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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


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


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


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


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


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


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


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


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*


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


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


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


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


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


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


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


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


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


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


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


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


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


22

Figure 18: Optimization, Analyt ics And Core Merchandising Value


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


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.

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