Journal of Retailing 85 (1, 2009) 7183

Why is Assortment Planning so Difcult for Retailers?

A Framework and Research Agenda
Murali K. Mantrala
a,
, Michael Levy
b,1
, Barbara E. Kahn
c,2
, Edward J. Fox
d,3
,
Peter Gaidarev
e
, Bill Dankworth
f
, Denish Shah
g
a
University of Missouri, Columbia, MO 65211, United States
b
Babson College, Babson Park, MA, United States
c
School of Business Administration, University of Miami, Coral Gables, FL 33146, United States
d
JCPenney Center for Retail Excellence, Edwin L. Cox School of Business, Southern Methodist University, United States
e
Oracle Retail, Cambridge, MA 02141, United States
f
Direct Store Delivery, Kroger, United States
g
J. Mack Robinson College of Business, Georgia State University, 35 Broad St., Ste. 400, Atlanta, GA 30303, United States
Abstract
When retailers conduct product assortment planning (PAP), they determine (1) The variety of merchandise, (2) The depth of merchandise, and
(3) Service level or the amount of inventory to allocate to each stock-keeping unit (SKU). Despite longstanding recognition of its importance, no
dominant PAP solution exists, and theoretical and decision support models address only some of the factors that complicate assortment planning.
This article simultaneously addresses the variety, depth, and service level aspects of PAP to provide a more thorough understanding. A review of
current academic literature and best trade practices identies open questions and directions for further research and applications.
2008 New York University. Published by Elsevier Inc. All rights reserved.
Keywords: Product assortment planning; Stock-keeping unit; Consumer; Retailers
One of the most basic strategic decisions a retailer must make
involves determining the product assortment to offer. Retailers
attempt to offer a balance among variety (number of categories),
depth(number of stock-keepingunits [SKUs] withina category),
and service level (the number of individual items of a particu-
lar SKU). Yet retailers also are constrained by the amount of
money they can invest in inventory and by their physical space.
Offering more variety thus may limit the depth within categories
and the service level, or both. By making appropriate trade-offs
with respect to variety, depth, and service levels, retailers hope
to satisfy customers needs by providing the right merchandise
in the right store at the right time. If the retailer fails to pro-
vide the expected assortment, customers defect, causing losses
in both current and future sales. If a customer hopes to purchase

Corresponding author. Tel.: +1 573 884 2734.

E-mail addresses: mantralam@missouri.edu (M.K. Mantrala),
mlevy@babson.edu (M. Levy).
1
Tel.: +1 781 239 5629.
2
Tel.: +1 305 284 4643.
3
Tel.: +1 214 768 3943.
clothing but cannot nd all the product categories necessary to
put together an outt (variety), his or her preferred style in the
category (depth), or the proper size, the retailer has failed and
may not be able to induce the customer to return.
The heterogeneous nature of the marketplace also demands
that retailers tailor their assortments to local tastes rather than
making national-level product assortment planning (PAP) deci-
sions. Macys, for instance, having realized that a one size/style
ts all strategy is not adequate, is moving toward tailoring at
least 15% of the merchandise in each of its store to local tastes
(OConnell 2008).
Despite the longstanding recognition of the importance of
PAP, practitioners have not adopted a dominant solution, and
despite emerging academic literature on PAP, extant theoret-
ical and decision support models address only subsets of the
range of factors that make assortment planning so challenging.
Researchers tend to focus on analytical solutions that deal almost
exclusivelywithquestions of depththat is, whichSKUs should
be carried within a particular categorybut fail to address
all three issues associated with PAP decisions simultaneously.
We attempt to correct for this omission and provide a more
0022-4359/$ see front matter 2008 New York University. Published by Elsevier Inc. All rights reserved.
doi:10.1016/j.jretai.2008.11.006
72 M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183
thorough understanding of the difculties of assortment plan-
ning by reviewing current academic literature and best trade
practices, as well as identifying questions and directions for
further research and applications.
Product assortment planning model
To facilitate our discussion, we provide a conceptual frame-
work for PAP-related decision making in Fig. 1. We use this
framework to guide our exploration of the current state of prac-
tical and academic knowledge about PAP. Product assortment
planning entails a series of trade-offs, during which retailers
must consider consumer perceptions and preferences, their own
supply-side constraints, and the external environmental fac-
tors, such as economic conditions and competitors strategies.
Retailers then invest in people and systems according to the fun-
damental category assortment decisions they make. Customers
benet fromthese costly investments by nding and buying what
they want; if their experience is favorable, they become loyal and
generate revenues for the retailer. Therefore, an appropriate met-
ric for assessing the long-term success of assortment decisions
uses customer lifetime value (CLV), as we show in Fig. 1.
Understanding inputs to product assortment planning
decisions: where do we stand?
The conceptual model in Fig. 1 illustrates three sets of inputs
toPAPdecisions: consumer perceptions andpreferences, retailer
constraints, and environmental factors.
What do we know about consumer perceptions and
preferences?
A growing body of consumer behavior research focuses on
consumer choice within a single category, that is, the depth
aspect of the retailers PAP related to how many and which
SKUs to offer within a product category. Determining the opti-
mal number of SKUs requires identifying the number of distinct
brands or product types to offer, the number of variants of
each brand or product type to offer, and the number of units
of each variant of each brand or product type to carry in inven-
tory. Because many factors govern consumers preferences, as
the rst box in Fig. 1 implies, these determinations are dif-
cult.
As a starting point, the retailer needs to identify consumers
preferred brands. According to consumers, an optimal assort-
ment includes the rst choice preference for each consumer in
the target market, but in some markets, the heterogeneity of
preferences is so massive that even this seemingly simple solu-
tion becomes quite difcult (Green and Krieger 1985). Even if
a retailer can determine and carry the rst choice preference of
each member of its target market, consumers frequently want
options or exibility in their choice set (Kahn and Lehmann
1991).
Consumers desire for exibility
Consumers prefer exibility because the purchase occa-
sion often is separate in time from the consumption occasion.
The consumer must predict his or her future utilities, which
is considerably more difcult than predicting immediate
utilities (Kahneman and Snell 1992; Simonson 1990). Con-
sumers also try to avoid the difculty or stress of making
the inevitable trade-offs associated with choosing products
(e.g., price for quality, health for taste). Finally, consumers
preferences may change over time as a result of satiation
(McAlister and Pessemier 1982) or the need for stimulation
(Menon and Kahn 1995, 2002), prompting them to prefer
a choice set that allows for variety-seeking behavior (Kahn
1998).
Fig. 1. Product assortment planning model.
M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183 73
Assortment exibility also enables consumers to acquire
information about the items in the set (Brickman and DAmato
1975; McAlister 1982), particularly when they lack knowledge
or want to sample different options to learn about their own
preferences. Changing goals, needs (Simonson 1990), or social
situations (Ariely and Levav 2000; Ratner and Kahn 2002) also
demand more exibility. Drolet (2002) suggests that consumers
crave variety among items within a choice set because they also
desire variety in the decision rules that they use. For example, if
a consumer traditionally uses a price rule that dictates choosing
the highest priced option, he or she may opt to use a compromise
option rule in a subsequent decision.
Consumer preference instability
Another factor associated with assortment size pertains to
assumptions about the stability of consumer preferences over
time. Economists frequently model preferences as stable and
known with certainty (Luce 1959), but compelling evidence
implies consumers preferences instead develop as a function
of the choice set and task demands (Bettman, Luce, and Payne
1998). That is, preferences depend critically on the meta-goals
of the decision maker (e.g., maximizing decision accuracy, min-
imizing cognitive effort, minimizing stress, maximizing choice
justication), the complexity of the task, the other options in
the choice set, and the representation of the choice set. An item
that represents the rst choice in one particular situation might
not be the item chosen in another scenario. Therefore, in many
circumstances, no single most preferred item exists, because the
most preferred item gets constructed at the time of choice as a
function of the decision circumstances.
Of particular relevance when thinking about assortment deci-
sions is the role that the conguration of the consumers choice
set can have on the ultimate consumer choice. Research shows
that adding items to an assortment strategically can affect the
likelihood that a specic product is chosen. For example, Huber,
Payne, and Puto (1982) identify an asymmetric dominance
effect, such that adding a dominated alternative to a choice set
can increase the likelihood of choosing the alternative that dom-
inates. Simonson (1989) also identies a compromise effect;
the share of a product increases when it represents the inter-
mediate or compromise alternative but diminishes when that
choice is the extreme option (Simonson and Tversky 1992).
Kivetz, Netzer, and Srinivasan (2004) further demonstrate that
compromise effects are robust across assortments that are larger
than three options, so as Rooderkerk, van Heerde, and Bijmolt
(2008a) note, popular discrete choice models that do not account
for suchcontext effects mayleadtosuboptimal product line deci-
sions. These latter authors propose an extension of the standard
multinomial probit model that decomposes a products utility
into a partworth utility and a context-dependent component
that captures multiple (substitution, attraction, and compromise)
context effects. They nd evidence of context effects in choice-
based conjoint data and demonstrate that their proposed model
predicts a holdout choice set better than does a standard discrete
choice model. Accommodating context effects thus appears to
suggest product lines that differ systematically from product
lines that ignore context effectsan observation highly relevant
to retail assortment planning.
Global versus local utility
Consumers may not be able to choose a favorite itembecause
they may try to maximize global utility across a sequence of
choices rather than local utility at the time of the choice (Kahn,
Ratner, and Kahneman 1997). For example, Loewenstein and
Prelec (1993) show that consumers respond to the gestalt prop-
erties of a sequence of consumed goods rather than the properties
of each item, such that they may prefer to spread out pleasurable
items or construct improving sequences of consumption (e.g.,
save the best for last). Alternatively, they may choose to maxi-
mize the memory of their choices rather than the real-time utility
(Ratner, Kahn, and Kahneman 1999).
Such arguments and the signicant heterogeneity across
consumer preferences suggest retailers should construct huge
assortments that provide a wide variety of items that appeal to
every consumer taste and each consumer situation. The growth
of specialty retailers such as Barnes & Noble (books), Best
Buy (electronics), and Staples (ofce supplies) supports such
a strategy. However, these retailers also face the perpetual risk,
in attempting to satisfy multiple preferences across consumers
and provide exibility in product choices, of offering too much
variety.
Too much choice
Consumers might perceive large assortments negatively
if they create frustration or a sense of being overwhelm-
ing (Huffman and Kahn 1998; Iyengar and Lepper 2000). If
customers become frustrated with the complexity of a large
assortment and then direct that frustration toward the retailer,
they may decide not to return to the store (Fitzsimons, Greenleaf,
and Lehmann 1997). To maximize customer satisfaction yet
provide a large enough assortment to ensure they carry the
consumers rst choice, retailers should control both the pre-
sentation of information and the input consumers provide
(Huffman and Kahn 1998). With large assortments, retailers can
increase consumer satisfaction by presenting information about
the choice options accordingtoattributes rather thanalternatives.
For example, rather than considering hundreds of different sal-
ads, a consumer should make a choice about each item(attribute)
to be included, or not, in the completed salad (alternative). When
the assortment contains fewer options however, presentation by
alternatives is acceptable and does not cause dissatisfaction.
Consider, for example, the successful strategy applied by
retailers such as Costco, which offers relatively fewSKUs within
a category but constantly changes the SKUs offered. Costco pur-
sues this strategy to make opportunistic buys of high-quality
items that it sells to customers at lower prices, but the approach
offers the additional benet of creating a treasure hunt expe-
rience for consumers. Shallow depth within a product category,
which changes over time without notice, prevents overwhelming
the consumer with too much choice and offers surprises about
what will be available at any one time. However, as the con-
74 M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183
sumer gains more expertise, he or she can parse through deeper
assortments better, which may lead to greater dissatisfaction if
the desired option is not available, the key limitation of this strat-
egy. Regular patrons of warehouse clubs, who are aware of the
changing assortments, are less likely to be dissatised than those
with less experience shopping at these types of stores.
Another means to help consumers cope with a complex
choice set requires organizing the external structure of the assort-
ment to be consistent with the consumers internal categorization
structure. For example, Morales et al. (2005) focus on the layout
or organization of the assortment and the retailer-provided lter-
ing or screening method for examining items in that assortment.
The layout refers to the classication system the retailer uses
to display the category (e.g., by brand, color, or style), whereas
ltering pertains to the presentation of the assortment, either all
at once or in sections. Filtering has great relevance for Inter-
net assortments but also applies to physical spaces (e.g., apparel
displays of complete outts). If the way consumers organize
the items in the assortment in their heads (e.g., their schemas
[Alba and Hutchinson 1987] or shopping goals [Huffman and
Houston 1993]) matches what they see on the shelf, they can pro-
cess information about the items more easily (Fiske and Taylor
1991).
Actual versus perceived variety
To complicate the retailers challenge when assembling
an assortment, the actual variety of the assortment may not
match the perceived variety that the consumer experiences
(Broniarczyk, Hoyer, and McAlister 1998). Displays of choice
options can affect the perceived variety of the assortment, even
if actual variety remains constant (Kahn and Wansink 2004). In
particular, two features of assortment structure inuence con-
sumers perceptions of assortment variety: (1) the organization
of the assortment (Hoch, Bradlow, and Wansink 1999) and (2)
the relative symmetry in the frequencies of items in the assort-
ment (YoungandWasserman2001). Actual varietyis the number
of options offered in the assortment, whereas perceived variety
may not be a direct function of the number of options offered.
Some studies even showthat people perceive assortments to pro-
vide more variety when SKUs are removed (Narisetti 1997). If
consumers perceive more variety in the assortment, they may
evaluate the product they select more positively and be willing
to pay more for it (Godek, Yakes, and Auh 2001).
These issues relate directly to consumers preferences for
items in the choice set. However, other factors, independent of
the choice set, also inuence the retailers assortment decision.
For example, searchandsubstitutioncosts that a consumer incurs
to nd a preferred item affect the consumers ultimate decision
to buy and therefore have an indirect effect on the assortment
decision.
Consumer search costs
Even when a consumer nds an acceptable product at one
retail store, he or she still may be uncertain whether similar prod-
ucts are available at other stores and be willing to go to another
store to explore other alternatives with the hope of nding a bet-
ter product, though doing so involves search costs (e.g., Cachon,
Terwiesch, and Xu 2005). To attract consumers to their stores,
many retailers (e.g., the specialty electronics retailer Media
Markt/Saturn in Europe; see Mantrala, Krafft, and Stiefel 2008)
position themselves as a one-stop shopping destination in their
specialty area by offering an assortment deep enough to make
consumers anticipate insufcient returns from further search at
competing stores. Such a strategy may have merit; 54%of shop-
pers prefer one-stop shopping (Fox and Sethuraman 2006). The
strategy functions best when competing retailers carry overlap-
ping rather than unique assortments. In this setting, Cachon,
Terwiesch, and Xu (2005) showthat in the presence of consumer
search, it may be optimal to keep otherwise unprotable prod-
ucts in the assortment, because they may attract consumers away
from searching at other stores. If a retailer fails to incorporate
the impact of possible consumer search into its PAP decisions, it
could end up with a narrower assortment that adversely affects
its prots.
Consumer substitution behavior
The last entry in the rst box in Fig. 1 notes that even if
it wanted to, a retailer cannot maintain a 100% service level
and carry every SKU in stock at all times. Even if the retailer
could determine the optimal assortment mix to carry, it may
be unprotable to stock such an assortment. Therefore, out-of-
stock (OOS) situations are key realities for retailers, which must
predict consumer reactions to these events. Consumers might
substitute a similar item, such as a different package size or a
different color, but easily substitutable SKUs increase the inven-
tory investment unnecessarily. In the worst case scenario, the
retailer stocks a substitutable item, but the consumer decides
instead to buy the preferred item from a competitors store. This
problem is even more severe for a retailers suppliers, because a
substitute SKU may come from a different supplier.
The specic cost of an OOS situation is signicant for retail-
ers, which can lose nearly half of intended purchases as a result
of stockouts. Abandoned purchases translate into sales losses
of approximately 4% for a typical retailer (Corsten and Gruen
2004). Verhoef and Sloot (2006) report that brand switching is
the most common reaction (34%) to an OOS situation, followed
by postponing the purchase (23%), store switching (19%), and
itemswitching (18%). Therefore, carrying substitutes just for the
sake of providing a substitution option may be a poor strategy.
Summary of consumer issues
Despite progress in understanding consumers inuence on
PAP decisions, much remains unknown. The challenges of PAP
from a consumer perspective involve the complex phenomenon
of dealing with product assortments that are attractive but pose
choice difculty (Broniarczyk 2008). More research should
investigate the factors that moderate these effects.
In attempting to answer a fundamental questionWhat is the
optimal balance between having too many SKUs within a cat-
egory and not enough?research should attempt to determine
M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183 75
how much depth will satisfy consumers desire for exibility.
Can retailers predict unstable consumer preferences in a timely
and useful fashion and thus consider them during merchandise
inventory buying decisions? Which retailers or retail formats
benet most from large assortments, and which would do better
if the assortment were highly edited? If an edited assortment is
desirable, how can the retailer determine which items to keep in
the assortment and which to remove?
Although some research suggests the inuence of assort-
ment layout on purchases, more work should guide retailers
in their purchasing decisions. Retailers are experimenting with
format blurring; for example, Walgreens is adding more con-
venience items to attract convenience customers. Despite this
apparently growing trend, academic research into the impact
of such strategies on consumer behavior in general and loyalty
behavior in particular remains limited. Furthermore, both retail-
ers and academics clearly recognize the costs associated with
OOS situations. Online retailers can track clicks and estimate
what customers buy instead, but in brick-and-mortar stores, it
is far more difcult to determine when, if, and for what a sub-
stitution purchase occurs. Such information would be useful for
PAP.
Retail practitioners have devised various methods to capture
changing customer tastes and translate those desires into new
products or services, such as cool hunters who encourage oth-
ers to pass on trend information or borrow ideas from runway
fashion shows. More room exists for academics to incorporate
structure, theory, and methodology into developing assortment
strategies that capture and translate these rapidly changing con-
sumer perceptions and preferences.
Finally, extant research to date has only concentrated on one
of the three factors that constitute the PAP decision, namely,
assortment depth, or how many SKUs to carry within a product
category. Additional research must examine how consumers
perceptions and preferences impact variety, the service level,
and the interrelations among the three. As previous research
shows though, even if retailers knew the exact depth, variety,
and service level that would best satisfy customers, they might
not be able to achieve them because of the constraints these
retailers invariably face.
What do we know about retailer constraints?
The most obvious constraint on the size and composition of
retail assortments, at least in a brick-and-mortar context, is the
space available in the store. Without considering costs, the ideal
store size equals the sum of all ideal category assortments. Yet
space requirements further depend on the physical dimensions
of the individual items and their strategic importance. Average
demand, variability of demand, and target service levels (i.e.,
percentage of demand satised) dictate how much merchan-
dise should be in a store and, consequently, how much space
is needed. Finally, supply chain characteristics such as deliv-
ery cycle and shelf pack size determine space requirements.
Underlying all these factors, as outlined in the second box on
the left-hand side of Fig. 1, are the retailers strategic choices
with respect to its market position and image.
Physical space
Because expanding the physical dimensions of stores is very
costly and often impossible, total oor space remains essen-
tially xed. Retailers typically plan the space requirements for
their stores by rst choosing the number of categories (variety
or breadth), then how much space each category requires based
on the number of SKUs within the category (depth), and nally
the number of units within each SKU (desired service level).
The addition of ancillary areas, such as cash wraps or dressing
rooms, provides the total store size. The limitations of physi-
cal space often force retailers to make less-than-optimal space
allocation decisions, which are further complicated when the
space requirements within categories change over time. Retail-
ers typically arrange certain products together within a category
to enable customers to shop easily, though in some settings, com-
plementary merchandise appears together to facilitate bundling
strategies and encourage unplanned purchases.
The number of SKUs (depth) in a category or individual items
(service level) within a SKU depends on several factors. First,
the physical dimensions of an item affect how much space is
devoted to it. Second, the more shelf space allocated to a SKU,
the greater is the probabilitythat it will attract shoppers attention
and be purchased as a result. The most commonly used heuristic
allocates shelf space to SKUs in direct proportion to their sales,
though more analytical approaches introduced by Corstjens and
Doyle (1981, 1983) and Bultez and Naert (1988) propose mod-
els for optimizing the allocation of shelf space among SKUs
in a category. These models are based on response functions
that capture how product sales respond to changes in the num-
ber of facings allocated. Van Nierop, Fok and Franses (2006)
extend the shelf-space optimization problem by considering the
effect of shelf space on other marketing mix decisions. In gen-
eral, optimizing shelf space, particularly among larger numbers
of SKUs, requires solving a complex integer program problem
using sophisticated methods such as simulated annealing.
Third, both average demand and variability of demand affect
shelf space requirements. As consumers demand more units per
period on average, more shelf inventory is necessary; moreover,
as demand varies from period to period, the retailer must stock
additional inventory on the shelf to satisfy demand in excess
of the average. Retailers and their supply chain partners can
mitigate these additional shelf inventory requirements by short-
ening reorder and delivery times. For example, if the retailer
orders fewer units of an SKU more frequently, it can allocate
less space to that SKU without running out of stock.
Fourth, in a related point, the retailer must consider its target
service level when determining how many individual units of a
SKU to carry. As the required service level increases from, say,
9095%, the additional inventory required increases exponen-
tially. Retailers must therefore make strategic decisions about
higher versus lower service levels for specic items. For exam-
ple, an ofce supply store such as Staples should never be out of
paper or certain types of ink and toner for printers, so these items
must have higher service levels despite the associated higher
shelf inventory and space requirements. On the other hand, Sta-
ples may decide to assign a lower service level, and therefore
76 M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183
allocate relatively less shelf inventory and space, to merchan-
dise that is not as important strategically, such as desk chairs or
expensive fountain pens.
State-of-the-art inventory management systems enable retail-
ers to forecast demand fairly accurately, control for demand
variability, and provide targeted service levels. However, sys-
tems that apply to staple goods differ from those for fashion
merchandise because their demand characteristics differ (e.g.,
Mantrala and Rao 2001). Specically, fashion merchandise sys-
tems forecast sales at the category level, because specic SKUs
vary from season to season. The buyer then must integrate
consumer characteristics and environmental considerations to
determine the specic SKUs to buy. Any fashion-based system
also aims to have zero inventory at the end of the season, which
is not relevant for staple items. Systems for staple goods, in
contrast, tend to use previous sales history at the SKU level to
forecast future demand. These systems are only useful for deter-
mining the number of individual units a retailer should carry
within an SKU; they ignore the variety and depth problems. Both
types of systems are readily available in commercial forms (e.g.,
Elmaghraby and Keskinocak 2003).
Fifth, the retailer must consider the delivery cycle and case
pack size when allocating space. Although some retailers can
control how often they receive merchandise and inuence the
case pack size, others lack this power. Retailers without the
power to control these variables must allocate space on the basis
of the number of units that they typically sell during the delivery
cycle and then allocate enough space to accommodate at least
one case pack. In turn, they may allocate more shelf space to
an item than either optimization models or heuristic approaches
recommend. For example, if a retailer expects to sell fewer than
12 units per week of an SKU but the vendor only delivers once
every 2 weeks or the shelf pack contains 24 units, the retailer
must order 24 units at a time and overallocate space to the item.
Market position, format choice, private versus national
brands, and brand image
The next several entries in the Retailer Constraints box in
Fig. 1 pertain to the core of any assortment decision, namely,
the retailers market position in terms of the amount of variety
and brand image. For example, category killers and specialty
retailers offer deep assortments in a narrow variety of product
categories, while warehouse clubs offer shallow product assort-
ments but a broad variety of product categories. The variety of
categories and the depth of SKUs within categories thus dene
the type of retailer and its positioning in the marketplace.
The assortments composition, in terms of quality, price lev-
els, and brands, also determines a retailers market position and
image. For example, Saks Fifth Avenue and Neiman Marcus
both offer fashionable, exclusive, expensive brands to support
their prestigious brand images. In contrast, more than 50%of the
U.K. grocery retailer Tescos products are private labels, includ-
ing premiumprivate labels, such as Tescos Finest, that heighten
its overall image (Kumar and Steenkamp 2007).
In general, retailers are increasing their private-label presence
and introducing multi-tier store brands (i.e., value, standard, and
premium). Kumar and Steenkamp (2007) note that private-label
products account for 20% of U.S. sales in supermarkets and dis-
count stores and appear in more than 95%of consumer packaged
goods categories. Therefore, understanding the retailer position-
ing and the assortment of national and private-label brands sold
by the retailer in relation to its image has critical importance
(Ailawadi and Keller 2004). In particular, retailers of strong
private-label brands canearna differentiationadvantage andthus
build store loyalty (Corstjens and Lal 2000). Ailawadi, Pauwels,
and Steenkamp (2007) reveal that a well-differentiated private-
label program can induce a virtuous cycle, in which greater
private-label share increases share of wallet (of customers),
and greater share of wallet increases private-label share. How-
ever, there is still much to learn about the interactions between
national and store brands in a retailers assortment, including
the ability of high-equity brands to increase the value of lower-
equity brands in the same retail department (Simmons, Bickart,
and Buchanan 2000), as well as their impact on the retailers
image. Furthermore, the use of such tactics may depend on ele-
ments external to the retailers themselves, including for example
whether competitors have adopted private labels, whether eco-
nomic conditions encourage consumers to consider private-label
products, and so forth, as the next section addresses.
What do we know about environmental factors?
In addition to consumer response and retailer con-
straints, environmental factors external to the organization
provide important inputs into a retailers PAP decisions.
Competition-related assortment trends, changing economic
and environmental conditions, shifting consumer proles and
lifestyle trends, and changes in trade areas are especially relevant
(see bottom box on left-hand side of Fig. 1).
Competition-related assortment trends
The same product category might be purchased from stores
that employ very different retail formats; for example, a con-
sumer can buy soda at a grocery store, discount store, warehouse
store, convenience store, drugstore, extreme value retailer, or
even an ofce supply category killer like Staples. These cus-
tomers have become accustomed to shopping for the same
merchandise at multiple formats. Fox and Sethuraman (2006)
observe that consumers face format blurring, because differ-
ent retail formats increasingly stock similar categories, which
increases competition among retailers.
In terms of between-format assortment competition, Fox and
Sethuraman (2006) also observe that consumers assortment
preferences depend heavily on the purpose of the shopping trip.
These preferences affect both the variety and depth of assortment
decisions. If the goal is to stock up on groceries, shoppers prefer
stores that offer larger assortments, because they can mitigate the
cost of searching through the assortment by purchasing a larger
basket of goods. For quick trips however, smaller assortments
that require less search tend to be preferable. As a result, stock-
up trips often occur in supercenters and supermarkets, whereas
quick trips tend to focus on convenience stores and drugstores.
M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183 77
Retailers therefore should segment their markets on the basis
of shopping trip purpose, such that each shopper may appear
in the target segment for some trips but not others. In the mid-
dle, supermarkets must decide whether they want to compete
for consumers stock-up or quick trips. Their strategic choice
in this regard inuences both assortment sizes and the specic
inventory carried.
Several factors also should determine within-category assort-
ments. Recent econometric research by Briesch, Chintagunta,
and Fox (2008), in which they use household-level market basket
data, reveals that the number of brands offered in retail assort-
ments has a positive effect on store choice for most households,
whereas the number of SKUs per brand, sizes per brand, and
proportion of SKUs unique to a store (proxy for private labels)
have negative effects on store choice.
Changing economic and environmental conditions
Macroeconomic and environmental trends also inuence
both variety and depth PAP decisions. For example, retail-
ers in developed economies must deal with the boombust
nature of those economiesan issue very much on the minds
of retailers during serious economic downturns. This scenario
is especially problematic for high-ticket, durable goods retail-
ers (e.g., automobile dealers) that must quickly adapt their
assortments to ongoing cycles. As the issues of environmental
responsibility and energy conservation become more signif-
icant for consumers, retailers experience pressure to supply
ecologicallyfriendlyproducts. Lee Scott, Wal-Marts CEO, even
announced that Wal-Mart would stock more affordable, energy-
saving products to counteract rising energy costs, with the goal
of doubling the sale of products that enable homes to be more
energy efcient. Thus, customers no longer have to pay pre-
mium prices to obtain energy-saving products (Rosenbloom
2008; Wong 2008). Similarly, rising concerns about climate
change and global warming prompted Ofce Depot to intro-
duce a Green Store with an emphasis on green products, such
as ofce supplies, technology, and furniture that offer recy-
cled content, remanufactured components, energy efciency,
and a lack of toxic chemicals (Reuters 2008). Tesco also has
unveiled a plan to include carbon labels on the full spec-
trum of its 70,000 products, highlighting its awareness of the
socially responsible need to minimize carbon emissions (Finch
2008).
Shifting consumer proles and lifestyle trends
Retailers must adjust the variety and depth of their assort-
ments to changing consumer tastes and proles. Consider, for
example, the impact of the aging population, particularly the
giant segment of aging Baby Boomers, on assortment deci-
sions. No longer having to support their children, this group
generally has more disposable income than other age groups,
yet much of that wealth is expended on services and experiences
rather than products. Retailers targeting this age cohort therefore
focus on improving the convenience and quality of the shopping
experience and emphasizing wellness offerings. For example,
conventional supermarkets offer more natural, organic, low-fat,
low-sugar, and low-salt merchandise. Partially as a result of
changing lifestyle trends, sales at natural food retailers such as
Whole Foods are growing at 20% per year (Weitz and Whiteld
2006).
In keeping with this trend, Target has pledged to carry more
natural care items in its assortment, and Marks & Spencer has
increased its organic product assortment to almost 500 products,
which enabled it to enjoy a 48% sales increase in organic foods
in one year. Marks & Spencer also has banned the use of 60
pesticides in its product lines. French retailers that belong to the
Fdration des Entreprises du Commerce et de la Distribution
(FECD)which represents 93% of the nations hypermarkets
and more than 80%of supermarkets (Wong 2008)have signed
an environmental charter, pledging to increase the proportion of
organic foods in their merchandise mix by 15% each year.
Changes in trade areas
Most retailers segment their markets or trading areas pri-
marily on the basis of customer-specic (e.g., demographics),
market-specic (e.g., weather, region), or store-specic (e.g.,
urban, suburban, or rural; presence or absence of competing
stores) factors, and then modify the variety and depth of their
assortments on the basis of these factors (Grewal et al. 1999).
For example, grocery stores in markets with larger Hispanic
populations tend to offer more authentic Hispanic food items;
drugstores in markets with more elderly populations carry larger
assortments of incontinence products, whereas those in markets
with more young children and families carry larger assortments
of diapers; and department stores in trendier urban markets offer
more haute couture fashions (Fox and Sethuraman 2006). Cus-
tomizing assortments for individual stores, or micro-marketing
(e.g., Hoch et al. 1995), offers an effective competitive weapon,
to the extent that assortments can be customized in a cost-
effective manner.
Buyers have an intuitive feel for how environmental factors
affect their assortment decisions, but more research would be
useful. In what circumstances does format blurring improve
customer loyalty, revenues, and CLV? What impact does an
assortment shift have on store brand image, and vice versa? How
do various private-label programs interact with the remaining
assortment, and what is their joint impact on loyalty, revenues,
and CLV? Finally, how should trends like the green movement
and shifts in trade area composition inuence PAP decisions,
and will such trends alter CLV and its antecedents?
Summary of inputs to assortment decisions
The three classes of input factors that help determine the
optimal variety, depth, and service level of retail product assort-
ments thus involve a host of complex trade-offs (summarized in
Table 1). As our PAPframework in Fig. 1 indicates, the outcomes
of these trade-offs should include positive inuences of the cus-
tomer experience, which affects customer loyalty and prots,
with the ultimate objective of maximizing customer lifetime
value.
78 M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183
Table 1
What makes PAP so difcult?
Dimension Impact
CONSUMER PERCEPTIONS and PREFERENCES Different consumers have different assortment preferences (Green and Krieger 1985)
Consumer preferences can change overtime (McAlister and Pessemier 1982)
Consumers often seek variety and or exibility of choices (Drolet 2002; Kahn 1998; Kahn
and Lehmann 1991; McAlister 1982; Simonson 1990)
Consumer preferences are unstable (Bettman, Luce, and Payne 1998; Kahn et al. 1997;
Loewenstein and Prelec 1993)
Large assortments can sometimes frustrate or overwhelm the consumer (Fitzsimons et al.
1997; Huffman and Kahn 1998; Iyengar and Lepper 2000;)
Actual variety of assortment may not be the same as variety perceived by consumers
(Broniarczyk et al. 1998; Kahn and Wansink 2004; Narisetti 1997)
Consumers may switch retail stores, even with high search costs (Cachon, Terwiesch, and Xu
2005; Mantrala, Krafft, and Stiefel 2008)
Consumers may switch retail stores if their desired product is not stocked or out of stock
(Corsten and Gruen 2004; Verhoef and Sloot 2006)
RETAILER CONSTRAINTS Product assortment is constrained by the physical dimension of the items and the
corresponding space available in the store (Corstjens and Doyle 1981)
Relative shelf space allocated to a item depends on the strategic importance of the item
(Bultez and Naert 1988)
Variability of demand can impact product inventory levels
Low probability of stockouts require high inventory levels
Delivery cycles can govern shelf space allocation for individual products
Retailer type or market position heavily inuences assortment composition (Kumar and
Steenkamp 2007)
Different retail formats are increasingly stocking similar categories (Fox and Sethuraman
2006)
ENVIRONMENTAL FACTORS Macroeconomic and environmental trends inuence product assortment (Reuters 2008; Wong
2008)
Product assortment needs to be periodically adjusted to account for shifting consumer prole
and lifestyle trend (Wong 2008)
Retailers need to modify assortment to suit demographics and other characteristics of each
store location (Fox and Sethuraman 2006; Grewal et al. 1999)
Understanding the outputs of product assortment
planning: where do we stand?
The outputs of the PAP model in Fig. 1 are fairly straight-
forward: retailers invest in staff and information technology
infrastructure to create a customer experience that generates rev-
enues and loyal customers. As a long-terminvestment, the value
of loyal customers reects CLV.
In the face of uncertain economic times, some of the worlds
great fashion houses have, for the rst time, invested in PAP
software, whereas they previously left assortment decisions to
head designers. As fashion cycles shorten and consumers pock-
etbooks shrink, retailers also have become less patient about
accepting late merchandise. Valentino Fashion Group SpA, for
example, recently invested more than $20 million in SAP AG
software that enables it to track daily store performance, manu-
facturing, and shipping. Burberry and Gucci have made similar
improvements (Passariello 2008), with the expectation that these
sizable investments will translate into higher sales and more
loyal customers.
To acquire and retain loyal customers, retailers cannot sim-
ply satisfy them. Rather, customers expect the merchandise they
want to be available, in their size, in the stores, when they want
it. To build and maintain a loyal group of customers, retailers
must attempt to augment satisfaction (Levitt 1983), move past
delight (Kotler 1994), and achieve consumer affection (Peterson
1990). Delight goes beyond the basic expectations required for
satisfaction by delivering unexpected, augmented attributes to
the product/service, such as recycled paper packaging or spe-
cial orders. Affection is patronage loyalty, built on both past
unexpected experiences (delight) and future expectations (Taher,
Leigh, and French 1996).
A useful measure that considers costs, revenues, and, implic-
itly, customer loyaltyas its position on the right side of Fig. 1
indicatesCLVequals the expected nancial contribution from
the customer to the rms prots during their entire relationship
(Gupta et al. 2006; Kumar 2006a,b; Kumar and George 2007;
Kumar and Petersen 2004; Kumar, Ramani, and Bohling 2004;
Kumar, Shah, and Venkatesan 2006; Kumar, Venkatesan, and
Reinartz 2006; Kumar and Steenkamp 2007; Kumar, Petersen,
and Leone 2007; Reinartz and Kumar 2000, 2002, 2003;
Reinartz, Thomas, and Kumar 2005; Thomas, Reinartz, and
Kumar 2004; Venkatesan and Kumar 2004). To estimate CLV,
rms use prior behaviors to forecast future purchases, the gross
margin from these purchases, and the costs associated with ser-
vicing customers, such as the costs of communicating through
advertising, personal selling, or other promotional vehicles.
Multiple marketing-related activities inuence CLV, beyond
simply PAP decisions, and it would be an analytical challenge to
parse out PAP fromthe other variables. Yet CLVremains a theo-
retically justiable measure that most retailers could incorporate
into their arsenal of metrics.
M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183 79
Practical tools and academic decision support models for
assortment planning
The three sets of PAP inputs imply complex trade-offs along
the dimensions of breadth, depth, and customer service level,
with both strategic and tactical implications. Because the ulti-
mate goals of this planning process include specifying the right
mix of SKUs that maximize the retailers sales, prot, or cus-
tomer equity, subject to budgetary and space constraints, we
consider how retailers typically tackle such trade-offs, the tools
available to support their decisions, and emerging recommen-
dations from academic research.
PAP in practice
Typical PAP practice proceeds through strategic (long-term)
and then tactical (short-term) elements, which generally involve
several interrelated steps (e.g., Kok, Fisher, and Vaidyanathan
2006). The strategic or long-term step determines the breadth or
variety of a stores assortment by delineating various categories
and subcategories of products to be carried. A grocery retailer
like Albert Heijn divides its overall assortment into merchandise
categorieschilled products, dry goods, and groceriesand
then into subcategories such as wines, cereals, and breads. Sim-
ilarly, a specialty retailer like Best Buy might determine how
many and which product categories (e.g., computers, cameras)
and subcategories (e.g., conventional still cameras, digital cam-
eras) to offer in stores. The role of each category in the overall
assortment, such as staples, variety enhancers, niche, or ll-
in products, also inuences the store space conguration and
allocation (Dhar, Hoch, and Kumar 2001).
The retailer then implements more short-termplanning steps,
including demand forecasts and the ensuing sales, margin, and
turnover goals across a planning horizon, as well as space allo-
cations and inventory investments based on these goals.
Conterminously, the retailer determines the specic depth
of assortment, or the SKUs to carry in each subcategory. This
step depends, in part, on the value that the target market places
on the range of selection. That is, depth must be deeper for
customers who are less willing to substitute for their preferred
item. Regardless of whether the category consists of fashion or
staple goods, decisions about which SKUs to carry and where
to obtain them remains the responsibility of the buying team.
Simultaneously, the retailer identies the service level to pro-
vide for each SKU. These three strategic decisions must occur at
the same time because, to a great degree, they dene the retailers
image and format. With a xed amount of space and money
for inventory, a retailer strategically chooses to provide variety
(e.g., hypermarket Carrefour), depth of assortment (e.g., cate-
gory killer Best Buy), and a high level of in-stock availability
(e.g., The Gap), or both.
This assortment planning process is, of course, extremely
complex and challenging because of the interrelationships
among the steps and the amount of calculations involved for
each SKU. A large, national retailer must monitor and adjust
such decisions across thousands of SKUs during each planning
cycle, even as new products are constantly introduced, stores
open and close, and customer tastes evolve. As a result, it is
almost impossible for a buyer or category manager to develop
assortments intuitively, aided only by spreadsheets.
The huge impact of the assortments composition on the
retailers sales and prots places PAP at a high priority for
most retailers. When they develop in-house approaches, these
retailers need both business consultants and academics to pro-
vide tools that can help them make complicated assortment
plans and decisions in a more efcient, timely, and protable
manner. We summarize several decision aids available commer-
cially and emerging from academic research that may inform
category assortment decisions, as depicted in the center of
Fig. 1.
Commercial aids
As computing, data capture, storage and mining, and commu-
nications technologies have improved, consultants and software
vendors have offered more PAPsolutions, some of which replace
homegrown spreadsheet decision aids with dedicated software
applications that enhance the efciency of the retailers deci-
sion making. Advanced analytical tools augment such tools
by providing greater decision quality during specic steps of
the process. Both large enterprise software vendors that aim
to provide a suite or one-stop solution to the retailer and
smaller retail software companies that specialize in best-of-
breed point solutions offer such tools. The former typically
focus on workow, integration, and efciency, whereas the latter
concentrate on a particular task in the planning processthough
this distinction is blurring as large vendors acquire more small
rms. Some of the best known service providers in this area
include SAP, Oracle, JDA, SAS, NSBGroup, Maple Lake, Torex
Retail, and Manhattan Associates.
The minimumbenet expectedof a software solutionrequires
that it enable the retailer to conduct analyses, just as it has done in
the past, but with less effort. Any dedicated assortment planning
application therefore should offer the following capabilities:
Workow management to ensure all necessary tasks is per-
formed in the correct order.
Scalability, or the ability to handle tens of thousands of SKUs
and thousands of store locations.
Integration to provide data interfaces with other enterprise
systems.
Automation of recurring tasks.
Reports summarizing historical and in-season performance,
alerts, and exceptions.
User management that denes which users can employ a
particular facility.
Management of the business rules that formthe decision logic
used by operational systems within the organization or enter-
prise.
Conguration points that enable the user to change the sys-
tems behavior to suit customer practices.
These functionalities are not particularly analytical but are
important to users because they depict all relevant data on one
80 M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183
screen, rather than requiring users to look at multiple printouts
or spreadsheets.
In terms of the analytical features though, an assortment plan-
ning application should be able to offer demand forecasts, both
top-down and bottom-up, for both old and new items, and at
any level of aggregation (e.g., store vs. region vs. chain; SKU
vs. style vs. category). It should be able to determine optimal
size proles for apparel in individual stores. In addition, the sys-
tem should be able to provide different assortments for different
stores on the basis of individual demand characteristics.
Most analytics deployed in large-scale applications are rather
simple by academic standards, because they must be fast and
robust to produce good answers within a reasonable time. Many
of the best known analytics have been employed commercially
since at least the early 1970s, and most are designed to solve
two assortment planning issues: the correct depth within a cat-
egory and service level. Few consider the appropriate variety.
As we stated at the outset, no dominant solution exists for the
retail PAP decision that tackles all these issues, leaving the
door wide open for contributions from academics from various
disciplines.
Decision models from academic research
Growing attention to developing PAP optimization models
has emerged among scholars in operations research, marketing,
and management. Kok, Fisher, and Vaidyanathan (2006) review
various classes of published and emerging decision models,
including assortment planning with multinomial logit models
of consumer demand (e.g., Cachon, Terwiesch, and Xu 2005;
Miller et al. 2006; Vaidyanathan and Fisher 2004; van Ryzin
and Mahajan 1999) and assortment planning with exogenous
demand models (e.g., Kk and Fisher 2007; Smith and Agrawal
2000).
Despite considerable progress in addressing retailers needs,
two key challenges demand more research attention (Kok,
Fisher, and Vaidyanathan 2006): (1) knowing how to cus-
tomize the retail assortment at the store level, rather than
simply using a centrally planned assortment for all stores; and
(2) developing attribute-based approaches to PAP, rather than
the product-focused approaches that have dominated previous
research.
Using an attribute-based approach, retailers can predict sales
of new products on the basis of information about the attributes
of existing products. For example, a retailers assortment plan
for a jeans category might consider size distribution, colors,
and styles to predict demand for new jeans styles. Recent work
by Rooderkerk, van Heerde, and Bijmolt (2008b) attempts to
address both of these challenges by developing a normative
model that provides optimal category assortment solutions at
the SKU level by store, thus accommodating differences in
store characteristics and the demographics of the trade area. The
novel features of their methodology include a sales response
model that extends the attribute-based approach of Fader and
Hardie (1996) and a heuristic procedure for solving the result-
ingquadratic knapsackoptimizationproblemthat derives (near-)
optimal solutions at the most disaggregated level. They estimate
a SKU-by-store level model that decomposes the sales of an
SKU into (1) an attribute-based baseline component, unaffected
by the presence of other SKUs; (2) the effects of the stores
own marketing mix; and (3) the cannibalizing effects of substi-
tute SKUs carried and promoted by the store. Using attributes
rather than SKU-specic effects enables the model to handle the
sales of large sets of items and still predict sales for all prod-
ucts, even those not yet available, assuming they are composed
of existing attributes. In an application of their methodology,
Rooderkerk, van Heerde, and Bijmolt (2008b) show that the
optimized assortments increase expected prots compared with
current assortments. In a subsequent paper, Rooderkerk et al.
(2008c) develop a counterpart to the knapsack problemthat pro-
vides solutions robust across the uncertainty in the products
prot contributions.
Yet assortment planning challenges remain. First, most extant
academic models apply to single-category assortment problems,
even though consumers often buy products from different cat-
egories together on a particular shopping trip, perhaps because
of their complementarity or similar purchase cycles (e.g.,
Manchanda, Ansari, and Gupta 1999; Russell et al. 1997). Bell
and Lattin (1998) showthat consumers make store choices on the
basis of total basket utility. Thus, more work should incorporate
the basket effect of consumer behavior and optimize the over-
all assortment (e.g., Agrawal and Smith 2003). Furthermore,
multiple-category assortment models should address strategic
considerations, such as the categorys designated role (e.g., sta-
ple, variety enhancer) in the retailers category management
system (Cachon and Kok 2007).
Second, retailers implicitly know that they should modify or
adapt their assortments over time in response to environmen-
tal trends. Yet most academic models (cf. Caro and Gallien
2007) fail to consider the factors that drive such changes in
assortments. Third, retailers must consider nonstore elements of
the marketing mix, such as advertising, promotions, and pric-
ing. McIntyre and Miller (1999) argue that for a given xed
shelf space allocation, the processes of selecting and pricing the
assortment become inseparable if the retailer allows for across-
product effects (e.g., substitutability, complementarities). Yet
surprisingly few academic models jointly optimize assortment
planning, pricing, and promotions, though some commercial
software vendors (e.g., DemandTec, see Prime Newswire 2008)
claim to have developed comprehensive suites for such inte-
grated planning.
Fourth, academic assortment decision models tend to be
stronger in their analytics and algorithms than are commer-
cial solutions available in the marketplace. Yet they still must
demonstrate their implementability and protability to gain
acceptance among practitioners. The main barriers to practi-
tioners adoption of the latest models from research journals
include:
Data requirements: are the data required to apply these models
readily available?
Model complexity: do these models require signicant human
involvement and subjective judgments that cannot be auto-
mated easily?
M.K. Mantrala et al. / Journal of Retailing 85 (1, 2009) 7183 81
Ease of integration: can the new models be easily integrated
into the retailers existing systems, or do the latter need to be
overhauled?
Ease of validation: is it possible to measure incremental ben-
ets without eld tests?
Costbenet considerations: do the benets promised by
advanced models outweigh the implementation costs?
Successful eld tests of decision models are the best way to
expedite their adoption in practice. However, eld tests demand
signicant investments of bothexecutive time andorganizational
resources, along with close collaboration between the researcher
and the practitioner (e.g., Mantrala et al. 2006). Gaining such
support in a fast-moving business world, where managers tend
to be preoccupied with their immediate problems, is difcult.
Consequently, many academic models get published without
adequate eld testing, slowing down the adoption of academic
modeling advances in practice.
In summary, academic models should strive to provide more
valuable insights and directions for PAP improvements to practi-
tioners. Because assortment problems, in their full form, tend to
be rather intractable and next to impossible to solve completely,
practitioners could benet signicantly from models that pro-
vide insights into which factors dominate and which have less
signicance in their decision making.
Conclusion
In 1999, Journal of Retailing devoted a special issue to
assortment planning, in which Kahn (1999) noted progress,
beyond treating assortment planning as a space allocation
problem. Articles in that special issue addressed more sub-
tle issues, such as the customer decision process and the
competitive relationship among stores in relation to their assort-
ments.
In the ensuing decade, many contributions have enhanced our
understanding of PAP, but much more remains unsure, including
the factors that moderate consumers responses to retail assort-
ments (Broniarczyk 2008). Recent consumer research ndings
reveal that the retail managements assortment planning prob-
lem is far more complex and challenging than the special issue
authors perceived in 1999, highlighting the continuing need
for research that can help retail executives manage and allo-
cate assortments (Grewal and Levy 2007). Kok, Fisher, and
Vaidyanathan (2006) specically recommend that assortment
model builders should draw on the signicant body of recent
marketing ndings pertaining to consumers perceptions of
variety and incorporate theminto assortment optimization mod-
els.
Another broad area of inquiry involves determining the
optimal balance among variety, depth, and customer ser-
vice level. Academic research and the analytical solutions
offered to industry deal almost exclusively with questions
about depth. Yet variety, depth, and service level decisions are
interrelated, making it incumbent on researchers and practi-
tioners to nd solutions that integrate all three dimensions of
PAP.
In the course of our discussion, we have outlined various
open questions and issues that deserve attention but have been
barely addressed by retail practitioners, consultants, or aca-
demics. Finding suitable answers to these questions requires
more basic consumer and operations research. We hope this
review spurs further research and inquiry into retailers PAP
from multiple disciplinary perspectives.
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