Assortment planning is the process of selecting the collection of products which will be on offer in particular areas (localisation) and during specified periods of time (seasonality). It considers the financial objectives and seasonality of the product selection in a way so that both your and your customers gain from the outcome.
Assortment planning entails the evaluation of individual product attributes including: Brand, Size, Style, Colour, Function, Price and Stock Keeping Unit (SKU) performance during selection to address the preferences and needs of your customers. The assortment plan defines the products that make up your Categories, Sub-categories, Segments, and Sub-segments.
Optimising shelf space and the product selection within that space has always been a primary concern for retailers. The reasons for that are because the assortment of products is critical to demand generation and shopper satisfaction.
One of the main ways a retailer can increase the financial performance is by increasing the level of customer satisfaction through the variety of products on offer.
An important factor to consider during the assortment planning process is that assortment variety increases inventory costs. Therefore it is important for assortments to be optimised.
From the supplier’s viewpoint, assortment selection and category space allocation are equally critical. Suppliers can’t generate any sales if their products aren’t represented on store shelves.
As retail channels blur, assortment decisions are more important than ever and will determine whether or not a retailer can stay relevant in a competitive environment. To compete and win, there is a growing imperative for retailers to tailor their assortments by neighbourhood to respond to local preferences, and offer shoppers the right products at the right place and the right time.
This implies that product assortments are tailored store-by-store and category-by-category depending on your clustering strategy.
With that said, we see that modern category management is tasked with “assorting to the individual”. This customer-centric approach to category management puts your customer at the centre of all decisions made with regards to which products to place on offer, how they'll be grouped, and how they'll be displayed.
In practical terms, this means identifying the customer segments present within your shopper base and setting up category strategies evolving around the four P's, namely Product, Place (or merchandising) Price and Promotion. This is so as to better reach each segment.
Before you select your product assortment, you must identify the different consumer decision trees present within a category. Simply put, a Consumer Decision Tree (CDT) is a graphical record of the thought process which any shopper goes through when selecting a product in a category.
This graphical record outlines the different product attributes that make up the purchasing decision. For example, a customer may look at price first, then flavour, then size and brand last.
That said, it's highly unlikely that there is only one consumer decision tree per category. That's because there are different consumer behaviours based on cultural, personal, physiological and social factors that exist within a consumer base. For each of these segments, there is a different focus or priority. For example, your customers may be price sensitive which means the price will be higher on their Consumer Decision Tree.
The use of CDTs helps you to understand not only the buying behaviour of your customers better but also to grasp the expectations of each customer segment. This product knowledge is then translated into your assortments which align to a retail strategy with consumer behaviour.
Store clustering or store grouping is the grouping of stores based on similar store and demographic characteristics. Store clustering is a critical step for the assortment planning process as it helps you to create localised assortment plans that meet the needs of local shoppers. Once the store clusters have been determined, assortments are created for each of those groups to meet the demand patterns specific to each store cluster.
Essentially, there are two ways you can cluster your stores.
One productive way to identify store clusters is to measure the share of sales by store for each segment and compare the results across multiple stores (heat mapped floor plans are a useful tool to measure category performance and relative category space allocation). By doing so, you can soon see if there are similar trends among categories.
For example, an analysis of the cereal category might reveal that in some stores there is a significantly higher percentage of sales for the “Health” segment, while another group of stores shows a higher percentage of sales for the “Kids” segment.
This difference in sales could suggest that the first group is a health-oriented cluster, and therefore the assortment for the Cereal category must pay particular attention to the health segment. Subsequently, additional research by analysing factors such as age, income, ethnicity, and so on will help you to identify similar neighbourhoods and validate the existence of a particular store cluster.
The first thing to do when approaching clustering is to identify the two primary space and assortment variations that will drive localised assortments across your retail universe in almost every case.
1. Shopper demand variation among categories
The shopper demand for different products will vary from store to store depending on multiple factors including Geo-demographic, Location, and Seasonality. The factors can be measured by the analysing internal point of sale data and external market data.
2. The store format
Floor space in a particular store is a crucial element for creating a category assortment. Each assortment should take into account the space available across multiple stores.
Store and category-based clustering are at the core of your assortment planning strategy. As stores across a retail universe may present a difference in demand among categories, your stores or categories that present similarities are grouped together.
Localised assortments are then generated for each category or store cluster to better meet the needs of local shoppers. When creating localised assortments, there are two categories of products to identify:
The “base range”
Products in the base range will stay the same across all of your stores regardless of local preferences. The base range will usually comprise of the most popular products and brands that your shoppers expect to find across all of your stores.
You can use assortment optimisation software tools to reveal brand and SKU strengths and help them select these products and brands.
The “custom assortment”
These are the products or segments specific to each store cluster. These products are tailored to the specific needs of each cluster, and relate to the preferences of particular customer segments.
For example, if the customer segment in a particular cluster is price sensitive, you might want to place more economy products to better retain the loyalty of this customer segment. On the other hand, if the customer segment is convenience driven, more products with a convenient and appealing format will optimise the chances of increasing sales.
Before creating assortment plans, it is important to align internally around the role each category plays in the merchandising strategy, as well as the implications those roles will have on category space allocations and assortment decisions. How does each category relate to one another in your store from a consumer point of view, and where does each category fit in the shopping experience?
By answering this question, you can adopt a more customer-centric approach to your category management strategy. Taking the correct merchandising strategies that will enhance the strengths of a category.
The four major consumer consumer-based category roles are:
It is important to determine the role of each category beforehand as this will determine and direct the merchandising strategy that will be put into place to deliver on the category role. And ultimately, it will affect the product selection and space allocation.
For example, if you choose to give your Meat category a Destination category role, the merchandising strategy you choose will most likely be focused on increasing traffic and defending the market share for this category. To do so, you need to allocate more space to this category, keep margins relatively low to be attractive, and offer an excellent selection and variety.
Cross merchandising is a tactic that category managers use to drive additional in-store sales. It is a Transaction Building strategy that focuses on increasing the size of the average basket, by encouraging your consumers to purchase complementary products.
For example, instead of just buying a bag of crisps, a customer would add salsa sauce to their basket. Or, when purchasing paint, your customer would purchase paint brushes too.
Spotting the products which can be cross-merchandised before creating an assortment will ensure that you take full advantage of every opportunity to increase your sales.
Knowledge of transferable demand metrics within a category has a significant impact on your assortment plan as it will help you to prioritise a specific SKU or encourage the inclusion of an SKU in an assortment as opposed to products that might want to be removed.
By analysing how products are performing within a category using assortment planning software, you can compare SKUs and determine whether an SKU’s volume is more or less likely to be transferred to another SKU remaining in the assortment. If this challenge or opportunity is not taken into consideration during the assortment planning process, then the category will be placed at risk.
For example, which products are showing high levels of loyalty? You'd usually prioritise high loyalty SKUs in your assortment plan over lower loyalty SKUs because low loyalty SKUs could be transferred to other SKUs in the assortment.
Secondly, which products show high levels of exclusivity?
Products that are highly exclusive have less transferable demand and therefore should be kept or added into the assortment. Removing SKUs with high levels of exclusivity would put the category at risk and may drive your customers to shop elsewhere.
Assortment planning is a critical step of category management. However, it is not dependent from other category management decisions. Assortment plans should always take into account the greater business strategy and the set of goals that you pre-define. That's because it will affect the space and the product selection attributed to each category.
Once the strategy has been agreed upon internally, it will give direction as to what merchandising tactics you should put in place to achieve your goals.
For instance, you might choose to target a specific customer segment such as a price-sensitive segment or a convenience-driven segment. Other elements to consider in your assortment planning strategy includes the pricing strategy that you will adopt, and whether you will focus on higher profit margin products or rather try to push for higher volumes or units of merchandise.
Another element to consider is the Image Enhancing strategy that you will use to enhance your positioning in the market place. Your overall image positioning will be determined based on any area of the assortment plan relating to quality, variety, price, service, presentation, delivery and brands available.
With the knowledge and skills required to develop optimised assortment plans, it can be time-consuming for you, especially without the right people skills.
You'll often find that outsourcing this function to third party experts who have developed this skill over time is the most efficient solution for your business.
Your executives are then freed up to focus on higher-level strategy and to ensure that your brand strategy is communicated and reflected throughout your stores.
Planning localised assortments is highly dependent on effective software because of the highly data-intensive nature of category management.
DotActiv’s assortment planning software works from an SQL data platform and is integrated with shelf and floor planning software.
The tool enables users and planners to rapidly plan localised assortments that are based on the retailers' unique strategies.
Localised assortment plans are effective when based on the right data.
To create a data-driven assortment using assortment planning software, you will need to source, clean and consolidate the following data:
Assortment Optimisation is often perceived as too complex to implement.
However, that's not true. It can be achieved with the right tools, the right skills and the right process, starting from cleaning and consolidating the data, to stapling down the merchandising principles, aligning the merchandising strategies with the assortment planning strategy and using software to apply it.
With today’s competitive pressures, assortment optimisation is vital to customer satisfaction. Although the decision to optimise assortments can be seen as hard to implement, the right combination of data, strategic decisions and enabling software will ensure that the right mix of products is offered to the right shoppers.
By combining internal and external market data with new predictive analytics software, you can explore multiple combinations and alternatives of category space and assortment plans, including assortment variations for each store cluster and format.
In the long term, adopting an assortment planning strategy effectively will help you to better retain the loyalty of their shoppers.
Behind every successful business undertaking, product or project is a "methodology" which acts as the foundation on which everything else is built. In DotActiv’s Assortment Planning Software, assortments are built using Rules, Templates and Plans.
Rules are defined by individual calculations that are used in order to rank products within a database, and to generate an assortment based on specific attributes.
These calculations relate to performance on non-performance based criteria such as Internal Market Sales Rank, Time on Shelf, Internal Market Units Rank, External Market Sales Rank, External Market Units Rank, House Brand, SKU size, Price, Brand, Colour, Flavour, and Profit.
Usually, two or three rules are applied to each segment of a category, and once the correct assortment has been generated for each segment, the products are grouped in templates and plans.