The retailers that are surviving—and in some cases even thriving—in the current economy are investing in a customer-centric approach to buying and assortment management. These retailers continue to achieve top-of-mind status among their key customers by implementing four winning strategies.
By Gurdip Singh and Ijaz Parpia
Long before Main Street was eclipsed by Wall Street, proprietors of mom-and-pop stores had achieved the "customer-centric" shopping experience that's now coveted by retailers nationwide. It was a simpler time for inventory management: the owners knew their customers well, what products they needed and how much they would be willing to pay for them. If a customer requested something the store did not carry, it was simply added to the next purchase order. Today, the shopping experience looks much different. The proliferation of department stores, grocery store chains and big-box stores during the past two decades has ushered in dramatic changes to the retail landscape—rendering customer-centricity an increasingly elusive goal.
This has resulted in the merchandise planning process becoming more centralized with the majority of decisions taking place at the retailer's national headquarters. The store manager—who continues to have the most frequent contact with customers—has little control over selecting products that will best meet those customers' needs. While a centralized planning process enables retailers to achieve substantial cost savings, it has slowly eroded their ability to connect with customers and meet their specific market needs.
Retailing is rocket science!
Meeting local market needs is just one of many factors contributing to the increasingly complex task of inventory management. How do retailers balance changing market conditions, financial risks, and global sourcing and manufacturing opportunities, all while accommodating fast-changing trends? How do retailers accurately forecast inventory positions for the upcoming holiday season when previous buying patterns don't hold true in the current economic environment? And how can retailers ensure that their merchandise forecasts and plans are actually achievable?
To add to retailers' woes, consumer spending remains constricted. July 2009 marked the 11 th straight month of sales declines reported by retailers ("July sales drop shows retail pressure continues," www.reuters.com, August 3, 2009). August 2009 also saw lower back-to-school sales, which often reflect how stores will perform during the holidays—casting an ominous shadow on the upcoming holiday season.
In spite of this, more than 80 percent of the retailers surveyed for an August 2009 RIS News report believe the upcoming holiday season will be somewhat better than last year, or at least comparable to last year ("Retailers Walk the Razor's Edge for the 2009 Holiday Season," RIS News, August 3, 2009).
Achieving customer-centricity through right brain/left brain synchronicity
Regardless of whether economic recovery is imminent or months away, retailers that embrace customer-centricity will be better prepared to manage the complexity of inventory management and maximize sales in the short term. To create a customer-centric shopping experience, it is critical for retailers to make smarter decisions about product selection and assortment breadth and depth.
By employing buying and assortment management strategies, retailers can define and understand how to target their desired customer segments. They can then integrate that information with their internal planning and execution processes with a level of expediency that meets customers' expectations and outperforms the competition. The crux of this process hinges on retailers knowing exactly what products interest their desired customer base, so they can be confident customers will continue to shop at their stores—regardless of how the economy is performing.
The retailers that are surviving—and in some cases even thriving—in the current economy are investing in a customer-centric approach to buying and assortment management. By implementing the following winning strategies, these retailers continue to achieve top-of-mind status among their key customers.
Strategy #1: Narrow assortment based on local needs
Successful retailers are intelligently narrowing their assortments to address local market needs. This involves tailoring assortments to key customers by employing micro-segmentation—accomplished by analyzing forward-looking buying patterns of those preferred customers—which enables retailers to then stock for and target such shoppers directly. This strategic approach shifts retailers' assortment management strategies from the national level to the store level.
This means consumer goods companies will fight for shelf space, especially as large retailers take the lead in reducing inventory assortment. These types of shelf-constraints are common with European retailers, as their stores are typically smaller than those in the United States. With this new approach, retailers will need an assortment tool that features space-constraint planning to ensure they are achieving maximum value with their shelves and fixtures.
Strategy #2: Improve inventory flow
Retailers that refresh their product mix on a regular basis can expect to see greater foot traffic through their stores. More dynamic floor-sets and the resulting shorter product lifecycles create the urgency of buying now—and result in less inventory overall. Store managers are able to tell customers when new inventory is coming in, so returning customers are not just those reconsidering a purchase.
Strategy #3: Simplify the customer shopping experience
Today's hurried, budget-conscious and eco-friendly shoppers are interested in getting all their shopping done in one trip in order to save time, money and gasoline. Winning retailers not only carry the right products, but also strategically place assortments of market baskets, collections or ensembles together in a way that simplifies the shopping experience for the consumer (See "Shelf-centered Collaboration").
For example, fashion retailers that arrange an entire look—such as the blouse, skirt, shoes and accessories—in one display reduce the likelihood that a customer will need to go to different departments (or worse, other stores) to locate the right shoes or purse to match an outfit. Not only does this create a simpler, stress-free experience for time-crunched consumers, but it also increases the chance that the customers will buy more in a single visit.
This represents a dramatic shift in thinking for retailers; they now must focus on how their customers want to buy products instead of on how they source and purchase products. This change in priority can affect the entire buying and assortment process for a variety of the store's products. For instance, if a retailer decides to carry 15 styles of boots, but half of them can only be worn with skinny jeans that are not being stocked this season, the likelihood of meeting sales targets is poor.
Industry executives and analysts say some of the largest retailers are expected to slice the product assortments in their stores by at least 15 percent in the next year or so. Wal-Mart disclosed plans to cut the variety of its microwave popcorn by 25 percent, and Rite Aid Corporation revealed plans to reduce the variety of its pain-relief products by 14 percent ("Retailers Cut Back on Variety, Once the Spice of Marketing," The Wall Street Journal, June 26, 2009) .
Strategy #4: Anticipate and react quickly to changes in consumer needs
The current economic environment makes it harder to forecast demand because previous buying patterns are not a good predictor of future trends. As retailers see changes in demand, they need an iterative, interactive process with suppliers so that rapid decision making can be implemented at the store level.
Many retailers collect point-of-sale data, but do not have the capabilities to quickly act on the demand signals from that data. In fact, while 67 percent of retailers are using consumer analysis and insights to drive chain-wide marketing and merchandising decisions, only 47 percent indicate that they are using consumer insight to inform activities such as demand planning and forecasting, according to a May 2009 Precima report entitled, "Winning at Consumer Centricity: 10 tips for Retailers and Manufacturers."
Retailers not only need the ability to re-forecast target segments based on demand signals, they also need to account for inventory and supplier constraints, integrate assortment decisions with price and promotion decisions, and view how those changes will affect future sales. Once retailers integrate these processes, they must then be able to execute the re-forecasted changes at a pace that meets—or even exceeds—customers' expectations. With this type of continuous planning, reconciliation with the financial merchandise plan is even easier for retailers.
While speculation is mixed on how quickly the U.S. economy will recover, retailers focused on integrating customer-centric buying and assortment management strategies into their operations will be well positioned to ride out the current economic pressures—and emerge from this recession stronger than ever.
Gurdip Singh is vice president of services for i2's retail and consumer industries business unit. Ijaz Parpia is i2's vice president of retail.
