Merchandising 3.0. Why Retailers Need to Find the Perfect Blend of Art + Science to Be Relevant to Shoppers Again.

Transcription

1 Why Retailers Need to Find the Perfect Blend of Art + Science to Be Relevant to Shoppers Again. RESEARCH PARTNER

2 Unfamiliar Territory. Merchandising is a retailer s central nervous system one that provides strategic focus on what the retailer should sell, to whom, at what time and place. It forms the glue between Marketing at the front-end of retail and Supply Chain at the back-end. And, merchandising especially in fashion and apparel retail, where namesake designer brands and labels reward individual brilliance - has traditionally been one of the industry s true art forms. There is no denying the success designers, buyers and merchants have delivered fashion and apparel retailers through sheer gut, intuition and experience. And, they ve been rewarded for it an overwhelming majority of the top 20 apparel retail CEOs are exmerchants. But, the times they are a changin. The march of technology has brought with it a new-age consumerism that is upending traditional retail wisdom. And, the same deeply rooted merchant gut-driven, product-centric culture and business processes are now in need of a fundamental overhaul. EKN Research conducted an executive survey of 60+ retail merchandising executives, to better understand where the industry currently stands in terms of merchandising maturity. This point of view presents an executive summary of EKN s findings and analysis. Research Demographics % 60 % 57 % 20 % US retail executives Soft-Lines 30% Hard-Lines from retailers with more than $1 billion in annual revenue Director or VP Level SVP or C-Level

3 The Spectrum of Merchandising Maturity Retailers turning on omnichannel commerce capabilities (such as store-inventory lookup, ship-from-store, online recommendations engines) forced the hand on the (slow) move from Merchandising 1.0 to 2.0. The real challenge for retailers will be to continue the move towards true customer-centric merchandising. Merchandising 3.0 Framework 1.0 PRODUCT-CENTRIC 2.0 CROSS-CHANNEL 3.0 CUSTOMER-CENTRIC MERCHANDISING PROCESS PLANNING Based on product categories and store clusters. Channel-driven with limited cross-channel collaboration. Based on customer segments. Unified team responsible for planning across channels. ASSORTMENT Low variability of assortment across stores. Limited personalization and localization. Significant increase in online assortment. Mass-based, disconnected across channels. Highly localized and personalized assortments based on micro customer segments. ALLOCATION Limited flexibility with fixed allocation for DCs, warehouses and stores. Improved flexibility for product categories that have higher uptick online. Allocation is still locked/driven by channel. High flexibility and quick response time based on real-time allocation. Integrated with new last-mile fulfillment partners. PRICING Based largely on historical data and intuition. Online and offline pricing still disconnected. Improved pricing analytics. Optimized based on fulfillment, inventory, and customer data. PROMOTION Heavy use of mass promotions. Tactical promotions based largely on yearly plans. Focused on driving channel growth, especially through digital conversion. Personalized, with the ability to optimize across channels. BUILDING BLOCKS ANALYTICS MATURITY Low Medium High CORE TECHNOLOGY PLATFORM Legacy with best of breed additions. Best of Breed Merchandising Platform. Heavy on custom mods and integration. Single Omnichannel Toolkit. SOA based ORGANIZA- TION DESIGN Fractured Channel-Centric Unified

4 A Framework to Improve Maturity As a core retail function, merchandising has a deep impact on a retailer s brand, marketing strategy and programs, supply chain and inventory strategies, and channel operations. In a traditional retail environment the focus is on optimization of each individual function. Optimization, however, tends to prioritize the local optimum (channel-centric merchandising efficiency) over the global optimum (customer-centric merchandising proficiency). To truly achieve the vision of a frictionless, personalized, channel-agnostic customer-experience, retailers will need to evolve the merchandising function to be unified rather than just optimized. Unified across the merchandising process chain, across the enterprise and across channels. The Building Blocks of Merchandising 3.0: UNIFIED MERCHANDISING ORG. STRUCTURE CUSTOMER INSIGHTS MERCHANDISING TOOLSET 3.0 Make the organization customer centric Improve analytics maturity across the merchandising function Building upon embedded analytics, deliver consumer-grade enterprise software to employees Each of the sections that follow provides directional guidance, current retailer maturity and prescriptive recommendations for each of the key transformation areas.

5 A Framework to Improve Maturity: Customer Insights If merchandising is an art, customer data and advanced analytics are now part of the artist s toolkit. With the amount of customer data at a retailer s disposal, it is foolish to forgo the opportunity to improve the merchandising process by not utilizing those insights. Intuition combined with intelligence is more powerful than intuition alone. Empower merchants through self-service data visualization Most retailers exhibit a reporting culture that is at odds with their lack of analytics maturity the greater the number of reports, the less likely it is any of them are used in any meaningful way. Retailers should set an aggressive target of eliminating 70%-80% of all reports (especially those that look backwards), and instead focus on providing the merchandising team simple, self-service tools to visualize forward-looking scenarios. Retailers cite Limited Reporting as the biggest gap in their current Retail Planning software Focus on prescriptive analytics that offer insights in plain-speak in a few key high-value areas In 2017 retailers will prioritize merchandising analytics investments on customer segmentation, inventory planning and demand forecasting. The specific use cases they will focus on include personalizing offers based on local customer needs, clustering stores based on customer behavior, identifying variation in size-level demand across stores and optimizing promotions for maximum customer impact. Beyond investments in tools that deliver these capabilities, retailers must lay the foundations by improving the quality of their data and data-model. Yet those that go the extra mile by customizing alerts and actions into plainspoken natural language that tell the business user exactly what to do, would ve addressed advanced analytics biggest nemesis: inability to interpret = inaction. 4 in 5 retailers want to improve their focus on the in-store experience, yet only 1 in 5 will increase the number of store associates. Merchandising teams will need sharper analytics and increased collaboration to help store teams do more with less.

6 A Framework to Improve Maturity: Customer Insights Integrate customer insights into core merchandising toolsets Continuing with the theme of making it easier for the merchandising team to use customer insights, it is incumbent on both retailers and software providers to blur the line between a merchandising workbench and an analytics platform. Increasingly analytical capabilities will either be directly embedded in, or be easily integrated with, the core merchandising toolset. Top 3 Areas of Analytics Focus #1 #2 #3 Clustering Inventory Planning Demand Forecasting Retailers will increasingly be pushed outside their comfort-zone of store and online channels into rapidly emerging channels such as social buy buttons, web-browser shopping carts, messaging platforms and 3rd party apps. The role of analytics and insights will evolve further as retailers need to go beyond merchandising for channels they own and operate. The opportunities to localize assortments and personalize pricing and promotions are tremendous. Retailers must tune their analytical radar to these digital signals beyond the traditional channels they own and operate.

7 A Framework to Improve Maturity: Merchandising Toolset 3.0 Most retailers merchandising systems are rooted in legacy, offering a false sense of security to those that understand how to use the systems and to those that maintain them. Retailers must take a hard look whether their current toolset passes muster in light of the demands of a digital workforce and the need to move towards a smarter, sharper customer-centric merchandising strategy. Deliver a consumer-grade software experience to employees They ve come to expect that based on their experiences with devices and software from personal use (Think Apple, Netflix, Uber, Snapchat). Improve the user experience by benchmarking against and learning from leaders in the consumer software and apps category. Design the application architecture with a mobile-first, anything-next view. Enable greater enterprise collaboration. Accelerate new feature deployment. At the same time, provide enterprise-grade performance and security Evaluate the benefit of a cloud-based deployment that offers enhanced application availability, performance and stability. Prioritize software that offers bi-directional API access, allowing easier integration with other services and software. 1 in 3 retailers rate a complicated user interface as their top merchandising systems challenge Retailers cite the difficulty to maintain and upgrade merchandising systems as their second biggest technology challenge Embed analytics and smart reporting within merchandising software By powering key features within the merchandising toolset through analytics, retailers can take the friction out of the associate s experience. Allow buyers and merchants to find or set-up products via flexible categories that match customer segments or seasonal buying scenarios. Use data-science and algorithms to make predictive recommendations that help create a frequently bought together ensemble.

8 A Framework to Improve Maturity: Organization Culture & Structure Merchandising 3.0 For decades retailers organizational structure and culture was optimized for a channel-centric reality. Becoming customer-centric will neither be easy nor quick. Retraining the organizational fiber such that customer-centric muscle movement feels natural will require significant structural and cultural changes. Create an integrated merchandising team responsible for a unified merchandising plan Merchandising teams must be channel-agnostic, rewarded on overall retail performance and encouraged to collaborate across categories. Simply put, buying plans that optimize for channels vs. for customer segments are sub-optimal and leave both revenue and profit on the table. To truly organize themselves around customers, retailers must explore more radical organizational structure changes wherein each customer persona could represent a vertically integrated business unit with a CEO responsible for everything from sourcing through to inchannel presentation. Institute a role accountable for the customer experience Whether as a change-agent or a more permanent role, retailers need someone (other than the CEO) accountable for the customer experience. Part of the charter of this role needs to be the definition of specific integration points of the merchandising function with other functions. For instance, a unified merchandising plan needs to take into account whether the store and ecommerce teams in turn are integrated or maintain separate inventories. A product-centric organization culture (top challenge for 1 in 2 retailers) and a channelcentric organization structure (top challenge for 1 in 3 retailers) indicate a clear lack of organizational alignment as inhibitors to being more customer-centric. Further, 3 in 4 retailers are looking to institute a role accountable for customer experience in the next 2 years.

9 A Framework to Improve Maturity: Organization Culture & Structure Train and hire merchants to be more receptive to insights Software alone isn t the cure-all. Retailers must invest in training buyers, merchants and merchandising executives on how to leverage customer insights to improve decision-making. Further, retailers must invest in change management and place higher value on talent that understands the importance of big data driven decisions. Beginning with a two-ina-box model (Merchant + Analyst), provide the organization training wheels for its progress towards a more insights-driven culture. Less than 15% of retailers rate themselves as ahead of competition in terms of use of analytics and insights to drive customer-centric merchandising. Merchandising is the lifeblood of retail. If you strip away the bells and whistles from retail s core business model, all that remains is the art of knowing what to sell to whom at what price. While this central axiom of retailing success hasn t changed in centuries, what s changed is how to succeed at it. Shed decades of channel-centric muscle-memory. Unify merchandising teams and processes. Embed shopper insights into merchandising processes. Re-imagine merchandising software to deliver a higher benchmark of performance, user friendliness and portability.

10 Our research agenda is developed using inputs from the end user community and the end user community extensively reviews the research before it is published. This ensures that we inject a healthy dose of pragmatism into the research and recommendations. This includes input of what research topics to pursue, incorporating heavy practitioner input via interviews etc., and ensuring that the blend of research takeaways are oriented towards a real-world, practical application of insights with community sign-off. For more information, visit www. eknresearch.com. us at EKNinfo@edgellmail.com JDA Software is the leading provider of supply chain, manufacturing planning, retail planning, store operations and collaborative category management solutions. JDA s innovative solutions and unmatched industry expertise help companies streamline their supply chain, optimize inventory, labor and customer service levels, and deliver increased profits. As a result, JDA s solutions have become the industry standard for more than 4,000 of the world s leading retailers, manufacturers and distributors. To learn more contact JDA. Disclaimer: EKN does not make any warranties, express or implied, including, without limitation, those of merchantability and fitness for a particular purpose. The information and opinions in research reports constitute judgments as at the date indicated and are subject to change without notice. The information provided is not intended as financial or investment advice and should not be relied upon as such. The information is not a substitute for independent professional advice before making any investment decisions. Copyright 2016 EKN Registered Office: 4 Middlebury Blvd. Randolph, NJ Ph: (973)