Consumer-centric merchandising

MMR, June 23, 2008

CHICAGO -- A new report from AMR Research finds that combining product assortment and space-planning processes will be a top priority for food retailers in the United States this year. The study, titled "Five Food-Retailing Technologies That Will Drive Value in 2008," contends that benefits to be gained include improved in-stock positions, lower shrink and optimized labor and inventory levels.

The report says retailers need to merge assortment and space planning processes to balance the growing assortment alternatives available with the fierce competition for shelf space at the store level. Retailers that have combined the two disciplines reported a number of benefits, including:

* Revenue increases ranging from 10% to 20% as a result of reallocation of space to quicker-selling items, assortments tailored to local demographics and refined assortments that streamline store-stocking practices and improve on-shelf availability.

* Gross margin increases of 5% to 15% when retailers identify higher-margin items, ensure their inclusion in the assortment and allocate the proper amount of space to them.

* Inventory reductions of 5% to 10% through the elimination of inefficient inventory.

The latest report is a follow-up to a two-part series issued by AMR Research last year. That study, titled "Space Management in a Customer-Centric World: How to Increase Revenue and Strengthen Customer Loyalty," argued that retailers have to move away from chain-level assortments and tailor their offerings to specific locations and store demographics.

"Consumer-centric merchandising is one of five demand-driven strategies retailers use to create a differentiated shopping experience," the report stated. "Space management initiatives provide retailers the ability to effectively manage the delicate balance between store-shelf space and assortment alternatives. To drive customer value, retailers must have systems and business processes that translate consumer insights, use localized data and create store-specific merchandising plans."

Currently, the report continued, most product assortment and space allocation decisions are made with limited awareness of the overall merchandising strategy, resulting in less-than-optimal assortments and profit targets; with a product-centric rather than a customer-centric decision cycle; and using analytics that focus on subprocesses rather than on a holistic review of merchandising strategy and execution.

The 2007 report went on to define a space management model composed of seven elements, including planning, analytical and execution activities. The heart of the process consists of space planning at the macro (or department) level, the category level and the micro (or store-specific) level.

In an optimized, demand-driven decision environment, for example, micro-level space management would be fully integrated across both the marketing and merchandising functions, using suppliers' category captains for insights. Such key functions as price optimization, in-store labor scheduling and supply chain management would be fully integrated to enable monitoring of store-level compliance.

The most recent report from AMR Research singles out Galleria Retail Technology Solutions, which claims to be the only company offering an automated, synchronized assortment and space-planning solution.

In interviews with MMR earlier this year, executives of Food Lion LLC pointed out that Galleria software was an important enabler of the company's customer-segmentation and store clustering strategies. "A couple of technology solutions that are integral to our clustering and segmentation work are DemandTec and Galleria," said chief operating officer Cathy Green. "They are critical links to bringing segmentation and clustering alive.

"We're in the process of implementing both of them from a planogram and pricing perspective to automate some manual processes."