Defining Twenty-first Century Merchandising

BenchmarkReport:September2010

WrittenBy: NikkiBairdandPaulaRosenblum,ManagingPartners

EXECUTIVESUMMARY
Afteraseriesoffitsandstarts,theretailthoughtprocesshasirrevocablychanged.Sciencesupportedprocessisnowcore tothemerchandisingdiscipline.However,faithinscienceisnotalwaysgroundedinanunderstandingofwhatitcando (evenforthelargestretailers),leavinguswithsomeconcernsaboutunrealisticexpectationsandabacklashlaterinthe decade.Tohelppreventthisbacklashandcreatethemostopportunitiesforsuccess,RSRhasdefinedsevencriticaltenets for21stcenturymerchandising.

BUSINESSCHALLENGES
Continued economic uncertainty has brought new issues to the forefront of retail merchants. Fractured planning processes have been usurped by concerns over underperforming inventory on the one hand, and outofstocks on the other as the biggest challenges retailers face in merchandising. Operationally, merchants must learn to work with the supplychain,storesandmarketingtoinsuretheirstrategiesareexecutedinanefficientfashion.

OPPORTUNITIES
Integratedplanningwithcrossfunctionalteamsremainsacriticalopportunityforimprovingthemerchandisingprocess, but price and markdown optimization to improve sellthrough have emerged as a way to combat underperforming inventory. Retailers are currently using demand forecasting tools to plan future seasons and adjust inseason. Perhaps mostinterestingly,wereseeingcrosspollinationacrossretailsegments,withthosesellingFastMovingConsumerGoods beginningtoadopttoolsandtechniqueshistoricallyusedmorefrequentlybyretailerssellingGeneralMerchandiseand Apparel.Thisisperhapsthemosttellingsignofachangeintheworldofmerchandising.

ORGANIZATIONALINHIBITORS
Despite all the signs of change, cultural issues still loom large within the enterprise. Laggards lack of capital seriously constrains any kind of technologyenabled change. Our retail respondents believe, though, that if their inventory management processes could be improved, and inventory made more accurate, they might be able to move forward moreeasily.

TECHNOLOGYENABLERS
Integration,mostespeciallybetweenplanning,allocationandreplenishment,remainthemostdesirableendstategoal, followedcloselybytheenablersofmerchandiseanalyticsandpriceandassortmentoptimization.RetailWinners(those who overperform in year over year comp store sales) are most interested in attributebased merchandise planning systemsandassortmentoptimization.Laggardsstilllooktogettheirfundamentalmerchandisemanagementsystemsin order. Retailers selling fast moving consumer goods in particular are looking to invest in a fullrange of merchandising technologyenablers.

BOOTSTRAPRECOMMENDATIONS
Basedonourreportfindings,RSRrecommends7coretenetstosupport21stcenturymerchandising.1)Optimizationin merchandisingspansproducts,pricesandprocesses,2)ensuremerchantshaveasolidunderstandingoftheirtools,3)do nottinkerwithassortmentswithoutbroadduediligenceandreviewofpotentialconsequences,4)bringmarketinginto merchandisingplanningandexecutionsprocesses,5)crosspollinatetoolsandtechniquesacrossretailsegments,6)make sureshiftsinmerchandisingcapabilitiesarestrategic,notjusttacticaland7)reducerelianceonmerchantsastheunique intersectionpointbetweenconsumerinsightsandproductplans.

TableofContents
EXECUTIVESUMMARY.....................................................................................................................................ii BusinessChallenges....................................................................................................................................ii Opportunities .............................................................................................................................................ii . OrganizationalInhibitors............................................................................................................................ii TechnologyEnablers...................................................................................................................................ii BootstrapRecommendations.....................................................................................................................ii SECTIONI:OVERVIEW....................................................................................................................................1 NascentChangeBecomesManifest..........................................................................................................1 ScienceMattersaLot,ButUnderstandingLags........................................................................................1 Methodology.............................................................................................................................................2 DefiningRetailWinnersandWhyTheyWin..............................................................................................3 SurveyRespondentCharacteristics...........................................................................................................3 SECTIONII:BUSINESSCHALLENGES...............................................................................................................5 InanUncertainGlobalEconomy,NewChallengesEmerge......................................................................5 WhyWeLookforaMagicBullet...............................................................................................................5 OperationalChallengesHamperStrategyExecution.................................................................................6 SECTIONIII:OPPORTUNITIES..........................................................................................................................8 CreatingaBetterProcess:OpportunisticToolsandTechniques...............................................................8 WhatOpportunitiesAreRetailersTakingTODAY?....................................................................................9 FMCGRetailersTakingPagesfromtheGMAPlaybook...........................................................................10 SECTIONIV:ORGANIZATIONALINHIBITORS.................................................................................................12 WithChangeComesResistance..............................................................................................................12 TheRoadtoGranularityisPavedwithInventoryManagement.............................................................13 MovingUptoMoveAcross.....................................................................................................................15 SECTIONV:TECHNOLOGYENABLERS...........................................................................................................16 IntegrationRemainsanEndStateGoal...................................................................................................16 WinnersLookingtoEnableCustomerandLocal.....................................................................................17 IfMoneyGrewonTrees..........................................................................................................................17 FMCGFinallyInvests................................................................................................................................18 SECTIONVI:BOOTSTRAPRECOMMENDATIONS..........................................................................................20 #1:OptimizationinMerchandisingSpansProducts,Prices,andProcesses............................................20 #2:EnsurethatMerchantsHaveaSolidUnderstandingofTheirTools..................................................20 #3:DoNotTinkerwithLocalAssortmentsWithoutBroadDueDiligence..............................................20 #4:MarketingMustBeanIntegralPartofMerchandisePlanning&Execution.....................................20 #5:RetailersWillCrossPollinateBestPracticesAcrossSegments.........................................................20 #6:ThisShiftinMerchandisingCapabilitiesisStrategic,NotTactical.....................................................21 #7:MerchantsNoLongertheIntersectionPointBetweenCustomerInsightsandProductPlans.........21 APPENDIXA:TheBOOTMethodology.........................................................................................................22 APPENDIXB:AboutRSR...............................................................................................................................23

Figures

Figure1:OptimizedProcessesandProceduresImportanttoMostRetailers ...............................................1 . Figure2:SolidUnderstandingLagsRecognitionofImportance ....................................................................2 . Figure3:AverageComparableStore/ChannelSalesIncreases......................................................................3 Figure4:ExternalBusinessChallengesTakeCenterStage ............................................................................5 . Figure5:TheWorstPerformersWorryoverUnderperformingAssetstheMost..........................................6 Figure6:LearningtoExecuteandWorkTogether.........................................................................................7 Figure7:ToolsandTechniquestoHelpImproveMerchandisingProcesses..................................................8 Figure8:WhatstheBaseline,andWhereareWeHeaded?.........................................................................9 Figure9:GMAMoreMatureinMerchandisingProcesses ..........................................................................10 . Figure10:2012sBraveNewMerchandisingWorld....................................................................................11 Figure11:CulturalResistanceCareenstotheTop.......................................................................................12 Figure12:EconomyDragsonLaggards........................................................................................................13 Figure13:GettingovertheHump................................................................................................................14 Figure14:LaggardsNeedMoreHelp...........................................................................................................14 Figure15:WhatRoleforStore?...................................................................................................................15 Figure16:IntegrationAspirations................................................................................................................16 Figure17:AttributesandAssortment,HandinHand..................................................................................17 Figure18:IntegrationandAnalyticsTopFuturePlans.................................................................................18 Figure19:AVerticalWishList......................................................................................................................19

SECTIONI:OVERVIEW
NASCENTCHANGEBECOMESMANIFEST
RSRconductsbenchmarkstudiesonthestateoftheartandscienceofmerchandisingeveryyear. Thisyear,ourgoinginhypothesiswasthatafteraseriesoffitsandstarts,theretailthoughtprocesshas genuinely and irrevocably changed. We expected the see this change affect merchants across several dimensions:anembraceofsciencebasedprocesses,collaborationwithotherinternaldepartments,anda morecustomerdatadrivenapproachtocreatingandmanagingassortments. Our survey respondents did not disappoint. Science has become core to the merchandising discipline. Fracturedplanningprocessesarecontinuingtoheal,andperhapsmostinterestingly,retailersarelooking across segments to find transferrable best practices. We find retailers that sell fast moving consumer goods (FMCG) embracing tools and techniques long used by those selling General Merchandise and Apparel (GMA). For example, while only 16% of FMCG retailers have practiced bottomsup planning andreconciliationoftopdownandbottomsupplanningformorethanayear(vs.47%ofGMAretailers) another32%areimplementingthistypeofsystemnow. st Thisisafarhealthierchangethanearly21 centuryattemptstoinfuseretailwithtoolsandtechniques fromotherindustries.Forexample,SixSigmaRetailinginstoreswasanunmitigateddisaster,andthose leaders who were brought in to implement it have gone back from whence they came. Now we find retailersmakingsenseofmaturingmerchandisingtools,evenastheyrushtocatchuptothecustomeron outwardfacingtechnologies.

SCIENCEMATTERSALOT,BUTUNDERSTANDINGLAGS
As we can see in Figure 1, the vast majority of todays retailers recognize the importance of optimized processesandprocedures.

Figure 1: Optimized Processes and Procedures Important to Most Retailers HowImportantarethefollowingtoYourRetailing Success?
ExtremelyImportant SomewhatImportant LittletoNoImportance

Lifecyclepriceoptimization

46%

42%

12%

Anoptimized,endtoendmerchandisinglifecycle

48%

48%

4%

Localizedassortments

56%

32%

12%

Source:RSRResearch,September2010

 Thus, we can say the first tenet of 21st century merchandising is recognizing the importance of optimizingprices,product,andprocess. However, the recognition of importance is not always matched by an understanding of how these optimizedprocessesandtechnologieswork(Figure2).

Figure 2: Solid Understanding Lags Recognition of Importance WeMayNotUnderstandit...butweKnowit'sImportant

Solidunderstanding ExtremelyImportant

56% 46% 46% 48% 44%

26%

LifecyclePriceOptimization

IntegratedMerchandisePlanning, AllocationandReplenishment

AssortmentOptimization

Source:RSRResearch,September2010

Unlessitsrectified,thissituationcouldeasilyleadtoalatedecadebacklash,asunrealisticexpectations onwhatoptimizationtechnologiesandprocessescanaccomplishcouldleadtodisillusionment. Oddly, the greatest disconnect is found in the largest retailers. Only 18% of respondents with annual revenuesgreaterthan$5billionreporttheyhaveasolidunderstandingoflifecyclepriceoptimization, yet 64% believe it is extremely important to their retailing success. The prospect of having powerful toolsinthehandsofthosewhohavehugereach,butonlyavagueunderstandingofhowtousethem,is disconcertingtosaytheleast. Therefore, the second critical tenet of 21st century merchandising is ensuring merchants have a solid understanding of the optimization tools, processes and techniques they plan to employ. Throughout thisdocument,wellcontinuetoidentifycriticaltenets,alongwiththeobstaclesthatmightkeepretailers fromadoptingandadheringtothosetenets.

METHODOLOGY
RSRusesitsownmodel,calledtheBOOT,toanalyzeRetailIndustryissues.Webuildthismodelwithour surveyinstruments.AppendixAcontainsafullexplanationofthemethodology. Inoursurveys,wecontinuetofinddifferencesinthethoughtprocesses,actions,anddecisionsmadeby retailers who outperform their competitors and the industry at large. The BOOT model helps us better 2

 understandthebehavioralandtechnologicaldifferencesthatdrivesustainablesalesimprovementsand successfulexecutionofbrandvision.

DEFININGRETAILWINNERSANDWHYTHEYWIN
OurdefinitionoftheseWinnersisstraightforward.Wejudgeretailersbyyearoveryearcomparablestore sales improvements. Assuming industry average comparable store sales growth of three percent, we defineretailerswithsalesabovethishurdleasWinners,thoseatthissalesgrowthrateasaverage, andthosebelowthissalesgrowthrateaslaggardsoralsorans.Itisconsistentthroughoutmuchof RSRsresearchfindingsthatWinnersdontmerelydothesamethingsbetter,theytendtododifferent things. They think differently. They plan differently. They respond differently. Their merchandising practicesarenoexception. Of course, in the wild economic times of 2009 even previous Retail Winners sustained significant sales losses, especially at the high end of the market. To normalize the data, we did two things: we asked retailerstoaveragetheirperformanceoverthepriorthreeyears,andwealsoaskeddirectlyaboutthe impacttheeconomicdownturnhadonsales. The law of large numbers seems to have hit our largest retailers the hardest. While aggregate performanceisevenlydistributedacrosstherespondentpool(Figure3),only6%ofretailerswithannual revenueover$5billionreportedahistoryofoverperformance.Infact,historicallyretailersofallother revenuetiersoutperformthelargestretailers.

Figure 3: Average Comparable Store/Channel Sales Increases AnnualComparableStoreSalesIncreasesbased on3%Average

38% 31% 32%

Worsethanaverage

Average

Betterthanaverage
Source:RSRResearch,September2010

On the flip side, the largest retailers were least impacted by the economic downturn, with only 18% reporting significant revenue losses, vs. 48% of the smallest retailers. It may not have been Walmart Timeaseveryonethoughtitmightbe,buttherecessionof2009definitelysawcustomersspendingtheir moneyatlargerretailersanddesertingtheindependents.

SURVEYRESPONDENTCHARACTERISTICS
RSR conducted an online survey from MayJuly 2010 and received answers from 98 respondents. Respondentdemographicsareasfollows: 3

 JobTitle: SeniorManagement(CEO,CFO,COO,CIO) VicePresident Director/Manager InternalConsultant&OtherStaff 2009Revenue($Equivalent): $50Millionorless $51$999Million $1$5Billion Over$5Billion Locations(Headquartersvs.RetailPresence): Region USA Canada LatinAmerica Europe UnitedKingdom MiddleEast Africa Asia/Pacific Segments: HQ Presence 72% 74% 8% 25% 0% 7% 6% 15% 3% 11% 3% 10% 1% 7% 7% 12%

25% 31% 28% 16%

31% 39% 15% 15%

FastMovingConsumerGoods(FMCG) GeneralMerchandise,Apparel FoodandHospitality

36% 60% 4%

Last3YearsComparableStoreSalesGrowthRates(assumeaverageann.growthof3%): WorsethanAverage 31% Average 32% BetterthanAverage(RetailWinners) 38%

SECTIONII:BUSINESSCHALLENGES
INANUNCERTAINGLOBALECONOMY,NEWCHALLENGESEMERGE
Last year, we observed that Fractured Planning Processes was losing its preeminent position as the most frequently identified topthree business challenge in merchandising. It remained the most frequently cited issue, but for the first time since RSR has asked the question, fewer than 50% of respondentsplaceditattopofmind. Thisyear,wecanseetheshiftisalmostcomplete.Newissueshaveusurpeditmoreoutwardfacing and no doubt directly related to continued economic uncertainty. Figure 4 shows underperforming inventorytobefarandawaythebiggestissueretailersface,followedbytheothersideoftheinventory challengecoinoutofstocks.

Figure 4: External Business Challenges Take Center Stage BusinessChallenges

Underperforminginventory Outofstocksremainapersistentproblem Fracturedplanningprocessesmakeusless efficient We'restuckinourproductselection:some retailersoutpriceus,someoutstyleus Consumersexpectmorelocalizedassortments thanweprovide Ourstoresarea"seaofsameness" ourproduct mixisundifferentiated Theuncertaineconomydrivesustounderbuy Segmentblurring competitionfromunexpected places 27% 26% 23%
Source:RSRResearch,September2010

56% 40% 37% 35% 35%

Getting departments to work together in planning and executing merchandising strategies remains a concern,butaswellsee,ithasdroppedfromastrategicissuetoanoperationaltacticalmatter.

WHYWELOOKFORAMAGICBULLET
RSR has observed on many occasions that category or department turn calculations can mask serious problemsatamoregranularlevel.Astheoldsayinggoes,ifyouvegotonefootinabucketoficeandthe otherinabucketofboilingwater,onaverageyoumaybewarmbutyouredefinitelyuncomfortable.The twinconcernsofoutofstocksandunderperforminginventoryareclearexamplesofthisproblem,and areaprimaryreasonwhyretailersbelieve intheimportanceofassortmentoptimization.Whileoutof stocks tend to be a consistent topofmind concern regardless of retailer performance, concern about underperforminginventoryincreasesinverselytoperformance(Figure5). 5

Figure 5: The Worst Performers Worry over Underperforming Assets the Most UnderperformingInventoryasaTop3Business Challenge
85%

50% 32%

RetailWinners

AveragePerformers

Laggards
Source:RSRResearch,September2010

Weveheardagreatdealofanecdotalinformationaboutretailerstrimmingtheirassortmentstomakeit throughtrickytimes.Mostoftheseanecdotesdonotendwithpositiveoutcomesprimarilybecausethe trimstendtobedonewithveryroughblades. Hence,wecometothethirdtenetof21stcenturymerchandising:Neitheraddtonorsubtractfromlocal assortments without looking at the impact on other categories and departments. True customer and marketbasketanalysisisacriticalpartofassortmentoptimization.RetailWinnersknowthis.Laggards actfromdesperation,andtheirplightcontinuesunabated.

OPERATIONALCHALLENGESHAMPERSTRATEGYEXECUTION
Whileinventorymanagementhasreplacedfracturedplanningprocessesasthebiggestbusinesschallenge forretailersintheirmerchandiseoperations,theabilitytoexecuteplansbothwithintheorganizationand across other departments remains a key concern. Retailers selling General Merchandise and Apparel (GMA)are,forobviousreasons,moreconcernedthanthosesellingFastMovingConsumerGoods(FMCG) about managing the complexities of their crosschannelmerchandising operations (44% rate this a top threeconcernvs.23%respectively). FMCG retailers, however, are far more concerned about getting stores to execute merchandising plans thanGMAretailers(73%vs.36%respectivelyratethisasatopthreeconcern).Webelievetherearetwo reasonsdrivingthisissueforFMCG.First,thenotionofcentralizedcontrolofmerchandiseassortmentsis newer to FMCG retailers than it is to GMA. Decentralized Computer Assisted Ordering (CAO) has historicallybeenfarmoreprevalentinFMCGthaniteverwasinGMA.Second,FMCGremainsfarmore promotionalthanmostGMAretailers,withtheobviousexclusionofmassmerchants.Thesheernumber ofSKUsinastoresellingfastmovingconsumergoods,thechallengeofmanagingtoplanogramsthatmay ormaynothaveanyrelationtothestoresactuallayouts,androtatingendcapdisplaysareachallenge forchainswithdecreasingpayrollindifficulteconomictimes. Beyond these two challenges, there was some degree of unanimity around operational business challenges(Figure6showsresponsesoftheaggregaterespondentpool).

Figure 6: Learning to Execute and Work Together TopThreeOperationalChallengesFacedinExecuting MerchandisingStrategies

Gettingmerchandisingandsupplychaintowork together Gettingstorestoexecutemerchandisingplans Overallexecution Managingthecomplexitiesofcrosschannel merchandising Gettingmarketinginlinetosupport merchandisingplans 26%
Source:RSRResearch,September2009

60% 53% 45% 37%

TheriseoftheChiefMarketingOfficeracrossallretailsegmentsandtiersisapparent.Aquarterofour respondentsreportgettingmarketingtosupportmerchandisingplansasatopthreeconcern.Thisfinding isprimarilydrivenbyRetailWinners,whorecognizetheneedtointegratethekeepersofcustomerdata intotherestoftheorganization.RSRbelievesthistrendwillonlycontinue,anditbringsustoourfourth tenetof21stcenturymerchandising:Marketingmustbeanintegralpartofmerchandiseplanningand execution. As we look through the opportunities available to retailers, well find the ways winning retailers are meetingthesechallengesandthe21stcenturymerchandisingimperative.

SECTIONIII:OPPORTUNITIES
CREATINGABETTERPROCESS:OPPORTUNISTICTOOLSANDTECHNIQUES
In an environment where underperforming inventory is a critical concern, where theres a sense that people are ready to work together, and with somewhat shaky sales projections, retailers can see clear opportunities to improve their processes in support of retailing success. Figure 7 shows the relative importance of opportunities, which clearly match up with business challenges. Its interesting to note thatmostoftheseopportunitiesinvolvetechnologyenablementratherthansimpleprocesschanges.

Figure 7: Tools and Techniques to Help Improve Merchandising Processes OpportunitiestoCreateaStrongMerchandisingProcess

VeryImportant SomewhatImportant LittletoNoImportance

Priceandmarkdownoptimizationtoboostsellthrough Integratingplanningwithcrossfunctionalteams Improvingourabilitytoadjusttodeviationsfromsales forecasts Betterincorporationofcustomersegmentations& preferencesintotheplanningprocess Localizedpromotionstobettermatchdemandagainst availableinventory Testingmerchandiseinasubsetofstoresbefore committinginbulk Earlierindicationsofdemandthroughsentiment analysisormonitoringofsocialnetworks Testingassortmentsonlinebeforeallocatingtostores

59% 58% 57% 52% 36% 31% 22% 10% 37% 34% 42% 43%

38% 33% 38% 41%

3% 8% 5% 7% 21%

36% 36% 53%

Source:RSRResearch,September2010

The best way to push underperforming inventory through the pipeline is certainly through price and markdownoptimization,designedtomaximizesellthrough.Ninetysevenpercentofretailrespondents reportthisasatleastasomewhatimportantopportunity.However,anelementoffantasyremains,asthe smallestretailers,whohavetheleastabilitytoactuallyexecuteonthisopportunity,ratedithighest,with 88%believingitsveryimportant. Notsurprisingly,thelargestretailers,thosewithannualrevenueover$5billion,aremostinterestedinde siloing their organizations. Seventypercent of respondents believe integrating planning with cross functionalteamsisveryimportant.Theyareusing,orwilluse,technologytosupportintegrationacross departments.Thisisanotherareawheremarketingintegrationiscritical.Customerinsightsareneeded tosupportfindingoptimallocalizedprices,promotionsandassortments,andthemarketingdepartmentis thedefactoownerofthatinformation. FMCG retailers are considerably more interested in localized promotions that match demand against availableinventorythantheirpeers(45%rateitveryimportantvs.only29%ofretailerssellingGeneral Merchandise and Apparel). RSR believes several factors contribute to this interest. The most obvious is 8

 FMCG retailers longer history of localized assortments purchased through decentralized processes. FMCGretailersalsoembracedpriceandpromotionoptimizationearlierthanGMAretailers,whofocused moreonendoflifepricing. Weweremostinterestedtodiscoveranoveralllackofinterestinusingtheonlinechannelasatestbed for new assortments. Retailers recognize the need for consistency across channels, and in fact, would rather use some of their stores as a proving ground for new product than any other channel. Retailers believe, and past data has shown, the crosschannel customer much less tolerant of mistakes, miscues andpoorproductthantheinstorecustomers.

WHATOPPORTUNITIESARERETAILERSTAKINGTODAY?
Retailershavebeenusingbreadandbuttertoolstoenabletheirmerchandiseprocesses,asillustratedin Figure8.

Figure 8: Whats the Baseline, and Where are We Headed? MerchandisingProcessesinUse

Inusemorethan1year Inthelastyear Implementingnow Plannedforthenextyear 4% 22% 11%7% 17% 17% 13% 15% 34% 28% Noplans

Initialdemandforecastasthebasisfornextyear'splan Inseasondemandforecast Bottomsupplan Reconciliationofbottomsupandtopdownplan Initialpriceoptimization Assortmentlocalization Assortmentoptimization Promotionoptimization Markdownoptimization Optimizationofassortmentagainstkeycustomersegments Reconciliationofplanagainstdistributioncapacity Customersentimentanalysis

56% 39% 36% 34% 29% 27% 27% 25% 24%

11% 15% 4% 11% 19% 8% 15% 18% 20% 20% 16% 24%

15% 18% 24%

16% 15% 23% 18%

18% 12% 20% 18% 27% 27% 35% 38%

20% 13% 24%

13% 20% 13% 22%

16%

20% 9% 25%

12% 14% 11%

Source:RSRResearch,September2010

Withinthenextyear,over90%ofourrespondentswillbeusingsomeformofinitialdemandforecastto createaplanforthefollowingyear.Similarly,85%willhavetheabilitytorecastthatdemandwithinthe season.WhilemostGMAretailersmaynotbeabletoeitherstaunchorexpandtheflowofproductin response to this demand forecast, they hope to adjust prices and promotions to maximize both gross margindollarsandsellthrough.

FMCGRETAILERSTAKINGPAGESFROMTHEGMAPLAYBOOK
Aswenotedintheoverview,wereseeingalotmorehealthycrosspollinationacrossretailsegmentsand subverticals than in the past. This is dramatically illustrated in the Figures 9 and 10. Figure 9 shows merchandisingprocessesthathavebeeninplaceforlongerthanoneyear.

Figure 9: GMA More Mature in Merchandising Processes Today'sMerchandisingProcesses

GMA
Initialdemandforecastasthebasisfornextyear's plan Reconciliationofbottomsupandtopdownplan BottomsupPlan Inseasondemandforecast Initialpriceoptimization Reconciliationofplanagainstdistributioncapacity 11% 47% 16% 42% 37% 32% 21% 18% 5%

FMCG
65% 42% 47%

Source:RSRResearch,September2010

Many of the processes weve highlighted in Figure 9 have been historically considered traditional practicesforGeneralMerchandiseandApparelretailers,whilethosesellingFastMovingConsumerGoods were traditionally more interested in market basket analysis, boosting average transaction value with loyaltyprograms,andmanagingwithinanygivencategory. However,whenwelookatrespondentswhoindicatetheyeitherimplementedprocesschangesoverthe past year or are in the middle of implementing changes we find a very different scenario. The retail merchandisingworldwilllookquiteabitdifferentbythestartof2012(Figure10).

10

Figure 10: 2012s Brave New Merchandising World MerchandisingProcessesinPlaceby2012

GMA FMCG

Initialdemandforecastasthebasisfornextyear's plan Reconciliationofbottomsupandtopdownplan 69% 58% 63% 63% 70%

85% 79%

BottomsupPlan

Inseasondemandforecast 59%

84%

Initialpriceoptimization

84% 52% 68%

Reconciliationofplanagainstdistributioncapacity

Source:RSRResearch,September2010

HerewefindFMCGwillhaveachievedparity,orinsomecasesactuallyleapfroggedtheirGMAcousinsin merchandiseprocesses. Thus,wefindthefifthtenetof21stCenturymerchandising:Retailerswillcrosspollinatebestpractices acrossallsegments,lookingforsimilaritiesandopportunitiesalongwiththemoreobviousdifferences. Withallthisseeminggoodnesscomingdowntheroad,whatcouldstandinthewayofatrulymodernand advancedmerchandisingenterprise?Asalways,wehavetolookfortheenemywithin.

11

SECTIONIV:ORGANIZATIONALINHIBITORS
WITHCHANGECOMESRESISTANCE
Over the past two years, the primary organizational inhibitors have been driven either by the messy technologyinfrastructuresthathinderchangeortheeconomicconditionsthathavemadecapitalscarce orROIamorestringentrequirement.Thisyear,anewinhibitorhasreachedthetop:culturalresistance tochange(Figure11).

Figure 11: Cultural Resistance Careens to the Top OrganizationalInhibitors

Culturalresistancetoanintegratedplanning process Scarcityofcapitalfornewtechnologypurchases Dataisnotclean;pricing,inventory,customeror POS Pastexperiencewithmerchandisetechnologies showstheROIishardtoprove Theexistingtechnologyinfrastructureis preventingusfrommovingforward Toomanyforecasts nosingleversionofthetruth Incentivesarenotaligned,creatingorganizations thatworkatcrosspurposes Poorperpetualinventorysystems 42% 39% 37% 35% 30% 25% 23%
Source:RSRResearch,September2010

67%

For cultural change to impact merchandising organizations is a tremendous shift in perspective within retail.InotherbenchmarksthatRSRhasconducted,"merchandisingwon'tworkwithus"isacommon refrain. Even with the advent of sciencebased pricing, retailers have to some degree limited the influenceofculturalresistancebyisolatingpricinggroupsunderthemerchandisingumbrella. Butnolongercantheyremainisolated.Asmerchandising'sissuesbecomedefinedintermsofinventory managementandcustomerinsights,demandinggreaterdegreesofgranularityandfaster,moreflexible processes,anorganizationthathashistoricallydictatedchangesinotherpartsofthecompanynowfaces theneedtochange. This leads to our sixth tenetof 21st century merchandising: Retailersmust recognize that 21st century processesrequiremorethanatacticalshiftor"simple"increaseingranularityandplantheirchange managementaccordingly. Interestingly,thisisrecognizedwithequalfervorbybothWinnersandlaggards(Figure12). 12

Figure 12: Economy Drags on Laggards Top3OrganizationalInhibitors

Winners Culturalresistancetoanintegratedplanning Scarcityofcapitalfornewtechnologypurchases Dataisnotclean;pricing,inventory,customeror Pastexperiencewithmerchandisetechnologies Theexistingtechnologyinfrastructureis Toomanyforecasts nosingleversionofthetruth Incentivesarenotaligned,creating Poorperpetualinventorysystems 10% 28% 22% 43% 43% 38% 33% 33% 33% 28% 19% 22% 33%
Source:RSRResearch,September2010

Laggards 71% 72% 61%

Typically, laggards are less cognizant of cultural issues. But for merchandising changes, laggards' challengesaroundcapitalconstraintsandpoorperpetualinventorysystemsoutpacetheirpeers. The differences between GMA and FMCG retailers fall into more stereotypical bands for the verticals FMCG retailers are more capitalconstrained then their fattermargined peers. They also have poorer perpetual inventory management, and larger issues with data cleanliness. However, one additional differenceposesapotentialopportunityforFMCGretailers:becausetheyhavenotimplementedalotof "merchandising" solutions outside of pricing, they are less jaded than their GMA peers about past implementationsandROIpromises.

THEROADTOGRANULARITYISPAVEDWITHINVENTORYMANAGEMENT
Inventory accuracy tops the list of retailers' opportunities to overcome their inhibitors inventory accuracynarrowlyoutpacesevenorganizationalchangetobetteralignmerchandisingteams,thenatural partnertotheculturalchangeinhibitorthattopsthelistabove(Figure13).

13

Figure 13: Getting over the Hump

WaystoOvercomeOrganizationalInhibitors
VeryImportant SomewhatImportant LittletoNoImportance

Betterinventorymanagementprocessesandsystems formoreaccurateinventory Changingorganizationalstructurestomoreintegrated merchandisingteams Moreinvolvementfromseniormanagementchampions Morerealtimevisibilitytodeviationsfromtheplan Smaller,easiertodigestprojectsthatbuildtoalarger, integratedendstate Changingcompensation&incentivestobemore alignedacrossthecompany Datacleansingprojectsorproviders

58% 57% 52% 49% 46% 33% 28% 44% 48%

34% 34% 36% 39% 40%

8% 9% 12% 12% 13% 23% 24%

Source:RSRResearch,September2010

Thisrepresentsasignificantshiftfromlastyear,wherethechampionshipofseniormanagementandreal time visibility into inventory conditions topped the list. Retailers have backed off of the realtime requirementthisyear,seekinginventoryaccuracyhoweverfarfromrealtimeitmaybe. Laggards drive the greatest differences in the opportunities to overcome inhibitors that retailers see (Figure14).

Figure 14: Laggards Need More Help

OvercomingOrganizationalInhibitors "VeryImportant"
Winners Betterinventorymanagementprocessesand systemsformoreaccurateinventory Changingorganizationalstructurestomore integratedmerchandisingteams Moreinvolvementfromseniormanagement champions Morerealtimevisibilitytodeviationsfromtheplan Smaller,easiertodigestprojectsthatbuildtoa larger,integratedendstate Changingcompensation&incentivestobemore alignedacrossthecompany Datacleansingprojectsorproviders 19% 29% 33%
Source:RSRResearch,September2010

Laggards 48% 43% 38% 45% 50% 43% 59%

72% 65% 67%

24%

14

 Almost across the board, laggards ascribe more importance to everything from better inventory management systems to more involvement from senior management champions, to changing compensationandincentivesordatacleansingprojects. Itisinterestingtonotethatdespitetheacknowledgementofdirtydataasanorganizationalinhibitorby Winners (43% rated it "very important"), only 24% rate data cleansing a "very important" way to overcometheobstacle.It'snotthedatathatistheissue,it'sthesystemsandprocessesthatleadtodirty datathatmustbefixed.

MOVINGUPTOMOVEACROSS
With more involvement desired across multiple areas of the retail organization from inventory to marketing, to senior executives, who requires the most education about the coming changes to merchandise strategy? The executive team, merchandising, and store operations, followed by supply chainandmarketing(Figure15).

Figure 15: What Role for Store?

ParticipantsintheStrategicDirectionofMerchandiseStrategies
Participates Executiveteam Merchandising StoreOperations Marketing IT Finance eCommerce/DirectOperations SupplyChain Procurement/Sourcing 19% 17% 28% 33% 30% 31% 27% 25% 21% 23%
Source:RSRResearch,September2010

RequiresEducation 53% 43% 44% 40% 44% 81% 77%

36%

Storeoperationscontinuestooccupyatopplaceonthelistofthoserequiringmoreeducationin2009,it heldthetopspotwithWinners,with26%selectingthisgroup.Thisindicatesanimportantcaveattothe sixthtenetof21stmerchandisingwhileitmayrequireastrategicchangewithinmerchandising,stores needtoremainontheradarofgroupsimpactedparticularlygiventhebusinesschallengesthatretailers earlier reported around execution. If stores don't understand the changes that are occurring within merchandisingandhowitwillimpactanythingfrom"manager'sspecials"tonewlayoutsorassortments, thentheywillnotbeabletobeactiveparticipantsinmakingthosechangeshappensuccessfully.

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SECTIONV:TECHNOLOGYENABLERS
INTEGRATIONREMAINSANENDSTATEGOAL
Onceagain,thetopofretailers'wishlistsofvalueinmerchandisingisoccupiedbyintegratedplanning, allocation,andreplenishmentsystems(Figure16).

Figure 16: Integration Aspirations

TechnologyEnablers Valuevs.Use
VeryValuable InUseMoreThan1Year 74% 62% 60% 27% 26% 30% 20% 28% 17% 31% 21% 19% 22% 31% 39% 38% 60% 58% 56% 53% 49% 46% 45%

Integratedplanning,allocation,andreplenishmentsystems Merchandisinganalytics Priceoptimization Assortmentoptimization Integratedassortmentandspaceplanning Automatedreplenishment Storeexecutionmanagement Marketbasketanalytics Integratedcustomerdatawithinmerchandiseplanning Supplychainplanning Attributebasedmerchandisingplanningsystems Spaceoptimization Newmerchandisingcoresystems(MMS) 21%

30% 29%

Source:RSRResearch,September2010

Leastimportant,andwiththesmallestgapbetweenvalueanduse,isnewcoremerchandisingsystems. Retailerscontinuetoseelittlevalueinreplacingthecore,buthaveambitiousaspirationswhenitcomes toaddingnewcapabilitiescapabilitiesthatideallywillbeintegratedtothatcore. However, don't be fooled by industry vertical stereotypes when it comes to the technologies thatboth FMCGandGMAretailersvalue.Therewasalmostnodifferenceinthevaluethatbothgroupsascribedto spaceoptimizationorautomatedreplenishmenttechnologiesthathavetraditionallybeenthedomainof FMCG.GMArespondentsweremorelikelytoseevalueinanewcoremerchandisingsystemandalsoin attributebased merchandise planning applications, but both groups laid equal importance on store executionmanagement.

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WINNERSLOOKINGTOENABLECUSTOMERANDLOCAL
TheclearestdifferenceinwhatWinnersvalueintheirmerchandisingtechnologyenablersvs.theirpeers comes down to what Winners feel they need in order to inject customer and local insights into their planningprocesses(Figure17).

Figure 17: Attributes and Assortment, Hand in Hand "VeryValuable"TechnologyEnablers

Winners Integratedplanning,allocation,andreplenishment systems Assortmentoptimization Attributebasedmerchandisingplanningsystems Priceoptimization Integratedcustomerdatawithinmerchandise planning Merchandisinganalytics Newmerchandisingcoresystems(MMS) Spaceoptimization 29% 35% 19% 41% Laggards 65% 58% 53% 47% 47% 45% 44% 41% 71% 71% 71%

82%

Source:RSRResearch,September2010

While both sets of respondents place heavy emphasis on integration no surprise given the business challenges and opportunities above they diverge on where to go next. Nearly three times as many Winners as laggards place significant value on attributebased merchandise planning systems, and Winnersarealmost1.5timesmorelikelytovalueassortmentoptimization.Laggards,ontheotherhand, arestilllookingtogetthefundamentalsright,includingnewcoremerchandisingsystems,andheavybets placedonthevalueofpriceoptimizationandmerchandisinganalytics. Thisleadstotheseventhtenetof21stcenturymerchandising:Retailerscannolongerrelyonmerchants' headstobetheintersectionpointofcustomerinsightsandmerchandiseplans.Inordertoexecuteat the granularity that retailers need, merchandising systems will have to evolve, from updates to core systemstoensuringthatattributeswithinplanningsystemscanhelpcarrytheburdenofoperationalizing customerinsightsinproductplans.

IFMONEYGREWONTREES...
Whenitcomestocurrentlyadoptedtechnologies,retailersreportafairlywelladoptedcorethe"basics" ofsupplychainplanningandreplenishment.Inlinewiththedesirefor,butrelativelackofunderstanding of,optimizationtechnologies,afull32%ofrespondentsreportedimplementingpriceoptimizationinthe lastyear(Figure18). 17

Figure 18: Integration and Analytics Top Future Plans

LengthofTimeInvolvedwithTechenabledProjectstoSupport Merchandising
Longerthan1year Lessthan1year Supplychainplanning Automatedreplenishment Integratedplanning,allocation,andreplenishmentsystems Merchandisinganalytics Marketbasketanalytics Assortmentoptimization Integratedassortmentandspaceplanning Newmerchandisingcoresystems(MMS) Priceoptimization Attributebasedmerchandisingplanningsystems Storeexecutionmanagement Spaceoptimization Integratedcustomerdatawithinmerchandiseplanning BudgetedProject 31% 30% 30% 29% 28% 27% 26% 22% 21% 21% 20% 19% 17% 12% 13% 12% 17% 11% Planned,butnotBudgeted 22% 17% 17% 21% 15% 21% 19% 20% 32% 19% 13% 8% 17% 11% 31% 21% 21% 12% 15% 11% 13% 15% 11% 11% 17% 23% 21% 9% 15% 17% 16% 17% 15% 10%

Source:RSRResearch,September2010

Wherethefaceofmerchandisinglookstochangethemostinthenext1218monthsisaroundanalytics merchandiseanalyticsandmarketbasketanalytics,enabledthroughintegratedplanning,allocation,and replenishment, and possibly anchored with a new core merchandising system, ideally with attribute basedplanning. Unfortunately,budgetscontinuetobewatchedcarefully,andasaresultthereareseveralprojectswhere thedesirewithearmarkedplansistrumpedbylackofbudget.Themostnotableisspaceoptimization, with31%ofrespondentsindicatingthatiftheyhadthebudget,theywouldhaveaproject.Secondonthe listofdesiresisalsonotable:customerdataintegratedtomerchandiseplanning.

FMCGFINALLYINVESTS
One longheld tenet of retail technology has been that FMCG particularly grocers do not invest in technology, and when they do, they often try to build it themselves, rather than buy software. That appearstobeabouttochange.FMCGretailersdidmuchbetterinthedownturnthantheirpeersinother verticals(thoughmanywilltellyouitwasequallytoughforthemasconsumerstradeddownwithintheir basket), and so now have an opportunity to invest in their future. Their plans include new core merchandisingsystems,integratedplanning,allocation,andreplenishmentsystems,andstoreexecution management(Figure19).

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Figure 19: A Vertical Wish List TechnologyAdoptionPlans

FMCG Budget FMCG Planned GMA Budget GMA Planned 19% 21% 11% 17% 14% 14% 14% 7% 3% 7% 7% 4% 13% 7% 10% 13% 7% 13% 13% 17% 19% 19% 19% 19% 19% 19% 17%20% 24% 27% 28% 25% 25% 25% 25% 25% 31% 31% 31% 31% 31% 31% 38%

Newmerchandisingcoresystems(MMS) Integratedplanning,allocation,andreplenishment systems Storeexecutionmanagement Attributebasedmerchandiseplanningsystems Automatedreplenishment Assortmentoptimization Spaceoptimization Supplychainplanning Marketbasketanalytics Priceoptimization Merchandiseanalytics Integratedcustomerdatawithmerchandiseplanning Integratedassortment&spaceplanning

7% 11% 7% 4%6% 7%

13% 14%17%

Source:RSRResearch,September2010

FMCG retailers are all about integration these days not only is integrated planning, allocation, and replenishmentatthetopoftheirlist,everysingleFMCGretailerrespondenttooursurveyindicatedthat theyeitheralreadyhadoraregoingtohaveintegratedassortmentandspaceplanningassoonasthey cangetit.Oncethat'sachieved,itappearsthatspaceoptimizationwillbenextontheirlist. GMAretailersaremorefocusedonanalyticsmerchandiseandmarketbasket.Theyaremorelikelyto alreadyhaveattributebasedmerchandiseplanningsystems,sotheirfutureinvestmentsappearsmaller here.However,capturingattributesisanimportantprecursortosuccessfulmerchandisinganalytics. One area where priorities diverge between the two groups is in store execution. Neither group has a significant investment in place for store execution management, but FMCG appears to be looking to addressthisandsoonwhileGMAretailersgaveitalowfutureinvestmentpriority.Theindustrywill havetowatchandseetofindoutwhichstrategywasthebetterone:executionoranalytics.

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SECTIONVI:BOOTSTRAPRECOMMENDATIONS
Throughoutthisreportwehavehighlightedthetenetsthatwebelievewillbecomecriticaltoenabling21st century merchandising practices. To levelset, 21st merchandising combines customer insights and localizeddemandtocreatesciencebaseddecisionsaroundassortmentandprices.Whatdoyouneedto enablesuchpractices?Thetenets:

#1:OPTIMIZATIONINMERCHANDISINGSPANSPRODUCTS,PRICES,ANDPROCESSES
Whiledifferentkindsofoptimizationhavecomeintovogueinmerchandisingpriceoptimization,space optimization, and assortment optimization especially retailers clearly understand that these need to workwelltogethersothattheydonotcomeupwith"suboptimal"results.Processisthekeythesteps that connect these different pieces together, assisted by integration of the technology enablers that supporttheseprocesses.

#2:ENSURETHATMERCHANTSHAVEASOLIDUNDERSTANDINGOFTHEIRTOOLS
Thedegreetowhichsciencebasedtechnologieshasbeeninjectedintomerchandisinginashortperiodof time is significant. More often than not, the understanding of a new tool's value outpaces the understanding of how it works, what itcan really do, and most especially how it might be applied to a retailer's unique circumstances. Merchants in particular have seen an enormous change in how they work,andinhowtechnologycouldpotentiallysupporttheirwork,andthesenewrequirementsneedto beacknowledgedandaccommodated.

#3:DONOTTINKERWITHLOCALASSORTMENTSWITHOUTBROADDUEDILIGENCE
Thelasttwoyearshaveseenasignificantnumberofproofpointstosupportthistenet.Asretailerstryto trim their assortment to meet more discerning customers, inevitably mistakes are made because due diligencehasbeenlimitedtothecategoryowner'sfieldofview.Inaworldrichwithcustomerdataand market basket analytics, these mistakes should never happen. But most important, retailers should recognize that the more local they get in their assortments, the smaller is their margin of error with fewer"averages"tohidtheoversandtheunders.

#4:MARKETINGMUSTBEANINTEGRALPARTOFMERCHANDISEPLANNING& EXECUTION
Marketingownscustomerinsights,andtheyownthecommunicationchannelsthatbestreachtheright customerswiththerightmessages.Theyalsohavethebestknowledgeofwheretofindthosecustomers, bothinthechannelsandgeographically.Toexecuteatthegranularlevelthatretailersneedtoachieve, merchantsneedmorethanageneralunderstandingofwhotheirshopperis.Thatmeansthatmerchants should knowwho their counterparts are in marketing, and they should meet morethan once in a blue moon.

#5:RETAILERSWILLCROSSPOLLINATEBESTPRACTICESACROSSSEGMENTS
Threeareaswithinmerchandisingarecurrentlyleadingtheway:pricing,andspaceplanningfromFMCG and attributebased "true" merchandise planning from GMA. Of thethree, there has already been the most crosspollination around pricing, as FMCG retailers look to add markdown optimization to their

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 portfoliofortheincreasingnumberofseasonalitemstheycarry,andGMAretailerslooktofulllifecycle pricingandpromotionoptimizationtogivethemfinergrainedcontrolovertherateofsellthrough. This is more revolutionary than it sounds. RSR has worked with many a vendor entering the retail technologyspacefromotherindustriesvendorsthatareshockedthattheirmarquisgroceryclientbuys themnocredibilitywithGMAorviceversa.Thefactthatthesetwoverydifferentverticalsarepoisedand willing to learn from each other speaks to the importance they are placing on process change and improvementsinmerchandising.

#6:THISSHIFTINMERCHANDISINGCAPABILITIESISSTRATEGIC,NOTTACTICAL
Becoming more granular in your assortments and prices is not just about adding yet another level or attribute to your merchandise hierarchy. It is yet another proof point for the profound changes that customer centricity is driving within the retail industry. As such, retailers need to treat it as transformative, with all of the change management and organizational structure scrutiny that should come with business transformation. While merchandising will need to bear the brunt of that scrutiny, marketingandstoreoperationswillneedtocomealongfortheride,ifalloftheseeffortsaregoingtobe successful.

#7:MERCHANTSNOLONGERTHEINTERSECTIONPOINTBETWEENCUSTOMERINSIGHTS ANDPRODUCTPLANS
Themoregranularyouget,themoredifficultitistoholdallthedetailsinoneperson'sheadespeciallyif you seek speed and flexibility at the same time. Merchants have long been the intersection point betweencustomerinsightsandproductplans,drivenperhapsbyanoccasionalcustomerbrieforshopper insightspresentationbymarketingorathirdparty.Thiscannolongerholdanditmeansthatsystems andprocesseshavetochangeinordertoenablethisnewgranularity.Wesawthatwinnerswerelooking closely at assortment optimization, enabled by attributebased merchandise planning. Without placeholdersforgranularityinyoursystems,youwon'tgetfar.

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APPENDIXA:THEBOOTMETHODOLOGY
TheBOOTmethodologyisdesignedtorevealandprioritizethefollowing: BusinessChallengesRetailersofallshapesandsizesfacesignificantexternalchallenges. Theseissuesprovideabusinesscontextforthesubjectbeingdiscussedanddrivedecision makingacrosstheenterprise. OpportunitiesEverychallengebringswithitasetofopportunities,orwaystochangeand overcomethatchallenge.Thewaysretailersturnbusinesschallengesintoopportunities oftendefinethedifferencebetweenWinnersandalsorans.WithintheBOOT,wecan alsoidentifyopportunitiesmissedanddescribeleadingedgemodelswebelievedrive success. OrganizationalInhibitorsEvenasenterprisesfindopportunitiestoovercometheir externalchallenges,theymayfindinternalorganizationalinhibitorsthatkeepthemfrom executingontheirvision.Opportunitiescanbefoundtoovercometheseinhibitorsaswell. Winningretailersunderstandtheirorganizationalinhibitorsandfindcreative,effectiveways toovercomethem. Technology Enablers If a company can overcome its organizational inhibitors it can use technologyasanenablertotakeadvantageoftheopportunitiesitidentifies.RetailWinners aremostadeptatjudiciouslyandeffectivelyusingtheseenablers,oftenfarearlierthantheir peers.

AgraphicaldepictionoftheBOOTfollows:

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APPENDIXB:ABOUTRSR

RetailSystemsResearch(RSR)istheonlyresearchcompanyrunbyretailersfortheretailindustry.RSR provides insight into business and technology challenges facing the extended retail industry, providing thoughtleadershipandadviceonnavigatingthesechallengesforspecificcompaniesandtheindustryat large.Wedothisby: Identifyinginformationthathelpsretailersandtheirtradingpartnerstobuildmoreefficientand profitablebusinesses; Identifyingindustryissuesthatsolutionsprovidersmustaddresstoberelevantintheextended retailindustry; Providing insight and analysis about a broad spectrum of issues and trends in the Extended RetailIndustry.

Copyright2010byRetailSystemsResearchLLCAllrightsreserved. Nopartofthecontentsofthisdocumentmaybereproducedortransmittedinanyformorbyanymeanswithoutthe permissionofthepublisher.Contactresearch@rsrresearch.comformoreinformation.

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