Merchandising Optimization

image of rsr researchBy Paula Rosenblum, managing partner, RSR Research

For the fifth consecutive year, RSR Research conducted a benchmark study of retailers’ merchandising tools and techniques. There is no doubt that the core of merchandise operations has changed. Specifically, optimization tools and techniques can infuse the entire merchandise life cycle, with intelligence and analytics we used to only dream about. These techniques include forecasting; assortment optimization, integrated merchandise planning, allocation and replenishment; promotion optimization; and life cycle price optimization. While merchants have known for some time that these tools are extremely important for their retailing success, understanding of how they work has lagged. Fortunately, overall, retailers’ knowledge of these advancements has improved.

Key findings include:

• While out of stocks and inventory performance remain top-of-mind, particularly for large retailers and those who sell fast moving goods, retailers’ concerns about understanding customer preferences, and their own ability to respond to those preferences with new ideas about pricing and promotions, have become their top business challenges.

• 34 percent of all respondents plan to optimize their assortments against new key customer segments in the coming year. Another 24 percent plan to include initial price optimization in their processes in 2013, and 22 percent will incorporate promotion optimization.

• Winners continue to enjoy gross margin improvements, but laggards are feeling the pain of over promotion and inventory imbalances.

Of retailers in the mid market (those with annual revenue of $50 to $999 million), only a third report a solid understanding of most of the tools and techniques above, with the exception of forecasting, where they still lagged all other respondents, 50 percent vs. 75 percent, respectively. Lack of understanding translates into a dearth of technology adoption plans. The mid market lags in adoption of most modern merchandising tools, specifically:

• Assortment optimization technologies: Only mid market retailers have yet to budget for something to improve their assortment. While 33 percent report they have plans, there are no budgets in place. Without budget, there can be a two year lag time to implementation at minimum.

• Price optimization: Even as this technology becomes a mainstay in the retail enterprise, almost a third of mid market retailers report no plans to implement at all.

• Market basket analytics: No mid market retailers report use of this technology, while 51 percent of the largest and 44 percent of the smallest retailers report the technology has been implemented.

• Customer segmentation: 58 percent have no plans to use this technique. This lags all other retailers significantly.

• Planogram optimization: 69 percent have no plans to use this tool.

Over the past few years, the mid market has proven nimble enough to outperform its larger brethren. In the race to keep up with an erratic economy and very large competitors, these retailers may be setting themselves up to fall behind. Retail is not about technology; it remains about helping customers find the solution they need for their needs at a particular point in time. But with over educated consumers and large retailers gaining agility through sophisticated forecasting and optimization technologies, it’s incumbent on the mid market to elevate their game.