A.T. Kearney, Retail Insights

Happy Accidents

happy_accidentsOffering a wider assortment at every store helps increase sales while keeping complexity in check.

Less is more: This is the prevailing wisdom of today’s retail assortment strategies; assortments should be localized, limited, and carefully curated.

But, more often than not, bigger is better. Carrying a wider assortment in each store can boost sales without increasing cost, space needs or inventory. In fact, it’s possible to offer complete assortments while decreasing inventory. This sounds counterintuitive, but there’s logic to the strategy.

Why is the industry so fixated on slashing assortments? The “choice is a trap” and “paradox of choice” arguments — that consumers actually prefer only a few options instead of being confronted with a wall of choices — is gaining traction in popular culture and especially at retail. And, while it may be accurate in certain limited settings, it doesn’t hold true when applied to the industry at large. In fact, as assortment size goes up, sales always increase.

Many consumers are getting pickier. Niche groups that demand specific products — from CrossFit shoes to Himalayan pink salt — continue to grow. When retailers skim the surface of a given category, savvy consumers notice, and leave with the impression that the retailer doesn’t understand or care about that category. Larger assortments are not just about improving sales, they’re about protecting the customer experience.

Assortment’s cousin is speed of delivery. Amazon — arguably the most transformational retailer of our age — shows the power of a full assortment. Its boundless choice is its biggest competitive advantage. But even Amazon is squeezed by a growing demand for faster and faster delivery. As such, there’s an inherent value to being a true one-stop shop in a given category, both for attracting local consumers to your store for products they need immediately and for fulfilling speedy ship-from-store orders placed online.

The Link Between Assortment Size and Sales

How can assortment growth drive sales growth? The average retailer sells less than one unit per week per store of the vast majority of its SKUs, with many selling less than one unit a month. At this rate, making a sale is almost accidental, almost impossible to forecast. So it follows that the more products a retailer has, the more accidents — instances where the consumer finds exactly what he or she wants — will happen.

Yes, many things influence sales — pricing, store location, layout, customer experience, sales staff, etc. But, above all other factors, a customer has to see a product he or she wants to buy. Without that, no other bells and whistles can drive a sale. When a large assortment is combined with other features that help consumers find exactly what they want — an easy-to-navigate store, helpful associates, competitive prices — the result is incredibly powerful.

This holds true for both online and brick-and-mortar channels. We have seen significant sales increases due to larger assortments in non-food categories from apparel to electronics, where consumers usually want a specific product that meets exact specifications. More surprisingly, there is even a lift in sales in food categories, where many consumers are not willing to settle for a different product.

Big Data, Big Assortment

The slow sales rate of many SKUs per store means that at a local level, retailers have very little data on which to base decisions, rendering much of their predictive sales data victim to small sample size. It’s virtually impossible to predict in which store in a given vicinity exactly where, when and by whom a particular slow-moving product will be bought. Developing localized assortments is to some extent like searching for a needle in several separate haystacks; you not only have to figure out which local customer will buy a certain niche product, but from which of your stores she will purchase it. Basing all this off a sales rate of perhaps a dozen units a year only makes it harder.

Instead, making assortment decisions at a much higher level gives retailers the fullest possible picture of consumer trends and behavior — while also reducing the time it takes to design an assortment. Making these larger assortment decisions as simple as possible by putting the full assortment or larger assortments at each store further increases efficiency.

Local store managers will make the argument that they know their local customers best and therefore should make assortment decisions. But many other variables that also affect sales — product cost and pricing, marketing, store location, to name a few — are also better made at the macro level because of two things: data and efficiency.

As the following case study shows, when organizations are willing to pilot a full assortment, the results will speak for themselves.

A business we will call “ElectronicsCo” is a global consumer electronics manufacturer and retailer that sells its products in 2,000 of its own stores and through 10,000 retail partners across 30 countries. Its fashionable products have a short lifecycle because frequent product launches quickly make older models obsolete, leading to low unit sales and making it difficult to forecast individual sales per store.

So, ElectronicsCo decided to offer a wider assortment at each store, in most cases by 20 percent to 30 percent. The new assortments were designed with an eye to simplicity, making it as easy as possible to manage a more comprehensive assortment. In a 120-store pilot, total sales across all SKUs grew 11 percent almost immediately, and the average shortage rate per store plummeted by 75 percent.

Given these powerful results, it’s not surprising that ElectronicsCo decided to roll this new assortment strategy out to the rest of it national stores, and then around the globe. The strong results continued, with sales growing an average of more than 5 percent across thousands of doors — all while cost and inventory remained flat.

In addition, the workload required to handle assortment definition and replenishment has fallen — a task that once required a team of 80 now only needs five.

Given these results, it’s no surprise that this new way of thinking is here to stay. Says the CEO, “Not only did we reduce costs, but we increased our sales by hundreds of millions of Euros. It is very simple: This is our new way of working.”

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Electronics Co is just one example of how increasing assortment can grow sales and reduce inventory. In fact, A.T. Kearney has successfully applied this paradigm shift in a wide variety of business conditions. These include diverse product categories and assortment sizes — from dozens to thousands — in direct and indirect channels, in different countries, during normal and promotional periods, whether sales are assisted by a sales force or not, and regardless of whether the channel was driven by a retailer or manufacturer. A few other examples are illustrated in Exhibit 1.

This shift requires a change in mindset across category management, supply chain and the retail organization as a whole. Instead of producing or purchasing products based on the retailer’s expectations of consumer demand, they should be based on sales expectations. Instead of delivering products to stores en masse based on anticipated sales, products should be delivered in small batches. And instead of maintaining a bit of flexibility via small quantities held in central inventory, flexibility is key and requires maintaining a large quantity of products in central inventory.

While the organizational change involved may seem daunting, the rewards are well worth it. Not only can larger assortments drive significant sales growth while maintaining or even reducing costs, they also help preserve the customer experience.

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