Assortment optimization offers retailers tremendous potential to improve business performance. A more efficient supply chain, happier shoppers, increased sales, and improved margins are possible when assortment optimization is at the center of a comprehensive strategy. And when that strategy capitalizes on advanced technologies to reimagine legacy assortment planning processes retailers are better positioned to keep pace with fast-changing shopper behaviors.
To be clear, product assortment is always at the center of a retailer’s strategy. Shoppers’ perceptions are driven by a retailer’s breadth of assortment and depth of offering within categories. Then the value proposition is further established through pricing, store experience and service levels. However, the foundation is assortment which is why retailers are on a quest to provide shoppers with the optimal offering.
What’s Changed?
The goal of assortment optimization hasn’t changed, but the means of achieving it and sense of urgency to do so have. Today, retailers have established processes to delete items based on performance, add others based on potential and adjust category space allocations. The goal is to satisfy shoppers and achieve the highest potential sales and profit, but reliance on familiar processes and legacy solutions hinders true assortment optimization because of new marketplace realities. For example:
- Shopper behavior is changing faster than ever and expectations are elevated when it comes to product availability. Shoppers expect to find local, regional, national, and private brands, niche items from upstart suppliers, hot on-trend products and brands with sustainability or cause-related attributes.
- Channel preferences are affecting which products are bought where, how often and in what sizes. In-store assortments are affected by e-commerce penetration rates by category and how stores fit in a retailer’s e-commerce fulfillment strategy.
- Competition has changed. New types of category specialists have emerged, market shares are shifting and direct-to-consumer players now target specific categories, lifestyles, and demographic groups.
These factors expanded the universe of variables that affect item and category performance, thus challenging the effectiveness of legacy approaches and solutions to achieve assortment optimization.
Optimization Versus Rationalization
Assortment optimization is not the same thing as SKU rationalization although there is a tendency to use the phrases interchangeably. The key difference is that a retailer’s assortment optimization efforts may involve rationalizing SKUs, but simply reducing the number of SKUs does not guarantee that an assortment has been optimized. Said differently, SKU rationalization can be an outcome of assortment optimization, but isn’t a requirement if not supported by data.
The distinction is important because past efforts at optimization were geared toward rationalization. The logic was sound enough and based on a view that many retailers assortments had become bloated. By deleting redundant items, slow movers and third or fourth tier brands, retailers could gain supply chain efficiencies, simplify store operations, perhaps improve in stock levels by freeing up shelf space for top performers.
That logic is still valid, but retailers now have a powerful ally as they look to achieve assortment optimization that keeps shoppers happy, delivers supply chain benefits and improves financial results.
Achieving True Optimization
New possibilities with assortment optimization are available to retailers thanks to the advent of Retail Assortment Optimization Applications (RAOA). These applications are helping retailers avoid past mistakes when SKU rationalization unaided by data science passed for assortment optimization.
“The market for RAOAs has been evolving over the last 10 years, with increasing levels of advanced analytics and AI capabilities becoming the norm,” is how Gartner(r) describes the state of affairs in the “Market Guide for Retail Assortment Optimization Applications in Merchandising,” by Jonathan Kutner and Robert Hetu, published June 7, 2022.
The Market Guide, which lists Symphony RetailAI a Representative Vendor, notes that, “examples of uplifts achieved from implementing RAOA demonstrate on average: 2% to 5% average uplift in total sales; 5% to 20% overall reduction in assortment; and 15% to 20% increase in product availability.”
Those are impressive statistics, but achieving such gains is dependent on the use of advanced technology which is not where most retailers are today. According to Gartner’s Market Guide, “most retailers remain at a low level of maturity for assortment optimization methods.”
Optimization For All
Because every retailer is different, assortment optimization will look quite different from company to company based on total SKU count and the role played by the breadth and depth of the product offering in the value proposition. For example, Walmart spent decades establishing a reputation for low prices on an extremely broad assortment and one of its supercenters offers more than 100,000 items. Costco is at the other end of the spectrum, with a reputation for quality and value and an assortment in its warehouses of 4,000 or fewer items.
Between these two highly successful companies there are hundreds of others, each with a unique approach to assortment, diverse business challenges, and benefits to be achieved through optimization. Thanks to technology, those opportunities can be pursued with a higher degree of confidence that positive outcomes will be achieved to favorably impact the bottom line.
Want to discover what’s possible with a modern approach to assortment optimization? Learn how leading retailers are gaining an advantage with Retail Assortment Optimization Applications, connect with a solutions consultant today.
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