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Merchandising 2016: Big Changes Coming
Benchmark Report
Paula Rosenblum and Steve Rowen, Managing Partners
December 2015
Sponsored by:
Executive Summary
Key Findings
A retailer’s assortment has always been important. But in the digital age, with customers becoming
increasingly demanding – and powerful – it has become a matter of make or break. How a retailer
merchandises is a strong indicator of how successful the entire enterprise will be. Thus, we make
certain to check the status of retailers’ merchandising efforts every single year.
This year, new consumer shopping behaviors have made the merchandising process infinitely more
difficult. Consumers just don’t shop the way they did a few years, months, or in some cases, even
weeks ago. As a result, retailers are crying out for a better understanding of consumer
demand. Analytics to measure consumers’ paths to purchase (and post-purchase) behaviors offer
an ability to do just that. Unfortunately, what we find is that their understanding of these same tools
and techniques dramatically lags behind their appetite. The following are some of the highlights of
this report:
• Retail Winners have a completely different view of the merchandising landscape. For these
over-performers, there is no greater challenge than understanding evolving customer
preferences. They understand that virtually everything else - out of stocks, inventory
issues, pricing strategies – are all influenced by the new ways consumers are shopping
stores, in their homes, at work, and on their mobile devices in between, But what are they
doing about it? We start to explore their options in the Business Challenges section,
beginning on page 6.
• While challenges abound, the most successful retailers will always find a way to convert
challenges into opportunity. As it relates to merchandising in 2015, Winners put on a tutorial
showing how that is done. Read about their approach starting on page 9, in the
Opportunities section.
• Given their perceived inhibitors (better data faster), it’s not surprising to see Winners most
frequently interested in improving their inventory processes and systems as a solution. It’s
also not surprising to see them looking for real-time visibility into deviations from
expectations. It is however, quite surprising to see how many want to change their
organizational structures. We examine what they plan to do within Organizational
Inhibitors (page 12).
• And it’s become clear that retailers of all sorts are planning big changes to their portfolios.
In fact, a significant percentage of retailers are contemplating a refresh of core
merchandising systems. We set out to quantify that change in the Technology Enablers
section, beginning on page 18.
Based on our data, we also offer several in-depth and pragmatic suggestions on how retailers
should proceed. These recommendations can be found in the Bootstrap Recommendations
portion of the report.
We certainly hope you enjoy it,
Paula Rosenblum and Steve Rowen
ii
Table of Contents
Executive Summary ........................................................................................................................... i Research Overview ......................................................................................................................... 1
Time Honored Tradition Meets Cutting Edge Trends .................................................................. 1 What Makes For A Merchant’s Success? .................................................................................... 1 Not So Fast! ................................................................................................................................. 2 Who’s In The Know? .................................................................................................................... 3 Retail Winners And Why They Win .............................................................................................. 3 Methodology................................................................................................................................. 4 Survey Respondent Characteristics ............................................................................................ 4
Business Challenges ....................................................................................................................... 6 Genuine Dissent .......................................................................................................................... 6 Something Old, Something New .................................................................................................. 7
Opportunities ................................................................................................................................... 9 Winners’ Step-wise View ............................................................................................................. 9 Effects Of Revenue On Outlook................................................................................................. 10 Time Waits For No One ............................................................................................................. 10
Organizational Inhibitors ................................................................................................................ 12 Dramatic Differences Depending On Performance And Products ............................................. 12
Winners Want Better Data Faster, Laggards Need The Basics............................................. 12 Short Lifecycle Going Granular, Durables Stung By Past Purchases, Basics Lack Basics .. 13
Just As Problems Differ, So Do Perceived Solutions ................................................................ 14 Winners See Some Surprising Solutions, Laggards More Logical And Measured ................ 14 Concurrence Across Verticals On The Need For Organizational Change ............................. 15
The Digital Economy Adds Stresses To Merchandising Organizations .................................... 16 Operational Challenges Highlight Today’s Merchandising Complexities .................................. 16
Technology Enablers ..................................................................................................................... 18 Many Technologies, And The Need For Change ...................................................................... 18 Where Is Change Coming? ........................................................................................................ 20
BOOTstrap Recommendations ..................................................................................................... 23 Change Is Inevitable; Plan For It Carefully ................................................................................ 23 Set a Sustainable Strategy ........................................................................................................ 23 Determine Technologies Required to Support New Strategies ................................................. 23 Execute The Plan ....................................................................................................................... 23 Insure Processes Are Changed In Concert With New Technologies ........................................ 24
Appendix A: The BOOT Methodology© ........................................................................................... a Appendix B: About Our Sponsor ..................................................................................................... b Appendix C: About RSR Research ................................................................................................... c
iii
Figures
Figure 1: Keys To The Kingdom? .................................................................................................... 1
Figure 2: Not Quite .......................................................................................................................... 2
Figure 3: Fashion: Knowledge By Necessity ................................................................................... 3
Figure 4: A Picture Tells A Thousand Words .................................................................................. 4
Figure 5: A Much Bigger Picture ...................................................................................................... 6
Figure 6: An Inverted Playing Field ................................................................................................. 7
Figure 7: Winners’ Leading Vision ................................................................................................... 9
Figure 8: Biggest Retailers Gain An Edge ..................................................................................... 10
Figure 9: Progress Marches On .................................................................................................... 11
Figure 10: Winners Want To Go Faster, Laggards Just Want *Something* ................................. 12
Figure 11: Barriers Differ Dramatically Across Verticals ............................................................... 13
Figure 12: Along With Better Solutions, Winners Want Organizational Change ........................... 14
Figure 13 : Some Vertical Answers Rational, Others Not So Much .............................................. 15
Figure 14: Operational Challenges Highlight A More Complex World .......................................... 16
Figure 15: High Value Assortment, Forecast And Space Management Techs ............................. 18
Figure 16: Optimization, Analytics And Core Merchandising Value .............................................. 19
Figure 17: Plans: Assortment, Forecast And Space Management Techs .................................... 21
Figure 18: Optimization, Analytics And Core Merchandising Value .............................................. 22
1
Research Overview
Time Honored Tradition Meets Cutting Edge Trends
The Merchandising Benchmark Report is one of RSR Research’s most consistently revealing
annual studies. The world of retail merchandising is a microcosm for the industry at large. As it
becomes increasingly difficult for retailers to find “hot” or unique products to sell (thereby losing the
ability to differentiate themselves from competitors), the choices retailers must make about what to
sell and when become all that much more critical.
A retailer’s assortment has always been important. But in the digital age, with customers becoming
increasingly demanding – and powerful – it has become a matter of make or break. How a retailer
merchandises is a strong indicator of how successful the entire enterprise will be.
What Makes For A Merchant’s Success?
Firstly, let’s look at how all retailers view the components of success. When we look at the overall
response pool (more on different types of retailers’ viewpoints shortly), Customer Analytics
represent the most important tool a retailer can give its merchandising team. In the context of
today’s marketplace, this makes a great deal of sense.
New consumer shopping behaviors have made the merchandising process infinitely more difficult.
Consumers just don’t shop the way they did a few years, months, or in some cases, even weeks
ago. Therefore it comes without surprise that – again, when viewed as a single unit – retailers would
cry out for a better understanding of consumer demand. Analytics to measure consumers’ paths to
purchase (and post-purchase) behaviors offer an ability to do just that.
Figure 1: Keys To The Kingdom?
Source: RSR Research, December 2015
20%
19%
19%
16%
14%
14%
42%
39%
36%
38%
33%
30%
37%
42%
45%
46%
53%
56%
Lifecycle price optimization
Localized assortments
An optimized, end-to-end merchandising lifecycle
Unified pricing, promotion and assortmentmodeling
Retail Forecasting (demand forecasting,forecasting for replenishment, etc.)
Customer Analytics
Importance To Retail Success
Very Important Somewhat Important Not Important
2
Retailers also place a high importance on the ability to forecast based on the new shopper’s fickle
demands. Perhaps most interestingly, however, is that retailers place tremendous value on tools
that could unify the price and promotions they are running across all of their touchpoints with
consumers. Moreover, they’d like to be able to understand the effects of these changes before they
are rolled out, while still in the modeling stage. This is highly encouraging, as, in the past, retailers
have relied far too heavily on endless promotions – often with no insight into their true cost/effect -
to create excitement around the Brand. Has our industry evolved to a point when price will not be
the most frequently pulled lever when trying to create consumer demand? Perhaps, but perhaps
not.
Not So Fast! When we look at the same aggregate pool of retailers, what we find is that their understanding of
these same tools and techniques dramatically lags behind their appetite (Figure 2).
Figure 2: Not Qui te
Source: RSR Research, December 2015
Unfortunately, this has become a commonplace observation in recent years’ research. Retailers,
hard-pressed by consumers to find new and interesting ways to meet demand, are being tested.
Retailers know they need to change, and they are constantly reminded that they need to adapt. But
with so many technology solutions in the current marketplace, they simply aren’t certain which will
“get them there” fastest. As a result, many cling to notions of the “if” technology (“If we only had
more of this particular technology, performance would improve”) – without a solid understanding of
43%
39%
40%
32%
31%
34%
27%
35%
32%
26%
34%
32%
27%
27%
22%
29%
35%
35%
37%
39%
46%
Lifecycle Price Optimization
Size Optimization
Assortment Optimization
Promotion Optimization
Customer Analytics
Integrated Merchandise Planning, Allocation andReplenishment
Forecasting
Understanding Of Merchandising Tools And Techniques
Solid Understanding Familiar with Concept Not Very Familiar
3
what process changes technology can enable. It’s a real problem, and as we’ll see in this research,
a much bigger problem for certain types of retailers than it is for others.
Who’s In The Know?
When we look at this same information by the type of products being sold, we find that new
merchandising tools and techniques generally are best understood by fashion and seasonal
retailers (Figure 3).
Figure 3: Fashion: Knowledge By Necessity
Source: RSR Research, December 2015
When compared to retailers selling hard goods or basics, everything fashion and seasonal retailers
is driven by sudden shifts in consumer demand. Their enhanced knowledge of planning, allocation
and replenishment tools is a direct result of their enhanced need to plan, allocate and replenish
with those sudden shifts in mind. They rely on forecasting more, and if they are good at their job,
their product assortment is far more customized according to shopper subsets than someone
selling televisions or canned food. It should come as no surprise that this segment of retailers
makes up the most tech-savvy contingency of retailers who responded to our survey.
What is disheartening, however, is this: with the amount of value most retailers told us many of
these merchandising tools hold (back in Figure 1), there is still a lot of work to do for hard goods
and basics retailers to leverage any real benefit from them.
Retail Winners And Why They Win
In our benchmark reports, RSR quite frequently cites differences between retailer over-performers
in year-over-year comparable sales and their competitors. We find that consistent sales
performance is an outcome of a differentiating set of thought processes, strategies and tactics. We
call sales over-performers “Retail Winners.”
17%
31%
25%
40%
29%
42%
27%
17%
43%
26%
35%
30%
43%
35%
31%
33%
36%
36%
43%
52%
55%
Lifecycle Price Optimization
Promotion Optimization
Size Optimization
Customer Analytics
Assortment Optimization
Forecasting
Integrated Merchandise Planning, Allocation andReplenishment
Solid Understanding (By Product Sold)
Fashion and Seasonal Durable and Hard Goods Basics and Perishables
4
RSR’s definition of these Winners is straightforward. Assuming industry average comparable
store/channel sales growth of 4.5 percent, we define those with sales above this hurdle as
“Winners,” those at this sales growth rate as “average,” and those below this sales growth rate as
“laggards” or “also-rans.”
The differences between Retail Winners and average and lagging retailers will comprise a large
part of this report, in particular. Because when it comes to merchandising, Retail Winners are in a
league of their own. Just consider how their gross margin compares to that of their competitors
over the past 36 months (Figure 4).
Figure 4: A Picture Tel ls A Thousand Words
Source: RSR Research, December 2015
In light of this, it’s not difficult to understand that they are doing so much better than their peers. In
the coming pages of this report, we’ll gain quite a bit of understanding as to how and why.
Methodology
RSR uses its own model, called The BOOT Methodology© to analyze Retail Industry issues. We
build this model with our survey instruments. See Appendix A for a full explanation.
In our surveys, we continue to find the kinds of differences in thought processes, actions, and
decisions cited above. The BOOT helps us better understand the behavioral and technological
differences that drive sustainable sales improvements and successful execution of brand vision.
Survey Respondent Characteristics
RSR conducted an online survey from September – November 2015 and received answers from
113 qualified retail respondents. Respondent demographics are as follows:
• 2014 Revenue (US$ Equivalent) Less than $50 million 10% $51 million - $249 million 5% $250 million - $499 million 16% $500 million - $999 million 11% $1Billion to $5 Billion 28% Over $5 Billion 30%
17%
58%
25%
17%
14%
69%
Remained the Same
Decreased
Increased
Selling Gross Margin % Over Last 3 Years
Winners Laggards
5
• Products sold: Fashion/Short Lifecycle 28% Seasonal 9% Basics/Replenishment 27% Durable/Hard Goods 20% Perishables 15%
• Headquarters/Retail Presence:
HQ Retail
Presence USA 66% 72% Canada 2% 26% Latin America 2% 16% UK 19% 40% Europe 4% 24% Middle East 1% 13% Africa 1% 10% Asia/Pacific 6% 22%
• Year-Over-Year Sales Growth Rates (assume average growth of 4.5%):
Worse than average (“Laggards”) 16%
Average 51%
Better than average (“Retail Winners”) 34%
6
Business Challenges
Genuine Dissent
With regard to to business challenges, Winners show us how differently they view their
merchandising worlds. For those over-performers, there is no greater challenge than understanding
evolving customer preferences (Figure 5).
Figure 5: A Much Bigger Picture
Source: RSR Research, December 2015
Winning Retailers understand that virtually all of the options - out of stocks, inventory issues, pricing
strategies – are all influenced by the new ways consumers are shopping stores, in their homes, at
work, and on their mobile devices in between. It is the knowledge base from which all other
operations will improve.
13%
19%
13%
50%
13%
56%
44%
44%
25%
25%
0%
16%
22%
22%
22%
22%
44%
44%
50%
59%
Our stores are a "sea of sameness" our productmix is undifferentiated
We're stuck in our product selection: someretailers outprice us, some outstyle us
Consumers expect more localized assortmentsthan we provide
Fractured planning processes make us lessefficient
Segment blurring competition from unexpectedplaces
Promotional reliance leading to brand equityerosion
Underperforming inventory
Inability to identify new ideas and innovate quickly(pricing strategy, promotion strategy, customer
preferences, etc.)
Out of stocks remain a persistent problem
Understanding customer preferences
Top Three Merchandising Strategy Business Challenges
Winners Laggards
7
Conversely, when we examine what lagging retailers perceive as most challenging right now, it
should come as no surprise that their reliance on promotions and price cuts has led to erosion of
their overall brand. For far too long, retailers desperate to get consumers’ attention have simply
inundated them with an endless barrage of promotions. In fact, we’ve often asked who was training
who in this scenario: were consumers training retailers to lower prices long before necessary or
were retailers training shoppers to simply sit and wait - that promotions were inevitably coming?
Either way, laggards have a real problem in this hyper-promotional environment. It is also worth
noting that fractured planning processes (a problem that was ubiquitous among all retailers just a
few short years ago), has now become a challenge that resides mostly for laggards. This makes
every subsequent step of their merchandising process more painful.
Something Old, Something New
Also, this year, we asked something we’d never asked before. It’s one thing to understand the
challenges retailers perceive on a daily basis, but we wanted to also know how those challenges
have been impacted by “the digital economy.” As we see in Figure 6, the question and its resulting
data is revealing. Winners and laggards have an almost perfectly inverse view of things.
Figure 6: An Inverted Play ing Fie ld
Source: RSR Research, December 2015
For Winners, it’s all about consumer-centric concerns. How can merchants present shoppers with
the most relevant offerings? How can they make sure the assortment in digital channels aligns and
varies from store assortments appropriately? Further, how can they make certain that store
assortments are appropriate to meet specific demographic desires on a location-by-location basis?
And are they able to “fill in the gaps” of what consumers do between decision points? This is an
40%
33%
40%
53%
20%
47%
27%
40%
19%
23%
26%
29%
29%
52%
55%
68%
Erosion of physical print/ad media
Concern over gross margin impacts due to broad
digital promotions and mobile coupons
Traffic reductions in stores due to lack of
consistent brand experience
Supply chain disruptions due to new digital
demand signals not being captured effectively
Increased pressure to localize assortment
Missing detailed customer information at relevant
shopper decision points
Understanding and making assortment choices in
digital channels versus stores
Keeping offerings relevant given newer trends and
shoppers
Top Challenges To The Merchandising Group Due To Digital Economy
Winners Laggards
8
especially important distinction in the overall thought process of Winners compared to that of under-
performers. Winners know that understanding consumer behaviors across the entire selling
environment really is the key to future success, and they also are aware that, by and large, it
is still an elusive component of their understanding of the modern consumer.
By comparison, laggards focus elsewhere. Lagging retailers point to faulty supply chain data,
decreased traffic in stores and decreasing gross margin (both due in no small part to excessive
promotions), and the fact that traditional advertising has let them down. This is classic lagging
behavior: while Winners ask the tough questions about what they can be doing to improve, those
on the bubble say the game has become too tough to play.
It’s no secret who will come out on top. Now let’s look at the ways some of these retailers are able
to convert challenge into opportunity.
9
Opportunities
Winners’ Step-wise View
While challenges abound, the most successful retailers will always find a way to convert challenges
into opportunity. As it relates to merchandising in 2015, Winners put on a tutorial showing how that
is done (Figure 7).
Figure 7: Winners’ Leading Vision
Source: RSR Research, December 2015
The findings in Figure 7 are yet another strong indicator that Winners focus on the consumer far
more than their competitors. Each of the areas where they’ve perceive enhanced opportunity -
tailored assortments, markdown optimization, the ability to adjust to deviations from forecasts, and
merchant-oriented workflows- represents a step-wise approach to overall change. More
importantly, each is rooted in the desire for the flexibility required to meet the needs of a
dramatically changing retail landscape.
By comparison, laggards are more concerned with merely fixing their immediate problem. They
need to make more use of cross-functional teams in their planning (something Winners tackled
years ago). They also understand that their planning won’t be very effective until they can finally
33%
40%
13%
27%
40%
47%
33%
27%
40%
13%
20%
27%
30%
33%
37%
40%
47%
53%
Integrating planning with crossfunctional teams
Shifting to a holistic pricing, assortment and
promotion decisionmaking process
Merchantoriented workflows and automation
Localized promotions to better match demand
against available inventory
Better incorporation of customer segmentation &
preferences into the planning process
Consistent, accurate and detailed demand
forecasting platform
Improving our ability to adjust to deviations from
sales forecasts
Price and markdown optimization to boost sell
through
Tailoring assortment to customer preferences
Top Opportunities To Improve Merchandising Processes
Winners Laggards
10
include accurate customer segmentation and preference information. The good news? It appears
that laggards are learning that the days of endless price-driven promotions will only lead them
further into a death spiral: they rate the opportunity to shift to a holistic pricing, assortment and
promotion decision-making process at a rate of two to one over Winners.
With regard to markdowns, they remain a fact of retail life. It is impossible to predict a product’s
demand perfectly, and for those who overbought, or for products ending their useful life, markdowns
are inevitable. Winners, however, understand that as it stands markdowns are not optimized to
their fullest extent. They, too, appear to be reconciling that they’ve been too quick to cut prices in
the past. Will more science behind their game of “who flinches first – customer or retailer?” curtail
this trend in the future, allowing them to maximize margins? One can only hope this is the case.
Effects Of Revenue On Outlook
When we examine one opportunity: retailers’ ability to adjust to deviations from sales forecasts, we
find some very telling differences based on retailer revenue (Figure 8.)
Figure 8: B iggest Reta i lers Gain An Edge
Source: RSR Research, December 2015
The world’s largest retailers are aware that – until now – flexibility has not been their strong suit.
The larger the retailer, the more power and scale it offered, while the smaller the retailer, the more
nimble and agile it was. However, technology is changing these once-reliable retail truisms. More
than half the largest retailers in our survey identify the ability to adjust to deviations from sales
forecasts as their top opportunity. They may not yet be able to pivot as quickly as small retailers
can, but they’re working on getting there someday soon.
Time Waits For No One
When retailers report their long-view plans for their merchandising systems, we can see real
change is happening, and quickly (Figure 9).
58%
32%
41%
17%
More than $5B
$1 - 5B
$250 - $999m
Less than $250m
Opportunity: Improve Ability To Adjust To Deviations From Sales Forecasts (By Revenue)
11
Figure 9: Progress Marches On
Source: RSR Research, December 2015
Retailers have an increasing appetite for Software as a Service (SAAS) and Cloud-based delivery
models. In fact, when given 5 choices of statements to describe their companies’ plans for the
longer term future, nearly 40% chose this statement as the one that best encapsulates their
merchandising systems for the next 3-5 years. That’s solidarity.
A marked improvement has been made just in the past 12 months in retailers’ efforts to move away
from the spreadsheet-centric decision making processes of the past. With only 5% of retailers
reporting this as an issue, it is a fair assumption that most progressive-minded retailers have moved
past the days when spreadsheets ran the world.
So what are the inhibitors standing in the way of retailers being able to push forward faster? Let’s
find out.
19%
28%
10%
14%
29%
5%
25%
15%
18%
37%
We are seeking to eradicate the spreadsheet
wherever possible
We are seeking greater integration between point
solutions
We are moving away from homegrown
applications towards point solutions
We are moving away from homegrown
applications towards an integrated suite
We are seeking more innovative delivery models
like Software as a Service, Cloud & Agile
Best Description Of Company's Long Term Merchandising Plans
2015 2014
12
Organizational Inhibitors
Dramatic Differences Depending On Performance And Products
When we look within retail merchandising organizations, differences vary so widely both by
performance and products sold that looking at aggregate responses is not useful. Hence, we’ve
chosen to look at the data solely based on both retailer performance and the type of products being
merchandised.
Winners Want Better Data Faster, Laggards Need The Basics
RSR’s core belief is that winning is no accident. It’s an outcome of different thought processes,
strategies and tactics. And we can see this in their perception of things that hold them back (Figure
10).
Figure 10: Winners Want To Go Faster, Laggards Just Want *Something*
Source: RSR Research, December 2015
Winners want their data to become actionable faster, and so their most frequently cited inhibitor is
the need for speed from data feeds to output planning and action systems. Beyond this, they
40%
13%
27%
53%
7%
27%
33%
60%
7%
33%
34%
25%
30%
32%
34%
34%
34%
32%
16%
30%
17%
21%
21%
21%
24%
28%
35%
41%
41%
52%
Incentives are not aligned, creating organizationsthat work at cross-purposes
Scarcity of capital for new technology purchases
Cultural resistance to an integrated planningprocess
Data is not clean; pricing, inventory, customer or POS
Past experience with merchandise technologiesshows the ROI is hard to prove
Too many forecasts: no single version of thetruth
Ability to do granular attribute analysis to drivenew ideas in merchandising
The existing technology infrastructure ispreventing us from moving forward
Poor perpetual inventory systems
Improving speeds of planning solutions andcomputing systems, data feeds, integration…
Top Three Organizational Inhibitors Standing In The Way Of Integrated Merchandising Processes
Winners Average Performers Laggards
13
recognize that poor perpetual inventory and antiquated technology infrastructures can only be
stretched so far.
Laggards, on the other hand are somewhat unified on the major problems they face: an intractable
existing technology infrastructure, and dirty data.
Ironically, when we get to the section on Technology Enablers, you’ll see that technology refresh
plans are all over the map; in some cases average performers are most interested in changing up
their portfolio than higher or lower performing peers.
Short Lifecycle Going Granular, Durables Stung By Past Purchases, Basics Lack
Basics
It’s impossible to talk about merchandising without looking at different verticals. Quite simply, to
those who practice the art and science of merchandising, their worlds are dramatically different.
We can certainly see this in their perceived organizational inhibitors (Figure 11)
Figure 11: Barriers Di ffer Dramatical ly Across Vert icals
Source: RSR Research, December 2015
24%
27%
34%
29%
39%
20%
24%
42%
44%
17%
47%
26%
21%
37%
21%
11%
37%
37%
21%
42%
14%
14%
18%
25%
29%
32%
36%
39%
39%
54%
Past experience with merchandise technologies showsthe ROI is hard to prove
Poor perpetual inventory systems
Cultural resistance to an integrated planning process
Incentives are not aligned, creating organizations thatwork at cross-purposes
Data is not clean; pricing, inventory, customer or POS
Scarcity of capital for new technology purchases
Too many forecasts: no single version of the truth
The existing technology infrastructure is preventing usfrom moving forward
Improving speeds of planning solutions and computingsystems, data feeds, integration points, etc.
Ability to do granular attribute analysis to drive newideas in merchandising
Top Three Organizational Inhibitors By Retail Vertical
Fashion and Seasonal Durable and Hard Goods Basics and Perishables
14
As a general rule, fashion and seasonal retailers have been merchandising technology leaders.
They are most likely to “push” merchandise to stores rather than have it “pulled” by store operations.
Hence they are most likely to cite an interest in “going granular” – having their computer systems
replace human beings in defining and describing store and customer specific attributes. And they
are most likely to express frustration with the speed data comes out of their existing systems.
Those selling basics and perishables have historically been technology laggards. So along with the
need for speed, and frustration with their technology infrastructure, their fast moving product
generates dirtier data – data that they feel the need to clean. Surprisingly, they are also more likely
to cite cultural resistance to an integrated planning process.as an issue than other retailers.
Finally, we were most surprised to find retailers selling durable and hard goods expressing what
amounts to rampant disappointment with past merchandise technology purchases. At the same
time, even though they say “it hasn’t worked yet,” almost as many hold the hope that more granular
attribute analysis will yield creative new merchandising ideas. In a vertical that has been dominated
by price transparency and continued margin reductions, it’s hard to imagine what they expect to
achieve.
Just As Problems Differ, So Do Perceived Solutions
Winners See Some Surprising Solutions, Laggards More Logical And Measured
Given their perceived inhibitors (better data faster), it’s not surprising to see Winners most
frequently interested in improving their inventory processes and systems as a solution. It’s also not
surprising to see them looking for real-time visibility into deviations from expectations. It is however,
quite surprising to see how many want to change their organizational structures (Figure 12).
Figure 12: Along With Better Solut ions, Winners Want Organizational Change
Source: RSR Research, December 2015
40%
27%
60%
40%
27%
73%
33%
32%
34%
46%
30%
39%
68%
52%
14%
28%
38%
45%
55%
59%
62%
Data cleansing projects or providers
Changing compensation & incentives to be morealigned across the company
Smaller, easier-to-digest projects that build to alarger, integrated end-state
More involvement from senior managementchampions
More real-time visibility to deviations from theplan
Changing organizational structures to moreintegrated merchandising teams
Better inventory management processes andsystems for more accurate inventory
Top Three Means To Overcome Inhibitors
Winners Average Performers Laggards
15
Laggard responses are more predictable. Having recognized their organizational structures are
dysfunctional, they believe that changing them will help move forward. Their consistent desire for
smaller projects that lead to a better end-state is likely rooted in the lack of free capital that comes
from consistent under-performance in sales. It’s a logical and rational way to solve the problem of
poor systems, and one we don’t often see laggards recognizing in our studies.
Concurrence Across Verticals On The Need For Organizational Change
We see almost complete concurrence on the importance of creating more integrated merchandising
teams, across all the retail verticals we surveyed. From there, responses vary widely (Figure 13).
Figure 13 : Some Vert ical Answers Rat ional , Others Not So Much
Source: RSR Research, December 2015
Somewhat surprisingly given their past investment success, retailers selling fashion and seasonal
merchandise are more likely to look for small, easy to digest projects to overcome organizational
challenges and involvement from senior management to drive change.
Those selling basics and perishables, on the other hand, in recognizing they are technology
laggards are bullish on better inventory management processes and systems, and better visibility
into plan deviations. However, even given their understanding of the “dirty data” they possess, they
don’t seem all that interested in cleaning it. We worry that investments will lead to the old aphorism:
GIGO (garbage in, garbage out), and they’ll make investments that don’t yield desired results.
Instead, retailers selling durable and hard goods have fixated on data cleansing and compensation
strategies to solve the problem of disappointing past project performance. This is frankly hard to
understand.
29%
22%
54%
61%
29%
42%
63%
47%
42%
26%
53%
32%
32%
68%
21%
25%
36%
39%
50%
61%
68%
Changing compensation & incentives to be morealigned across the company
Data cleansing projects or providers
More real-time visibility to deviations from theplan
Better inventory management processes andsystems for more accurate inventory
More involvement from senior managementchampions
Smaller, easier-to-digest projects that build to alarger, integrated end-state
Changing organizational structures to moreintegrated merchandising teams
Top Three Means To Overcome Inhibitors
Fashion and Seasonal Durable and Hard Goods Basics and Perishables
16
The Digital Economy Adds Stresses To Merchandising Organizations
The emergence of marketing has added somewhat well-publicized internal challenges to the
merchandising organization. Fifty-five percent of respondents cite a lack of system integration
between digital (marketing) and merchandising as a top-three operational challenge, and 48% cite
challenges understanding the impact of social media and mobile advertising on sales as operational
head scratchers. Laggards and average performers are more concerned about the former than
Winners (60% and 64% vs 42% respectively), while Winners and average performers are more
concerned about the latter (48% and 52% vs. 33% respectively).
RSR believes that necessity is driving the marketing and merchandising organizations back
together again. They clearly need more shared data to truly come together, but we see the
beginning of normalization.
Operational Challenges Highlight Today’s Merchandising Complexities
Operationally, merchants find themselves pulled in many different directions. Traditional stress
points, like the challenge of store and supply chain execution, are joined by new complexities
mostly driven by the cross-channel imperative. Inventory must be more accurate, and
merchandising across channels has basically doubled the job of some of merchants (Figure 14).
Figure 14: Operational Chal lenges Highl ight A More Complex World
Source: RSR Research, December 2015
Not surprisingly, fashion and seasonal merchants are most challenged to manage cross-channel
merchandising. After all, apparel is the largest selling category in digital channels, Those retailers
selling fast moving basics and perishables most frequently cite inventory inaccuracies. Finally,
given the need to bring product in faster and get it out to the consumer in tighter time frames, getting
23%
36%
48%
52%
39%
32%
41%
30%
42%
53%
47%
37%
21%
26%
32%
42%
22%
28%
28%
28%
38%
44%
47%
66%
Getting marketing in line to supportmerchandising plans
Getting merchandising and supply chain to worktogether
Getting stores to execute merchandising plans
Getting an accurate picture of our currentinventory position
Holistically predicting the impact of futurepricing, assortment and promotional decisions
Executing at a more granular level against ourmerchandising plans
Inability to identify new ideas quickly in a sea ofcustomer information and execute on these
Managing the complexities of cross-channelmerchandising
Top Three Operational Challenges
Fashion and Seasonal Durable and Hard Goods Basics and Perishables
17
merchandising and the supply chain to work together is most frequently cited by those selling
durable and hard goods as an operational issue.
The most surprising data point above is the inordinate stress between marketing and
merchandising for those selling durable and hard goods. We can only assume this is “the Amazon
effect.” Marketing is making promises that the merchants just can’t keep.
With these organizational challenges delineated, it’s time to take a look at the technology enablers
retailers believe will help them move forward. It’s interesting to see how willing retailers really are
to swap out aging technologies to support their opportunities and mitigate their execution issues.
18
Technology Enablers
Many Technologies, And The Need For Change
Merchants are charged with finding, buying and pricing the products a retailer’s target market is
most likely to purchase. As such, it’s one of the most mature functions in the retail enterprise.
As we’ve repeatedly observed, today’s merchant is very different than merchants in days gone by.
The perception that “computers” are a necessary evil has been replaced by a sense of real
dependence on technology to support a more complex, far-reaching enterprise.
And so, first and foremost, let’s take a look at the value retailers place on various merchandising
technologies. There are so many technologies, we’ve divided our list into two charts, and because
requirements are so different for the different retail verticals, we’re displaying value based on
products sold.
First up, let’s look at assortment, forecasting and space management technologies (Figure 15).
Figure 15: High Value Assortment , Forecast And Space Management Techs
Source: RSR Research, December 2015
Retailers selling fashion and seasonal products are most interested in curating their assortments
and managing their processes in a holistic fashion. As such, they place the highest value on
Assortment optimization, attribute-based planning systems and integrated planning, allocation and
replenishment systems.
24%
61%
56%
51%
46%
39%
44%
61%
26%
53%
58%
47%
32%
47%
42%
53%
44%
68%
32%
60%
40%
20%
28%
44%
Attribute-based merchandising planning systems
Integrated planning, allocation, and replenishmentsystems
Integrated assortment and space planning
Assortment optimization
Space optimization
Planogram optimization
Initial demand forecast as a basis for next year'splan
In-season demand forecasting for price,promotional or assortment planning
High Value Technologies By Vertical: Part 1
Fashion and Seasonal Durable and Hard Goods Basics and Perishables
19
Retailers selling durable and hard goods tend to spread their interests a bit more. They are
surprisingly concerned about optimizing use of space, placing highest importance on planogram
optimization and integrating assortment and space planning. But a majority also places a high value
on demand forecasting and integrating their entire merchandising process.
Retailers selling basics and perishables are more focused. For them, in-season demand
forecasting and integrated planning, allocation and replenishment are most important. Surprisingly,
they place less importance on space and planogram optimization. We would have expected just
the opposite.
Next, let’s take a look at what amounts to a potpourri of other merchandising technologies, ranging
from core merchandise operations management to various kinds of price optimization technologies
(Figure 16). Again, some answers are surprising and counter-intuitive.
Figure 16: Optimization, Analyt ics And Core Merchandising Value
Source: RSR Research, December 2015
In today’s ever-escalating promotional environment it’s not surprising to see congruity on the value
of promotion optimization. And the need to curate assortment translates into relative unanimity on
the value of customer segmentation.
48%
43%
65%
48%
53%
33%
28%
38%
43%
45%
38%
45%
26%
47%
58%
53%
47%
47%
26%
21%
58%
47%
42%
42%
44%
52%
52%
44%
48%
56%
28%
36%
44%
36%
48%
44%
Automated replenishment
New core merchandising systems
Integrated customer data within merchandiseplanning
Market basket analytics
Customer segmentation
Web analytics
Bottoms-up plan
Reconciliation of bottom-up and top-down plans
Optimization of assortment against key customersegments
Initial price optimization
Markdown optimization
Promotion optimization
High Value Technologies By Vertical: Part 2
Fashion and Seasonal Durable and Hard Goods Basics and Perishables
20
We are surprised to see the relatively low percentage of retailers across all verticals seeing value
in bottoms-up planning. After all, of curated assortments are the goal, and the merchant is obligated
to stay within the constraints of his open-to-buy, one would expect bottoms-up planning to be a key
prerequisite. It’s also somewhat odd to see the reconciliation of bottoms-up and top-down plans
rated generally more important than the actual plans themselves. We wonder what exactly these
retailers are planning to reconcile to.
Beyond these similarities, things get a bit more differentiated.
Fashion and seasonal retailers are most keen to replace their core merchandising systems. This is
an obviously daunting task, but the demands of cross-channel retailing are dictating a change.
They are also most bullish on web analytics, likely because they rely more on the web to sell their
products.
Retailers selling durable and hard goods continue to surprise. They are most interested in
optimizing their assortment against key customer segments. Since they generally have larger
footprint stores than their peers, we believe this is more about not “turning off” customers within the
wrong demographic segments than it is optimizing their space. This is also reflected in their interest
in integrating customer data into their merchandise plans.
Retailers selling basics and perishables recognize that their customers expect more curated
assortments than in the past. As such, they are far more likely to place a high value on integrating
customer data into merchandise planning and segmenting their customers. Of course, for highly
replenishable items, automated replenishment is always highly valued.
The discontinuity we see here is that given their concern with inaccurate perpetual inventory
systems and associated “dirty data” they’re less likely to embrace the idea of replacing core
merchandising systems. It’s true that 43% placed a high value on this change, but we suspect
there’s a real disconnect between understanding the value of a solid foundation and the
optimization technologies that rely on that foundation for effectiveness.
Where Is Change Coming?
Regardless of the value they place on individual technologies, it’s clear that retailers of all sorts are
planning big changes to their portfolios. We set out to quantify that change.
Towards that end, we asked retailers to rate their usage of technologies along the following scale:
Using and satisfied, using and looking to change, budgeted, planned, or no plans. While we know
that a budgeted project is most likely to come to fruition in a faster timeframe, it’s also very useful
to look at overall interest levels, particularly by retailer vertical.
We therefore summed those responses that indicate retailers are using a technology and looking
to replace it, have a budgeted new project in place, or are planning to implement for the first time.
The charts below in Figures 17 and 18 delineate these plans.
Of particular note, we think is the significant percentage of retailers contemplating a refresh of core
merchandising systems (Figure 18). While retailers selling durable and hard goods are most likely
to be contemplating this refresh (68%), more than half of retailers in all other verticals agree.
21
This is important to note: there are few more daunting tasks than replacing core merchandising
systems. The fact that business users, rather than just IT personnel are warming up to the task tells
us almost all we need to know about just how much the world of merchandising has changed.
Figure 17: Plans: Assortment, Forecast And Space Management Techs
Source: RSR Research, December 2015
49%
63%
63%
66%
66%
61%
66%
63%
68%
42%
42%
58%
53%
58%
53%
53%
64%
56%
64%
72%
52%
48%
68%
56%
Attribute-based merchandising planning systems
Integrated planning, allocation, and replenishmentsystems
Integrated assortment and space planning
Assortment optimization
Space optimization
Planogram optimization
Initial demand forecast as a basis for next year'splan
In-season demand forecasting for price,promotional or assortment planning
Change Is Coming: Product Part 1
Fashion and Seasonal Durable and Hard Goods Basics and Perishables
22
Figure 18: Optimization, Analyt ics And Core Merchandising Value
Source: RSR Research, December 2015
If retailers follow through on even half these plans, we’ll see a truly transformed enterprise. It’s
important to remember that at the end of the day, the retail industry sells products to consumers.
Any technology that helps pick the products consumers want, price them reasonably, and control
costs at the same time can bring great benefits to the retailers that embrace them.
45%
50%
53%
40%
50%
50%
53%
48%
55%
50%
48%
38%
47%
68%
58%
58%
63%
63%
58%
58%
47%
53%
68%
58%
48%
56%
48%
40%
52%
36%
40%
44%
40%
36%
40%
52%
Automated replenishment
New core merchandising systems
Integrated customer data within merchandiseplanning
Market basket analytics
Customer segmentation
Web analytics
Bottoms-up plan
Reconciliation of bottom-up and top-down plans
Optimization of assortment against key customersegments
Initial price optimization
Markdown optimization
Promotion optimization
Change Is Coming: Product Part 2
Fashion and Seasonal Durable and Hard Goods Basics and Perishables
23
BOOTstrap Recommendations
Change Is Inevitable; Plan For It Carefully
One thing is very, very clear. The face of the merchant’s portfolio is going to change significantly in
the coming three years. Based on our data, almost every item in the merchant’s toolkit is up for
reconsideration by a majority of retailers, from core systems to recently implemented optimization
tools and techniques.
On the plus side, it’s encouraging to see this much willingness to change. But our thoughts return
to long and painful past technology rollouts. No matter how you look at it, the retail industry cannot
afford to have their worlds frozen in place while five-year enterprise transformations lumber along.
Following are some general rules to contemplate in planning for this change.
Set a Sustainable Strategy
The worst thing a retailer can do at this time is to undertake scattershot implementations of various
and sundry technologies. It’s more imperative than ever to put a strategy in place with all
stakeholders. Questions to ask include:
• What are the short, medium, and long-term objectives for merchandising processes?
• How will we determine the most efficient and effective sequence of events?
• How will we measure success?
• What is the methodology we’ll use to adjust our objectives as necessary? Change
Management remains a requirement.
Determine Technologies Required to Support New Strategies
This may sound simple on the surface, but in fact, the sequence of technology implementation is
both science and art. Neither can the enterprise wait five years to see results, nor can it support
spending money on technologies that may not fit into the final portfolio. A master plan and rollout
sequence is imperative. While it’s easy to either relegate this decision-process to the CIO or make
him the victim of a user-defined process, the best of all worlds is to make him a partner in a user-
driven process.
The goal here is straightforward. Set a roadmap for a long journey that delivers benefits to users
all along the way. In other words, “plumbing,” or technology infrastructure is certainly necessary,
but it’s also critical to install something that adds business value along with that plumbing.
Execute The Plan
The fundamentals of project and change management are certainly beyond the scope of this
document, but we would be remiss if we didn’t at least give them a passing mention. It seems as
though for some that would provide technology to retailers (including their own IT departments),
these basics have gotten lost in the wave of seeming continuous change.
Retail Winners win because they know how to take grand plans and turn them into actionable
results. It’s imperative that others follow their lead in that regard. It serves no good to be a world-
class planner without equivalent management and execution skills.
Designate one person in charge of transformation, and hold him or her accountable for success or
failure. Provide an adequate team to support these efforts.
24
Certainly team membership can change over time, as different strategies and accompanying
technologies are rolled out, but continuity is imperative. Time and time again we have seen that
every major undertaking requires one lead with several partners. Otherwise they are doomed to
fail.
Insure Processes Are Changed In Concert With New Technologies
When the world surrounding the merchant changes, day-to-day activities must likely change as
well. Every strategic step, accompanied by one or more technologies, must also stand with a new
set of procedures, policies and work flows. The workflows of the past cannot be bolted onto the
technologies or strategies of the future.
Perhaps this is the single most significant requirement as we move forward into merchandising’s
new world. Start with the strategic goal, pick the technologies that matter, execute on the
implementation, and most importantly, ensure that the rank-and-file understand implications to their
work day. Compensation incentives may need to change as well. RSR has said, for as long as
we’ve been in business: “People do what they are paid to do.” They may do more if they’re really
motivated, but they certainly won’t do less.
Reward those who both embrace new processes and suggest improvements that make managing
their jobs easier. Sometimes the most “difficult” employee may actually have the best ideas.
We do believe a new generation of merchandising is unfolding. It’s becoming apparent that using
the lever of price to drive demand will no longer suffice. Merchants will need creativity underpinned
by real science to move into new realms. Following the steps outlined above will help make that
shift as painless as possible. It’s an exciting time and as always, it’s a great time to be a part of the
retail industry.
a
Appendix A: The BOOT Methodology©
The BOOT Methodology© is designed to reveal and prioritize the following:
• Business Challenges – Retailers of all shapes and sizes face significant external challenges. These issues provide a business context for the subject being discussed and drive decision-making across the enterprise.
• Opportunities – Every challenge brings with it a set of opportunities, or ways to change and overcome that challenge. The ways retailers turn business challenges into opportunities often define the difference between Winners and “also-rans.” Within the BOOT, we can also identify opportunities missed – and describe leading edge models we believe drive success.
• Organizational Inhibitors – Even as enterprises find opportunities to overcome their external challenges, they may find internal organizational inhibitors that keep them from executing on their vision. Opportunities can be found to overcome these inhibitors as well. Winning Retailers understand their organizational inhibitors and find creative, effective ways to overcome them.
• Technology Enablers – If a company can overcome its organizational inhibitors it can
use technology as an enabler to take advantage of the opportunities it identifies. Retail
Winners are most adept at judiciously and effectively using these enablers, often far
earlier than their peers.
A graphical depiction of the BOOT Methodology© follows:
b
Appendix B: About Our Sponsor
SAP is the leading provider of application solutions for the retail industry. Real-time retail has been
reimagined with the SAP HANA® platform. Innovation is the core of the next-generation
applications from SAP. Every function is integrated, cloud first, and on a common platform to drive
insights across channels based on a unified, comprehensive view of customers and inventory. SAP
HANA delivers the consistent, personalized shopping experience customers demand and improves
operational efficiency and margins. SAP helps retailers of all sizes to understand, anticipate and
inspire their shoppers by providing a compelling shopping experience. The SAP® for Retail solution
portfolio also provides specific solutions for retail companies in the food, fashion and hardlines
businesses. Learn more about SAP at www.sap.com/retail.
c
Appendix C: About RSR Research
Retail Systems Research (“RSR”) is the only research company run by retailers for the retail
industry. RSR provides insight into business and technology challenges facing the extended retail
industry, providing thought leadership and advice on navigating these challenges for specific
companies and the industry at large. We do this by:
• Identifying information that helps retailers and their trading partners to build more
efficient and profitable businesses;
• Identifying industry issues that solutions providers must address to be relevant in the
extended retail industry;
• Providing insight and analysis about a broad spectrum of issues and trends in the
Extended Retail Industry.
Copyright© 2015 by Retail Systems Research LLC • All rights reserved.
No part of the contents of this document may be reproduced or transmitted in any form or by any means without the permission of the publisher. Contact research@rsrresearch.com for more information.
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