Merchandising 3.0: Five strategies for retail planning success

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In retail, merchandising is the link between sales and marketing on the front end and supply chain at the back end. Merchandising tells retailers the all-important four W’s: what to sell, when to sell, where to sell, and who to sell to. These four W’s are critical for sales, marketing, and supply chain because retailers must know them in order to balance a positive consumer experience, available inventory, and the ability to meet consumer’s future needs in timely manner.

Although the four W’s concept is widely known and established, most retailers still struggle to implement and execute it successfully. To accurately identify the four W’s, retailers need to define a product strategy (call that Merchandising 1.0), a cross-channel strategy (Merchandising 2.0), and a customer strategy. Having all three strategies, and planning for them, is Merchandising 3.0.

Recently, we have seen cases where having just product planning or cross-channel planning is not sufficient for retail success. If a retailer has a merchandising approach based only on products, it often ends up succeeding in either online sales or brick-and-mortar sales—but not both. On the other hand, if a retailer is good only at cross-channel selling (that is, combining online, in-store, and other channels), it often delivers products that fail to resonate with shoppers; this puts its brand identity at risk and, eventually, causes the retailer to lose market share. In either of these cases, having both product and cross-channel merchandising strategies would help the retailer stay ahead of the competition.

Then we add customer-centricity, the element that creates Merchandising 3.0. It’s sometimes most apparent when it’s absent; department stores and their big-brand suppliers, for example, are increasingly at odds over promotions, especially discount pricing. The retailer wants to offer discounts while the supplier doesn’t, or vice versa. These retailer-supplier clashes might be avoided if pricing were optimized based on a combination of product inventory (Merchandising 1.0), selling channel (Merchandising 2.0), and customer data (Merchandising 3.0). This tells me that, as retailers begin to focus on creating Merchandising 3.0, it’s imperative that they don’t forget about Merchandising 1.0 and 2.0 altogether.

Here are five strategies that can help retailers succeed at Merchandising 3.0:

  1. Balance store inventory: Keep it light and fast-moving.

    Inventory restraint is a constant theme at big department stores like Nordstrom, Macy’s, and Kohl’s. Retailers use this strategy to avoid late-season discounting that cuts into gross margins, but a lean stocking strategy raises the risk of lost sales revenue if goods aren’t in stock or if buyers misread fashion trends.

    The balance between marketing needs and logistics costs has become tougher to strike as online competitors eat into brick-and-mortar store sales. Keeping inventories lean means retailers may not be able to maximize sales revenue to pay for their physical stores. But lean inventory can pay off: shoe retailer DSW Inc. raised its outlook after reporting that tighter inventory helped improve quarterly net profits.

    Companies that are both suppliers and retailers, such as British luxury house Burberry Group, can get squeezed between their conflicting roles. The company is now working on tailoring its inventory to a sales strategy that relies on its own branded stores and other department stores. Burberry is trying to maintain, and even bolster, its upscale brand by keeping inventories lean and minimizing discounts; the company has even pulled out of some U.S. department stores that slashed prices on its products. Burberry’s results so far are mixed, but the company plans to continue its inventory management efforts.

    The relationship between suppliers and stores is becoming more shaky as e-commerce grabs a bigger portion of sales, and the conflict is escalating in the apparel world as the lean supply chains that serve fast-fashion companies push consumers toward lower-cost goods.

  2. Balance merchandising volatility: External factors influence demand.

    Wages, employment conditions, and climate are three volatile factors that retailers should always consider and incorporate into their plans. Dick’s Sporting Goods provides a recent example of how climate can affect sales: The retailer typically sells high-margin cold-weather gear during winter. However, this winter has been warmer than normal, and the company is now worried about the amount of inventory sitting on its shelves as it prepares for spring.

    As we read in The Wall Street Journal, another example comes from J.C. Penney. The retailer resumed appliance sales to reduce the effect of weather-related categories (such as apparel) and to remain competitive with online sellers such as Amazon (since refrigerators and stoves aren’t typically purchased online). Chief Executive Marvin Ellison says rolling out appliance sales “created disruption that negatively impacted sales.” The company kept apparel inventories thin as a hedge against the volatile clothing category, and the company plans to continue that strategy after what Ellison noted was the “warmest September ever on record.” (There’s the climate influence.) Overall, sales fell in the quarter ending October due to weak performance in the apparel category.

  3. Balance fulfillment channels: Keep it customer-centric.

    Big retailers like Wal-Mart and Target are making it easier for shoppers to pick up online orders in brick-and-mortar stores. Among the changes: Wal-Mart allow same-day store pickups for more products, put more staff at pickup counters, and place inventory at stores closer to workers to save time. In-store pickup smooths pain points for both the retailers and their customers, and attempts to turn the brick-and-mortar business into an advantage over online competitors.

    A PwC survey of consumers showed about 21 percent of Americans use in-store pickup regularly, and 48 percent say they use it on occasion, so the need is real. But managing inventory for both online and brick-and-mortar sales has been a major challenge for retailers, and this holiday season will be a big test of whether the sellers can get the mix right. Success will require these retailers to balance a customer-centric approach with a cross-channel strategy.

  4. Align with the supply chain: Collaborate with manufacturers on pricing.

    Rising prices for commodities like palm oil, crude oil, and aluminum are presenting increasingly tough challenges for producers and distributors. Unilever—the world’s second-largest consumer-goods company behind Procter & Gamble—pointed to rising prices for commodities as a drag on third-quarter earnings. Middlemen companies like Unilever and Reckitt Benckiser, which makes Lysol disinfectants, are being squeezed from both sides, as raw materials costs rise and consumer demand remains uncertain. Unilever and Reckitt both reported recent gains in revenue, but the gains came largely from price increases rather than expanding demand. Meanwhile, P&G is offering a sluggish forecast, adding to the bumpy sales outlook for the world’s makers of consumer goods.

    Since commodity price fluctuations impact retail prices, alignment with suppliers is key so that prices can be adjusted to maintain profitability. Innovation can also help: for example, Macy’s is working with its suppliers and distributors to place RFID tags on all its merchandise by next year. This will allow them to monitor inventory better and align merchandise to the supply chain.

  5. Apply integrated technology to retail planning.

    Technology can have a powerful impact in improving the accuracy of forecasts and enabling integrated business planning across all lines of a retailer’s business. Digital transformation can help retailers to understand the financial impacts of trade-offs and enable advanced decision-making in their planning processes. This calls for a merchandising solution that delivers high performance, user friendliness, and connected planning.

    Retailers today can drive the future of their business—within and across departments at the strategic, tactical, and operational levels—without compromising usability, flexibility, ease of model changes, or speed. Integrated technology can help them assess the impact of business decisions and planning scenarios better than the isolated point solutions and standalone spreadsheets that they rely on for planning across departments today.

    The Anaplan platform delivers a single real-time, cloud-based environment that can help retailers accurately plan and optimize, quickly respond to change as a department or organization, and seamlessly align across the entire business to meet overall retail planning objectives. It can be the foundation of Merchandising 3.0. Discover our retail specific apps that can automate and streamline the planning process across sales, marketing, and supply chain.

Visit us at the St. Regis Hotel in New York City on January 15–17 during NRF to learn more about Anaplan for Retail. Relax in our suite and network with Anaplan executives, receive personal demos, and meet some of our partners. Click here for more details.

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