EKN, the research arm of Edgell Communications, conducts an annual survey of merchandising trends. Supply Chain Nation discussed this year’s study with Sahir Anand, vice president of research & principal analyst at EKN in anticipation of the August 19 webinar on this topic. Here is an excerpt.
SCN: Your Omni-Channel Merchandising Strategies study reports that the top business challenge retailers face is the need to maximize gross margin, closely coupled with the need to minimize markdowns. This might indicate that retailers are struggling to turn their merchandizing plans into effective assortments at the local level. Do you agree, and if so, what are the causes of this?
Anand: The notion that retailers are focusing on creating more margin-oriented drivers for unified merchandising is an accurate assessment. The major areas revolve around the ability to sell better, drive margin uplift and improve category-level uplift. Category management has become tougher and tougher in retail over the last 12 months. It has become a zero-sum game for a lot of retailers, barring luxury retail where you see a lot of upside for the existing categories year over year. Then you always have a novelty factor in luxury, where you have a new handbag, a designer shirt, or a new type of apparel product, and that’s what creates a newness factor from the consumer’s perspective, and that’s what drives the upswing in traffic and the excitement around field events, etc.
What our research shows is that for 2014, per the latest data that we’ve collected from over 100 retailers (52 percent large and 48 percent others), for companies that have $500 million and upwards in revenue, improving promotional effectiveness and price competitiveness is important for almost 40 percent of these retailers. What’s also important is improving demand forecast accuracy for about 42 percent of retailers.
The top three merchandising strategies revolve around creating more tailored, specific, and precision assortments. What this really tells us is that there is a focus on moving the categories in the right direction in terms of overcoming that zero-sum game. A lot of retailers focus on holding the status quo when it comes to sell-through and margin improvements so precision and localization forces them out of a comfort zone.
There is a definite focus on improving the precision of assortments down to the specific customer segments and having that optimal mix of standard or precision assortments. A combination of improving demand forecast accuracy and promotional effectiveness is also important. That ultimately changes the overall perception that things outside of luxury retail are tough in terms of category-level movement, margin uplift and same- store comps. There is also a channel shift and customers must keep coming back to the stores. There are ways to bring them back, such as new products, shelf-level engagement, promotional effectiveness and creating more tailored, specific, and precision-based assortments.
SCN: The respondents to your survey said their top priority for operational improvement was to improve their merchandise assortments. What benefits will this offer within the context of omni-channel operations?
Anand: You’re looking at an increase in spending for merchandising solutions of about eight to nine percent from 2014 to 2017 as a percentage of the total IT budget. This shows there’s definitely renewed interest in improving assortments, in improving the category-level sell-through, and driving precision assortments, as well as providing an omni-channel 360-degree view of merchandising. By that I mean when you’re looking at increases, is that just a factor of double-digit online growth in terms of category-level movement and category-level sales, as well as the fact that there is a channel shift? That’s where retailers need to take a step back and look at, “Okay, if our biggest challenge is to maximize gross margin amidst the slower-than-expected recovery in our store comp sales, then what are some of the things that we can do in order to address the high-level challenges?”
The high-level challenges and top merchandising challenges have not differed from 2013 to 2014. They are maximizing gross margin and improving the customer’s perception of assortments. It was definitely the slower-than-expected recovery in the stores that hurt same-store sales comps.
Technology is a bigger challenge when changing or transforming omni-channel merchandising solutions. Whether you’re planning for omni-channel demand, price promotion optimization, store space optimization or store shelf optimization, that this is where the legacy retail technology architecture, as well as the legacy thinking, becomes a major roadblock.
I’ll give you a good example. When it comes to the overhaul of online merchandising tools, that is an easier sell internally than a wholesale change in the end-to-end merchandising system that manages the store-based merchandising. That is because for more than seven out of ten retailers, these systems have traditionally existed in silos. They have some common buying functions, yes. And companies like New York and Company, Macy’s and Staples are trying to integrate these different systems to work together. It means you have one common merchandising team to create the whole omni-channel merchandise plan. When you drive pricing promotional assortment allocation, it should be done as a collective group across all channels. It’s takes people out of their comfort zone, telling them that they ought to work together.
You’ve got to create a unified merchandising plan, a unified buying strategy. When it comes to your purchasing requirements, you need to look at all-channel demand. When you’re filling demand, you need to look at channel complexities first and impacting merchandising positively all across the organization. Limited Brands and Bed Bath & Beyond are moving in that direction.
So there’s a trend where a handful of best-in-class companies are leading the charge, and they’re breaking down the internal silos and comfort zones. As a result, channel teams are looking at merchandising in very different ways. If retailers want to address the need to maximize gross margin, which is the number-one challenge for 54 percent of retailers according to our 2014 data, then they need to integrate existing systems across all channels and have one team addressing it rather than several disparate teams.
SCN: Thank you, Sahir. In Part II of this series, launching August 28, Anand will discuss how systems integration and analytics are impacting omni-channel merchandising.