Industry Point of View Sponsored by Protect Your Retail Turf: Assortment Optimization Strategies In the last few months, fundamentals of the retail industry are trending on the softer side. Several retailers are facing headwinds in terms of tepid customer traffic in stores, unpredictable top line revenue and emergence of off-price sales channels in traditionally less price sensitive segments such as specialty, apparel, fashion and luxury. In the face of such macro problems, a strong focus is needed on one of the core customer-centric retail building blocks - Assortment Management & Optimization. However, standing in the way of perfect assortments are two business challenges that retailers are currently grappling with. First, more than 1 in 3 retailers lack predictive tools to forecast customer demand and second about the same percentage are unable to plan assortments around multiple product attributes such as size, color, styles and others 1. This point of view report presents key analysis from EKN 2016 Assortment Planning and Localization survey of about 50 North America-based retailers. This report highlights strategies and solutions that aid better assortment-mix decisions in retail pre-season, in-season and end-of-season. Strategies and solutions that are discussed in this report can ultimately lead to more profitable retail execution - precision assortments, increased full-priced sell-through of merchandise, improved gross profitability and reduced dollar markdowns. 1 EKN 2016 Assortment Planning and Localization survey
EKN 2 CURRENT STATE OF ASSORTMENT MANAGEMENT What Customers Look for in an Assortment Overall, retailers and customers cite different reasons why customers buy products from the retailer. From a retailer s point of view, product quality is the prime reason customers are buying products from them, followed by overall customer experience at the store or sales channel. Product range or depth of assortment comes next on the retailer s list of most influential customer purchase drivers. Unexpectedly, according to retailers, price is ranked #4 on the list of purchase influencers for customers. However, EKN s 2014 Millennial customer survey (n=1800; North America) shows that the retailer point of view is divergent when compared to the customer perspective regarding top factors influencing buying decisions of customers. According to the EKN survey, the top factors affecting the millennial customer s purchase behavior indicates price sensitivity, discounts & promotions and product availability rank as top drivers for customer purchase. When one compares the list of top 5 factors from both surveys, price is the only common driver of purchase both from the point of view of the retailers and customers. These results indicate that retailers need to re-think the overall value associated with customer purchase drivers. Augmenting products or assortments and related shopping experience need to be a higher focus for retailers so that customers look beyond price and discounts as the leading factor influencing their product purchases. An increased focus on enhancing assortments and shopping experience ensures full-price sales and higher margin. Moreover, such strategy enables a stronger long-term competitive differentiation. Factors influencing customer s buying decisions Retailer s POV Customer s POV 60% Product quality Price of the product 91% 50% Customer experience Discounts and promotions 74% 40% Product range Product availability 70% 28% Price Pleasant staff 55% 28% Preferences Ease of navigating the store 40% Source: EKN 2016 Assortment Planning and Localization survey Source: EKN Millennials Consumer Study, 2014
EKN 3 Are Universal or Local Assortments Better for Retailers and Customers Applying a universal vs. local assortment strategy is the big dilemma that is dogging most retailers who want to differentiate their brand on the value and depth of their assortment-mix and overall customer experience. For the most part, 6 in 10 of all retail assortments are universal or applicable to a broad group of customers or bordering it. The reason is that on average 7 in 10 retailers do mere macrolevel geographic customer segmentation to plan targeted product lines and product varieties due to lack of investments in deeper preference and affinity-related customer insights 2. The downside of a broad geographical cluster-based assortment plan and segmentation strategy is an assortment that is too generic for customers that have specific tastes and lifestyles. When it comes to seasonal selling, a few weeks into the season such universal assortments often show poor inventory turnover and high-dollar markdowns. 7 in 10 retailers do mere macrolevel geographic customer segmentation to improve targeted product lines and product varieties Currently, the different types of customer demographics and psychographic segmentation areas are largely outside the capability set of a majority of retailers (illustrated in the chart below). However, with adequate investments in local customer insights, category and item analysis and store/channel audits, retailers can develop more targeted and localized assortments or product lines/varieties. A sharper focus using deeper customer demographics and psychographics across brands, channels, promotions, frequency, recency and basket size drivers can help not just retailers, but also support the sales and operations plans of consumer products and supplier communities. Level of consumer segmentation to improve targeted assortments (Figures below are % of total respondents who currently segment their customers based on criteria mentioned below) Answer Options Customer demographics areas Customer geographic areas Customer psychographic areas Price Points 60% 68% 46% Merchandise category 60% 50% 62% Transaction size or value 54% 66% 32% Basket size 52% 70% 40% Shopping frequency 52% 58% 36% Brands 50% 50% 44% Transaction Volume 48% 78% 16% Channels 42% 82% 34% Shopping recency 40% 76% 16% Promotions 40% 66% 42% Occasion (sales event etc.) 28% 76% 40% 2 EKN 2016 Assortment Planning and Localization survey
EKN 4 Extent of Process Integration Consumer Insights, Assortments & Allocation Irrespective of retail size and segment, there is a strong need for deeper integration of assortments with consumer insights, allocation and merchandise financial plans. 60% of the retailers surveyed do not possess customer-centric store-level clustering for omnichannel assortments leading to declining full-price sales and lower than expected inventory turns and sell through of merchandise, EKN 2016 Assortment Planning and Localization survey reveals. One of the major reasons is disparate and legacy assortment management that does not allow for extensive in-process customer insight input for assortment planning. Such insights are gathered via transaction business intelligence, unstructured and syndicated data solutions. 60% of the retailers surveyed do not possess customer-centric store level clustering for Omnichannel assortments Moreover, a third of retailers have no formalized processes to integrate assortment management and allocation execution for stores and other channels. From a planning and execution perspective, these two big pillars of merchandise management are largely handled separately. The lack of integration between the two sides is apparent in the case of many retailers. For instance, the coordination between open-to-buy, category and department-level assortment plans and precise allocation of all SKUs for both promoted and non-promoted items is done too late in the in-season planning process leading to delayed shipments, out-of-stocks and fulfillment delays. Integration and merging of merchandise financial plans and decisions with assortment strategies is also critical as retailers need to ensure that the financial goals meet the product and sales goals location by location and channel by channel.
EKN 5 TOP BUSINESS CHALLENGES: DIFFICULTY IN FORECASTING DEMAND AND ATTRIBUTE-BASED PLANNING Retailers find themselves in a tricky position as they need accurate demand forecasts to plan assortments more effectively for their stores and other channels. However, the prevailing demand forecasts leave a lot be desired as the average retail forecast accuracy stands at a mere 60% (according to anecdotal evidence), irrespective of which forecast methodology one uses. Moreover, legacy ERP and excel-based forecasting tools do not possess predictive capabilities that utilize heuristics and algorithms for identifying causal and predictive relationships between demand, assortment buys, price elasticity, sales, allocation and supply planning. The second biggest business challenge is an issue which is at the heart of the assortment planning process for a third of companies. Over the years, the growing range complexity within retail categories has led to the adoption of attribute-based (size, color, styles, etc.) assortment planning. But, many prominent retailers still do bulk top-down plans and universal year-over-year assortment planning without much emphasis on attribute-based segmentation of buys by customer groups, size, styles, colors or other types of attributes. Top 7 challenges in assortment management Lack of predictive tools to forecast customer demand Unable to plan assortments around multiple product attributes Speed to market for new products Difficulty in planning omnichannel assortments Difficulty in clustering locations to local tastes and preferences Legacy systems or spreadsheet-based planning tools Lack of better customer segmentation/ insights Multi-attribute based planning is quite efficient for all stakeholders as it helps address scale and assortment specificity, but retailer migration towards attribute-based planning has been tepid at best. The reason is again legacy thinking and hard-to-break merchandising methodologies that rely on bulk category, department or class-level plans. Such plans have a set buying and order management route through domestic or international buying offices, brokers, agents and distributors via traditional invoices and purchase orders with bulk pallet requirements that contain only basic UPC or SKU data. The third challenge, speed to market, is being felt by a third of retailers. There is swift change taking place within retail sales and customer purchase behavior. Even as digital is expanding with high double-digit expected growth by 2018 at 30% CAGR 3, there is a pattern of inconsistent customer purchases at retail stores in several retail segments over the last few quarters. Such trends have meant that many retailers are expanding their current assortments every day to add new products. However, assortment expansion poses a serious speed to market and leadtime challenge as new products need to be backed by strong marketing, operational plans and field sales training. While retailers cite an average design-deliver cycle time for products at 4 months 4, both retailers and customers expect even faster speed to market so that product gets into the hands of customers faster and cash registers ring louder than before. This will also enable a better and more agile response from retailers towards emerging customer behavior and related trends in the stores. 3 EKN 2016 ecommerce Growth and Future of Omnichannel survey 4 EKN 2016 Private Label Sourcing survey
EKN 6 TOP INVESTMENT AREAS AND STRATEGIC LEVERS Top investment areas for assortment management 48% Assortment plan visualization 48% 32% 32% 28% Integration of merchandise plans with assortment planning Demand forecasting/ demand signal repository Omnichannel assortment management and visibility Consumer insights/ predictive and advanced data analytics 26% 26% 24% 20% 16% Assortment plan execution through integrated allocation Space-aware assortments New product development Assortment localization Assortment/SKU rationalization While the top challenge for retailers is the lack of predictive tools to forecast demand, the leading investment area that retailers are focused on for 2016 is assortment plan visualization (close to 5 in 10 retailers). While the top challenge for retailers is the lack of predictive tools to forecast demand, the leading investment area that retailers are focused on for 2016 is assortment plan visualization (close to 5 in 10 retailers). One of the reasons behind such an investment is the lack of adequate visibility towards multi-attribute assortment plans across multiple store formats and too many frequent changes to the assortment. Moreover, the need for effective retail store execution is another reason behind such investments. Traditionally, retailers have lagged behind consumer product companies in adopting 3D visualization tools for assortment management and visualization of product images in distinct store settings (big-box, small format, express stores, others). The 3D visualization tools allow companies to do close to real-life planogram simulations on product facings and aisle placements in different store formats. The main roadblock in the adoption of new types of assortment visualization tools is the over-reliance on 2D planogramming which is a laborious process of maintaining and updating product selection, shelf-level facings and aisle placements. The second biggest investment is in the area of integration of merchandise plans with assortment planning. Retailers either develop top-down or bottoms-up merchandise plans. Such plans typically reside in separate modules within a software platform or are developed using spreadsheets. These plans end up being developed separately from assortment plans. As a result merchandising and assortment planning processes are disconnected from each other in terms of strategy, production and even marketing. There is an immediate need for deeper integration between these two critical merchandising pillars so that a common vision and business objectives are followed by all stakeholders. Ultimately, the business goals inherent in the merchandise plans must be supported by items or assortments that help meet the business goals. Assortment plans need to be linked more cohesively with the financial targets in the merchandise financial plan.
EKN 7 TOP CAPABILITIES: NEED FOR DEEPER INTEGRATION BETWEEN CORE MERCHANDISING AREAS Current & planned use of key capabilities for assortment management Capabilities Currently Use Plan to use within 12 months Integrated assortment planning and allocation execution processes 66% 30% Integration of merchandise financial planning to assortment development 58% 34% Actively managed plans for both short and long lifecycle products Customer-centric store-level clustering for assortment planning 50% 50% 40% 42% Demand-driven assortment plans pre-season and in-season 40% 48% Define markdown strategies to manage end-of-life/end of season inventory to improve margin performance 40% 48% Reduce end-of-season on-hand inventory and related markdowns through optimum order quantities 38% 50% Early order commitments, close to, and in-season adjustments Buyers and merchants are able to access detailed analysis of store plans to ensure alignment with strategic and financial goals 36% 36% 50% 48% On-demand visibility into assortment plans, forecasts and performance 32% 42% Automated matching of size, color and styles attributes with plan and orders 32% 46% The leading capability used by two-thirds of retailers that aids effective assortment management is related to integrated workflows between assortment planning and allocation management. However, for many retailers such capabilities are still fulfilled in silos rather than executed in a single and integrated platform. Allocation and assortment management teams need to be encouraged to share unit-level insights in real-time with each other, and allocation managers must be able to see and use multiple, attribute-based plans and product images. Retailers must invest in a common platform for visibility and analysis of assortment information and related allocation plans. Merchandising teams must be able to analyse and summarize assortments by location and align the same to allocation and financial targets. Two-Third of retailers use integrated workflows between assortment planning and allocation management. Source: EKN 2016 Assortment Planning and Localization survey
EKN 8 Close to 4 in 10 retailers are unable to ensure integration of merchandise financial planning to assortment development. When done right and within one system, integrated financial planning and assortment development can provide retailers with the ability to make agile decisions and have timely visibility throughout the planning process. This helps retailers: Align, analyze and summarize financial goals by category and location and align with items within assortments Retailers must invest in a common platform for visibility and analysis of assortment information and related allocation plans. Ensure clear communication and collaboration between internal and external supplier stakeholders Avoid manual planning and distributing of inventory at the last-minute to meet some customer trends Make the right amount of merchandise buys in line open-to-buy goals and financial targets The gains of such integrations are decreased lead-times, fewer delayed orders, accurate inventories and reduction in lost sales. The top two planned capabilities that 1 in 2 retailers want relates to the finalizing of assortment buys and managing an optimum order management process with suppliers. The retail industry also has to deal with scenarios where early commitments to the orders are made several weeks or months in advance. But, if a demand trend shifts then retailers should have ability to adjust orders either close to the trend taking place or make in-season adjustments. No one wants excess inventories or markdowns at any stage of the selling season. This improves the excess inventory situation and improves the overall communication between suppliers and retailers. Retailers rate top two planned capabilities as Reduce end-of-season on-hand inventory & related markdowns through optimum order quantities Early order commitments, close to, and inseason adjustments
EKN 9 TECHNOLOGY ENABLERS AND DEPLOYMENT STRATEGIES Merchandise Planning Solutions: Up-To-Date Merchandise Planning Solutions: Currently Upgrading 62% Strategic and financial planning 40% Demand forecasting 60% Consumer/customer analytics 42% Product/item master (MDM) 52% Supply planning 50% DC replenishment 50% Inventory management 48% Assortment planning/optimization Merchandising applications space has a high degree of fragmentation. The adoption of legacy applications and spreadsheet usage is fairly common in key merchandising functions even among large and well-established retail brands. Retailers can address many legacy and traditional planning, assortment and allocation-related integration gaps by using a unified and integrated workflow-based platform that follows four key strategic pillars: customer science, digital user interface and experience, integrated workflow and functional collaboration. In terms of use of merchandise planning related value chain technologies, the highest demand for upgrades for close to 1 in 2 retailers is within visual merchandising, category management and space planning. Companies want to get customers flocking into the stores again and such applications can help drive up location-based customer experience and lack of location-based merchandise innovation. More than 4 in 10 retailers are currently making the much needed upgrades to ERP-based or best-of-breed demand forecasting, distribution center replenishment and assortment optimization. The intent here is to align financial and profitability plans location by location with unique, expansive and differentiated customer-centric assortments that are trendy. In terms of execution solutions, almost half the retailers feel they possess updated systems for allocation, store replenishment, item master, analytics and space management. While retailers claim being up-to date on such applications, the reality is that there are often large integration gaps between planning and execution applications and related workflows such as merchandise allocation and assortment management. Additionally, pricing, promotions, markdown and planogram management need a definite face-lift due to a large concentration of legacy and home-grown applications that are close to or reached end-of-life. Retailers are currently in the process of upgrading such applications as there are a number of business benefits to be derived from execution focused applications. Retailers need to be judicious in selection and make sure that the sales uplift, operating profit and sell through benefits of such applications are assessed well to prove the ROI to management.
EKN 10 Current status of merchandise execution solutions Up-to-date Currently Upgrading Need Upgrading Merchandise allocation Replenishment management Product/item master (MDM) Merchandise analytics Space management Promotions management Pricing management Planogram management Markdown optimization Hitherto, 6 in 10 retailers deployed their merchandising systems using a license on-premise model. This has been the norm as that is how most retail enterprise applications were deployed to comply with application customization, data management and software application security, technology governance and business user license requirements. However, SaaS applications hosted in the cloud and managed services models have been adopted by close to a third of companies. SaaS deployments has caught on in the retail industry for reasons such as ease of scalability, flexible pricing terms when compared to on-premise models and ease of future upgrades. Managed services is an area that is fast emerging as the next best resource-friendly recourse for small IT teams that are already stretched for managing multiple retail applications and an already complex architecture. Remote management of IT infrastructure and day-to-day data management and other responsibilities reduces the burden on the core IT team. Within merchandising, bi-directional data integration/flow and upgrades are constant requirements. When priced and managed right, SaaS and managed services can help retail companies focus their limited IT resources on mission-critical tasks and drive IT stack innovation. Deployment strategy for assortment planning solutions Currently deployed License on-premise (62%) Software-as-a-service (SaaS) hosted in the cloud (32%) Plan to be deployed in 12 months Software-as-a-service (SaaS) hosted in the cloud (32%) Hybrid Cloud (38%) Managed services model (40%)
EKN 11 CONCLUSION Assortments in terms of number of products, varieties and lines are the heart and soul for any retailer to build and sustain a customer-centric business. However, the road to assortment optimization is long one and one that requires crossing a series of speed-bumps and milestones. For over a third of retailers, assortment management is yet to be connected to allocation in a real-time process or at a user level. Similarly, for one-third of retailers, assortments are devoid of the process and feature connectivity in terms of the financial and overall merchandise plan. Additionally, the shortcomings related to lack of an accurate demand forecast, consumer insights and multiattribute based planning hampers developing of precision assortments that can sell through, drive traffic and enhance margin. Retailers can address these problems by transitioning out of systems that are legacy and cause several planning, assortment and allocation-related process integration gaps. Retailers can transition to a single, unified and integrated merchandising process-based platform that follows four key strategic pillars: customer science, digital user interface and experience, integrated workflow and functional collaboration. A platform approach can reduce the silo burden engulfing merchandising applications including assortment management. The road to assortment optimization would be less bumpy if retailers possess a series of user-level integrated workflows that presents the best set of tools for organizations to come up with targeted and balanced assortments.
EKN 12 RECOMMENDATIONS ST S h o r t T e r m ( 0-6 m o n t h s ) Medium Term (6-12 months) LT Long Term (1-2 years) ST Migrate to a multi-attribute based assortment planning system. Create attribute-based planning based on common product specifications (size, color, styles etc.) and customer segmentation attributes (preferences and affinity) Ensure full functional and organizational integration between merchandise planning, assortment management and allocation for strategic planning, financial plan-product plan-sales alignment, production/otb, order and marketing Add a consumer insights module within the merchandise and assortment management system for seamless customer behavior data access at an end-user level ST Develop benchmarks and KPIs that can measure targeted pre-season and in-season assortment progress (shorter lead times, on-time orders, inventory accuracy, lower lost sales, higher full price sell through, lower markdowns etc.) ST Define pre-season, in-season and end-of-season assortment performance areas in line with performance goals. Identify product remedy or change areas where performance is on expected lines or worse ST Ensure that assortment plans meet company goals both in terms of bottoms-up and tops-down plans Use investigative and predictive data insights to identify and resolve gaps in assortments through a phased evaluation of pre-season, in-season and end-of season assortment plans Evaluate a managed services strategy for merchandise and assortment management. Develop a roadmap for technology migration towards lean customer and data science driven assortment planning and execution models
About EKN 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. Email us at EKNinfo@edgellmail.com About JustEnough JustEnough is a leading provider of Demand Management solutions for retail, wholesale and direct-to-consumer businesses and is serving the planning needs of many of the world s leading brands. Available OnCloud and On- Site, JustEnough s solutions help companies to forecast their customer demand; plan their assortments, allocations and inventory; shape their demand with promotions and markdowns and then execute on those plans. JustEnough s innovative and easy-to-use solutions share a common architecture and database making it easy to start by addressing your biggest opportunities first and then bringing on additional solutions when you re ready. JustEnough s solution suite includes: Merchandising Financial Planning, Assortment Planning, Allocation, Demand Forecasting, Inventory Planning, Replenishment, Markdown Planning, Price Management and Promotion Management. Our industry-ready retail planning solutions are highly scalable and flexible. Our solutions grow and adapt to new business needs as your customer demands change and new selling channels emerge. Additionally, our retail solutions seamlessly integrate with any enterprise resource planning (ERP) system whether it s Microsoft Dynamics, Oracle, SAP, NetSuite or your own system. To learn more please visit www.justenough.com or email info@justenough.com. 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 07869 Ph: (973) 607 1300