LOCAL MARKETING DRIVES REVENUE THROUGH INTEGRATED PLANNING

By Jim Bunn, Partner

Introduction

As retailers strive to meet the diverse demands of their customers in an ever increasingly segmented market, many have sought a competitive advantage through localized marketing. These localized, or neighborhood, marketing efforts require a high level of planning and coordination from category and assortment plans to site-specific space plans.

Family Dollar is an excellent example of a company that has adopted a coordinated planning approach to meet site-specific demands. Family Dollar typically created three to five plans based on store size but could not tailor local assortments to customer preferences until it restructured and revolutionized it’s approach to planning. With almost 7,000 stores, meeting local customer preferences is exceedingly difficult. Prior to changing it’s planning processes, Family Dollar used only spreadsheets and was unable to customize its approach or react quickly to marketplace changes. With an integrated knowledge base that included assortment and space planning, Family Dollar is now quickly able to respond to events in the marketplace and provide products that are closely linked to consumer demand.

Space Planning is the process of efficiently managing assortments at the neighborhood level. By assigning assortments to sites, retailers can enable greater control over the assortments and by extension, the items, a store can purchase or sell. This document provides insight into the best practices related to the areas of Space Management and Assortment Planning. The following sections outline how the best retailers are using space management and assortment planning functions.

Integrated Planning – Best Practices

Many retailers have embarked on some form of Neighborhood Marketing initiative. In particular, companies like Family Dollar, ShopKo, Food Lion, Winn-Dixie, Wal-Mart and many others, are focusing on catering to localized consumer demand while continuing to maintain centralized control of their assortments through strong category management, assortment planning, and space planning. Whether you’re in off-price/discount, grocery, apparel, consumer electronics, or another segment of retail, effective space plans begin with solid category plans that identify store clusters. Wal-mart and Hannaford are using category management software with sophisticated algorithms to analyze category/item sales trends in an effort to identify logical clusters of stores. These “intelligent” clusters provide an easier method for managing stores with similar needs and similar customer bases. Unlike simple geographic of demographic data, intelligent clustering provides a means of grouping locations that may have no other common thread than their sales pattern. With these clusters, category plans created at the central office, begin to move closer to consumer demands.

Within Category Management, each category is run like a “mini business,” with its own strategies, inventory plan, and profitability targets. The trend within category management is to increase the collaboration, and exchange of information, between the retailer and the supplier. Using Wal-Mart as an example, suppliers are expected to suggest new product introduction, planogram requirements, and promotional activity. While the ultimate responsibility for performance sits with the category manager, goals and targets are established with the vendor and appropriate penalties and fines are incurred by the vendor if targets are not met. Obviously this degree of collaboration requires strong analytical and collaborative tools and enforceable contracts with vendors. Category plans typically take a “top down” approach while assortment plans take a “bottom up” approach, starting at the item level. A core assortment is developed with modifications being made for cluster, region, and store variations. The assortment plan needs to be tightly integrated with category plan to ensure alignment throughout the planning process and continuity to the consumer centric localized assortment. Food Lion and Delhaize, the Hannaford subsidiaries, are perfect examples of companies who use an integrated approach. Both companies use Galleria’s Micro Assortment Planner to deliver customer centric assortments communicated through tailored, automated planograms.

In general, the best practice is to continue the alignment of Category Planning and Assortment Planning into Space Management. Space Management and Assortment Planning should utilize a mix of the following components to achieve the goal of having the right product in the right place at the right time:

Assortment Planning

• Assortment planning – planning optimal breadth and depth of products aligned with merchandise and category plans within space constraints

• Customer-centric planning – planning based on consumer demand throughout the process versus product-centric

Space Management

• Space planning (macro) – ability to plan floor space at a department or category level

• Space planning (micro) – ability to plan the shelf space down to a SKU level

• Store clustering – ability to cluster stores using store attributes and customer purchasing behavior, including demographics from third party sources, customer loyalty, etc.

• Store execution – ability to create store-specific planograms allowing for efficient execution by store team and ability to track compliance

• Planogramming – automation to create store-specific planograms based on clustering with easy to create models and templates for store, floor, fixture, and shelf layouts

Collaboration and Knowledge Base

• Central data repository – common knowledge base for storage of data for analytics, and templates and models for planograms

• Collaboration and communication – effective collaboration and communication exists between manufacturers, merchants, planners, marketing, and stores

The benefits of aligning category planning, assortment planning, and space planning with the consumer direction are limitless.

Space Management and Assortment Planning Maturity Model

While there is no single “best practice” that works for all retailers regardless of segment, the following maturity model can be used to facilitate agreement between various groups within the organization and develop a plan to achieve the desired results. Companies seeking to obtain a sustainable competitive advantage find themselves in the Advanced to Distinctive sections. These companies have very sophisticated assortment planning applications that are well integrated with their category management and space planning applications. This ensures not only the synchronization of information but also the continuity of vision and direction.

Summary

For many retailers Space Management has not progressed beyond simple floor plans or generic planograms, and for many, Assortment Planning still consists primarily of using standalone spreadsheets. For industry leaders, and specific sectors, such as grocery, advanced strategies are being embraced as they strive to implement a holistic customer-centric merchandising strategy.

Many retailers still operate in functional silos, with little or no collaboration amongst different functional teams. Industry leaders realize the importance of strong collaboration and business process integration with all the partners in the merchandising process, including manufacturers, merchants, planners, marketing, and stores.

Software vendors are building, internally or through acquisition, integrated product suites with advanced micro and macro space planning, planogram creation and execution, and assortment planning. However, the maturity of the current software landscape still dictates a “best-of-breed” selection to match each retailer’s requirements. Retailers need to consider their overall ERP or merchandising strategy and that Space Management and Assortment Planning are components to be integrated into the overall strategy.

There is no “one size fits all” answer and recommendation relative to Best Practices other than to candidly assess the requirements and capabilities (strengths and weaknesses) of your company as well as the competition in order to determine the appropriate Space Management, Assortment Planning, and Category Management strategy.