putting up my latest promotional display? But store labor is not a sunk cost - when store associates spend their time doing a merchandising activity, there's an opportunity cost to that, primarily in the form of helping customers. And when store labor is viewed as "free," it gets abused and over-used, again, limiting stores' ability to execute merchandise strategies.
Pricing, merchandise localization, cross-channel - all of these activities put increased pressure on the organizations that implement a merchandise strategy. If the merchant drives the activity, they should have accountability for the results. Merchants should be held accountable for the supply chain costs of delivering their goods to channels, and they should be charged the labor costs of implementing their price or promotional strategies in stores.
Discussion Question: Do you think how merchants are measured should be redefined in light of activities such as pricing optimization, merchandise localization and cross-channel shopping? What other criteria would you include in measuring merchant performance in today's retail climate?