Curb range proliferation to thrive amid inflation
12 MINS READ
The inflation paradox
There is a paradox that retailers face when cost pressure is high, and margins are continually challenged during inflation.
When the supply base feels the impact of rising raw material costs, it raises prices for retailers. But higher cost poses a challenge to retailers against the backdrop of consumers with less money to spend amid inflationary pressures. For suppliers, buyers, and merchandising teams, this creates significant challenges.
It often leads to a protracted negotiation, with the supplier demanding higher costs, and retailers fending off the requests with counter arguments around the intrinsic value of an item versus the cost being levied. This is especially true when the item is not just a simple commodity, with the value of the raw material for all to see, but also has brand equity baked into the cost of goods, hidden within the proverbial ‘black box’ of suppliers’ recommended retail price.
The retail price—legally only for the retailer to set—is an enormous driver of margins. Accepting a cost increase and raising the price for the consumer balances the books, but no retailer wants to lead that charge. Although with the current disparity on price, some appear to have been forced to do so, negatively impacting their price positions.
With these challenges in mind, all too often, the standoff can result in the supply stopping—either through the retailer delisting swathes of a brand’s products as leverage, or the brand stopping the supply to the retailer to the same end. Neither of these scenarios has a positive outcome for retailers, suppliers, or customers, except perhaps getting to the lowest possible price increase.
The impact of ‘if you, then we’ negotiation
Changing dynamics in negotiations can lead to a product range being used as a strategic lever.
The other dynamic that has replaced this type of protracted negotiation is a twist in the traditional ‘if you, then we’ kind of tactic. This, in practice, manifests itself as a supplier using the available breadth of range as leverage. Buying teams are presented with the option of taking additional range and distribution points in exchange for better cost prices. Post GSCOP (Grocery Supply Code of Practice) in the UK, listing fees are no longer an option to generate revenue, but range proliferation continues.
On the surface, this can seem straightforward and avoid what could be an awkward negotiation, making everyone happy, right? Well, possibly, but it really depends on how aggressive this approach is, how important the new products are, and how they offer differentiation and value for the consumer.
The dark side of product proliferation
The pressure of growing assortments has been addressed by some retailers but remains a significant challenge for others.
A few retailers have made significant efforts in recent years to reduce assortments to a great extent in some areas. Others have not begun to address the challenge and perpetually rotate a tail of range and maintain a bloated assortment without any overall optimization. This creates continuous work and adds to the cost overall. The 80/20 rule applies well here with 20% of the range often driving 80% of sales and margin revenue.
The skill required is not just in simply identifying the cash and margin drivers, but also products that are most important to customers. This, in turn, will help identify the true tail of the range to confidently remove it. The space thus freed up can be used for true differentiation and uniqueness.
A shop’s walls and fixtures are not ’elastic’ and an increase in range over time has significant downstream impact on multiple business KPIs, negating any margin savings and often making things worse in the long run.
Availability of key lines, which hovers over 95% at best retailers but can be as low as 70% at others, can suffer as products receive less space. Distribution centers struggle to accommodate the additional picking slots, slowing down operations and increasing costs. Inventory levels can rise, consuming working capital. Replenishment costs increase through handling of additional products. Crucially, customer perception of range is negatively impacted, with too many variants of similar products, making it hard to determine value and make informed choices.
Changing the dynamics of negotiation with AI
Changing the dynamics of a negotiation takes planning and an enormous amount of data with sophisticated modeling to proceed with confidence.
Controlling this is not easy as there is a need to negotiate hard on cost, and often, there are very few alternatives to closing a deal. However, the answer can be found in optimizing assortments and reducing the range to a level that offers both choice and value without confusing customers.
The solution lies in changing the dynamic by reducing the levels of duplication and ensuring value is derived from the remaining assortment. When the assortment is optimized, the fastest selling products should be given more space in stores. Although fewer products are listed, shelf presence for brands is often increased (a brand KPI and objective). Although this space cannot be sold to a supplier, it can be used for mutual benefit through a relationship of partnership and trust.
The key is assortment and space optimization that drives truly store-specific ranges. This cannot be achieved through traditional models and requires a sophisticated approach by using tools that leverage artificial intelligence and machine learning to ensure all available data is considered above pure performance, including customer importance, substitutability, and uniqueness. Within these broad headings, there are countless nuances to be considered, including economic demographics, ethnicity, location, and customer mission.
Achieving all of this within the confines of a store’s footprint, without missing key need states, and keeping products on sale on the busiest of days, while keeping labor models lean, is a challenge beyond the capability of traditional and manual processes. Only the most sophisticated of models can cater to all the parameters and provide an output that is operationally actionable.
Finally, the accompanying governance and critical path processes to deliver these changes are more important than ever. Breaking down traditional business silos and taking a data-led approach throughout the range change program will help realize value at every stage in the product lifecycle.
The 80/20 rule applies for assortments as well—20% of the range often drives 80% of sales. Retailers who apply this golden rule can better align products with customer demand and increase margins.