Retail 101: Part Four with Mike Mauti
PMG: It’s good to good to visit with you again, Mike. Today, we’re talking about merchandising. I mean, there’s 1001 ways to do it, I’m sure. Where do you start? How do you approach it?
Mauti: Thanks Tom, I appreciate the conversation. The first step in a successful merchandising plan is to develop a go-to-market strategy. Simply put, this means deciding on how your store is going to ‘show up’ for your customers. This includes determining which customers in your marketplace you are going to target. Because, really, you can’t appeal to everyone. The go-to-market strategy then dictates every merchandising decision going forward, or at least it should. The most basic examples include discount and conventional strategies. In a discount go-to-market strategy, the target customer will place a higher priority on paying low prices. Whereas a conventional strategy will target customers who place a higher priority on service and variety. These two priorities however, each on opposite ends of a spectrum, do not completely segment the market of produce customers. There are other go-to-market strategies including a mass strategy for customers who prioritize convenience and a one-stop shop experience, while a club strategy appeals to customers looking to save money by purchasing in large quantities, either for home or business use. Each of these go-to-market strategies will use their merchandising plan to satisfy the top priorities of their target customer.
PMG: That sounds like a decision that is made pretty high up on the food chain, what about the folks that must execute within those boundaries once set?
Mauti: That’s a good point Tom, those decisions are normally made in a boardroom somewhere, far away from the people that need to build the day to day merchandising plans. But it is important for the Category and Merchandising teams to understand what framework they are working within and from there, they can begin.
The best way to look at merchandising, in my opinion, is in a review of the 4 Ps. The 4 Ps are Product, Placement, Price and Promotion. Before going anywhere else, I like to start with the ‘what’. For merchandising, the what refers to the Product assortment available for customers to purchase and remember, the target customer is determined by the store’s go-to-market strategy. Luckily, each strategy offers clues pointing towards the right assortment needed to satisfy the priorities of the target customer. As an example, a discount go-to-market strategy will point to different assortment decisions than a conventional one. Some people might think that satisfying a discount target customer can be accomplished entirely through pricing, but assortment plays a large part too.
You can’t discuss assortment choices amongst the different go-to-market strategies without discussing costs. There are plenty of costs associated with running a retail operation and like any business, a primary goal of a retailer is to recoup those costs and turn a profit. Many of these costs are associated with managing an assortment. The first cost that comes to mind when we think of product assortment is cost of goods but there are others. Labor, being the second largest cost in a retail operation, after cost of goods, is required to manage an assortment. For example, labor costs are incurred to receive product into the store, prepare it for sale, display and replenish it. Shrink is another cost associated with assortment. Products that do not sell incur a shrink cost. Generally speaking, both labor and shrink costs will be higher with larger assortments. Naturally, that means there is a cost associated with each incremental SKU (stock keeping unit) included in an assortment.
Anyone responsible for managing products must ask themselves an important question each time they are looking to increase their assortment (i.e. list a new item). Will the benefits of increasing assortment, including sales, profit and satisfying the customer’s need for variety justify adding the incremental costs? As discussed, the go-to-market strategy offers clues on how to answer that question. As you might’ve guessed, a conventional strategy will lean more towards adding assortment, while a discount strategy will lean more towards reducing assortment.
Assortment size is just one piece of the puzzle. All sorts of other decision factors come into play including: How many brands are required per category? How many pack sizes are needed? How many flavors will drive incremental sales before they begin to cannibalize each other? I’m sure you can guess that a discount operator will answer these questions with a lower number than would a conventional operator that is looking to satisfy customer attributes other than minimizing overall basket cost.
PMG: Then there is more freedom to add new products and expand the assortment if you are a conventional retailer?
Mauti: Usually that is true, particularly when you consider that the return on investment, or in this case the return on listing, has a much higher hurdle for a discount operator. For each listing decision, merchants must weigh the benefit of offering more customer choice versus all elements of incremental cost. If the primary customer benefit that the merchant is attempting to satisfy is price, then bringing in a larger assortment may be detrimental to that objective. The flip side to that, for the conventional operator, is valuing a total customer experience that oftentimes includes exposure to new, exotic products or an expanded selection of fruit and vegetables. In this case an expanded assortment may advance their objectives.
There is a fine line that all operators must balance. After all, there are some discount stores that are under-assorted, and some conventional stores are over-assorted. There is no hard and fast rule. Part of the decision-making process is determining how customers will react to a larger assortment? Will they respond positively by purchasing more, adding incremental sales that offset the added costs? Or will the new assortment be purchased in place of existing products offering no incremental sales, just incremental costs? These are questions for all merchants, regardless of go-to-market strategy.
PMG: What’s the balance between retailers seeking out a new item versus suppliers coming to the retailer and pitching their items? And how much do competitive factors play in deciding whether to add new products?
Mauti: That’s a good question, the truth is many factors come into play. In my experience, it is rare for a retailer to decide that they generically need to increase assortment. It does happen from time to time as part of a larger initiative, for example when a retailer wants to make a bigger play in organics, or locally grown product or some other strategic position they are looking to enhance. But more often, the decision to list new items is an impromptu event. A merchant will sort through numerous new item opportunities on a daily basis. These opportunities come from customer requests, suppliers pitching new items, competitors, trade magazines and trade shows to name a few. Quite frankly, merchants could spend their entire careers listing new items. As mentioned earlier, the benefits of a new item must outweigh the costs, but there is a different decision factor that arises out of this situation. Not all new items necessarily have to increase the size of the assortment. The benefits of a new item opportunity could potentially outweigh the benefits of an existing item. A stagnant assortment could potentially become a tired assortment, particularly in a dynamic business, like produce. This is where the concept of assortment optimization (AO for short) can drive a lot of value. Essentially AO aims to have the most effective assortment possible given certain limitations. Available space, which we will talk about later, is one of those limitations. Now, its possible to work through AO manually using simple metrics like sales or profit margin to rank products, but I would recommend using one of several robust tools available on the marketplace. These tools can create custom algorithms based on numerous key metrics that will provide the optimum assortment for a specific business. It’s a little more involved but it can provide very good results.
PMG: So this idea of assortment optimization sounds like a little bit of art and a little bit of science together. I would guess that new items take some time to develop sales, do retailers ever worry that they are removing a product too soon, before they’ve given it time to develop?
MAUTI: You do have to use your judgment, which creates the intersection of art and science. A good habit we started when I was a merchant was to track the sales of a new product over a set period. If the product hadn’t gained traction, meaning if it wasn’t pulling its weight from a sales perspective over that time period, we would raise flags and potentially slate it for elimination. That set period would normally be six months to a year, depending on category and seasonality. That was the science. The art part of the equation was more of a qualitative analysis on the attributes of the product and whether those attributes could be satisfied by another product. A good example of this intersection of art and science plays out in some areas and some stores with a product like okra. If you look at the science only, you may be compelled to remove okra from your assortment because of low sales. Adding art into the equation, the fact that okra is a unique product that has few, if any substitutes would likely cause you to deviate from your initial assessment.
PMG: How do you let the consumer know you are stocking a new product, making it something the consumer should pay attention to?
Mauti: There can be a symbol right on the ad alerting customers to your new item, hopefully that will influence customers before they have determined where they will shop that week. In some cases, it could be the new item that drives new customers to your store. Another great way is through a sampling program. If a store has a robust program, it can be focused entirely on new products, given that there are so many entering the marketplace all the time. And when executed in conjunction with other departments, you give potential customers usage ideas while they are sampling the product for the first time. To me these are the two best ways to let your customers know about new products in your store. First you tell them, then you show them.
PMG: Sometimes you go to a trade show and a marketer will tweak a product they introduced a year earlier or have another go at a product by changing the packaging or doing something different, hoping to have it catch on in a bigger way. Believing in a new product isn’t always enough, is it?
MAUTI: There are some categories in produce that are ripe for innovation. And just as you alluded to, sometimes that innovation misses the mark. But it doesn’t always miss because the product was wrong, sometimes it just fails to capture customer enthusiasm or somehow the communication doesn’t stick in customers’ minds. Take the greenhouse categories for example, they experience an enormous amount of innovation. Expecting customers to accept all those new items as products they need to purchase on a regular basis is perhaps a little far-fetched. This is true even though most of these products are really very good. Sometimes you see certain products cycling back some years later capturing the attention of customers and suddenly become a winning product. Another example can be found in the potato category. Recently there has been an explosion of different potato varieties, packed in all kinds of different formats. Not all this different assortment is new. Take fingerling potatoes for example, twenty years ago they were considered a strange variety, infrequently finding their way into the grocery carts of customers. Every once in a while, they would come back for another marginally successful reboot, until recently. Today they are a big part of the potato category and many people are now cooking with them. Fingerling potatoes are a new product that has been around for decades.
PMG: What about innovation in whole commodities? As a retailer, what is the key to making the right moves when it comes to new varieties of apples, grapes or other commodities?
MAUTI: You always must go where the customer is heading. Over the last 10 years in particular, taste has been the biggest driving force for innovation. In all the categories we’ve mentioned, including the greenhouse categories, potatoes, apples and grapes, they have all experienced a recent boost because of the introduction of new, flavorful varieties. But it is not just these categories, you can go down the produce aisle and be hard pressed to find a category that hasn’t been touched one way or another by new, flavorful varieties. With everything I have been seeing in the produce industry, it looks like the next frontier for innovation is occurring in product packaging. Primarily to reduce the amount of plastic in the environment. Today, it is not unusual to see new products come into the marketplace that is no different than the old product it is replacing except in how it is packaged. Existing products are being presented to the customer with more post recycled or biodegradable materials or simply just less material than the typical plastic clamshell. If a company’s innovation focuses on where the customer is going, chances are it will be successful.
PMG: For a 100-store retailer located in different neighborhoods or different economic realities, how much autonomy do you allow each store to alter their assortment to suit the needs of their local customers? How much is driven from head office? Is there a preferred way to go?
MAUTI: The right answer to that question is different for each retail company. They need to review their individual strengths and weaknesses. Some companies generate success by being very regimented in how they manage their assortment. For these companies, they would view their assortment to be mandatory, ‘if it’s on the list, then it must be available in the store’. Typically, in these environments there would be no process that systematically enables non-supported products to be sourced. On the other end of the spectrum, there are organizations that have generated success by allowing flexibility within their network. Typically, they’ll have a core group of products that are expected to be on the shelves every day, but they’ll also leave a degree of flexibility to source products from local suppliers, or if the store caters to a particular multicultural group, they might expand their assortment in products to suit that population. Again, it’s hard to say which way is best because there are success stories using both methods. In some operations I’ve worked in the past there tended to be a limited degree of flexibility for stores to source locally grown produce or specialty products to satisfy the needs of their unique customer base. But in these operations, availability of the core assortment was the minimum expectation.
PMG: If there is flexibility given, does the produce manager feel more invested that way?
MAUTI: I would say that it is in the nature of a produce manager to ensure the products they source are successful. Sometimes this is a big benefit to the organization, when someone gets behind the success of a program and really gives it their all. Sometimes though, it can be to the organization’s detriment. If the effort to be successful on the non-core items comes at the expense of the effort to be successful of the core assortment, big problems can come from that.
Next topic: The role of placement of produce as a merchandising strategy