I heard former Macy’s CEO, Terry Lundgren, speak earlier this year on the changes in retail over time and the disruptions that have led to large scale industry changes. He described the period we are in now (starting in 2016) not as the Retail Apocalypse, but The Era of Imbalance. There are more stores, sites and inventory, than demand. As a result, consumers have more options than ever and retailers are working quickly to find ways to compete, or they are closing. While convenience, services, and experience are still the buzz words, the prior differentiators are now the table stakes. Convenience used to mean a local store, services used to mean a friendly, easy to find associate, and experience used to mean a well-organized and inventoried store with a wide breadth of assortment. However, with the retail imbalance that Terry described, retailers are looking for ways to exceed consumer expectations on convenience, service, and experience, but when it comes to assortment building, retailers are getting back to the basics. At Lowe’s, getting back to the basics is an integral part of the strategy as the first of four strategic areas of focus called Merchandising Excellence.
Before I get into the important implications of this to brands and manufacturers based on my experience in retail as well as conversations with Lowe’s Assortment Planning and Data Science leadership, allow me to review those “basics.”
The right product in the right store at the right time. Simple?
You hear more and more of retailers focusing on the fundamentals: “Right Product, Right Store, Right Time.” But, what does this “focus” mean? As a retail veteran and former buyer, I have experienced this firsthand. It means the retailer is looking to spend more time driving the core business and staying true to what matters to the consumer. It also means more science, less art in decision making. Focusing on the fundamentals includes data acquisition, insight gathering, and rethinking decisions and process. Common analytics you hear as part of refocusing on the fundamentals are localization, rationalization, and optimization.
Localization is getting product in the Right Store and results in differentiated assortments across the retail chain. Assortments are tailored to the store based upon geography, socio-economical differences, seasonality, store turn, etc. Shelf capacity will also play into the localization efforts as most retailers have varying footprints. When retailers start a localization initiative, it is always about getting the assortment right for the consumer while building a scalable process.
SKU Rationalization is offering the Right Product and includes an evaluation of all the SKUs in the assortment to determine if all of the selection is needed to meet consumer needs while achieving sales and margin plan. In most product categories, there are multiple choices for the consumer either within a brand or across brands that meet the same consumer need. During a SKU rationalization process, assortments are evaluated to understand where assortment breadth can be reduced while not sacrificing sales.
Inventory Optimization is all about ensuring the product is available for the consumer to purchase at the Right Time and in the Right Quantity. Right Store plays into this as well as demand varies by store. It is important to note that there are other goals besides reducing total inventory levels. Top turning SKUs will also be identified, and inventory investments will be made to ensure consumer demand is met. Ultimately, the outcome retailers are looking for is improved efficiency throughout the supply chain.
Price and Promo Optimization is an evaluation of elasticity and customer behavior related to fluctuations in price. This includes understanding if the category should be promotional, if pricing should vary across regions and level of elasticity compared with incremental margin generated even within the transaction or future transaction. There is margin savings for the retailer when removing promotions that are only rewarding consumer behavior that would have happened regardless of the promotion. This analysis includes assessing categories as trip drivers vs. add-on purchases, etc.
What does this mean for brands?
Ok so much for the fundamentals. Now I’ll let you in on some insider information from 13+ years of retail merchandising experience across buying, planning and allocation at PetSmart and Payless ShoeSource.
Retailers focusing on the fundamentals generates impactful change to brands and manufacturers. Brands and manufacturers can navigate these initiatives successfully, but not all will avoid purchase order reductions. Navigating these initiatives successfully requires being an active participant in the conversation, and the one thing all these initiatives have in common is the need for data and insights. While retailers will be acquiring their own data, doing their own analysis and formulating strategies, retailers will also expect brands to do the same. While each initiative will require a different type of analysis, all stem from the same data sources: historical sales data, market information, and consumer insights.
From my experience, most brands have some level of insight on historical sales based on retailer’s POS actuals. Brands can typically speak to what’s working and what’s not working when it comes to historical sales information (and retailers already know this also). However, what is helpful for retailers are the insights from the historical data on how to increase demand or maximize missed opportunities. If there is something interesting in the data, don’t just share the statistic, share how the retailer should action the insight. Examples would include:
- Insights on a successful promotion with success felt on both sides, retailer and brand
- Regional performance variances that can guide assortment selection
- Insights on optimal inventory including seasonality recommendations
- Events to remember to plan against that impact the category
While market information is common for retailers to hear from brands, there is a distinct difference between brands that do it well and brands that don’t. Those that do it well bring a perspective or hypothesis that speaks to why. Simply supplying market facts is not unique and not as helpful as providing insight with the facts. Examples would include:
- Insights on a competitive retailer that is gaining or losing share with information as to how that retailer competed differently
- Insights on segments of a category that are performing differently than the total
- Promotional examples that drove interest or results in a competitor or even noncompeting category
- Insights on retail store trends even in noncompeting categories
Consumer Insights are where I saw the most variation in what brands brought to me as a buyer. Retail buyers are looking for two things with respect to consumer insights. They are looking for an explanation of behavior or the why something happened. They are also looking for consumer insights to help understand how the consumers’ needs will evolve. These insights do not always need to come from a yearlong primary research project. Consumer insights can come from in-store consumer conversations, online consumer comments, demographic information combined with sales and marketing data, and similar data-driven insights. Remember, buyers are making decisions that won’t be implemented for six to even 18 months and need consumer insights to predict future consumer behavior. Examples would include:
- Insights on how consumers are making purchasing decisions
- Key influencers to the decision-making process
- Insights on what a consumer is willing to pay a higher price for
- Generational insights that impact purchase behavior
While some of this analysis can be common practice and has been going on behind the scenes already as you prepare for line reviews or business meetings, it is now even more top of mind for buyers. Buyers that are refocusing on the fundamentals are looking for even more supporting facts, analysis and insights to finalize assortment strategies. Assess your strengths and evaluate your data to ensure you are prepared to provide your retail partner with a recommendation supported with insights to remain an active participant in the conversation. If not, get help. Terry Lundgren also shared in his speech at the retail seminar, “You can’t relax in retail. You can’t take for granted that what happened last week or last year will happen again.” Don’t miss your opportunity, it’s time to get prepared to get back to the fundamentals. Are you ready to meet the elevated expectations?
Learn more about Kristin’s Retail Strategy Consulting Services.