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Retailers competing for limited consumer dollars have one powerful tool in their arsenal: offer newer and more desirable products.
The ploy of increasing prices to maintain margins worked for a while as retailers managed soaring inflation-triggered product costs and reduced sales volume. But prices are not infinitely elastic. The cost of goods remains elevated, and customers are now decreasing spend alongside shopping less frequently. This has pushed retailers to a tipping point.
A new, more holistic, data-driven approach to resetting assortment is necessary for success. Customers continue to trade down to more affordable brands—which will proliferate this holiday season—but their desire for newness remains high. Analyzing how items or vendors are performing is one step of iterating assortment, but it takes more to figure out which products are replaceable. Too often, we see retailers use a flawed or incomplete data set, or rely on a skewed sense of profitability, to make decisions. This leads to poor future planning—retailers must instead quantify the value their assortment strategy plays in driving traffic and customer acquisition. Machine learning and AI advancements can help retailers generate new approaches to age-old assortment management questions.
To start, retailers must ask themselves three questions:
- Is our assortment aligned with our broader strategy, customer positioning, and value proposition?
- Which brands and products are critical to driving our assortment strategy profitably?
- How can we implement a sustainable strategy with room to iterate each year?
The process is worth it. Strategically enacting these measures with proper data metrics will help retailers improve profit margins, simplify inventory management, and facilitate more targeted, customer-driven buys. Retailers can take three steps to effectively manage these changes:
1. Perform a top-down review of your company strategy. Then assess the competitive landscape and where opportunities exist
Align all category-level assortment decisions with your overall corporate strategy. When doing so, think through where you currently see yourself in the marketplace, and where you could shift moving forward to grow. Capture and understand consumer demand signals, as well as category penetration shifts, to augment your perspective. This information will help determine your right to play and right to win within certain categories and the market at-large.
As consumers trade down, retailers are noticing a shift in their traditional customer bases. With this challenge comes opportunity for those willing to think outside of the box. You must now work to retain existing customers, while also building awareness and purchase intent with new segments. For example, discount retailers have the chance to captivate a middle-tier customer that previously shopped elsewhere—if they can reach, acquire, and retain them successfully.
2. Conduct vendor- and product-level analysis. Then decide what stays and goes
Evaluate vendor and product performance on true profitability, accounting for markdowns, marketing costs, logistics, and other overhead. Once you factor in the relative importance of each vendor and product to your overall category assortment, you can take action.
From a vendor perspective, this is the ideal time to renegotiate costs and lock in lower rates with vendors that passed on price increases over the last two years. Vendors will likely try to renegotiate again if inflation returns or costs rise, but major commodity costs have been on a downswing over the last 12 months. Having a true understanding of which items are replaceable helps arm merchant teams with the leverage needed to conduct healthy negotiations.
From a product perspective, conduct replacement analysis to discern which products you can eliminate. For any product you cut, ensure you have a replacement that will appeal to current or future customers. Alternatively, you can consider which products remaining in your mix fill a similar need yet perform better, and boost marketing spend to grow sales.
Verify your choices through customer retention rate analysis. For each customer who bought a soon-to-be-removed SKU, determine the percentage of sales you will retain on similar products. This is a necessary step before enacting any changes, as is assessing vendor and product sales growth trends. Account for any future shifts that could impact growth, such as the supply landscape and potential production constraints.
3. Bring it all together and revisit annually
Create a feedback loop and conduct frequent tests to validate that sales resulting from assortment shifts are performing as expected. For ones that are not, adjust assumptions and iterate as needed to boost performance.
Set up a regular cadence to verify that category-level changes continue to reflect and support your top-level company strategy and direction. Repeat the full process annually (or bi-annually) to ensure that new data inputs are fully integrated into decisions.
In addition to macroeconomic reasons to renegotiate with vendors, major changes in product assortment provide a strong opportunity to adjust your payment terms and other contracts. Enacting a regular review cadence for your vendor base will allow you to proactively fix any margin performance issues and adjust terms as the market dictates. The more you can line up a fresh, diverse pool of vendors, the more you can optimize prices while also enticing customers with new selection.
In the face of economic headwinds, retailers must take a proactive, agile approach to revamping assortment management. Planning, managing, and executing an effective shift allows industry players to drive additional profit and meet consumer needs.
Those that embrace data-driven decision-making, a customer-focused strategy, and a regular review cadence will put themselves in position to thrive. Those that don’t will struggle to adapt in this evolving landscape.
