How to Capitalize on Customer-Centric Merchandising in a Diverse Marketplace

-Customize a merchandising strategy to revitalize existing stores and meet customer demand -

By Kent Smith, Global Business Development Consultant, Galleria

The retail industry’s growth period of building store after store has nearly exhausted itself. For many years, retailers have focused on building bigger and better stores. However, this tactic has tapped the majority of major and mid-tier U.S. markets. In addition, these stores are beginning to show signs of age. It is essential therefore for retailers to re-focus their strategies to optimize their existing store network.

When adding hundreds of stores every year, numerous retailers found it efficient to take on a one-size-fits-all approach to their merchandising strategy. However, this tactic doesn’t optimize sales or meet consumer need on a store-by-store basis. Shoppers today seek solutions that fit their needs; diversity in every sense is immense across the store network. Different store, consumer and market conditions combine to produce product demand, sales volume and mix that vary greatly. The averages approach often results in missed assortment opportunities, incorrect stocking levels and exposure to products that are out of proportion to what the customers at each store want most. Indeed, industry experience has shown the only consistent factor across stores is diversity. To help alleviate these issues, retailers can employ a customer-centric approach to merchandising.

New Generation Automation Tools

There are two attainable ways to become customer-centric. The first is to have demand-driven clusters based on actual store sales. Predictive or correlative approaches that are demographic-driven often break down due to differing lifestyles and preferences from market to market. The second is to incorporate a store-specific merchandise plan for every single condition within the store. To improve current store performance, some retailers have adopted automated merchandising solutions to execute optimized, store-specific merchandise plans. The use of data segmentation places more customer-centric assortments into existing stores and optimizes inventory and space to increase same-store sales without having to remodel or open a new store.

Historically, many retailers have found transitioning to a customer-centric strategy to be complicated. Many solutions simply did not measure up and some retailers made the attempt manually, only to generate mediocre results after a massive effort. Today, the stigma still looms. However, new generation retail and category optimization solutions are now available. They are quick and easy to deploy and significantly impact your bottom line. Using these new tools, retailers have experienced sales increases of up to 18 percent, margin improvements of up to 5 percent and a reduction in wastage of up to 20 percent. More importantly, retailers have achieved merchandise plan compliance of more than 95 percent. Retailers that produce generic plans typically have compliance levels of only 40-50 percent. Customer-centric merchandising equips stores with plans they can confidentially execute and easily restock and maintain. This provides benefits to both the retailer and the customer.

Is Customer-Centricity Worth the Effort?

Many in the retail industry still wonder if customer-centricity is actually necessary. This is because they don’t realize exactly how diverse their stores really are. Diversity in people, competition and other factors has grown massively over the past 20 years and is forecasted to continue. This is due to the growing Hispanic population, changes in income, lifestyle differences and other factors beyond existing tracking methods. To get a sense of how diverse your chain really is, quickly compare the selling mix and fixtures in just a handful stores.

There are four main sources of diversity: competitive, market, customer and store diversity. Competitive and customer diversity combine for actual store sales. For instance, customer demand and buying patterns may require a brand of ice cream to take up 60 percent of the category mix in one store but only 25 percent in another. If using a one-size-fits-all approach, the retailer will miss out on sales opportunities and either experience waste or out-of-stocks. Store diversity accounts for layout and in-store fixtures. Many retailers only create merchandise plans for 4, 8, 10 and 12-foot fixtures. However, the majority have much more diverse fixture sizes to merchandise. For example, one U.S. grocer with 200 stores has 97 different configurations for the cereal department.

To accurately gauge diversity and identify the benefits you can achieve from an automated customer-centric merchandising solution, request a rapid, no-cost pilot from a qualified vendor. To make the transition, partner with a provider that offers a solution that can quickly and accurately identify cluster and store-specific merchandise plans. It should be able to recognize the difference in consumer demand patterns at the cluster level while also recognizing the difference at the individual SKU levels on a store-by-store basis. This will enable you to develop a cluster strategy that is better suited to the neighborhood and a merchandise strategy to fit each specific store. As a result, you can effectively replenish stores to meet consumer demand and allocate saved labor to another task within the store.

Maintenance for Success

A customer-centric strategy gives you the abiltity to further build customer and brand loyalty. However, once a strategy is in place, ongoing maintenance is required for continued success. Changes to assortments are inevitable. Many retailers initially create their perfect merchandise plans for each category, but as time passes, corporate doesn’t communicate assortment changes down to the stores.

Also known in the industry as “minor revision”, ongoing maintenance can be a painless process using the right automation tool. When initially selecting your automated merchandising solution, ensure it has built in real-world tested minor revision capabilities. The one-in-one-out rule is fantasy. The minor revision tool enables retailers to retrieve a merchandise plan to identify what items have been removed from the assortment and what items need to be added. From there, the solution will identify a plan to make the changes work in a way that minimizes the overall change to the original plan and maintains strategic conformity. It will then publish executable store-specific plans. Unless a retailer manages minor revisions as adequately as the original merchandise plan, the display will begin to fall apart in terms of compliance causing shelf erosion to set in. Products will begin to shift and some will never even make it to the shelf. This can ultimately create a domino effect and greatly transform you planned strategy into something far different in stores.

Don’t Forget about Macro Space

To completely optimize existing stores, integrate assortment and space optimization at the macro and micro levels. Optimizing macro space ensures the space allocated to a category or department is right in the first place. To maximize profits, retailers can use a solution to test categories at the macro and micro level to ensure the optimal amount and range of products is available for purchase. By forecasting future store needs based on historical information and trends, retailers can understand the return and benefit a category will achieve from the space before implementing it. In addition, this method enables retailers to perform a “what-if” analysis to determine the financial impact of in-store changes that affect store space. By testing situations before execution, retailers can ensure they achieve a return on investment without any surprises.

Overall, a customer-centric merchandise strategy can build customer loyalty and increase profit in your existing store network. It’s not just an idea anymore; it’s happening today. A successful program should incorporate an automated solution with minor revision capabilities and a solution to optimize macro space. Doing so will ensure the ideal assortments are always available and every inch of selling space is optimized.

Kent Smith is a global business development consultant for Galleria. He has 20 years industry experience across a broad array of sectors in the United States, Canada, Central America, and Europe. For more information, please visit www.galleria-rts.com.