Which merchandising technologies hold the most value?
Through a special arrangement, what follows is a summary of an article from Retail Paradox, RSR Research’s weekly analysis on emerging issues facing retailers, presented here for discussion.
In our most recent merchandising research, retailers tell us that they are hyper-aware that many of the legacy technologies they’ve been using for years are in dire need of a refresh. However, some very interesting things emerge when we look at just how differently the best performers view merchandising technologies in the first place. It is quite staggering, in fact, just how much more value best performers find in these tools — even the oldest of them — and their ability to help put a relevant product mix in front of the consumer (and at the highest margin possible).
What makes this data all the more compelling is that when compared to the overall response pool, those whose sales are already performing best are the only ones who see the light. Consider the following points as they relate to movement from last year to today:
Source: RSR Research, February 2015
- The overall response group’s interest in web analytics is falling off the table (39 percent in aggregate this year compared with 47 percent last year). The fact that 59 percent of "winners" see this as a highly valuable technology set should be a serious wakeup call for average and lagging retailers.
- The aggregate response pool’s interest in optimization of assortment against key customer segments has also fallen: from 63 percent in 2013 to 51 percent today. Yet winners’ attentiveness to gathering as much information from web activity as possible is climbing every day. This is no happy accident.
- In fact, of the myriad options we provided, only one has gained favor among the general response pool. Markdown optimization is up to 57 percent among the aggregate from 50 percent last year. But that statistic absolutely pales in comparison to the 79 percent of winners who see markdown optimization as a way to maximize any mistakes that invariably occur within their product mix as being vitally important. For winners, it is the single most valuable tool in their merchandising arsenal.
Discussion Questions
Which merchandise technologies do you see gaining more attention from retailers and why? Which ones are losing appeal?
Poll
BrainTrust
Ben Ball
Senior Vice President, Dechert-Hampe (retired)
I don’t see it on the list, but I’m hearing more about the importance of software that improves localized allocations and assortment planning. “My Macy’s” has been the leader here, and several of its national competitors are playing catch-up. It’s not enough any more to capture regional/climate differences if two stores 10 miles apart appeal to completely different demographic and lifestyle profiles. The advance of this kind of software makes the process less “manual” on the retailer’s part, and might eliminate some of the need for markdown optimization if the goods are getting to the right stores in the first place.
There is no one technology that will find favor with “retailers.” The technologies that find favor with a particular retailer are the ones that facilitate a one-to-one connection with its consumers. There is no report that will allow retailers to find the magic merchandising tool. Retailers have to find what works with their consumers, and in what parts of the consumers’ journey.
My read on this is that the focus that is growing and will get bigger is assortment planning and all related planning modules or apps. Why? My Macy’s is an example of regionally-tuned and tight merchandise plans. Markdown optimization is always BIG when your planning is WEAKER. Web analytics is shifting into a standard, so not seen as “hot.”
Retailing starts and ends with good, executable and trackable planning that supports all sales channels.
No one does better analysis than the gang at RSR Research. For me it’s a given that when they publish a finding, one pays attention.
It may be due to the technology interests consuming me lately, but I immediately go to the implications of the rather sad state of software quality. Yelling a Clinton-inspired “It’s the software stupid!” is hard to resist.
There are two problems as retailers (or anyone else) try to use technologies to manage the business: 1. With every technical tool or app you adopt you agree with the manufacturer that it is not warranted to work as advertised. Read the agreement you clicked on and you’ll see what I mean. 2. When you begin to integrate various technical tools/apps you exacerbate the problem by an order of magnitude. Blending faulty software with other faulty software produces little but grief and the likelihood of poor decisions. So don’t totally abandon your intuitive judgement in favor of technology’s judgement just yet. In other words RSR should be warning us: “Do not try this at home.”
This is a bigger, more epidemic issue than we are willing to admit. The renowned complexity theorist Roger Sessions noted that if we can solve these IT problems we’ll add a trillion dollars to the GDP of the U.S. Yup, with a “T.”
Two things strike me here. The first is (as is usual for me) a truism of sorts. That those who actually USE the tools they have are the ones who reap the benefit and therefore value the tool more.
The second is that seven of the 12 tools valued have to do with price and assortment optimization. Only three directly target increased customer satisfaction. Which tells me that the “winning” retailers are still focused more on doing what retailers have always done — but better — and that we are still struggling with the idea of “consumer marketing” in retail.
First of all, this seems to be yet another study that “proves” that not only do smart animals use tools, they use them more effectively than dumb animals.
The only “tool” used more by losers (yup, I said it) than winners was market basket analytics.
So I guess the right answer to the first question is that good retailers use an effective blend of almost all technologies with an emphasis on precision pricing/promotion and supply chain tools. Why? That’s like asking “why” top athletes train harder than couch potatoes. It’s part of the DNA of winners.
If the chart is to be believed, the answer to the second question is “bottoms-up” planning and “market basket analytics” although “web analytics” also appears to be an endangered, or at the very least under-developed, tool as well.
In some regards the response to this question depends on how you define value. I often delineate between identifying value and capturing value and between direct and indirect value. A technology may be able to identify a lot of value but if the retailer cannot execute for some reason then they can’t capture the value. A technology can also provide value in the very direct sense (e.g., how many more dollars can I generate) and the less direct, but oftentimes more important, sense of operational value (e.g., making it easier for a category manager to do their job).
Markdown is a significant operational issue: you have a lot of inventory on hand and you need to clear it out to make way for the next lot of inventory so it has to be dealt with, but dealing with varying inventory levels by product at different locations is operationally challenging so a lot of retailers employ a very standard markdown plan with pre-defined markdown discounts at specified periods of time. Operationally this works well but financially it allows a lot of dollars to flow out of the company. A markdown solution that handles the operational aspect while also delivering the best financial outcome would have significant value.
Promotion planning has a lot of operational complexity as it involves every promotion that is run every week across a large number of categories. A promotion planning and management solution has to be able to handle all of this operational complexity while also being useable by a large number of category managers. This is a great example of being able to identify a lot of value, but the retailer won’t capture it unless every category manager makes better promotion decisions on a very consistent basis every week.
Assortment planning enables a category manager to identifying low-productivity items that can be safely removed from the assortment — the items that replace these de-listed items will then hopefully perform better than the de-listed items. Assortment localization can also provide benefits but in general a core part of the assortment is typically retained across all stores for operational reasons and a small percent of the assortment is, in effect, localized. As a result assortment planning can add value, and the value can be captured but most of the value is only applied across a small portion of the assortment that is de-listed or localized.
Pricing can have a major impact on financial value and is operationally easier to execute as pricing decisions can be taken on a centralized basis and executed directly through the price hosting system — the impacts are significant because they impact all items in all stores and are realized by every shopper every time they make a purchase. In a simplified way, items that are bought mainly on the basis of price will receive lower prices that will increase sales, prices that are mainly bought on a non-price basis will receive prices that are commensurate with the value that shoppers place on them and as a result the volume will remain flat but sales and profit dollars will increase.
Leveraging customer data across merchandising decisions will become increasingly important in the coming years. In order to deliver prices that shoppers want while simultaneously delivering the in-store service levels that shoppers will demand and still achieving their financial targets, retailers will need to incorporate more customer-specific insights into their markdown, promotion, assortment and pricing decisions. This is an added layer of customer-centricity to existing markdown, promotion, assortment and pricing solutions rather than as standalone solutions — this will amplify the value that is delivered by these existing solutions.
Inventory. Inventory. Inventory. Replenishment, promotions, markdown. That is what drives real growth. Optimize those and you’re far down the line. Sure there are literally dozens of other areas once we drill down to the elements of the merchandising processes, however if replenishment is optimized so overstock and out-of-stocks at the point of purchase are minimized (obviously not an easy task since these problems are still pervasive) you set up a replicable process for all retail outlets, online and offline. Promotions need to leverage the very latest technologies. I don’t believe legacy apps here are up to date in today’s environment. Finally, markdowns (I hate the thought of them in the first place) need to be consistent and not something that we “train” the shopper to wait for.
Very interesting to see “markdown optimization” at the top … essentially that is one of the old “Ps” … Price.
Apparently retailers in this study did not get the memo on omnichannel. The 4 “Ps” have been replaced by the 4 “Cs” :
– Connections
– Choice
– Curate
– Convenience
While price optimization is always important in retail, merchandising technologies need to start incorporating consumer behavior … realizing that all shopping does NOT take place in store.
Retailers pragmatically focus upon technologies that provide the biggest attainable, most immediate return. Thus web analytics and the consistently over-hyped market basket analysis are falling by the way-side as their financial benefits have proved to be neither significant or immediate.
What is not on the list, although tacitly included in automated replenishment, is the venerable problem of out-of-stock mitigation. For most high volume, food, drug and mass retailers, merchants understand you cannot sell or even merchandize what is not in the store.
The return on any progress in mitigating out-of-stocks is both significant and immediate. Two things retailers really like!
If I were interested in updating merchandising technologies I would prioritize things like what’s in the box, how do I use it, and where do I get the parts I need if they’re not in the box. As for consumables, it is more about content and freshness so I might use large lettering with easy to understand language. Audio visual with reply to consumer phone or email would be a valuable means to open a rapport for a lasting customer relationship.
The old ways aren’t working and perhaps never really did, so why not find out what the consumer wants and just give it to them?
I agree with Mark Heckman’s comments about out-of-stocks being important and needing the attention of retailers of FMCG. However, we have been talking about and studying this problem for, what, twenty-five years or more. Sadly, nothing has changed by way of solving or substantially reducing OOS.
This question is all the more important in light of retailers’ omnichannel efforts. It’s one thing to stock a store, and another thing entirely to stock a store that ships orders from the web. The smartest retailers are examining processes and numbers very carefully, and will make adjustments to hold their positions.