From a shopper’s perspective, as they enter a supercenter store such as Walmart, Target, or Meijer, they see a one-stop-shop for all their needs, from groceries to load their refrigerator and pantry to pet care, toys, fashion, home goods, electronics, auto, and lawn and garden. However, unbeknownst to the shopper, that widely diverse assortment, along with the supporting inventory, space allocation, pricing, and promotions, is determined based upon a vast amount of data sources, technology, and business processes that present a host of complexity for the superstore retailer.
“70% of retailers are willing to take humans out of key processes and rely on AI-powered automation and dynamic pricing.”
As retailers continue to cope with the wild shopper, competitor, and market behavior swings that characterize the landscape in general – and even more acutely during the pandemic – they are very clear on at least one thing: science-based automation and dynamic pricing capabilities are key. In fact, a recent retailer study found that a full 70% of retailers are willing to take humans out of key processes and rely on AI-powered automation and dynamic pricing.[i] But there’s a startling disconnect: more than 90% of retailers report manual or only semi-automated processes for pricing, promotion, and markdown. What’s stopping them from addressing the critical need they’ve identified? One factor clearly jumps out in the study findings: 57% of retailers say uncertainty about assessing solutions providers is a barrier to adopting science-based pricing.
57% of retailers say uncertainty about assessing solutions providers is a barrier to adopting science-based pricing.
The Supercenter Challenge: Unparalleled Complexity
Where does this complexity come from? Let’s break it down. At its simplest form its ties back to the length of the lifecycle of a product itself. Does the product show up in the market and then disappear in a matter of weeks, such as the latest swimsuit or influencer-driven beauty product or does It live a long life such as many of the fast-moving consumable goods (FMCG)? The type of merchandise drives the business processes, available data, and technology required.
Lifecycle Pricing for Long-Life Merchandise
Items that have been around for a long time are often well-known by shoppers precisely because they have been around for a long time. Many become KVIs. These items often have national brand loyalty and come with massive amounts of historical data on that specific SKU / item, while inventory processes follow a fairly predictable replenishment cycle. These items are often referred to as long-life items and are often fast-moving consumables common in grocery.
Retailers who carry grocery typically follow a well-known industry process called category management, which has been foundational for decades in grocery. This process is opportunistic in nature, centering around the opportunity to grow category sales and market share for the item while achieving category level roles, strategies, and financial objectives. This process drives a strong need to maintain an optimal everyday price across an extended timeline until the retailer decides to discontinue the item. The category management process is a highly collaborative process between retailers and their Consumer-Packaged Goods (CPG) partners. When items go into a promotion phase, a large majority of these promotions are recommended and funded by the retailer’s CPG partners. This results in a great deal of collaboration and negotiation, which includes getting to the optimal promotions and the incentives and level of compliance needed, followed by the financial reconciliation process. When these items enter their discontinuation or clearance phase, it involves a markdown process which determines the optimal cadence (timing and discount depth) to profitably clear the discontinued merchandise by the planogram reset out-dates. This, too, is often a collaborative process between retailers and their supplier partners.
The business process associated with long-life products such as grocery requires a robust lifecycle price optimization technology driven by science. The solution needs to deliver an optimal everyday price while also ensuring it can support a full end-to-end promotional process beginning with deal collaboration and management of the trade funds. It also needs to deliver an optimal markdown plan designed to ensure items flagged for discontinuation are profitably cleared by those out-dates.
Lifecycle Pricing for Short-Life Merchandise
Short-life items require a different business process from long-life merchandise. Unlike long-life Items, which Include an ongoing assortment rationalization process of adding, discontinuing, and maintaining Items In the category, the entire assortment Is turned in a matter of weeks. Apparel & accessories is a good example of short-life merchandise. The processes around this type of merchandise start long before the assortment hits the shelf, often on the runway. For this merchandise, it isn’t about maintaining an optimal everyday price. This process centers on the markdown plan and alignment to budgets and open-to-buy plans. There is the starting price or initial price and then the markdown plan or cadence that balances inventory with out-dates to ensure that merchandise is profitably cleared from the assortment by those out-dates. Often this type of merchandise is promoted at much higher levels. For example, often items on a markdown plan are also part of higher-level promotions such as a store-wide or department-level sale, requiring a more holistic promotional and markdown plan to ensure it’s taking all the discounts and how they are applied into account.
Unlike long-life merchandise that comes with years and years of history and market data, short-life merchandise and its associated business process requires a lifecycle price optimization solution that can support a world where assortments come with no history and the entire assortment turns in a matter of weeks. Not only is excess inventory incredibly expensive, unlike in long-life items such as grocery, but it also comes with no vendor support to help with excess inventory when those out dates are reached. It’s driven off of markdown budgets and aligns with open to buy plans vs. the typical replenishment process of long-life consumables. Putting the wrong tools against this type of merchandise and business processes is sure to create problems.
Retailers who carry a variety of merchandise types and their attendant multiple complex business processes and retail challenges need to ensure they select a lifecycle price optimization solution that can be pointed against the entire store, not just select departments or merchandise types. It needs to be able to bring both types of business processes together. For example, having one markdown tool to support discontinued long-life products and a separate tool that addresses short-life products such as fashion Is unacceptable. The technology needs to enable both processes, bringing It altogether into a single solution that is fueled by the power of AI.
Using the wrong tool in the toolbox, or a toolbox that is missing some of the tools necessary will surely result in a partially optimized store or, even worse, result in suboptimal pricing across the store, wreaking havoc on market share and margins.
The impact COVID has made in retail has changed the game forever. Now’s not the time to compromise on the technology and partnerships needed to ensure retailers such as supercenters can successfully deliver the prices and promotional offers shoppers demand, while also protecting and boosting financial performance.
[i] Source: “Smart Pricing Strategies for the Post-COVID World,” Tim Denman, Editor-in-Chief, RIS News, June 2020.