Andrew Fowkes, head of retail centre of excellence at SAS UK & Ireland, explores the factors driving some retailers to excel and others to fail in a complex environment
As we look ahead to spring, predictions of doom and gloom are dominating the landscape as the retail sector starts to prepare for end-of-year profit results.
A stark polarisation is now emerging between winners and losers on the high street. Companies that have focused on building a strong omnichannel experience have performed the best. By contrast, companies that refused to engage in heavy discounting are emerging as losers, as House of Fraser’s CEO made clear following a rocky 2017 Christmas period. The company pulled back from discounting to try and shore up profits, but then saw a 2.9 per cent drop in sales in the six weeks to 23 December.
That’s not to say that demand is dropping. Consumers are still willing to spend. However, with all the price pressures they face, they are being much more careful. It’s the perfect storm. And heavy discounting is damaging if you’re applying bigger discounts to certain goods than you need to. With that in mind, it’s retailers that get pricing decisions right that capture a greater share of the market. And by that, I mean very specific pricing decisions at a granular level. What do you charge for a particular make of flat-screen TV compared to a very similar product exhibiting different demand?
It’s becoming increasingly important for retailers to better understand customers and their behaviours towards price and service. Retailers need to analyse not just buying behaviour but peripheral data like browsing habits, incomplete checkouts, search terms and email click-through to determine what customers value before they’ve even made their purchase.
Once armed with this information, it’s possible to start building micro-segmentation strategies for different groups of customers. For example, our research shows that those aged 55 and over are least likely to shop around for deals. One in seven (15 per cent) prefer the convenience and security of a trusted brand. In comparison, just five per cent of 18- to 24-year-olds feel the same.
On the other hand, women are more likely than men to be influenced by a discount in-store or a flash sale online. Overall, 50 per cent would abandon a shopping cart and instantly switch to a discounted rate compared to 40 per cent of men, while one in four women classify themselves as more price-sensitive than they were a year ago, compared to one in three men. However, what’s more important is understanding customers down to the individual level, rather than purely basing decisions on these broad segmentations.
By thinking about which customers you’re targeting and how profitable different groups can be, it’s possible to create flexible pricing strategies that are more likely to appeal to them. Ultimately, the retailer that knows its customers best can create a price point and a range that suits the individual shopper, at a margin that will boost profitability.
However, the challenge doesn’t end there. Promotional activity often creates peaks and troughs in demand and the cost of misjudging demand can be high. Many retailers are at risk of losing a customer entirely if they get inventory forecasting and supply chain planning wrong. Likewise, if retailers don’t have the ability to provide stock visibility online, customers will switch to one that does.
In previous years, retailers may never have known about the disappointed shoppers who left their stores without making a purchase. Today, if a website shows that an item is out of stock, 45 per cent of shoppers would go straight to another company’s website to look for it there. Only 22 per cent would bother to check if the company had the item in-store, and just eight per cent would actually go to the store to get it. In other words, it’s a permanent ‘last-chance saloon’.
Stores have a limited capacity so retailers need the optimal mix of products to facilitate the best sales and profit mix. For many customers, the store is often the showroom that facilitates the online purchase, so retailers need to be able to effectively track the customer journey across all the potential purchase routes available to them.
However, as customers move online, data trails created by those shoppers can help retailers forecast more effectively, and be ready with the right products at the right prices in the right locations. It allows buyers and planners to bring merchandise into the business in a more timely way and facilitates decisions on whether to hold product at a warehouse or in-store.
When it comes to the year ahead, retailers are likely to continue battling against the same headwinds they experienced in 2017. Heavy discounting and weaker consumer demand is driving lacklustre trading. Operational costs continue to rise as business rates surge and the national living wage comes into effect, while the retail sector looks set to feel the fallout from Brexit as the prospect of non-tariff barriers and devaluation of the pound put further pressure on margins.
To succeed in a complex and challenging climate, retailers need to get smarter about the way they make decisions. This means analysing the vast amounts of sales history data and competitive or market data – as well as the very latest data on customers (e.g. online data) as their tastes inevitably change over time and when significant life events occur. Once you can extract insights from this information, it’s possible to make better decisions about pricing and stock levels.
In the long-term, this will help retailers plan and drive profits while continuing to satisfy customers’ expectations of a bargain or even a price they’re willing to pay. The consequences of failure are just too high. Using data available to build an accurate, up-to-date and joined up view of the customer across multiple channels is critical to making decisions that allow a retailer to remain competitive.
Author: Andrew Fowkes, head of retail centre of excellence at SAS UK & Ireland