Consumer Products Look for Shelf Life
By George Anderson
A number of factors go into to determining what products make it onto store shelves and racks, including a manufacturer’s ability to pay for space, markdown fees, promotional support, past product performance, consumer trends, local demographics, product uniqueness and more.
But, with a limited amount of space, the question of which products make it into stores and which ones should actually be there remains an ongoing topic of discussion between retailers and suppliers. It also remains a critical customer service issue, determining those who leave stores happy with their shopping experience and those who do not.
To get its product selections right, Walgreens relies on local demographic data. It does so to the point that the company says it doesn’t have a typical store out of the more than 5,000 it operates across the country.
Tiffani Bruce, a spokesperson for Walgreens, told The Fort Wayne Journal Gazette, “We take great pride in trying to tailor the product mix in each store. It could be different in one store from another Walgreens just a few blocks away.”
Target emphasizes style when making purchasing decisions.
Company spokesperson Brie Heath said the chain’s buyers “are always looking for something that is on trend, unique and differentiates us from our competitors.”
Richard Feinberg, a retail management professor at Purdue University and a researcher with the Purdue Retail Institute, said that, while stores that sell food and other consumer packaged goods can respond quickly to delist a product when it is not moving, clothing retailers do not have the same luxury, having to markdown existing stock and waiting for the next season’s fashions to arrive.
Moderator’s Comment: What factors are most important in retailer product stocking decisions? What do you see the biggest opportunities for improvement
in this area? –
George Anderson – Moderator
Differentiation vs. uniformity, two hot topics this week. In an ideal world, differentiation would be top of my list, uniformity right down there at the bottom. We talk so much about how customers want convenience; enabling them to deal with returns or other customer service issues anywhere in the store hits that button straight on. Why do all stores have to stock the same products in order to be competitive? Isn’t it be better to be just a little bit different and make your store more interesting? As it is, if the same products are available everywhere, customers will continue shopping by price and loyalty will remain as elusive as it is now. Much better, in my view, to fill the shelves with interesting and exciting alternatives that will tempt them to come back over and over again.
Good for Walgreens! Mass customization at the retail level is a good idea, but you need to be sure to also make it profitable. It really is all about what the consumer wants and about understanding consumer trends. Many retailers do not understand that, so it is good to see Walgreens working to provide what consumers want. As RFID costs come down, we will see many improvements in assortments and products that get delisted sooner than later. There are only so many spaces out there and if you are not holding your own or better, you will be gone!
All good points thus far. Most stores are still way over-SKUd, generally because of funny money. Some retailers make really good use of decision trees and get it better, achieving some differentiation and, arguably, more profitability as a result. In the February Harvard Business Review, page 122, there’s a really thought-provoking story by Daniel Yankelovich and David Meer: “Rediscovering Market Segmentation: the psychographic profiling that passes for market segmentation these days is a mostly wasteful diversion from its original and true purpose–discovering customers whose behavior can be changed or whose needs are not being met.” I recommend it highly.
Uh oh…. This is not so easy…segmentation, theories..? Just one look at the answers from the poll shows everybody that money talks all the time. Money up front to “deal” with the unknown, or the safe choice, because others did the introduction and tested the product for the shelves…. But the seller and his reputation and history can ease the decision. The rest is the nice words you will use to ease the situation when you carry out the loser. Or, do you tell them that they paid more?
Effective assortment planning and execution seeks to apply a Balanced Scorecard approach to governing metrics. GMROI is the best currently practiced financial metric, combining turn and profitability into a single common measure. In a planogram environment, GMROI per square or cubic inch is an even better metric. Total Value GMROI includes market basket impacts, and results in an even better measure, although much more difficult to calculate and communicate.
But financial metrics are only part of a Balanced Scorecard approach. Strategic factors such as customer service, image enhancement, and competitive differentiation are also important parts of the assortment equation.
Local market assortment execution must be balanced against economics. At some point, the proliferation of product, suppliers and inventory will overbalance against the potential sales volume being produced. The time, resources, and effort needed to execute, manage and change local assortments at the store and buying level need to be considered.
In short, it’s a complex equation.
Assortment planning is editing, since no store is infinitely large and no customer would have the patience to shop an endless store. Smart retailers test new items and new assortments rationally, doing as much as possible to minimize the Hawthorne Effect (Click here)
The Hawthorne Effect is most famous in industrial engineering. But it also applies to merchandising, because retailers who announce a test, treating the tested items in a special way, reduce the chances of getting accurate measurement.
Strategically, it is not all that difficult to figure out what you WANT to do or SHOULD do in determining what factors are most important in retailer product stocking decisions – what is going to drive the most business (in whatever way that is to be measured…profit, volume, foot traffic, etc.). Where it gets harder is in answering the second part of George’s question…how do you do that and where are the opportunities for improvement?
The areas of improvement are both operational and marketing/merchandising related. Getting product where it needs to be at the right time/right price (or cost) /right consumer is an ongoing battle (which is referred to in the example of apparel retailers who may miss a season or be stuck with product if it is not handled correctly).
The other area is in understanding the wants, needs, desires of consumers (merchandising and marketing to them in a way that spurs them to take action). Walgreens is focused on being store-specific in doing that by going so far as to say that stores a few blocks away may conceivably pull on different consumer bases and therefore, are stocked differently to reflect that difference.
How do you do all this effectively is of course the most complex part of the equation…but it has to start by defining, “What business am I in and what makes me unique?” From that answer the others will trickle (if not exactly flow).
A wide selection can lead to reduced sales. Every option offered to the shopper carries a decision cost with it, even if that cost is for them to ignore it. This doesn’t justify no choices, but the real cost of proliferating options is not just inventory and merchandising. (See Barry Schwartz, The Paradox of Choice.)
And retailing is not monolithic. Anyone looking for a book at Powell’s (offline) or Amazon (online) is expecting infinite choice, if that were possible. But for very many grocery items, fewer choices can lead to greater sales.
As more and more retailers outside of the food category are moving towards category management, I believe there is still the very basic need to balance or optimize revenue and profitability using both the science and the art of merchandising. The increasing usage of sophisticated modeling tools such as those offered by DemandTec give retailers the opportunity to optimize these two variables as they attempt to meet the consumer demand based on the factors they choose to include in their evaluation. Obviously the high-demand items will always find their way onto the retailer’s shelves because consumers will demand these products be stocked. I think it’s the assortment chosen beyond those that generate footsteps (traffic builders) that makes the difference in satisfying the majority of consumers living in and near the store’s drawing area…Walgreens and some other do this very well as they go the extra mile to create satisfied consumers through relevant assortments.
We’re ignoring two rules-of-thumb here: 1.) 70% of purchase decisions are made at the shelf and, 2.) shoppers don’t know what they want until they see it. Too much mental protein is burned figuring out what shoppers want, because shoppers themselves don’t know what they want.
A strategy I recommend is the creation of a dedicated area near the front of the store for shipper displays of new items. (If shippers aren’t offered, several services provide generic cardboard displays. Plus, the suppliers will do the display work.) The traffic in these sections is phenomenal, with nearly 70% of all shoppers cruising through all or part of them. Store managers can easily see which products are winners, and then graduate them to the shelf. Additionally, for the ever-growing refrigerated and frozen categories, coffin cases do the job. Manufacturers test customer appeal before rollout, so why shouldn’t retailers test shelf appeal?
When we look at SKU performance by store, region, demographic group, etc. we usually see great variances from item to item among these groups.
With stable product lines that don’t change significantly from season to season, placed in retailers that can effectively manage SKU differentiation at the store level, this information can be utilized to maximize space performance in a significant way. Often, it makes the most sense to optimize the SKUs carried by distribution center. Balancing the potential for SKU proliferation against carrying the best items that will sell to a specific group is always a challenge.
With product lines that are more fashion-driven, it is often after-the-fact that we can look at these data. We then attempt to use the information in our next update, to skew the offering to appeal to the largest customer segments and to try to place the new products appropriately.
Some retailers, particularly direct marketers, have only one version of their “store.” For them, this type of information can be used to see where there are weaknesses in their product mix relative to the market they want to reach.
Regardless of the extent to which this type of information can actually be used to improve space performance, it is always revealing to look at!
A wide selection does not lead to lower sales. An overwhelming selection with little product differentiation may do this (see FMI 1994). A wide selection which offers true choice (versus “more of the same”) will always be good for consumers. Of course, at some point a wide selection is bad for retailers as the marginal revenue per space declines past the point that wider choice increases.