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Guest comment: Imperatives for customer-centric digital merchandising

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by Sahir Anand

Two questions haunt merchandising, finance, and retail technology executives today. First, does the traditional ‘one-size fits all’ (common and similar store or channel merchandise sets) merchandising strategy still result in sufficient levels of inventory sell-through, profitability, and timely replenishment? Second, are current merchandise lifecycle business processes and systems enough to increase customer demand?

Aberdeen’s research suggests that traditional strategies must evolve if channels that employ them want to survive. Retailers are under increasing pressure to maximize gross margin and inventory turns. Ignoring store and channel merchandising inadequacies (with symptoms such as growing customer dissonance, high markdowns as a result low full-price sales, and declining profitability) can lead to store failure and shutdowns. Shrinking margins and slowing inventory turns are a sign that a store is losing touch with its customers – and when that happens, disaster is not far behind.

Revenue growth drives web 3.0 retail merchandising

According to Aberdeen data, 73% of digital retailers have identified maximizing gross revenue as the top operational pressure for enhanced merchandising processes. This fact marks an interesting change of events within online merchandising from only a few years ago when, as mentioned earlier, the top operational pressures for these retailers were building a repeat customer base and improving site experience.

Given that many retailers have yet to identify digital channels as a reliable source of profitability, and the expense associated with online upkeep, it is no wonder that these retailers are under increasing pressure to justify their existence with revenue centric results. In effect, the focus on revenue enhancement marks the sustained rise of revenue-centric digital retailing.

Take, for example, social media for retailers. According to Aberdeen’s August 2010 Social Media ROI benchmark report. Although 85% of retailers have an initiative in place to help manage brand reputation and encourage revenue-building consumer interactivity, 56% of retailers have indicated that they are unable to quantify the effect of social media – a key precursor to maximizing revenue.

This is a troublesome trend, considering that the top social media-related pressure for these organizations is increased utilization of this medium as a primary shopping vehicle. To counter this challenge, 45% of retailers are looking to diversify social media utilisation beyond marketing and into other areas of an organization. However, just 15% of respondents have solved this challenge in a meaningful and quantifiable manner. Interestingly enough, two other challenges tied for second place among surveyed digital retailers: matching customer-centricity levels of competitors, the customer perception that the retailer lacks responsiveness to their needs, and maximizing inventory turns (27%).

Increased customer centricity for retailers

Building a loyal, repetitive, and satisfied customer base is a top challenge for e-commerce retailers. Case in point, according to the April 2009 High Definition Retail E-Commerce benchmark, 40% of respondents identified low customer loyalty as their highest pressure for selling online. This task is further complicated in an extended digital environment that includes different mediums of communication, such as web-based shopping, mobile, and social.

Customer-centric expectations that run the gamut of these digital channels include:

• Consistent pricing

• An easy-to-navigate online, social and mobile presence

• A large and relevant amount of product information to browse

• Timely access to complimentary product information

• A slick, attractive product display

• Relevant promotions

Given that these customer-centric related challenges affect all digital channels in one way or another, it makes sense that retailers would see this as a major operational challenge going forward.

Retailer/consumer needs management

According to Aberdeen data, 27% of respondents indicated that one of the top operational pressures is decreasing responsiveness to customer needs in their digital selling environments. Given the ease of surfing from one retail competitor to another, it is crucial for these organizations to quickly and accurately meet the rapidly changing affinities of their consumer base.

Digital retailers do have an advantage over their brick-and-mortar brethren in that they have unlimited product display capabilities. However, this is both a blessing and a curse. Although digital retailers do not have to worry about physical space optimization, they must worry about virtual space optimization: making sure what is displayed is relevant, timely, and directly corresponds to a consumer’s desires.

Demand forecast accuracy top priority for digital retailers

According to Aberdeen data, 64% of digital retailers are focused on improving demand forecast accuracy, compared to 55% of store-level retailers. As noted in the June 2011 Mission Critical Merchandising and Replenishment benchmark report, this is a common challenge for retailers of all types.

Demand forecast accuracy depends on meeting the stated goals of an initial baseline demand forecast (both short-term and long-term), which can oscillate based on the successes of merchandising plans, assortment-mix, inventory allocation, and replenishment. This is a particular challenge for the store-level retailer, given that inaccuracies in shelf-level merchandising and store-level inventory strategies can also be particularly challenging to maintaining baseline expectations.

For the digital retailer, demand forecast accuracy is a different type of challenge. This retailer does not need to consider shelf-level merchandising, shrink, and in-store inventory levels. Instead, digital forecast demand accuracy depends on accurate customer- and business-facing data and analytics practices before, during, and after the retail buying lifecycle is complete. Before the process begins, for example, accurate customer data can dictate future buying trends, necessary inventory requirements, and cost-effective fulfillment strategies.

During the retail buying lifecycle, customer analytics can be used on an ongoing basis to constantly tweak baseline expectations. Finally, customer and business analytics can be used post-sale to further detect customer affinities, and more accurately predict future sales.

One digital retailer who has utilized analytics to shape the success of overall merchandising strategies is Motorcycle Superstore. Motorcycle Superstore is an internet-based retailer of motorcycle gear, apparel, parts, and accessories, and sports revenue of approximately $60 million annually.

The online retailer embraced a new ecommerce analytics solution that provided increased visibility into:

• Basic site traffic metrics

• Merchandising, marketing, and post-purchase activities

• The ability to tag all items offered on the Motorcycle Superstore website

This is not to say that the brick-and-mortar retailer does not collect large amounts of consumer data at the store-level. However, the digital retailer has the upper hand when it comes to insight collection due to the plethora of data collected in these non-traditional mediums (including site behavior, purchase history, etc). In fact, the principle challenge for the digital retailer is to sort through these various sources of data and turn it into actionable insight quickly and effectively.

Sahir Anand is VP/principal analyst, retail, Aberdeen Group

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