Incorporating the Halo Effect into Assortment Planning Meets Customer Needs
The retail landscape is undergoing a transformation unparalleled in history. Retailers are having to adjust rapidly for change they thought would occur over a decade, not in one year. AI driven analytics is helping Merchants develop far more effective assortments and giving them the resources and time to focus on what will be a challenging time ahead.
As we start to come out of the pandemic, Merchants are assortment planning in a far more complex and unpredictable time. Seamless multichannel shopping is expected by customers adding layers of complexity. Historical customer behaviour has been interrupted making planning and forecasting much more difficult, and margin pressures are accelerating as customers continue to become more prices sensitive and competitors more aggressive.
To solve knowledge gaps, and speed up decision making to meet the challenges, some Merchant organizations have defaulted to just adding more analytical labour and continued reliance on their legacy systems. Unfortunately, for the most part this approach has had only modest success while driving inefficiencies through more complexity and addition of low-value work to their organization. But perhaps most importantly, this approach does not address the root issue for the long term.
Leading Merchants organizations on the other hand are stepping up investment in automation and AI to orchestrate wholesale changes to their planning systems by automating processes and integrating AI based analytics. The next generation of Merchant tools have evolved quickly, and their success is measured in a step change in the effectiveness of promotional activity, markedly less inventory carried, fewer markdowns and reduced product spoilage.
The best of the AI analytical tools simplifies data by providing near time “what if “assortment scenarios along with very precise forecasts and significantly less people in the loop. Adding analysts and data people cannot match AI powered analytics which considers millions of variables per millisecond. The savings in time, freed-up cash flow and improved day to day assortment operations allow Merchants the time to focus on building long-term assortment and channel strategies. AI plays a vital role in support, but the art of Merchandizing takes the lead.
The focus of the Merchant is on three main areas when developing their long-term assortment strategy:
Assortment rationalization: Eliminating products from the assortment that have the least effect on the companies bottom line to improve supply chain efficiency is a measurement challenge. The key component of the measurement is the often-ignored product “halos”. In simple terms the halo is the additional products bought by a customer triggered by the initial product purchase. For example, when a customer buys pop they also buy chips. At the very heart of AI driven analytics is a clear picture of the halo effect across the whole assortment and when eliminating the long tail items in any rationalization exercise it is crucial to understand the more obscure relationships between products not seen necessarily by human eyes. Gain this clarity and the Merchants can be confident when calculating which items to eliminate or move to another channel.
Omnichannel: In 2020 digital shopping grew by nearly 5X vs the rate experienced pre-pandemic. The fortuitous B&M retailers who had embraced online shopping channels before the pandemic, the next level of competition is understanding the halo of products by channel and the interplay between them. For example, countless number of items like large format diapers and water lend themselves to being promoted through click and collect and not to the actual store where their weight and size reduces their product halo to near zero. The growth of digital channels may retrench after the pandemic but a great deal of it will be “sticky”. According to a McKinsey survey 3/4th of those who tried digital purchasing for the first time in 2020 expect to continue. Fact based assortment strategies across digital channel has become so complex that it’s impossible to meet customer needs without AI supported analytics that incorporate a full understanding of the ‘halo effect”.
Portfolio Management: Key to successful long term portfolio strategy is to ensure that that the assortment is focused on growth in growing categories and channels. Overall, Omni retail has been growing at 4.5% a year in North America so if your organization rate is below this you are in fact falling behind. Looking closer to the category level it is rarely measured fully so it is that many are blind to the reality that they may be growing sales but in categories in long term decline. This is an important issue of missing data sources rather than the capabilities of AI. Senior Merchants are paid to understand the changing dynamics of the industry and develop long-term assortment strategies to take advantage of, so it is a challenge that leading retailers are putting effort in to solving.
Complexities were driving inefficiency even before 2020. Merchants spent most of their time gathering data, reading unhelpful reports, firefighting issues and attending unproductive meetings. 2020 put the spotlight on this issue leading innovative Merchant organizations to start the process of what will be a drastic but long overdue change to the Merchant function.