December 12, 2006
Chain Store Age: ‘Tis the Season for Item Movement
By Deena M. Amato-McCoy
Through special arrangement, what follows is an excerpt of a current article from Chain Store Age magazine, presented here for discussion.
Currently, last-minute shoppers are navigating among dwindling stock levels and price slashes in hopes of completing their gift-giving obligations. And retailers are probably relying on two solutions to lure in harried shoppers, generate sales and lift their own holiday spirits.
Some chains are relying on assortment-planning solutions. By analyzing sales targets, shelf space and allocation rules, the solution enables planners to distribute the right mix (and amount) of products at store level.
For others, markdown optimization is the top choice. Here, chains use item-movement data, consumer shopping behavior data and other metrics to analyze and manage prices, promotions and markdowns on merchandise.
While both solutions help retailers target merchandise to consumers and move product, there is a strong debate about which is the superior option. In fact, this topic prompted two lively discussions during the SAS User Conference, BetterManagement Live!, held in October.
An informal survey of 13 retailers conducted during one session revealed three chains used a revenue-optimization tool to support markdown strategies. Meanwhile, 10 chains seemed wedded to assortment planning.
Those in the assortment-planning camp made compelling arguments.
Kevin Murphy, an executive from Bed Bath & Beyond, reported, “If you can create the right assortment to meet shoppers’ needs, there is no reason for markdowns.”
Ken Brame, CIO, AutoZone, stated, “Our shoppers are not trained to look at markdowns. If they need a starter or another part, they would rather it is in stock.”
Conversely, retailers that handle short life-cycle merchandise, such as apparel, were bullish on markdown-optimization solutions. An executive from The Children’s Place said, “We can’t predict the weather. If we stock a seasonal assortment and the weather patterns change, we need price optimization to account for that change.”
Some retailers are even upping the ante and using price optimization in hopes of connecting with some new shoppers.
The Athlete’s Foot knows when a new athletic shoe hits the market, chances are that teens and twenty-somethings have no problem paying $150 or $200. But a pre-teen’s mom who balks at paying full price may be more willing to spring for last season’s Air Jordans on sale for $80 or $90.
I tend to agree. While it makes complete sense to analyze data to forecast the best merchandising mix, execution can be tricky.
Maybe retailers need to look beyond the “price slash” stigma markdown-optimization software invokes. Rather, I think retailers opting for the “scalpel” approach provided by markdown-optimization software are taking a proactive step to improve turns, reach more shoppers and hopefully build new shopper relationships.
Surely, I don’t expect my opinion to end this ongoing debate, but the argument has opened my eyes. As I finish my shopping though, I will wonder whether I am fulfilling an intricate assortment plan, playing into the deep-discount game or adding a new favorite retailer to my shopping list.
Discussion Question: What is your perspective on the assortment planning versus markdown-optimization debate?
BrainTrust
Recent Discussions
Discussion Questions
Poll
As one of my old college professors once said, “it’s not either/or, it’s both and more.” What’s wrong with offering an “optimized” assortment and offering some special holiday deals? Isn’t this what the Athlete’s Foot is doing — having the better of both worlds?
I agree with most of my BrainTrust panelists. This is not an either/or decision, but instead a hybrid one. Most decent assortments of products sell during the holiday season, without having undue cost (and profit restrictions). The key here is to maximize assortment and velocity without compromising on price. This is the “secret sauce” which helps make retailers successful. Knowing the right combination, while ensuring maximized logistics cycling and control takes any good retailer to that next level of retailing: “great.”
Markdown vs. assortment? There is no dichotomy here. You have to master both, or least do them better then your competition. The absolute key is to learn what else profitable customers are buying when they buy key items in your assortments. That knowledge will inform you whether you have what you must have in your assortments; much more than item profitability.
Regarding markdown optimization, the retail apparel world is going to be hard pressed to make sustainable improvements here. This is because the modeling software bases demand forecasts on full price unit sales. Yes, unit sales are adjusted to remove seasonal and promotional spikes. But consumer research tells us that more than 60% of your shoppers exit your store without buying what they came in for. You must enrich the sales forecast with data points from this overwhelmingly large group. Did your shoppers have problem finding their size? Was it fit? Style? Price? Service?
The either/or question undoubtedly stems from a software solution perspective on the problem. Most software tools either address the assortment planning and allocation part of the problem or the markdown optimization part of the problem. As one of the earlier comments noted, you can do assortment planning and mark-downs without high-cost solutions. The “manual” approach often is the best place to start, since it forces you to analyze where and what kinds of improvements are needed. Then you’ll know whether the expensive solutions can help and how much improvement you can achieve without launching a huge IT project.
Well, we’ve covered the “you need both” waterfront thoroughly it seems. But ultimately this comes down to how well the retailer has pegged their shoppers’ needs and simple “utility theory.” Having the exact thing I want, when others don’t, extracts full price. Having merchandise that’s “OK,” but that, as the current Wal-Mart commercial for big screens touts “why does it cost so much more here?” obviously results in price comparison shopping and lower margins. And when a retailer has to search for the price at which someone will buy this stuff, well, let’s just hope they bought it really right. Everyone has their favorite strategy, but I vote with the assortment optimization crowd every time.
This question reminds we of what the late Senator Hubert Humphrey once said, “You got to do what you got to do.”
And that’s applicable for good retailers. It doesn’t have to be an either/or situation — assortment or markdown optimization — since both are valuable. Rather, there should be a focus on what a company’s operating objectives are in concert with the known desires and goals of its customers. Good retailers are like a river — and no river is a river that does not run in the direction of its customer’s approval.
At this stage in the season, markdown optimization is your only viable response. Assortment planning software and processes take longer to implement, rely on unit movement and replenishment, and look to get it “righter” on the front end. The front end is long gone now.
I am not a strong proponent of markdown optimization, primarily because of the difficulty of use and the challenges to integrate with both assortment planning and open to buy management. In theory, markdown optimization is a great tool. Used properly, and with consistent external circumstances, it will help the retailer maximize gross margin at the item level. I have yet to see a way in which it manages the entire assortment in a rational or integrated way.
If the retailer manages markdowns through distinct presentation (clearance end caps and in-aisle reduction talkers) it becomes difficult to maintain that clarity of presentation when implementing markdown optimization.
A final thought is to challenge the very existence of incremental price sensitivity in most categories. Can anyone really prove that 5% to 10% permanent markdowns, without special signing, have any measurable impact on rate of sale? If not, is it the price reduction moving the product, or the special signing?
As my fellow panelists have made clear, neither approach is mutually exclusive. The best assortment planning and the most advanced price optimization software are unable to incorporate dynamic change. Dynamic variables such as sudden changes in trends, weather, competition and economic impacts (rising inflation, fuel costs) will always play a role in how a retailer leverages all the tools in their arsenal to maximize sales and minimize markdowns.
I would focus on assortment and mark-down as retail-brand image building, attempting to drive traffic into the store. The word “optimization” seems to place the focus elsewhere — on market basket perhaps. Assortment and markdowns are ways of getting stuff in the cart for sure, but also consider them as drivers of store traffic. People go to the store where they expect to have a good experience, accomplish their mission, and stay in budget. Assortment and markdowns are ways of engendering expectations that will lead a shopper to come to your store, rather than someone else’s. In other words, they are routes to top of mindness, which is brand-building. If brandbuilding rather than total ring were the goal, would various modeling tools lead to different markdown strategies?
I imagine so.
Using all your tools is always the best strategy and highly seasonal or fashionable merchandise needs a different timing and action plan than the AutoZone starter with a shelf life 4 to 5 X greater than a coat. Markdowns are not unhealthy, too many markdowns are unhealthy. When I was a new buyer, one of the first lessons oft repeated to me by grizzled veterans was that “the cheapest markdown is the one taken in season”. They were right. We have to constantly reforecast backwards from our planned out of stock date and take action.
As always, there are also many creative ways to increase sales other than taking markdowns or larger markdowns; in store displays, cross merchandising, moving it in the store, larger ad boxes in print ads, and more. Not my favorite, but some retailers have cost effective ways to balance stock to reallocate and transfer inventory “bulges” to those stores most likely to move the items by the season’s end.
A great assortment plan is the right way to start, but we still can not always know about or forecast rising gas prices, competitor ads, hurricanes and poor execution. Plans of any kind are a problem when we get “married” to them. This is where some of the planners get into trouble, because they are committed to the plan, rather than executing to the best possible result. Mark’s quote on “Tyranny of Or” is great and I will use it and would like to throw out one from old ITT’s Geneen, “Management’s job is to get results”.
James Collins’ famous book, Built To Last, discusses The Tyranny of Or. There’s no reason to choose one OR the other (assortment planning versus markdown optimization). It’s natural for a well-run retailer to use both. Furthermore, well-run retailers have always used both, since both can be done manually. Of course it helps to have automation, but the basic techniques have been around since the beginning of retailing.
The first two points are cornerstones of the retail business!
For those retailers that have brand loyalty (not pricing power), the ‘unforgetable’ overlay of support to its primary loyalty group is service orientation, and timely, gift ideas and thoughts.
Too much to do before the Holidays is the consumers war cry! And to the Baby Boomers and impatient X and Y Generations, service and timely convenience is what adds the quality gross profit to retailers that know how to consumer market their brand name, and meet their shoppers’ needs!.
These above-mentioned, higher income and better educated targeted generations are the key to Holiday sales growth! Hmmmmmmmmmmmmmmmmmmmmm
Without a doubt, this is not a question of one or the other, but when to use which approach. For that matter, when to use them together. As one other person pointed out, we are way too late in the game now for anything other than matters of price point to drive in customers and increase sales. The inventory is in, much of it out, and we must maximize our sales potential with what we have left as we close out the Christmas season, and the year. Look to assortment-planning and introduction of new lines next year – then couple it with markdowns, if you will, to introduce it to your customers.
More Discussions
Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?Should IKEA Be Flattening Management?
Should IKEA be trimming down its management headcount?Is Legislation the Answer on Visa, Mastercard Swipe Fees as ~$200 Billion Record Is Set?
Is lawmaking the way forward on swipe fees?
As one of my old college professors once said, “it’s not either/or, it’s both and more.” What’s wrong with offering an “optimized” assortment and offering some special holiday deals? Isn’t this what the Athlete’s Foot is doing — having the better of both worlds?
I agree with most of my BrainTrust panelists. This is not an either/or decision, but instead a hybrid one. Most decent assortments of products sell during the holiday season, without having undue cost (and profit restrictions). The key here is to maximize assortment and velocity without compromising on price. This is the “secret sauce” which helps make retailers successful. Knowing the right combination, while ensuring maximized logistics cycling and control takes any good retailer to that next level of retailing: “great.”
Markdown vs. assortment? There is no dichotomy here. You have to master both, or least do them better then your competition. The absolute key is to learn what else profitable customers are buying when they buy key items in your assortments. That knowledge will inform you whether you have what you must have in your assortments; much more than item profitability.
Regarding markdown optimization, the retail apparel world is going to be hard pressed to make sustainable improvements here. This is because the modeling software bases demand forecasts on full price unit sales. Yes, unit sales are adjusted to remove seasonal and promotional spikes. But consumer research tells us that more than 60% of your shoppers exit your store without buying what they came in for. You must enrich the sales forecast with data points from this overwhelmingly large group. Did your shoppers have problem finding their size? Was it fit? Style? Price? Service?
The either/or question undoubtedly stems from a software solution perspective on the problem. Most software tools either address the assortment planning and allocation part of the problem or the markdown optimization part of the problem. As one of the earlier comments noted, you can do assortment planning and mark-downs without high-cost solutions. The “manual” approach often is the best place to start, since it forces you to analyze where and what kinds of improvements are needed. Then you’ll know whether the expensive solutions can help and how much improvement you can achieve without launching a huge IT project.
Well, we’ve covered the “you need both” waterfront thoroughly it seems. But ultimately this comes down to how well the retailer has pegged their shoppers’ needs and simple “utility theory.” Having the exact thing I want, when others don’t, extracts full price. Having merchandise that’s “OK,” but that, as the current Wal-Mart commercial for big screens touts “why does it cost so much more here?” obviously results in price comparison shopping and lower margins. And when a retailer has to search for the price at which someone will buy this stuff, well, let’s just hope they bought it really right. Everyone has their favorite strategy, but I vote with the assortment optimization crowd every time.
This question reminds we of what the late Senator Hubert Humphrey once said, “You got to do what you got to do.”
And that’s applicable for good retailers. It doesn’t have to be an either/or situation — assortment or markdown optimization — since both are valuable. Rather, there should be a focus on what a company’s operating objectives are in concert with the known desires and goals of its customers. Good retailers are like a river — and no river is a river that does not run in the direction of its customer’s approval.
At this stage in the season, markdown optimization is your only viable response. Assortment planning software and processes take longer to implement, rely on unit movement and replenishment, and look to get it “righter” on the front end. The front end is long gone now.
I am not a strong proponent of markdown optimization, primarily because of the difficulty of use and the challenges to integrate with both assortment planning and open to buy management. In theory, markdown optimization is a great tool. Used properly, and with consistent external circumstances, it will help the retailer maximize gross margin at the item level. I have yet to see a way in which it manages the entire assortment in a rational or integrated way.
If the retailer manages markdowns through distinct presentation (clearance end caps and in-aisle reduction talkers) it becomes difficult to maintain that clarity of presentation when implementing markdown optimization.
A final thought is to challenge the very existence of incremental price sensitivity in most categories. Can anyone really prove that 5% to 10% permanent markdowns, without special signing, have any measurable impact on rate of sale? If not, is it the price reduction moving the product, or the special signing?
As my fellow panelists have made clear, neither approach is mutually exclusive. The best assortment planning and the most advanced price optimization software are unable to incorporate dynamic change. Dynamic variables such as sudden changes in trends, weather, competition and economic impacts (rising inflation, fuel costs) will always play a role in how a retailer leverages all the tools in their arsenal to maximize sales and minimize markdowns.
I would focus on assortment and mark-down as retail-brand image building, attempting to drive traffic into the store. The word “optimization” seems to place the focus elsewhere — on market basket perhaps. Assortment and markdowns are ways of getting stuff in the cart for sure, but also consider them as drivers of store traffic. People go to the store where they expect to have a good experience, accomplish their mission, and stay in budget. Assortment and markdowns are ways of engendering expectations that will lead a shopper to come to your store, rather than someone else’s. In other words, they are routes to top of mindness, which is brand-building. If brandbuilding rather than total ring were the goal, would various modeling tools lead to different markdown strategies?
I imagine so.
Using all your tools is always the best strategy and highly seasonal or fashionable merchandise needs a different timing and action plan than the AutoZone starter with a shelf life 4 to 5 X greater than a coat. Markdowns are not unhealthy, too many markdowns are unhealthy. When I was a new buyer, one of the first lessons oft repeated to me by grizzled veterans was that “the cheapest markdown is the one taken in season”. They were right. We have to constantly reforecast backwards from our planned out of stock date and take action.
As always, there are also many creative ways to increase sales other than taking markdowns or larger markdowns; in store displays, cross merchandising, moving it in the store, larger ad boxes in print ads, and more. Not my favorite, but some retailers have cost effective ways to balance stock to reallocate and transfer inventory “bulges” to those stores most likely to move the items by the season’s end.
A great assortment plan is the right way to start, but we still can not always know about or forecast rising gas prices, competitor ads, hurricanes and poor execution. Plans of any kind are a problem when we get “married” to them. This is where some of the planners get into trouble, because they are committed to the plan, rather than executing to the best possible result. Mark’s quote on “Tyranny of Or” is great and I will use it and would like to throw out one from old ITT’s Geneen, “Management’s job is to get results”.
James Collins’ famous book, Built To Last, discusses The Tyranny of Or. There’s no reason to choose one OR the other (assortment planning versus markdown optimization). It’s natural for a well-run retailer to use both. Furthermore, well-run retailers have always used both, since both can be done manually. Of course it helps to have automation, but the basic techniques have been around since the beginning of retailing.
The first two points are cornerstones of the retail business!
For those retailers that have brand loyalty (not pricing power), the ‘unforgetable’ overlay of support to its primary loyalty group is service orientation, and timely, gift ideas and thoughts.
Too much to do before the Holidays is the consumers war cry! And to the Baby Boomers and impatient X and Y Generations, service and timely convenience is what adds the quality gross profit to retailers that know how to consumer market their brand name, and meet their shoppers’ needs!.
These above-mentioned, higher income and better educated targeted generations are the key to Holiday sales growth! Hmmmmmmmmmmmmmmmmmmmmm
Without a doubt, this is not a question of one or the other, but when to use which approach. For that matter, when to use them together. As one other person pointed out, we are way too late in the game now for anything other than matters of price point to drive in customers and increase sales. The inventory is in, much of it out, and we must maximize our sales potential with what we have left as we close out the Christmas season, and the year. Look to assortment-planning and introduction of new lines next year – then couple it with markdowns, if you will, to introduce it to your customers.