Omni-Channel Merchandising - RIS News

State of the Industry Research Series :

Omni-Channel Merchandising

www.eknresearch.com

EKN is part of the Edgell Family

Exclusive Sponsor

2013

Table of Contents

Executive Summary 3

Omni-Channel Merchandising 6

Research Findings 10

Recommendations 20

Appendix A: EKN Omni-Channel Merchandising Maturity Assessment Framework 27

Retail Honor Board 31

EKN Merchandising Vendor Landscape 33

Executive Summary

EKN 4

Merchandising, as a concept is relatively straightforward: Determine what to sell to whom at what price; forecast demand and procure accordingly; distribute stock optimally to ensure maximum demand fulfill-ment; organize, display and promote merchandise to increase appeal to customers.

That is not to suggest executing an effective merchandising strategy is easy. In fact, in a retailing environ-ment where consumers expect a seamless, singular retail experience across all of a retailer’s channels, the art and science of merchandising requires a new focus and new capabilities.

Retailers have traditionally been rewarded for having a product-centric merchandising strategy focused on maximizing sales within a channel. Today’s retailing environment requires them to have a more integrated approach, focusing on maximizing lifetime value of a customer relationship, independent of channel.

The impact on a retailer’s merchandising function is far-reaching. All processes across the merchandising value chain – planning, assortments, allocation, pricing and promotions – need to operate at a higher level of maturity. Doing so requires a focus on 3 key areas of capability:

• Integration: Merchandising business processes and technology systems need to integrate well within the merchandising value chain and across other enterprise systems such as Enterprise Re-source Planning (ERP), Supply Chain and Marketing.

• Unification: Unification speaks to the need for retailers to bring together disparate teams and planning processes into a unified team and planning process that is focused on merchandising around customer segments.

• Insights: Insights from analysis of customer and enterprise data is critical to improving merchan-dising decisions. Beyond data integration and technology related challenges retailers are faced with fostering a data-driven culture in a function that has traditionally been intuition–driven.

EKN conducted an industry survey to benchmark the state of the retail industry in terms of Omni-channel merchandising maturity. Findings from the primary research covering 60+ respondents, interview based qualitative inputs from retail executives, and EKN’s secondary research from public and proprietary sources are presented in this report. Key findings include:

• Lack of business process and technology integration across channels is a big stumbling block: 1 in 3 retailers report minimal or no integration of merchandising business processes and technol-ogy systems across channels. Promotions, assortments, demand forecasting and customer insights emerge as the areas of highest expected impact from integration and lowest current maturity.

• Retailers are prepared to make hard organizational structure and process changes: Retailers recognize the need to move away from channel or category centric merchandising plans. 1 in 2 plan to create integrated merchandising teams and unified merchandising plans over the next 2 years.

• Uptick in integration and net new development related technology investments: As com-pared to other business functions retailers are spending a greater percentage of their total func-tional IT spend in merchandising on integration, enhancements and net new development. EKN expects niche vertical solutions that utilize advanced algorithms and analytics to solve specific busi-ness challenges to be a focus area over the next 2 years.

Executive Summary

State of the Industry Research Series: Omni-Channel Merchandising5

• Retailers are sharply focused on upgrading merchandising analytics capabilities: Merchan-dising is rated as one of the top 3 retail business functions in terms of annual rate of growth of data. Along with multi-channel it is also a top 2 areas of planned analytics investment by retailers. There is significant headroom for improvement, with 3 in 5 retailers assessing their merchandising analytics maturity as being “basic”. 4 in 5 will be upgrading their merchandising performance and analytics capabilities over the next 2 years.

As retailers look to evolve their merchandising function to be more customer-centric, collaborative, insights-driven and technology-enabled, they will need to chart a clear strategy encompassing organizational change and technology enablement. EKN’s recommendations that follow in this report aim to provide a roadmap for the same, beginning with a maturity assessment of where they stand relative to industry leaders and a self-defined competitive set.

Executive Summary

Research Findings Fast Facts:• 72% of respondents rate integration of sys-

tems across channels as their #1 technology challenge as relates to Omni-channel mer-chandising.

• 22.7% - the percentage of total IT budget re-tailers expect to spend on merchandising by 2016.

• 1 in 3 retailers use a home grown system as their core merchandising platform.

Inside the report:• Evolving from Traditional to Omni-Channel

Merchandising

• EKN Omni-Channel Merchandising Maturity Assessment Framework

• Retail Honor Board

EKN 6



Retail’s consumer-driven transformation brings into focus the need for retailers to develop new capabilities such as pervasive customer insights, integrated and seamless execution across channels, one view of inven-tory and unified commerce. However, it also shines a light on the need for transformation within the most core of retail functions: Merchandising.

Merchandising is and will remain the heartbeat of a retailer. It is the central nervous system that provides strategic focus on what the retailer should sell, to whom, at what time and place. It forms the glue between Marketing at the front-end of retail and Supply Chain at its back-end.

The concept of merchandising itself remains relatively straightforward – an integrated end–to–end business process that is focused on:

• Planning the merchandise assortment

• Sourcing, distributing and allocating goods

• Planning how the goods are displayed and sold across channels

• Promoting and selling the assortment to customers

• Forecasting demand and replenishing inventory

What has changed, however, is the applicability of the above processes to all retail channels, not just stores. The change in focus is driven by retail’s new reality:

• Fewer second chances in retail: The barriers to a customer defecting to a competitor are lower than ever before. If a customer is unable to find the color or size they came looking for in the store, he or she can buy it online from a competitor’s website, using your free in-store Wi-Fi on their smartphone. Today, there are fewer second chances in retail. Therefore, getting the assortment and supply chain integration first-time-right can be the difference between capturing demand or losing sales.

• Single channel – “Retail”: The role of the store is evolving from a standalone commerce des-tination to a hub of customer experience and service. Our research shows that over the next 2 years retailers are preparing to integrate the store as part of a singular retail experience - enrich-ing all customer interactions through smart use of insights, simplifying commerce systems and integrating inventory across channels. This seismic shift in brick and mortar retailers’ approach to stores will have a transformational effect on their merchandising processes as well. Take for instance the fact that only 7% of retailers expect stores to retain their primacy in driving assort-ment by 2016. Others see a much more integrated approach to merchandising with online and mobile channels driving the assortment planning and stores carrying a smaller selection. It is only through such an integrated approach that concepts such as the Endless Aisle will come to pass.


EKN 8

• Data-rich, insights-poor: Retailers have access to more enterprise, customer and public data today than ever before. In addition, the cost of storing, managing and analyzing this data have reduced significantly. The factors that are limiting more effective data and analytics use are:

° Lack of specification around decisions that retailers want to impact.

° Clarity on the insights needed to enrich these decisions and what data is required to deliver these insight.

° Ability to effectively integrate insights into merchandising decision making processes even where insights are available.

° A shift in the traditionally intuition and experience oriented merchant and buyer culture to-wards a more insights–driven approach.

• Smaller retailers will need to focus Omni-channel efforts on highest impact functions: The threat of online retail is a uniquely lopsided one for small and medium size retailers. They share the same erosion of sales and customer engagement, as do larger retailers such as Target and Wal-Mart. However, their investment appetite and organizational preparedness to change is often limited by their size. It is critically important for such retailers to prioritize investments in areas that can help create differentiation and ultimately strengthen their ability to compete. EKN recommends Merchandising, with its enterprise-wide impact on all core retail functions (Marketing, Supply Chain, Stores, Multi-Channel), be high up on retailers’ priority list.

The merchandising function is symptomatic of the larger transformational challenge facing retailers. The core merchandising function has been a traditionally product-centric business practice driven by the in-tuition and experience of merchants. It has also historically been focused on a single channel - even when customer-focused, through initiatives such as localized assortments in stores. In order to move to the vision of an integrated business process that is truly focused on the customer requires a set of new capabilities:

• Organizational readiness: The organizational hurdles – culture and structure – are the hardest to overcome. Yet, they form the foundations upon which a change paradigm can be built swiftly and sturdily. A new mindset is required that:

° Rewards decisions based on a combination of insights and judgment, rather than experience alone.

° Focuses on the customer rather than on channels.

° Considers channels to be part of an integrated retail platform. Customers engage with one retail platform, not multiple channels.

• High analytics maturity: Retailers’ ability to plan, assort, forecast, price, localize or replenish ac-curately and efficiently is only as strong as their ability to integrate data and analytics into their merchandising decision making. Higher analytics maturity is a function of the ability to identify and integrate data whose analysis can help enrich decisions. It also means having the right tools that allow meaningful analysis of this data, delivering the insights to the right audience at the right time, and having the skills to interpret and act on the insights to improve merchandising decisions.



• Process and technology integration: With the emergence of channels such as online, mobile and social, the art and science of merchandising has changed. Not only must merchandising be inte-grated across channels, it needs to be integrated with other business functions in the enterprise. For instance, some retailers are increasingly experimenting with the concept of temporary pop-up stores that emerge around a particular customer segment, trend or occasion. Tight integration be-tween Merchandising, Store Operations and Marketing is required for such strategies that rely on flawless execution within a small window of opportunity to be scalable.

The Merchandising Process Value Chain: Evolution from Product-Centric to Customer-Centric


Merchandising Process

Product-Centric Retailing Environment

Customer-Centric Retailing Environment

Planning Channel specific merchandise teams and plans.Unified merchandising team and integrated

merchandising plans.

AssortmentLow variability of assortment across stores, low

levels of personalization and localization.

Highly localized and personalized assortments

based on micro customer segments.

Allocation

Limited flexibility with fixed allocation for

Distribution Centers (DCs), warehouses, stores

and online.

High flexibility and response time based on real-

time allocation.

PricingPricing is based largely on historical data and

intuition.

Price optimization based on advanced analytics

on data integrated from across enterprise and

customer data sources.

PromotionHeavy use of mass promotions and mark-

downs.

Personalized promotions integrated with overall

merchandising plan and customer profiles.

EKN 10

Research Findings

State of the Industry Research Series: Omni-Channel Merchandising11Research Findings

Survey respondent distribution by annual revenue (Figures are percentage of total respondents)

Survey respondent distribution by designation (Figures are percentage of total respondents)

35%

14%8%

25%

18%

<$100 million

$100 million to $499 million

$500 million to $999 million

$1 billion to $4.9 billion

$5 billion +

13%

29%

25%

33%

CXO

SVP/EVP/VP

Director

Manager

EKN 12Research Findings

Retailers have a clear vision of what they need to do better to move towards Omni-channel merchandising.

Highest priority operational improvements in the merchandising process in 2013 (Figures are percentage of total respondents)

EKN’s survey asked respondents to identify their highest priority merchandising process improvements, and 3 clear areas of focus emerged:

• Improving assortments (48%): Given how central assortments are to a retailer’s ability to attract customers, build a brand and maximize demand fulfillment, 1 in 2 retailers identified it as a high priority area that requires attention over the next year.

• Improving product availability (44%) and demand forecasts (40%): A SKU being out of stock is likely a lost sale for the retailer, especially if its systems do not allow it to tap into inventory across the enterprise, regardless of where it sits. While inventory integration is a foundational capability for retailers to be able to deliver a seamless experience, from a merchandising process perspective it becomes extremely important to forecast demand better, and ensure the right item is available in the right SKU at the right time.

• Improving analytics (41%): Analytics, and specifically the ability to leverage customer insights, is a horizontal capability that is applicable across the entire merchandising process. 2 in 5 retailers state this is a key area of improvement. With merchandising’s focus so clearly being driven by customer signals, needs and demand, retailers must ensure they are making the best use of data and analyt-ics to drive decision-making.

0 10 20 30 40 50

48%

44%

41%

40%

29%

24%

24%

21%

17%

5%

Improve merchandise assortments

Improve product or inventory availability

Improve merchandise analytics

Improve accuracy of demand forecasts

Improve replenishment processes

Improve merchandise allocation

Improve merchandise presentation

Improve alignment of pricing actions

Reduce markdowns

Improve store clustering


The lack of business process and technology integration across channels is holding re-tailers back.

Top 3 technology challenges as relates to Omni-channel merchandising (Figures are percentage of total respondents)

Top 3 business challenges in executing merchandising strategies (Figures are percentage of total respondents)

Processes that are the most important to integrate vs. maturity of process integration across channels

(Processes are categorized on the basis of indices created, where low indicates low maturity and least importance, while high indicates high

maturity and high importance)

0 20 40 60 80

52%

72%

45%

43%

38%

Integrating existing systems across channels

Lack of skilled IT resources

Lack of a centralized customer or product data system

Unavailability of a visible end-to-end package solution

Difficulty in justifying ROI

0 15 30 45 60

30%

30%

59%

41%

35%

27%

21%

14%

Nature of our product set is inherently difficult to plan for

Poor quality of data

Seasonal variation in demand

Lack of integration of merchandising processes andsystems across channels

Supply chain is not designed to support Omni-channelmerchandising

Lead time in implementing merchandising decisions

Poor execution of merchandising plans by stores

Lack of support from the marketing teamfor merchandising plans

Low High

High

Importance

Maturity

InventoryManagement

Marke�ng & Promo�ons

Demand Forecas�ng

Assortment Planning

Pricing

Customer Insight

Product Alloca�onMarkdowns

Procurement


Among the many impediments to retailers realizing this vision of Omni-channel merchandising, there is one that is more daunting than others. From both a business process (59%) and technology systems (72%) perspective, integration across channels is the biggest challenge, by far.

Further, EKN’s survey benchmarked the maturity of retailers in terms of integration across channels of the various merchandising processes, and found that:

• Lack of integration runs deep: 1 in 3 retailers report minimal or no integration across channels, validating that the lack of integration runs deep and across the entire merchandising process value chain.

• Core merchandising functions have the highest integration maturity: Processes focused on the core tenets of merchandising – inventory, price and procurement – are the most mature in terms of integration. Yet, the level of integration is low; for instance only 30% of retailers report tight integration of the inventory management process across channels.

• Low integration of customer insights a key impediment: Even though customer insights, de-mand forecasting and marketing & promotions are rated as functions that are relatively more im-portant to integrate across channels, the current level of process integration is below average. And, despite improving analytics being one of the top 3 priorities for retailers, only 1 in 3 identify cus-tomer insights as a process that is important for them to integrate across channels. Further, 60% of retailers report minimal or no integration in the customer insights process, representing the lowest maturity across the merchandising process value chain.


Efforts to improve collaboration across channels focused on integrated merchandising planning.

What initiatives are underway or planned to improve collaboration across channels to enable more effective Omni-channel merchandising? (Figures are percentage of total respondents)

Retailers are actively planning to take various structural, technological and strategic initiatives to improve collaboration across channels towards more effective merchandising:

• Integrated product catalog and data warehouse: 1 in 3 retailers have already created integrated product catalog and a centralized data warehouse for customer and product data.

• Integrated merchandising planning: Over the next 2 years 50% of respondents state an intent to integrate merchandising planning by increasing management involvement in the merchandis-ing process, integrating merchandising teams across channels and creating unified merchandising plans.

37%

33%

33%

30%

28%

22%

17%

27%

25%

38%

38%

38%

25%

32%

14%

25%

12%

13%

12%

24%

20%

22%

17%

17%

18%

22%

29%

31%

Create integrated product catalog

Create centralized data warehouse for customer aswell as product

Increase involvement from top management in theplanning process

Create unified merchandising plan

Create integrated merchandising teams

Re-design incentives to be more comparableacross channels

Encourage use of same merchandisingperformance metrics across all channels

Currently implemented Implement in next 12 months Implement in next 12-24 months No plans

0 20 40 60 80 100


Uptick in new technology investments expected in the next 24 months; promotions, markdowns and assortment optimization in focus.

IT budget allocated towards the merchandising function (Figures are average percentage of total IT budget allocated towards merchandising)

Distribution of IT spend on merchandising solutions in 2013 (Figures are percentage of total IT budget distribution)

Which of the following optimization solutions do you use currently, or plan to use? (Figures are percentage of total respondents)

36% 15% 24% 25%

Maintain existing systems Integrate two or more existing systems

Enhance or upgrade existing systems Implement new systems

Currently use Next 12 months Next 12-24 months No plans

0 20 40 60 80 100

39%

26%

24%

13%

13%

11%

9%

15%

11%

20%

14%

21%

9%

9%

18%

17%

16%

20%

25%

15%

18%

28%

46%

40%

53%

41%

65%

64%

Allocation Optimization

Price Optimization

Assortment & Size Optimization

Markdown Optimization

Promotions Optimization

Micro-Space Optimization

Macro-Space Optimization

17.5%

22.7%

2013 2016


What type of core merchandising system does your organization use? (Figures are percentage of total respondents)

Respondents in EKN’s survey use a variety of core merchandising systems – ranging from home grown to Best–of–Breed – illustrating a fractured technology mandate.

Retailers’ technology spending on merchandising systems is set to increase from 17.5% of the IT budget in 2013 to 22.7% in 2016, which amounts to a 9% compounded annual growth rate. IT budget allocation reflects a healthy split between new development, maintenance, enhancements and systems integration. In fact, with approximately 40% of the budget earmarked for new development and integration, retailers’ technology spending pattern indicates an uptick in solution deployment and upgrade activity over the next 2 years.

With low current adoption rates, niche vertical specific solutions that utilize advanced algorithms and analyt-ics to solve vertical specific business challenges represent the highest investment opportunity for retailers. Optimizing promotions, markdowns and assortment are the immediate areas of focus.

0 10 20 30 40

33%

25%

16%

16%

10%

Home grown system

An integration of multiple systems

3rd party solution (Best-of-Breed merchandising solution)

3rd party solution (ERP)

We don’t use a core merchandising solution


Merchandising analytics is a key focus for retailers to upgrade technology and capabili-ties.

Analytics maturity and upgrade plans of retailers (Figures are percentage of total respondents)

Sources of customer data that are integrated into the merchandise planning process (Figures are percentage of total respondents)

0 20 40 60 80 100

49%

32%

32%

81%

58%

20%

15%

Social media

Matket data (IRI, Nielsen)

Public data

Store (POS transaction data)

Online

Loyalty (Membership data)

Mobile

0 20 40 60 80 100

50%

35%

33%

32%

29%

25%

25%

25%

16%

11%

29%

29%

28%

31%

31%

31%

30%

30%

20%

20%

21%

36%

39%

37%

40%

44%

45%

45%

64%

69%

Merchandising Performance & Analytics

Replenishment & Allocation ManagementSystem

Item Management System

Demand Forecasting System

Core Merchandising System

Assortment Management System

Promotions Management System

Price Management System

Markdown Management System

Space Planning System14%

25%

36%

22%

3%

Merchandising Analytics Maturity

Next 12 months Next 12-24 months No plans

No Analytics

Basic Reporting

Basic Analytics

Investigative Analytics

Predictive Analytics


58% of retailers assess themselves as being able to perform basic reporting or basic analytics in the mer-chandising function, highlighting significant headroom for potential improvement in analytics maturity. Con-firming their recognition of analytics as a key driver of customer-centric and Omni-channel merchandising, 79% state an intent to upgrade their Merchandising Performance & Analytics capabilities over the next 2 years.

Another area for retailers to focus on as they look to improve analytics maturity is the depth and breadth of data sources integration:

• Transaction data: Integrating transaction data from all channels – stores, online and mobile – is the first step towards forming an integrated merchandising approach. All retailers must start here, especially those that are not yet leveraging insights to inform their merchandising decisions.

With 4 in 5 retailers currently integrating POS data and 3 in 5 integrating eCommerce data, inclusion of channel-wide transaction data will soon be table stakes. With only 15% leveraging data from their mobile channel, EKN expects those numbers to catch up with eCommerce fairly quickly.

• Engagement data: Data from marketing, loyalty programs and social media can provide valuable insight into customer preferences, and represents a significant improvement opportunity for retail-ers with less than 1 in 2 equipped to use data from their loyalty programs and less than 1 in 3 to do so with social media data.

• Public and syndicated data: The opportunity to improve merchandising decisions is not limited by the availability of enterprise or customer engagement data. Data from public sources such as the Department of Commerce, the US Census Bureau, industry trade associations, earnings announce-ments and syndicated data such as from Nielsen and IRI among others, can be useful in augment-ing the above core sources of data. Less than 1 in 5 retailers are currently able to incorporate public data into their merchandising analytics efforts.

Data Growth Analytics Maturity Technology Spending

High. One of top 3 business functions where retailers are experiencing the most data growth and correspondingly see the biggest opportunity for doing their first project.

Relatively immature. 1 in 2 retailers are only able to perform basic reporting or basic analytics.

High. Ranked 2nd in terms of planned technology spending in analytics in 2013.

Research Findings

Sources: The Future of Retail Analytics & Big Data in Retail

http://www.eknresearch.com/2013/05/24/the-future-of-retail-analytics/

http://www.eknresearch.com/2012/12/13/ekn-state-of-the-industry-research-big-data-in-retail/


Recommendations

= Short Term (0-6 months)

= Medium Term (6-12 months)

= Long Term (1-2 years)LT

ST

MT

EKN’s recommendations, below, and its maturity assessment framework in Appendix A are intended to as-sist retailers in moving merchandising process and technology from a traditional retailing environment to a more integrated, seamless, customer-centric reality.

Leveraging its proprietary frameworks and assessment tools, EKN provides retailers custom benchmarks and go-forward roadmaps. For more information, contact EKN.

mailto:ekninfo%40edgellmail.com

State of the Industry Research Series: Omni-Channel Merchandising21Recommendations

From Traditional to Omni-Channel Merchandising

As a core retail function, merchandising has a deep impact on a retailer’s brand, marketing strategy and programs, supply chain and inventory strategies and channel operations. However, in a traditional retail environment the focus is on optimization of each individual function. Optimization, however, tends to prioritize local optimum (channel-centric merchandising efficiency) over global optimum (customer-centric merchandising proficiency).

To truly achieve the vision of a single, unified retail experience delivered to customers across all chan-nels, retailers will need to evolve the merchandising function to be integrated rather than just optimized. Integrated across the merchandising process chain, across the enterprise and across channels. The table below describes the transformation of retailers’ merchandising function from a traditional, product-centric retailing environment to one that is focused on the customer.

Merchandising in a Traditional Retailing Environment


Product–centric

Retailers’ merchandise plans are based on product categories,

channels and store clusters.

Customer–centric

Customer segments emerge as the primary merchandising

categories, and products and channels are viewed as details in

a customer-centric merchandising strategy.

Isolated

Merchandising processes – such as planning, assortments,

allocation, pricing and promotions – are, at best, integrated

with each other, and at worst operate at different degrees of

maturity and efficiency.

Collaborative

Collaboration includes bi-directional retailer-customer com-

munication to improve merchandise plans, and an internal

collaboration capability for the retailer to tap into expertise

and experience regardless of role or location. Integration of

business processes and technology systems spans both inter-

process and inter-function integration.

Intuition–driven

Merchandising decisions are heavily based on the experience

and expertise of retail merchants.

Insights–driven

Merchandising decisions are driven by a powerful combination

of data based insights and merchants’ vast experience.

Technology–limited

Retailers are limited in their use of technology by the maturity

of systems and merchants’ and buyers’ “necessary-evil” outlook

towards technology.

Technology–enabled

Technology focus moves to deeper user participation through

improved usability, tighter integration and mobile optimiza-

tion. With a focus on embedding insights across systems and

decision-making processes, technology moves from being a

tool to improve productivity to an active enabler of Omni-chan-

nel merchandising.

EKN 22

Area: Strategy

Assess the current maturity of your Merchandising operations. Benchmark against your format set and retail leaders.

To improve Omni-channel merchandising maturity, retailers must start by benchmarking their current ma-turity against leading retailers at an enterprise and functional level. This exercise will provide them the inputs they need to build a customized path to evolve their merchandising operations.

The various evolution areas and strategies are detailed in Appendix A. The degree of importance and focus they attach to each area, and the specific strategies they choose to undertake, will be driven basis their size, format, consumer demographic, organizational culture and investment appetite.

We believe that retailers across all formats will have to benchmark and evolve their merchandising opera-tions along the 4 key areas defined above, with analytics being an enabler across all areas. Retailers should benchmark their performance against their immediate format based competitive set and retail leaders such as Macy’s, Nordstrom, Wal-Mart, Target and Apple.

Area: Merchandise Performance Measurement

Define and adopt a mix of metrics that measure Omni-channel merchandising process efficiency and customer behavior across all channels.

EKN strongly recommends that retailers move from measuring product performance to measuring how much impact they are having on customer behavior. We don’t expect traditional metrics to go away but do recommend the adoption of newer metrics that provide a more holistic view of overall merchandise perfor-mance.

• Traditional metrics or KPIs:

° Represents a set of KPIs used by retailers to measure the performance of key merchandising functions. These metrics have a high level of adoption across the retail industry.

• Emerging metrics or KPIs:

° Represents a set of KPIs that aim to measure the efficiency or efficacy of processes related (directly or indirectly) to merchandising. These metrics have a medium to low level of adoption across the retail industry.

• Customer-centric metrics or KPIs:

° Represents a set of KPIs that aim to measure merchandising process performance via the lens of strategic customer-oriented success metrics. These metrics have a low level of adoption across the retail industry.

Recommendations

ST

MT


ST

Traditional KPIs Emerging KPIs Customer-centric KPIs

Sales:

Sales growth

Sell through

Margin:

Gross margin return on

investment (GMROI)

Gross margin % (after markdown)

Selling expense to sale ratio

Inventory:

Inventory turns

Fresh stock %

Weeks of supply

Supply chain optimization:

Fill rate by order

Order fulfillment cycle time

Perfect order fulfillment

Inventory optimization:

ABC analysis

Stock-to-sales ratio

Stock outs

Gross margin return on inventory invest-

ment (GMROII)

Space planning:

Space profitability analysis

Promotion optimization:

Sales per promotional investment

Pricing:

Price range analysis

Markdown %

Customer share of wallet

Customer Lifetime Value (CLV)

Customer profitability

Customer retention

Standard product performance metrics by

customer segment

• Women’s Tops / Segment A

Area: Data-driven Decision Making

Incorporate customer insights across the entire merchandising function from front-end space plan-ning all the way back through the supply chain.

Execute a focused proof of concept (POC) that applies customer insights to a specific part of the merchan-dising process. Use this POC to assess the current quality of your data, analytics capability and the ROI that merchandising analytics will deliver to your enterprise. One of the areas we recommend focusing on is measuring pricing and markdown performance against customer segments.

Based on the results of the POC work towards integrating customer insights across all merchandising func-tions.

EKN 24

Area: Integrated Planning

Think of product assortment beyond individual channels and beyond what can be bought or stocked.

Think of product that you should serve your customers beyond just what you can physically stock. Larger online assortments and the use of endless aisle in the store mean that retailers shouldn’t be constrained by immediate availability or fulfillment. The focus should be on saving the sale via a wider virtual assortment.

Various factors should be considered before deciding which products to offer up in the endless aisle:

• Product size (Large products will take more space)

• Product velocity (Slow-moving products take up space in the store)

• Lost sales: Product and product categories

• Minimum stock levels

• Lead time (Products with longer lead time)

• Product variability (Off the shelf products or customized)

• Vendor integration (Real-time integration with vendors)

• Fulfillment time (Low fulfillment time so customer expectations are met)

Area: Integrated Planning

Move towards a unified merchandising model with a common team, Open-To-Buy (OTM) planning and integrated processes.

Build a unified team that is responsible for merchandising performance across channels and has a com-mon Open-To-Buy plan across channels. The merchandise planning and execution process will also span across all channels and will have a deep integration with customer insights. As retailers progress along this path they should evaluate methods of improving collaboration between the merchandising department and other functions that are closely related. This could mean the creation of a common merchandising and marketing team like Wal-Mart did in 2012, or the identification of single point of contacts in areas like tech-nology and marketing.

Recommendations

ST

LT


Area: Collaboration

Build customer participation across the entire merchandising process and employee participation across the entire enterprise using digital engagement technologies.

Social networks provide a great opportunity to build deeper relationships with customers and to get feed-back into product strategy. Retailers have the ability to conduct focus groups on tap and should use a mix of public and private spaces to get inputs from customers. Some examples include:

• Product creation: Customers generate new product ideas.

• Product selection: Customers provide inputs on which products to buy.

• Product feedback: Customers provide feedback on various aspects of existing products.

With a focus on process, team and technology integration, enterprise collaboration becomes critically im-portant as well. Social collaboration tools for the enterprise can be effective in breaking down traditional hierarchical and role-based barriers to communication, allowing retailers the ability to tap into expertise and experience across the enterprise. This is also an opportunity to work more closely with Marketing and strengthen inter-departmental collaboration.

Area: Technology

Upgrade the current technology infrastructure and improve usability.

With approximately 40% of the merchandising technology budget earmarked for new development and integration, retailers’ technology spending pattern indicates an uptick in solution deployment and upgrade activity over the next 2 years. Retailers need to spend smartly, and their merchandising technology platform needs to evolve across the following dimensions:

• Architecture: The biggest challenge being faced by retailers in executing Omni-channel merchan-dising strategies is process and technology integration. The technology architecture is a major limit-ing factor towards achieving true integration, and is a drag on both the cost of managing technology and speed at which new technology can be rolled out. In order to execute in the Omni-channel world retailers need to move towards a loosely-coupled service-oriented architecture that is light, built to support mobile devices and allows real time access to frequently used applications/services such as inventory position, product data and customer profile.

• Data management: The data that retailers will need to manage and integrate into their merchan-dising systems will only increase with time. Merchandising systems must be powerful enough to handle the huge amount of data that each channel generates, be able to analyze unstructured data and manage all the item information supplied by vendors. The merchandising systems should also be able to share data with vendors and partners.

ST

MT

EKN 26

• Usability and collaboration: The usability and intuitiveness of retailers’ enterprise applications pales in comparison to that of consumerized services, and merchandising systems are no different. As a new generation of merchants rises through the ranks, retailers will need systems that are intui-tive, work across PC and mobile devices and reward collaboration. As retailers evaluate tools for the future, they must pay strong heed to User Centered Design (UCD) and collaboration capabilities.

• Centralized data repository: Move towards a common data repository for customer, product and inventory data.

• Real-time data communication: Enable real-time data communication for critical areas such as inventory, and with key vendors’ electronic catalogs and data.

• Optimization: Use existing BI applications or Big Data solutions to optimize certain parts of the merchandising process, such as pricing and forecasting. Selectively invest in optimization solutions where it makes the most sense based on format and size.

Recommendations


Appendix A: EKN Omni-Channel Merchandising Maturity Assessment Framework

EKN 28

EKN Omni-Channel Merchandising Maturity Assessment Framework

EKN’s framework provides retailers an approach to assess their current Omni-channel merchandising matu-rity, and provides a roadmap to evolve their merchandising function from being product-centric and siloed to being technology-enabled, customer-centric, collaborative and data driven.

Evolution Level/

Category

Level 1 Level 2 Level 3 Level 4

Product-centric to customer-centric

Assortment

Same product assortment

across stores with no

localization.

Some variability of assort-

ment across stores.

Localized and personalized

assortments (both store

and online).

Customer-centric planning

where plans, assortments,

allocations and promo-

tions are all done based on

micro customer segments.

Extensive use of analyt-

ics to continuously refine

strategies.

PromotionsHeavy use of mass promo-

tions and markdowns.

Heavy use of mass promo-


Use of customized promo-


Segmenta-

tion

No segmentation or clus-

tering of customers/stores.

Heavy use of mass promo-


Customer segments are

used extensively for assort-

ment, pricing and promo-

tions.

Isolated to integrated & collaborative

Allocation

Limited flexibility with fixed

allocation for DCs, ware-

houses, stores and online.

Limited flexibility with fixed

allocation for DCs, ware-

houses, stores and online.

Medium flexibility with the

ability to modify alloca-

tion using algorithms and

homegrown tools.

High flexibility and

response time based on

real-time allocation.

Channel

Integration

Each channel operates

independently. Inventory is

locked within channels.

Inventory is locked within

channels.

Inventory is shared across

channels.

Real-time inventory infor-

mation is shared across

channels.

Merchan-

dise Process

Inte gration

No process integration

between channels.

Minimal integration of pro-

cesses across channels.

Moderate integration of

processes across channels.

Tight process integration.

Consistent product infor-

mation, inventory availabil-

ity, pricing and promotions

across channels.

Data Inte-

gration

Data exists in silos and not

integrated across channels

or systems.

Slowly moving toward

integrating product and

transaction data across

channels. Data still exists

in silos.

Creating a centralized data

warehouse for customer

and product data. The

information is available in

real-time.

Created a centralized data

warehouse for customer

as well as product data.

The information is avail-

able in real-time.



Evolution Level/

Category


Isolated to integrated & collaborative

Planning

Lack of integrated plan-

ning. High degree of free-

dom to category heads.

Lack of integrated plan-

ning. High degree of free-

dom to category heads.

Integrated planning in-sync

with overall business strat-

egy as well as with other

business functions.

In the process of creating

an integrated merchandis-

ing team.

Integrated merchandising

planning in-sync with over-

all business strategy.

Internal Col-

laboration

Poor internal collabo-

ration. No interaction

between Online and Store,

and with other business

functions.

Poor internal collaboration.

Limited interaction be-

tween Online and Stores,

and with other business

functions.

Good internal collabora-

tion. Active exchange of

data and information

between channels and

business functions.

Excellent internal collabo-

ration. Active exchange

of data and information

between channels and

business functions as well

as coordinated strategy

planning.

Intuition-driven to insights-driven

Merchan-

dise Plans

Based on intuition rather

than hard data.

Based largely on in tuition

but use some historical

data.

Require that hard data be

presented to justify invest-

ment.

Based on historical data

and also future projec-

tions based on forecasts

of economic and customer

data.

PricingBased largely on his torical

data and intuition.

Based largely on his torical

data and intuition.

Uses advanced analytics to

optimize prices.

Uses advanced analytics to

optimize prices.

Analytical

Maturity

Basic reporting used to

provide accurate, after-the-

fact information.

Basic analytics used to pro-

vide after-the-fact trends

and analysis.

Advanced analytics is used

to conduct correlation,

causal analysis and fore-

casting. Some predictive

models are also used, espe-

cially for forecasting.

Predictive analytics and

optimization algorithms.


EKN 30EKN Omni-Channel Merchandising Maturity Assessment Framework

Evolution Level/

Category


Intuition-driven to insights-driven

Data

Sources: Sales and

financial data is used as

the basis of merchandise

planning.

Quality & Governance:

Poor.

Sources: Integrated data

across enterprise systems

such as ERP, SCM, CRM

and Loyalty.


Still poor. Data silos exist.

Sources: Good integration

of core operational perfor-

mance data. Fair to good

integration of customer

and online data. Beginning

to leverage and integrate

unstructured data.


Efforts on customer Master

Data Management (MDM)

are underway. Close to de-

cision time synchronization

for key data sources.

Sources: Capabilities to

integrate and analyze

unstructured data are in

place. Integrated public

data to augment the

internal data available to

the buyers.

Getting close to a single

view of the customer and

single source of data.

Metrics Traditional KPIs. Traditional KPIs .

Traditional KPIs .

Exploring to use a mix of

Emerging KPIs and Custom-

er KPI’s to measure Omni-

channel process efficiency

and customer.

Uses a mix of Traditional,

Emerging and Customer

KPI’s.

Working to determine the

key KPI’s that determine

overall success.

Technology-limited to technology-enabled

Merchan-

dising

Systems

No core merchandising

system.

Dated core merchandising

system or an integration of

various systems.

Outdated architecture.

Current generation core

merchandising tools.

Limited use of optimization

tools, especially in areas

such as promotion, pricing,

markdown and assortment

planning.

Have invested in or are

building next generation

merchandising tools.

New service oriented

architecture.

Use of Best-of-Breed,

advanced merchandising

optimization tools, propri-

etary tools and algorithms.

Buyer Ex-

pectations

Buyers largely use spread-

sheets and rudimentary

database based tools.

Buyers largely use spread-

sheets and rudimentary

database based tools.

Buyers have developed

a degree of comfort with

their merchandising

toolset.

Buyers are techno-savvy

and are driving the devel-

opment of the toolsets.

State of the Industry Research Series: Omni-Channel Merchandising31EKN Omni-Channel Merchandising Maturity Assessment Framework

Evolution Level/

Category


Technology-limited to technology-enabled

IntegrationSystems are not integrated

and are non-synchronous.

Few systems are inte-

grated but are largely

non-synchronous.

Common view of the

inventory. Systems related

to product availability and

fulfillment are integrated

and synchronous.

Most merchandising sys-

tems are well integrated

and synchronous.

The merchandising tool-

sets are well integrated

into the overall analytics

engine and with other core

systems.

EKN 32Recommendations

Retail Honor Board

State of the Industry Research Series: Omni-Channel Merchandising33Retail Honor Board

Retailer Category Detail

Product Availability

Amazon.com uses a non-stationary stochastic model to improve product avail-ability. The approach supports fulfillment, sourcing, capacity and inventory deci-sions. Amazon developed new algorithms for joint and coordinated replenish-ment. It also implemented a new national forecasting approach at the SKU level based on historical demand, event history and plans, forecasts for each fulfill-ment center, inventory planning, procurement cycles and purchase orders.

Demand Forecasting

Waitrose developed a new system for forecasting store-level sales and demand. The system takes into account holidays, promotions and seasonality for predict-ing demand and feeding replenishment processes. Forecasts are produced for each category and SKU per day per store. Benefits from the new system include more efficient inventory levels, improved accuracy in the replenishment of dry goods, reduction in order changes and freeing managers’ time for customer in-teraction.

Pricing

PAC 2000A, an Italy-based retailers’ cooperative, uses an integrated price optimi-zation application that allows it to align prices across regions. The system collects daily sales data for 35,000 items from its 450 stores and then combines it with weekly market analyses. It simulates and analyzes different pricing scenarios, taking account of fluctuations in demand and rival retailers’ prices. By leveraging price optimization, comparable stores sales increased 2.4% in 2011 and the time taken to react to market changes reduced from 18 days to 3 days.

Customer-Centric

Merchandising

Wal-Mart created a “store of the community” localization program that tailors store formats, assortments, shelf space allocations and department layouts by cluster. Where in 2001 Wal-Mart had only 5 different planograms, today it has over 200 to select from. Stocking patterns are based on actual consumer pur-chases, area demographics, preferences from consumer surveys and inputs by local store managers.

Assortment and Pricing

American Eagle Outfitters, an apparel retailer, clustered its more than 750 stores based on the types of assortments to which shoppers were most responsive. The company found, for example, that customers in Western Florida bought merchandise similar to those in parts of Texas and California. In May 2013, the retailer launched an initiative - Project LASER: “Localized Assortment Strategies to Enhance Revenue” - which will impact approximately 300 full-time employees across several functions and departments. In addition to localizing store assort-ments by cluster, American Eagle is also localizing pricing by a regional clustering structure.

Assortment and Pricing

Planning

Advanced Auto Parts, a US-based retailer of automotive replacement parts and accessories, adopted new business processes and systems to localize offerings, gain greater control over pricing strategies including zone and category pricing, and streamline planning and allocations processes across all locations. The lead-ing automotive aftermarket retailer integrated its various merchandising sys-tems and converted approximately 760,000 SKUs from disparate legacy systems to a single SKU master.

EKN 34

EKN Merchandising Vendor Landscape


* Using SAP HANA

EKN Merchandising Vendor Landscape

Software Applications/

Vendors

Core Merchandising Solutions Optimization Solutions

Core Mer-chandising

Demand Forecasting

Merchandis-ing Perfor-mance & Analytics

Replenish-ment &

Allocation Management

Allocation Optimization

Promotions Optimization

*

Exclusive Sponsor

About SAPHeadquartered in Walldorf, Germany, SAP is the market leader in enterprise applications software in terms of soft-ware and software-related services revenue. Founded in 1972, SAP has a rich history of innovation and growth as an industry leader. SAP applications and services enable more than 197,000 customers worldwide in more than 120 countries to operate profitably, adapt continuously, and grow sustainably. With annual revenue (IFRS) of €14.2 bil-lion, SAP has more than 55,500 employees located in more than 130 countries worldwide. SAP is listed on several exchanges, including the Frankfurt stock exchange and NYSE, under the symbol “SAP.”

About EKNOur research agenda is developed using inputs from the end user community and the end user community exten-sively reviews the research before it is published. This ensures that we inject a healthy dose of pragmatism into the research and recommendations. This includes input of what research topics to pursue, incorporating heavy practi-tioner input – via interviews etc., and ensuring that the bend of research takeaways are oriented towards a real-world, practical application of insights with community sign-off.

For more information, visit www.eknresearch.com

Email us at [email protected]

Copyright © 2013 EKN

Registered Office: 4 Middlebury Blvd. Randolph, NJ 07869

Ph: (973) 607 1300

EKN is part of the Edgell Family

Disclaimer:

EKN does not make any warranties, express or implied, including, without limitation, those of merchantability and fit-ness for a particular purpose. The information and opinions in research reports constitute judgments as at the date indicated and are subject to change without notice. The information provided is not intended as financial or invest-ment advice and should not be relied upon as such. The information is not a substitute for independent professional advice before making any investment decisions.

Omni-Channel Merchandising - RIS News

Documents

Transcript of Omni-Channel Merchandising - RIS News