Precision Merchandising For the Holidays: Improving Profitability through Laser-like Targeting

Aberdeen data reveals that although we're in the midst of an economic downturn, retailers agree that the two leading objectives going into this holiday season are the need to maximize gross margin and inventory turns. Business context

Aberdeen data reveals that although we're in the midst of an economic downturn, retailers agree that the two leading objectives going into this holiday season are the need to

*Maximize gross margin (56 percent)
*Maximize inventory turns (48 percent)

 

While these tried-and-true retail metrics are certainly essential for retailers to remain profitable (or even solvent), it is important that in order to achieve these goals, retailers broaden their vision and specifically ask themselves: "How will the current economy affect my customers and sales? How have customer expectations of the shopping experience changed? And what tools or methodologies are available to me to best address these conditions?"

One of the dominant responses to emerge from this questioning is the willingness of many retailers to tailor or customize their assortments to more closely match the needs and wants of their customers.

This is a marked departure from the 80's and 90's when the most successful retail format was to expand the number of stores at a rapid rate, stocking each one with an identical assortment, in as nearly an identical floor layout as possible. What has changed to obviate this once peerless format?

Key business pressures driving precision merchandising

Aberdeen surveyed 100 retail enterprises between September and October 2008 to determine the pressures brought to bear on retailers, which led these enterprises to consider and in many cases implement a Precision Merchandising (PM) methodology. This is not a decision to be entered into lightly. After all, such an approach is certainly more work for the merchants, the distribution analysts and the suppliers, and therefore more expensive, at least up front.

Our data indicates that three key critical business pressures (Figure 1) are influencing retailers toward precision merchandising. As already mentioned, all retailers agree that gross margin and inventory turns are top-of-mind pressures and goals. But right after these two stalwarts of retail performance measurement comes a brand new entrant: "Matching competitor levels of customer-centricity."

Figure 1: A Brand New Pressure Enters the Scene

Source: Aberdeen Group, October 2008

With the pressure mounting and the need to continue to drive growth and profitability despite a down economy, today's retail professionals are digging deep and taking action in order to build more customer-centricity into their merchandising strategies, be more strategic in the decision making process, and open the lines of communication among all parties around precision merchandising.

Don't take it personally (no wait; take it personally!)

 

It wasn't so long ago that Nordstrom sales people set the retail industry standard for customer service by carrying little clientele books with them onto the selling floor. Referencing them when a recognized or high-valued customer came in, they used these books to recall a customer's recent purchases, important dates, fashion proclivities, etc.

 

Today, that level of personalization has extended itself across many, many facets of customers' lives: your broker knows your level of risk aversion; your real estate agent knows and keeps tabs on houses in your market, price range, etc. Why then, out of all business models, shouldn't the super-customer-centric retail business model be able to deliver this level of personalization, too? In fact, why not set the standard?

Personalization is on an evolutionary curve, beginning with loyalty programs, escalating into more specific CRM applications, and in its latest manifestation, precision merchandising.

 

Figure 2 illustrates how economic and competitive pressures to "match the higher levels of customer-centricity of competitors" are driving all three maturity classes of retailers to "design and implement an effective precision merchandising plan."

So these respondents have not yet achieved full PM capability, but are currently undergoing efforts to do so. Best-in-Class (BIC) retailers may currently be leading the pack in their ambition to attain this functionality, but it is readily and visually apparent that all retailers place value in customer-centricity and personalization, seeing as Industry Average and Laggard performers are just a hair's breadth behind the Best-in-Class.

Figure 2: Personalization - Everybody Wants In

 

Source: Aberdeen October 2008

With the pressure mounting and the need to continue to drive growth and profitability despite a down economy, today's retail professionals are digging deep and taking action (Figure 3) in order to build more customer-centricity into their merchandising strategies, be more strategic in the decision-making process, and open the lines of communication among all parties around precision merchandising.

Figure 3: Strategic Actions by the Best-in-Class, Industry Average and Laggard

Source: Aberdeen Group, October 2008

Required actions

Whether a company is trying to move its performance in precision merchandising from Laggard to Industry Average, or Industry Average to Best-in-Class, the following actions will help spur the necessary performance improvements to move up the precision merchandising maturity curve:

Laggard Steps to Success
* First, execute the basics correctly
* Look for clear, easy wins

Industry-Average Steps to Success
* Verify capabilities
* Improve demand signal responsiveness
* Integrate customer and merchandise data with an advanced merchandising system

Best-in-Class Steps to Success
* Integrate and leverage disparate customer data
* Look over your shoulder

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Ben Ream can be reached at [email protected]