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Retailers Can Do More with Less, When They Embrace Assortment Optimization

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Retailers that employ assortment optimization must make sure they do not drive away their best customers.

Retailers are always trying to find the right SKU balance. On one hand, they want to maintain a manageable number of SKUs for their merchandising teams. On the other they want to carry a big enough variety to stay above their competition in the eyes of the customer. Data-driven assortment optimization can win this battle for both sides and make life easier for store staffs while maintaining the best mix to build, and keep, loyal customers.

For instance, officials for the discount chain Dollar General said in March that they plan to reduce the overall number of SKUs, expanding some categories and contracting others.

“We actually believe we can do more in 2014 with less SKUs,” said Rick Dreiling, chairman and CEO, during an earnings call. He added the reduction is part of a “work simplification” program, designed to enable managers to focus on location merchandising.

Tracking the right metrics is crucial for understanding three things: the true incremental value of each SKU, who the top-priority shoppers are and which categories and items are most important to them. Companies considering trimming their SKU mix need to keep in mind that there are smart ways to make sure assortment optimization really works and does not drive away the best customers. Here are three ways to do that:

Know what your best customers are buying. The traditional way to cut back on products is to rank all the items by sales within each category and then cut from the bottom. However, this does not take into account that some low-volume items are valuable to your best customers. Take those items out of the store and some customers could move to a competitor. That is what happened to Walmart in 2010 when an aggressive “SKU rationalization” program eliminated hundreds of items without fully understanding the impact on the company’s best customers. Walmart eventually backtracked and brought back over 300 SKUs.

Be careful about eliminating products without offering options. Some lower sales items have low transferable sales. If they disappear and an alternative option is not offered, the value of the cut items disappears completely. Also, some lower sales items are part of groups of products often bought together. Lose those items and associated sales could be lost. A good assessment of assortment choices will lay out the financial impact of proposed changes. Technology solutions help retailers quantify the incremental value of each item by looking at three metrics: the demand transferable for each item, the importance of each item to complementary items and the importance of each item to the most valuable customers.

Focus on strong-performing categories. Dollar General’s Dreiling said SKU optimization means that instead of “trying to play in every category, really focusing on those that are most productive,” particularly in smaller stores, where space is at a premium. Blanket cuts of X% across all categories can easily result in too many cuts in some categories and too few in others. Some categories simply need more alternatives, and shelf productivity can vary between categories.Deep customer-level knowledge is the foundation for integrated customer-centric retailing and assortment optimization

As explained in the new LoyaltyOne white paper “Customer Centric Merchandising", deep customer-level knowledge, built on advanced analytical techniques, is the foundation for integrated customer-centric retailing and assortment optimization. Knowing the priority customers and how to serve them means leveraging customer-driven insights, identifying the most important categories, clarifying the role that different SKUs play in those categories, understanding how best customers respond to assortments and then translating strategic decisions into action—by removing low-risk, low-productivity items and giving more shelf space to more productive ones.

When assortment optimization is done right, companies see incremental increases in sales of 1 to 3%, incremental gross profits of 2 to 4%, better cash flow, faster inventory turns and less working capital tied up in inventory. Most importantly, retailers will be improving their merchandising without decreasing shopper engagement or business impact—by putting their best customers first.

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