Maximize Profit With Optimized Assortments
January 2012 Integrated Solutions For Retailers
By Matt Pillar, Editor In Chief
How assortment optimization reduces markdowns, increases margins, and creates customer loyalty.
Getting the most return on your inventory investment requires having the right inventory in the first place. Here, JDS Software president, Dan Friedman, offers advice on assortment planning and allocation strategies.
How important is assortment localization, and why?
Friedman: “The right product at the right time” is an age-old mantra for retail. With customer budgets shrinking and dollars being spent over the Internet, assortment planning is critical. Overstock results in markdowns and prevents regular-priced sales. Furthermore, because of the transition from baby-boomers to Gen X in the workforce, customer demand is inevitably changing. To be profitable, retailers must reduce markdowns and increase profit margins for their high-demand products. Without sophisticated assortment planning, markdowns increase and high margin items decrease. The 80/20 rule — 20% of your inventory accounts for 80% of your margin — has never been truer. Assortment planning also conveys the store’s image/story. Instead of the marketing department driving the retailer’s image, it will be molded by sales analytics and consumer purchases. With the right assortment in place, it confirms to the shopper that the store will have what they are looking for. Assortment planning reduces markdowns, increases margin, and creates customer loyalty.
What's the most direct and efficient route to assortment optimization? What's the greatest challenge to getting there?
Friedman: Assortment planning is challenging. Many factors need to be taken into consideration: product class, vendors, price point, seasonality, colors, and sizes. The challenge is that historical data is not always applicable; what was "hot" last year may not be this year. Thus, current trending needs to be evaluated and examined. Effective assortment planning compares current trends with the trend data for the year prior. New stores and/or special events can skew data. The most effective and efficient option is to have software dedicated to this type of analysis. For example, one of our reports tells the user how many different SKUs they have in a variety of merchandise categories (including vendors). It tells the user how many different items in a category a customer can choose from in their store or on the Web. It does not look at depth or quantity, but rather at assortment. It looks at the price point of these items and then considers what customers actually paid for the items in a given period. Adding what new items are received provides a picture of their assortment. A combination of what is on hand, what has sold, and what new product comes in rounds out the full analysis of assortment planning.
Can you point to any quantifiable results of improved planning and allocation in retail? What can retailers expect to achieve?
Friedman: There are two areas retailers can see improvement. First, improved sales can be realized by having the right inventory at the right time. If the retailer knows that S/S tops from Volcom sold for $24 successfully from previous sales, and they currently have an assortment of twelve different styles to choose from (priced similarly), they can avoid lost sales. Obviously, the selection has to be right, but it would be futile for the retailer to believe that it will sell Volcom shirts at $35 if its customers historically spend $24. The right assortment, therefore, can increase sales. Secondly, in the example above, if the retailer had a lot of $35 shirts, it would most likely have to mark them down to sell them. Therefore, a hit on its margins would occur. Assuming a 50% margin, if it sold 10 units at full price, it would have a gross profit of $120 ($24 x 50% x 10); if it was forced to mark down the $35 shirts by 33% to sell them, it would have a gross profit of $58, [($35 x 50%) – ($35 x 33%) x 10]. Simply put, selling items at full margin results in greater profit.