Supermarkets are not a giant vending machine: in-store range optmisation is critical, says IRI

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Martin Wood, head of strategic insight retail client service IRI UK, claims range optimisation is critical for supermarket success

Rarely have the supermarkets faced a fiercer battle to get their product mix right without damaging customer loyalty.

They know that the discounters’ radical approach to ranging has struck a chord with consumers.

In response, the mainstream grocers acknowledge they must rationalise the number of SKUs in their stores to simplify their offer, cut costs, maximise returns and stop the slump in their market share.

Across Europe retailers are sitting down with nervous manufacturers to review which products should be on the shelves next year. Range optimisation has become a necessary, if often complex, function.

It is part of Sainsbury’s latest strategy for its estate, for instance. The chain recently announced that a quarter of its larger shops have under-utilised space in-store. It will expand its own label, which may or may not boost loyalty, and allow more third party brands, such as Jessops camera shops, to open franchises.

The discounters’ successful business model has made the supermarkets reconsider whether consumers are as concerned about choice as we all thought they were. Less appears to be more in a modern store environment.

Certainly in such a competitive market it makes sense for retailers to have the right products available in clutter-free and easy to navigate environments. Busy shoppers can spend less time comparing brands, pack sizes and getting confused over different promotions. It also feeds into shoppers’ desire for more value transparent pricing.

An optimised assortment certainly presents stores with a welcome opportunity to reduce a whole range of costs, increase supply chain efficiencies and improve their overall return on investment.

So what’s not to like?

Well, removing anything that some customers enjoy is a risky strategy and no decision should be taken without data analysis. However the traditional approach of delisting lines based purely on rate of sale can be misleading, since some slow moving lines can have unique attributes that bring incremental benefits to the shopper and may not be substitutable within a category.

Retailers must look closely at EPOS data from a combination of different SKUs and examine what the impact will be on sales volumes should one or more SKUs be removed. Attribute data is crucial here to ensure a retailer has the optimum range in each store. Individual product attributes, such as flavour, pack size, brand name and their relative importance to shoppers’ buying decisions, must be thoroughly interrogated.

Such a scientific, optimised approach to range assortment management will reveal the impact of listing or de-listing particular products in specific categories. It will identify opportunities for newly-created white spaces in stores and ensure a category grows because the products stocked more accurately meet current customer needs whilst at the same time reducing retailer costs.

Before any SKUs are removed, a retailer must always consider whether consumers will switch to an alternative, or leave the store and visit a rival to buy a product they cannot do without.  It may well be harder to retain a customer who can no longer buy a particular organic or fair trade product, for example.

The cut-off point will vary from retailer to retailer. It will depend on the overall store proposition, its shoppers’ attitude to brands and own label, and the size of each outlet.

The results of this data deep dive can also be overlaid with analysis of individual shopper behaviours derived from loyalty and other socio-demographic data to discover which products are punching above and below their weight.

It is clear that by crunching large amounts of data big changes are possible. Although store managers should retain a certain level of autonomy to adapt this strategy to meet local shopping habits.

So will supermarket customers really appreciate this simplified offer?

The evidence from the discounters’ sales figures suggests they will, although many people who have shifted from mainstream grocers to Aldi and Lidl are arguably less concerned about brand and are most likely combining purchases from the discounters with their main grocery shop. Many of the shoppers who were tempted to try a discounter have been reassured over time by the quality of the products and have since returned time and again.

The future for private label in this era of simplification and range rationalisation is unclear. Traditionally own label has been profitable for retailers, yet the data analysis of the most lucrative combination of SKUs might reveal that in some categories the private label product is the one to go.

The manufacturers whose brands are strong and backed by clever marketing might benefit from the consumer trends to shop more frequently and across different retail brands as they hunt out the products they want at prices that appeal.

Into 2015 retailers will continue to work with manufacturers to drive a simpler and more transparent retail environment. After all, it is important for both sides that any optimised approach works effectively.

The multi-store repertoire of shoppers makes it clear that, while ‘good value’ is a key goal, they still want to buy their favourite brands. Supermarkets are in a true battle to get the product mix right and keep shoppers loyal to a store. Retailers cannot stock every SKU available (even in the somewhat vaster online warehouses), but planning what to stock is a necessary and increasingly complex function.