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

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

Stock overweight is a problem that burdens retail systems. Physical retailers are in special danger. Long tail of products is more and more catered for via Internet and customers see it more as an obstruction than a benefit.Though Category Management was from the very beginning also concerned with proper stock levels, fast changes of retail environment call for thorough refreshment of the approach. Swift Category Management (blending agile project management with Category Management 2.0) provides necessary organizing principles.

— STOCK LEVEL BETWEEN MATHEMATICAL ALGORITHMS AND CUSTOMER BEHAVIOUR

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

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

But the solution we suggest and support doesn’t originate within IT. It starts with the the customer: her /his perceived value of the offer that retailer provides. That is what bring customers into store. Then the offer should be properly layed 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 the sales.

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

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

As also our recent projects confirm, the following practices are very powerful agents of change:

  1. pick up categories that customers buy routinely and challenge your existing product decision trees: for example, cut the variety that actually represents clutter and refocus your efforts on individual subcategories -> do your customers really need another brand of yoghurt with strawberry flavour or this variery only increases the decision fatigue?
  2. find out the categories with high space inelasticity and leverage them with impulse categories that are usualy highly space elastic
  3. identify the supplemental categories with existing long tail of slow-moving infrequently bought products

In this article, we’ll explore more on the second option, as the other ones will be addressed seperately. Of course, you can directly get to know it and its suitability for your particular situation through our consulting / analytical services. The start might be smooth with our #leverages product.

— THE SUGGESTED APPROACH

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

1. Identify the right categories

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

For 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.
Mathematical model which is part of Omnibus #leverages product helps us identify the categories, and also provides referential values for decision-making like recommended assortment cuts and space reduction proposal.
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 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 payed off. Not only did stock dramatically decrease but the sales itself has either remained the same or increased.

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. Psychological foundations that make stock turn faster

As said earlier and to emphasize it again. Stock levels shouldn’t be just scrutinized from mathematical point of view. Just as important is taking customer behaviour into consideration. Retail space should make the most impact and stock 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 stock levels.

— THE RESULTS FROM RECENT STORE REMODELLING

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

— CONCLUSION

The results described above strongly support our believe in swift category management principles. Deliberately and decisively made assortment and space cuts might not just decrease the stock levels but provide better link to customer expectations in the changed 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 one possible answer. Even more – we see it as a necessary step – not only  for holding back the trends but also to bring new value for physical shoppers and gain additional traction.

Our product #leverages is developed to provide retailers and retail consultants with the analytical and tactical powers for such store remodelling projects.

 

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