Physical retail was supposed to have died by now. At least that’s how some retail pundits of the late 90’s saw the industry evolving at the dawn of the digital era. Many a dotcom startup held an equally dim view of the worth of physical stores. Having a digital-first mentality and making bold claims of disruption were great ways to garner credibility and secure funding, even though for many sectors the promised transformation never materialized.
There have been high-profile exceptions, of course. Amazon and Alibaba stand out for their spectacular success, but other digital-first examples include home goods retailer Wayfair and pet products retailer Chewy, companies with annual sales of $13.7 billion and roughly $9 billion, respectively. In the food and consumables world, online only U.K. grocer Ocado and Germany-based meal kit provider HelloFresh stand out with annual sales of nearly $3.4 billion and $6.8 billion, respectively.
Grocery has certainly experienced digital disruption, and that disruption was greatly accelerated during the pandemic, but predictions about the demise of stores couldn’t have been more wrong. In fact, stores matter more than ever because of shifting shopper behaviors and the value of having desirable real estate in close proximity to large numbers of shoppers. Stores now serve as experiential destinations for basic needs, prepared foods and new types of services, but they also function as fulfillment centers for digitally initiated orders, whether the shopper collects in-store, drives up for curbside or requests home delivery.
This is a unique dynamic unlike anything the industry has faced previously. Thus, fresh thinking is required when it comes to store planning and category optimization because decisions must account for shoppers’ new behaviors, the changed competitive landscape and the need of retailers to improve the productivity of existing selling space.
The Productivity Imperative
It is a new day for those involved in store planning and category optimization because of an ongoing shift in how retailers allocate capital budgets. Many retailers, but not all, have de-emphasized new store growth in favor of remodeling activity or systems and infrastructure investments that drive higher sales volumes from existing square footage. This phenomenon has long been evident in Europe where more restrictive development regulations exist, and more densely populated markets make growth through new store expansion more difficult than in the U.S.
However, U.S. retailers are now applying more of a European mindset to growth and capital allocation. There are notable exceptions, of course, because nothing in grocery retail is universal. For example, Dollar General, Family Dollar and Aldi continue to open large numbers of stores in the U.S., but they are also focused on remodeling. Most U.S. grocers as well as other major retailers with meaningful exposure to food and consumable categories tend to be quite selective with new store openings. When new stores open, they are likely to be relocations for older, smaller stores, or part of a larger mixed-use development that was years in the making. For most grocers, the emphasis is on enhancements to existing stores, ranging from a general refresh to a full-blown remodel, according to an analysis of publicly held retailers who provide visibility into their capital allocation plans.
The Big Shift
The emphasis on remodeling combined with the massive shift to omnichannel retail is what has raised the stakes for retailers to get store planning and category optimization right. Different groups of shoppers use stores differently now. Some may have shifted their purchases online for delivery or auto-replenishment. Others may prefer the online convenience of placing orders but prefer to pick up. And for others shopping a physical store fits their definition of convenience and may also be an enjoyable activity. For example, when pandemic lockdowns were eased, retailers across the board reported a strong rebound in customer foot traffic.
Retailers’ stores must now satisfy a broader range of operational demands, and this has huge implications for store planning and space allocations for categories. Meanwhile, there are countless other variables that come into play with key items that may or may not be drivers of loyalty or may only appeal to shoppers at specific stores with specific demographics. Within categories, some demand for products may be transferable, but maybe not, and this too can vary among high-value loyal shoppers who may be outraged if a favorite item isn’t available.
Faced with the complexities of the new retail reality, the odds of success are greatly improved for those who take advantage of the latest technologies to make optimal decisions about store layouts, space allocations and category assortments. Algorithms far outperform humans at absorbing the myriad variables and making optimal recommendations that measurably impact demand, the store experience and retail operations efficiency.
Data-Driven Planning Makes the Difference
Newton’s third law of motion posits that every action has an equal and opposite reaction. This concept can be applied to store planning and category optimization with a key exception. There is a reaction, but it isn’t always equal or opposite. Some decisions can amplify already favorable outcomes while others can have profoundly negative consequences if the proper data isn’t fed into a sophisticated AI-based decision-making engine to produce the perfect store plan and ideal category schemes.
That’s why if ever there were a case of good being the enemy of great it would involve taking a non-scientific approach to store planning and category optimization. Sure, reasonably effective decisions about fixturing, aisle widths, signing, category sizes, adjacencies and assortments could be made without the benefit of science. But why risk it since doing so will lead to inferior outcomes relative to competitors who are onboard with the latest technologies to improve the productivity of selling space at a time when shifting market forces require retailers to expect more from their stores?
It can seem counterintuitive in a world driven by digital forces, but physical stores have never been more relevant. Especially for retailers able to manage the complexity of infinite variables to make optimal decisions by using AI technologies.
Want more insight on what a winning store planning and category optimization strategy looks like? For a fresh perspective on these timeless retail challenges speak with one of our solutions experts.
