Decrease Inventory Level by 50%, Increase Store Sales & Profitability

Decrease Inventory Level by 50%, Increase Store Sales & Profitability
February 19, 2021 Omnibus

Inventory overweight is a problem that burdens retail systems. Physical retailers are in special danger as customer habits have changed dramatically. Long tail of products is more and more leaning on superpowers of Internet search engines. At the same time, customers in physical stores lack of the efficient search procedures. Increased assortment (and inventory) more often works as an obstruction than a benefit. Customers suffer from option paralysis and buy less as a consequence.

Though Category Management was from the very beginning also concerned with inventory levels, fast changes of the retail environment call for the thorough refreshment of the approach. Swift Category Management (blending agile project management with Category Management 2.0) provides necessary organizing principles.

— INVENTORY LEVEL BETWEEN MATHEMATICAL ALGORITHMS AND CUSTOMER BEHAVIOUR

In our experience, successful stores depend on clear strategies. Those shouldn’t be supported only by IT solutions but just as much by softer skills – store design, product presentation, visual merchandising, etc.

No doubt. Today’s successful retail leans on optimization methods powered by mathematical algorithms. Almost all processes in a store could benefit from proper IT support. Shelf inventory level is an especially grateful area for the deployment of optimization algorithms.

But the solution we suggest and support doesn’t originate within IT. It starts with the customer: her /his perceived value of the offer that the retailer provides. That is what bring customers into the store. Then the offer should be properly laid out in the space. This directly impacts customer behaviour, traffic flow and buying decisions. By triggering proper customers’ psychological mechanisms of buying you have a direct way towards accelerating stock turnover, increasing sales.

Only now, after these conditions are successfully met, optimization methods like stock prediction and automatic stock replenishment can provide their full power.

So – when you tackle overweight inventory levels, we don’t recommend starting with optimizations! Instead, focus on store space analysis and how particular product categories are bought.

Our recent projects confirmed the following practices as very powerful agents of change:

  1. substitute category assortment width with subcategories
    pick up categories that customers buy routinely, then challenge your existing product decision trees: cut the variety that actually represents clutter and refocus your efforts on subcategories -> do your customers really need another brand of strawberry flavored yogurt or the variety only increases the decision fatigue (-> subtract brands)? The other side of the coin: maybe your customers expect yogurt from sheep and goat milk in addition to cow milk (-> add subcategories)
  2. decrease shelf space for non-destination categories which are infrequently bought
    usually, those categories have a very long tail of slow-moving infrequently bought products, in one of our recent A/B experiments we have found out a category with 1200 products (SKUs) where the first 10 products brought the same sales as the last 600 -> clear candidate for cutting down space and assortment
  3. move shelf space from inelastic to elastic categories
    find out the categories with high space inelasticity and leverage them with impulse categories that usually highly space elastic

In this article, we’ll focus on the third tactic,  as the other two will be addressed separately. Of course, you can directly access the consistent theory through our consulting / analytical services. The start might be smooth with our #leverages product and its free 45-minutes presentation.

— THE SUGGESTED APPROACH

Our framework called #Leverages (get free PDF here!) supports the following approach:

1. Identify the right category candidates for shelf space change

Non-elastic categories with strong seasonality patterns are the most suitable product categories – candidates for space and inventory reduction.

One example: candles are “no brainer” as most sales occur in September and October (all connected to All Saints remembrance). Toys, gifts, wine, school equipment, boxes of chocolates, gardening are all such categories where strong seasonal factor decisively influences the sales.

The mathematical model which is part of the Omnibus #leverages model helps to identify the categories and also provides referential values for decision-making like recommended assortment cuts and space reduction proposals.
As mentioned seasonality and elasticity are scrutinized by a #leverage data model specially developed for such analyses.

2. Cut down on regular shelf space

After you select the proper category candidates the decision about cutting the assortment and shelf space should be taken. In our recent projects, we reduced space drastically – up to -58% of previous levels. As results show, it paid off. Not only did inventory dramatically decrease but the sales themselves have either remained the same or increased on reduced categories.

3. Increase presence and visibility of seasonal space

The space gained by cutting down on assortment and stock by brushing of dust from these slow-moving items should be partially substituted by seasonal areas. Here you should make a highly visible area, possibly put under inviting thematical umbrella – like “Back To School” seasonal department.

4. Leverage psychological foundations that make inventory turn faster

As said earlier and to emphasize it again. Inventory levels shouldn’t be just scrutinized from the mathematical point of view. Just as important is taking customer shopping behaviour into consideration. Retail space should make the most impact and inventory levels should support this. Optimization comes only after we define the proper store look which will make the most impact on sales.

After all, the customers buying decisions define the inventory levels.

— THE RESULTS FROM THE RECENT STORE REMODELING

Let’s just mention one of the selected categories (already mentioned above) where we decided to cut the space in half. After we implemented the change in the store, we carefully studied the impact. With 50% of the previous category inventory and comparing the results to the control group, we could see that the sales of a particular category didn’t drop at all. With the leverage of space gained we could actually activate other categories and increased the overall shopping basket.

In general, for selected 6 important categories, we have reduced the sales space to 48% of previous levels, but the sales increased by 3% regarding the control group of stores.

For one particular category where we not only decreased the space but also moved it to another, more frequent position the space reduction of 37% was followed by sales increase of 9%. Here the leverage for change was also the impulse nature of the particular category.

As said before, there were other immediate benefits – the newly gained space was partially transferred

a)  to customer satisfaction due to easier navigation

and

b) additional sales of seasonal and impulse categories which brought altogether sales increase in the scale of +18%

— CONCLUSION

The results above, taken from actual store remodelings,  strongly support our belief in swift category management principles. Deliberately and decisively made assortment and shelf space cuts might not just decrease the inventory levels but also provide a better link to customer expectations in the changing retail environment.

Yes, online sales puts more and more pressure on physical retailing. Redefining retailer’s assortment strategy in the direction of more flexible space options is a necessary step – not only for holding back the trends but also to bring new value for physical shoppers and gain additional traction.

Starting with a pilot store might work as a springboard for a later chain-wide retail store transformation. Our product Omnibus #leverages is developed to provide retailers and retail consultants with the analytical and tactical powers for such store remodeling projects. In case you’re interested please let us know and we’ll arrange a free 45-minutes training which will widen the perspective on the opportunity tactical leverages provide.

 

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