It All Comes Back to the Consumer
From the most popular, high-volume segments to niche sectors such as gourmet foods, virtually every product assortment in a store needs optimization to keep up with evolving purchase behavior. However, optimizing assortment to best meet consumer needs and desires is no cakewalk, being more akin to a tightrope walk. In the case of product assortment, this balance must be between art and science.
The science side, according to John Bajorek, senior vice president for brand, strategy and design at retail consultancy WD Partners, involves monitoring straightforward metrics related to profits, velocity and the frequency at which a shopper enters a store and purchases products in the specific category.
"Those are definitely critical–I think where we're seeing some shifting is that with retail today, especially with consumables, there's a need for the art side," he says.
The "art side" could include how a retailer gets consumers to interact with or try a product, as well as how store associates could be involved in the process, Bajorek adds. Ultimately, it all revolves around consumer behavior and interaction.
Retailers may choose from a number of methods to optimize product assortment, methods based on examining consumer behavior that range from the simple to the complex. One simple method, for instance, is for retailers to examine shelves to see what consumers aren't purchasing, thus determining which items are worth removing, says Ben Ball, senior vice president with retail consultancy Dechert-Hampe. Another method is for retailers to perform spin runs on turns quarterly and remove the bottom-performing 10 percent of the category, also imposing a "one in, one out" rule for all vendors that requires them to remove one of their SKUs to add another.
However, retailers need to understand that influences other than the product itself could be driving consumers' purchase behavior. Bajorek notes that, similar to the technology space, the retailers most successful with managing assortment have taken an "agile approach" in which they're looking at the process opportunistically.
"There are traditional triggers for resets usually driven by seasonality, but now we're getting into more dynamic functions," he states. "It could be things like the weather; it could be things like market volatility that causes the shopper to be more aware from a price perspective or value perspective, or if there's opportunity related to flavor or trial. The big difference here is, the successful retail executive who's responsible for consumer goods needs to be more agile to take advantage of market opportunities."
And in a world where consumer behavior is demanding an omnichannel strategy, retailers need to approach optimization with the understanding that consumers may prefer to purchase different products in different channels.
"To take the learning, for example, of different goods, there may be the preference to purchase them through the web or through the mobile experience versus in-store," he says, "which would give you the freedom as the category leader, as that retail consumer goods executive, to balance the assortment based on the preference of engagement."
Therefore, if a retailer is incorporating the endless aisle strategy–the "pulling of the web into the store"–it should be able to reduce and optimize the available SKUs to increase the likelihood of purchase and remove the paradox of choice.
"Make sure that the most successful retail executives are looking at it holistically as it relates to omni-commerce and where the products are being bought, where they're getting inspiration, and how they can best support the preference of the shopper," he says. "There are some logistical advantages, as well."
"Your assortment model needs to be fueled by objective, unbiased information with the goal of facilitating sustainable, profitable customer satisfaction."
WHAT'S THE FREQUENCY?
Whatever their strategies for review and optimization are, retailers must make sure they're executing them at the right frequency. Bajorek offers, as a general rule of thumb, that retailers should examine assortments approximately every two to three months. Meanwhile, Ryan Mathews, CEO of retail consultancy Black Monk Consulting, believes retailers could perform quick, top-line reviews every week via an early warning system to detect upticks and downturns across a category or subcategory.
However, Mathews notes, retailers performing his recommended method should not react too quickly and change an assortment simply because of the impact of random external factors.
"The weekly scan needs to be followed up by a slightly more robust monthly review and a more in-depth quarterly assessment," he explains. "Obviously, a deep-dive annual review is mandatory, but waiting too long to look at the assortment–too long, in some cases, being quarterly–can cause you to lose significant revenue."
Of course, consumer behavior differs from category to category, and assortment to assortment, so areas such as holiday merchandise, which doesn't see as strong or consistent consumer demand, does not need to be reviewed as frequently. But the right frequency cannot be taken lightly. Neil Stern, senior partner with retail consultancy McMillanDoolittle, notes that reviewing a category too frequently or too infrequently creates turmoil not just for buyers and suppliers, but also the consumer.
"Who's running the category? It really should always be the retailer, but it often has not been. Ideally, retailers need to own their own categories and receive input–or do this in partnership with suppliers."
DON'T SEEK TO SATISFY ALL
Ultimately, retailers need to understand that although it's critical to meet the needs of people who walk into their store, it can be quite damaging to attempt meeting the needs of all who enter.
"If I'm a retailer and I have a customer come in demanding guava-flavored anchovy paste, do I stock it?" Mathews questions. "Some people say, ‘Yes,' but I say, ‘No'–not until I get enough fans of guava-flavored salty paste."
A retailer will ultimately know when it has enough fans of such a product if it maintains an ongoing, open, two-sided dialogue with patrons to stay current with changing demands and execute a curatorial approach to optimizing product assortment, Mathews points out. Doing this requires top-level executives to make trips to their stores at least once in a while, taking the time to speak with their customers–as well as their frontline associates. It's critical to understand that the only way to stay in business for the long haul is to satisfy the demands of customers, not to simply succumb to the seduction of suppliers' slotting dollars.
"Your assortment model needs to be fueled by objective, unbiased information with the goal of facilitating sustainable, profitable customer satisfaction," he says.
Bajorek recommends engaging shopper panels with optimized assortments, noting that doing so helps retailers see and understand a shopper base's reaction to concepts prior to cost being outlaid to prototypes or even multistore rollouts, therefore allowing retailers to be more nimble and educated as to where they put their investments. It also allows for more consistent dialogue with a retailer's shopper base.
And for retailers that might be wary of listening to the biggest manufacturers in a category when curating assortment and determining shelf space, it might be smart to rely on a third party to better understand what consumers currently want to see on shelves.
The Wall Street Journal recently reported on Kroger's decision to take this approach for liquor, giving organizational responsibility to a private distributor rather than to the category captains. Doing so will allow Kroger to rearrange shelves more frequently to reflect changing consumer tastes and make seasonal adjustments, with the retailer requiring manufacturers to pay the distributor for the service. This allows the retailer, the closest to the consumer, to be in control.
"Who's running the category? It really should always be the retailer, but it often has not been," Stern says. "Ideally, retailers need to own their own categories and receive input–or do this in partnership with suppliers. Not sure what Kroger is proposing is new–but it is a matter of emphasis."
Updated Consumer Decision Trees Necessary for Relevant Assortment
Developing and implementing the right set for a category always has been a dynamic, never-ending process with high stakes. This is not surprising, given the numbers: According to retail consultancy Willard Bishop, more than 50 percent of SKUs sell less than one unit per week in a traditional grocery store, with most SKUs in dry grocery, general merchandise and health and beauty care losing money, despite occupying some of the store's least-expensive real estate. Meanwhile, 40 percent of a store's SKUs cover 95 percent of demand, which means three-fifths (60 percent) of the SKUs in a store account for just the remaining 5 percent of demand.
The consumer decision tree (CDT), a tool that assists retailers and manufacturers in creating planograms that align with their strategies, is essential for maintaining retail relevancy, according to the March 2016 edition of Willard Bishop's Competitive Edge, titled "Maintaining Shopper Relevancy at Retail." It allows trading partners to understand how, why and when shoppers substitute one SKU for another, and provides insights into demand transfers taking place between each pair of SKUs, leading to better variety and product substitution decisions. By developing a CDT, trading partners can identify and rank product attributes based on each attribute's propensity to influence a purchase decision, with the most common attributes including brand, flavor, form, health, size and price. They also can make better assortment decisions, helping category managers understand SKU substitutability and demand transfers. It also provides insights for developing shopper-friendly shelf sets, which could organize products horizontally, vertically or in block groups, depending on how shoppers make purchases within the category.
However, CDTs also need to be kept fresh, especially considering how the escalating rate of in-store purchasing decisions (as high as 80 percent in some categories) and outdated CDTs cause many category sets to become misaligned with shoppers' purchase behavior today. CDTs allow trading partners to understand how, why and when shoppers substitute one SKU for another, and provide insights into demand transfers taking place between each pair of SKUs, leading to better variety and product substitution decisions. When updating CDTs, retailers and manufacturers must work to get access to new customer purchase behavior data, says Paul Weitzel, managing partner with Willard Bishop and author of the publication. Additionally, they must measure basket purchases over time by household, measure tradeoffs within categories over time, and determine switching and transfer levels.