A number of years ago, I extolled the virtues of an approach to addressing the proliferation of underperforming SKU’s present in many categories populating store estates all over the world. Back then the word on the lips of many category practitioners was “rationalization”. What they should have been talking about and researching was how best can I optimize the category and be agile enough to meet the needs of my customers rather than what’s an efficient way to bring SKU counts and supply chain inventory down. It stemmed from people often casually swapping rationalization and optimization back and forth as though they were the same thing – clearly in the age of informed consumers who can easily be negatively impacted by large swaths of category changes, those terms are not the same.
Look beyond pure sales perfomance when cutting SKU’s
Cutting SKU’s solely on the basis of performance is a one-dimensional, blunt mechanism for keeping control of the category, yet easy to evaluate and relatively quick to implement. However the impact of doing this are wide reaching. When sales performance is the main driver for whether an item stays on the shelf, it ignores the impact on the category that customers preferences and shopping behaviours have. As retailers employ technologies that rapidly identify their most valuable customer segments, they need to take a holistic approach to the category and understanding what motivates your most valuable customers to purchase, has never been a more critical element to success.
History is littered with impulsive approaches to try and control categories. Read “The Rule of 17” to see how a retailer giant missed the boat by rationalizing rather than optimizing their categories and unconsciously ignored key customers in the process.
Building the most relevant, rather than widest assortment
At Symphony RetailAI, we receive inquiries from retailers and manufacturers everyday looking for assistance on how best to optimize assortments that rapidly identify and seize upon opportunities that can be executed with minimal disruption and that maximize value. With the increase in smaller format discount outlets, the requirement to build the most relevant, rather than widest, product ranges continues to grow as a priority for them.
So let’s look at the important factors that support category assortment optimization;
- Make assortment optimization part of the item life-cycle management process– To deliver positive financial results, organizations should implement ongoing reviews of assortments as part of an overall item life-cycle management approach. This should work hand in hand with merchandising and supply chain to ensure changes to the assortment are accurately executed at the store and evaluate the likely disruption to employees and inventory as part of the decision-making process before deciding to execute.
- Synchronize target customer requirements– It is critical for retailers to understand their target customers’ requirements in terms of variety and brand choice for each relevant category with their assortment optimization approach, ensuring that they are able to continue meeting expectations of the shoppers and their baskets that mean most to the your organization. Effective assortment decisions will be delivered when this planning is based on sales, customer and operational metrics that meet the needs of the most valued customers, those that drive profitable growth to the category and exhibit loyalty to the retailer brand.
- Align SKU approach with retail banner strategy– A retailer’s assortment must be consistent with the store banner strategy. Retail banners that target large, brand-loyal family shoppers will likely require more SKU variety than a retailer that targets smaller, limited income families. This requires an understanding of each customer segment and the relationship they have with each category and the behavior they exhibit when shopping it, both in traditional bricks and mortar and ecommerce channels.
- Run the numbers before implementing– Retailers should have the ability to accurately forecast brand switching and sales cannibalization/transferrable demand to fully understand the financial impact of category optimization decisions before implementing them in store. This helps retailers avoid generating categories that have unnecessary levels of product attribute duplication while maintaining necessary levels of variety and choice.
- Consider marketplace product availability– Retailers must understand product availability within their store trading areas to make ideal decisions related to assortments. This ensures retailers offer selections that are consistent and competitive with alternative shopping channels. This has become increasingly important in an omni-channel retail environment and must be analyzed and managed effectively.
- Test before you execute– Assortment optimization can dramatically impact a retailer’s business, both positively and negatively based on the accuracy of planning and execution. Rather than roll out assortment decisions across an entire store network simultaneously, savvy retailers will implement planned decisions in a small group of test stores to measure the actual impact and validate their estimated impact.
- Not a one-time adjustment…but a change in strategy – Retailers should approach assortment optimization as a change in their strategy versus a one-time adjustment in their business. This avoids the dangerous cycle of over-assorting and abrupt reductions in selection that can alienate customers. This aligns with a paradigm shift with the grocery industry where more and more retailers are looking to a refinement of assortments over time instead of being tied to a calendar based assortment review strategy, as discussed in the aforementioned “Rule of 17” It’s important to evaluate opportunities that can drive growth now, instead of waiting and missing out on the opportunity until the review process for a category is run many months later.
It’s critical that an organization’s strategic category management decision process seamlessly synchronizes with merchandising and other elements of the retail supply chain to ensure high levels of compliance and customer satisfaction. It’s not an instant cure to optimizing assortments, however it significantly improves merchandising, reduces out-of-stocks, cuts excess inventory and improves customer loyalty.