competing in the age of amazon - symphony retailai · competing in the age of amazon. 7. while...

Competing in the Age of Amazon

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Competing in the Age of AmazonProfitable Category Diversification & Expansion Leveraging Customer Insight

Results of US Customer-Centric Category Management Survey of Retailers

Research partner


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A customer-centric approach

A closer look at the category management process of Amazon reveals that the retailer adopts a customer-centric approach while efficiently planning the entire end-to-end process; they look at the category development process through the eyes of the consumer rather than that of traditional retailer constraints.

They are able to understand and predict what a consumer is looking for or will be interested in when searching for a product by deeply mining purchasing histories and behaviors that put the consumer at the forefront of decision making.

However, this trend is yet to gain prominence. While many retailers have the inclination to follow this path, they are still lagging behind in terms of customer-centric category management capabilities, technological capacity and talent that can transform insights into actionable growth propositions.

The world of category management is going through considerable disruption. Category development and optimization processes have evolved from being a rigid top-down business model to one that is rapidly incorporating consumer insights and related trends such as understanding the shifting path-to-purchase, customer purchasing behavior and the impact on the shopping journey. In fact, it is with these changes that opportunity comes knocking, especially for grocery, mass merchants and hardline retailers.

Introduction

Retailers and suppliers have the opportunity to tap into this category development and optimization opportunity window and emerge as the leaders in their respective categories and markets.

Amazon’s formula for success

In the past few years, Amazon has exceled as a company that has constantly raised the bar and is the retailer of choice for a majority of consumers.

The formula for success can not only be put down to the ease of minimum click shopping, a robust loyalty program and expedited delivery, but also to the wide range of categories that deliver customer relevant items and services.

The ability to stock multiple categories throughout the food and non-food spectrums, and display items that consumers need and desire conveniently is closely related to Amazon’s excellence in category planning and management.

Amazon has successfully carried out customer-centric category upgradation by continuously adding depth and range that specifically meet the needs of its customers and is profitable both in item sale and ultimate overall cost to serve, which has set a new standard for most other retailers to follow.


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This report presents trends and insights from a 50+ US-based retailer survey conducted in June 2017. It takes an in-depth look at the current state of customer-centricity in category management and associated value drivers and benefits. The report also analyzes the importance of collaboration between retailer and supplier or brand collaboration along with the limited customer-centric category execution capabilities at present.

Survey Demographics

Total No. of respondents

52

Geographical coverage Industry

United States

Type of retail format that were surveyed

Targeted job profiles that were surveyed

Business functions that represented the retail industry in the survey

Grocery stores and supermarkets

80%

Merchandiser/Buyer

40%

Merchandising

Finance

Information Technology

Marketing

Operations63%

4%

19%

4%

10%

Director of merchandising

31%Category manager

25%SVP / VP merchandising

4%

Do-it-Yourself (DIY)stores

10%Consumer electronics stores

10%

Tier1 Retailers56%

Tier2 Retailers44%


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ExecutiveSummary

The EIQ-EKN Research conducted a 50 retailer Customer-centric Merchandising and Category Management survey covering leading retailers across the United States in following categories: Grocery and supermarkets, DIY and consumer electronics. The results of the survey revealed that local store-level category management is the most widely adopted strategy with 7 out of 10 retailers using it to cater to local customer needs.


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of retailers attempt to customize their processes at a local or store level benefit from an increase in overall customer satisfaction

retailers view category planning as important when achieving a customer-centric category management approach

73%

8 10out of

Retailers place utmost importance towards customer-centric pricing & promotions, space & assortment management

Local store-level category management is the most widely adopted strategy to cater to local customer needs

Customer-centric focus is the key to driving success

Positive intent towards retail-CPG collaboration with limited step towards execution

of retailers recommend location-based clustering70%

7 10out of

Half

retailers face challenges in collaborating in meaningful ways

of the retailers who currently have an operational relationship, have initiated the process for a more collaborative approach (product innovation, category recommendations, pricing, others)

retailers have observed significant to above average performance improvements within store customer performance metrics (customer satisfaction, NPS, others)

8 10out of

Adopting a customer-centric focus based on real-time data availability rather than sticking to a ‘one-size-fits-all’ concept.

Deploying latest technologies and software that can sync data from different departments and transfer them into usable formats.

Implementing a forward-looking category management strategy which should include the right mix of pricing and promotions.

Recommendations for retailers

Key highlights from the survey


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Current State of Customer-Centricity in Category Management

At its most basic level, category management is a process which creates a comprehensive plan that meets shopper needs in a superior manner thereby producing effective business results for retailers and manufacturers. Category management is a holistic approach, which develops a detailed plan based on facts, insights, sound strategies and proven tactical success models.1

One of the biggest enhancements in category management is the inclusion of shopper insights into this function. Information obtained from internal (loyalty card, customer segmentation and POS data) and external (market syndicated data purchased from vendors) sources are processed and analyzed to determine shopping patterns of consumers which are used to define the characteristics of a category. While a number of retailers have made significant advances when it comes to integrating customer insight within this function, others are still struggling to easily and efficiently put their customers at the heart of their category development decision making.

Pricing & promotions, space & assortment management have utmost importance in a customer-centric focus

Despite challenges, retailers still rely on various forms of data for an efficient category planning process

Limitations with regard to data and capabilities have hindered the customer-centric focus

1

3

2

1 CatMan 2.0, Driving Growth in Shopper-Centric World, 2016


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While pricing and promotions are the two most important pillars to attract, and retain customers, it is also the most difficult to ensure they are aligned with customer expectations. Unsurprisingly, product pricing and promotions have been categorized as ‘extremely important’ by retailers.

The process of planning is complex and involves multiple steps. For simplicity these can be categorized under 3 broad heads:• Category assessment or review

process which involves data analysis thereby identifying SWOT areas

• Creating a category plan with key focus on areas of improvement and recommendations

• Preparing an implementation plan that details the degree of coordination and communication for a successful execution strategy

retailers view category planning as important when achieving a customer-centric category management approach

Pricing & promotions, space & assortment management have utmost importance in a customer-centric focus1

It is evident from the survey that retailers of all sizes have attached ‘importance’ to product pricing in terms of the customer-centric process. • To attain effective pricing, retailers delve

into consumer purchase data and competitive data to extract meaningful insights that reveal their shopping habits and purchasing behavior, which can then be utilized for appropriate pricing

• While some large retailers can execute this process somewhat smoothly on the back of availability of clean data, other retailers are lagging

of retailers consider that the use of customer buying insights when pricing products is very/extremely important

• Within category management, the space management function provides a solution to the problem of conducting an optimal store layout or on shelf presentation

• Be it arranging store layout or allocating retail space according to categories or grouping merchandise types by department or class, retailers have to make sure that the end result leads to ease of consumer traffic movement through the store as well as viewing the right product at the right place for conversion

60%

70%of retailers pointed to the fact that space management plays a vital role in the customer-centric category management process

of retailers indicate that consumer insights driven promotions are critical for category management

Promotions are often viewed as an extension of pricing where prices are altered from the existing state to attract customers’ attention and create a demand for the product.

More than

60%

8 10out of


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More than

50%

Such data, even though present, is not likely to provide any meaningful customer insights based on which a retailer can make some category improvement decisions. • Inconsistencies may arise due to

technological constraints in gathering sufficient real-time data and processing it for further use. Also, budget constraints can be a hindrance to adopting suitable technologies

• In other instances, there are possibilities that external data acquired by a retailer is incomplete or not up to the expected standard for use in the process

• The presence of data alone will not provide results. It is professionals with analytical skills and capabilities along with apt technologies that will deliver actionable insight

• As retailers gather ever increasing repositories of data, the demand for such talent is increasing

• However, there is a dearth of the right insight and category skilled practitioners which has fueled competition amongst retailers to hire the best

of retailers are grappling with data that is either incomplete or inconsistent

of retailers also lack the right talent to analyze such data

50%

One of the key challenges in embracing a customer-centric approach is to determine agile ways to replace an existing category management solution with a customer-centric category development and planning approach due to the effect it has on other functions such as inventory management, replenishment, allocation, marketing and in-store execution. So, what are the major challenges that retailers are currently facing?

Limitations with regard to data and capabilities have hindered the customer-centric focus2

Nearly

50%• The perception is that any technology-centric addition or upgrade is cost-

intensive and requires several rounds of cost-benefit analysis before being fully implemented

• There is also the challenge of legacy processes and disintegrated systems where retailers find it a significant task to switch to a whole new system

of retailers are uncertain about the ROI involved in any investments that will help them in understanding customer behavior

$

Source: EIQ Customer-Centric Merchandising and Category Management Survey, 2017

Inconsistent or incomplete data

Insufficient data analytics talent and capabilities

Uncertainty over the ROI

Legacy processes and disintegrated systems

Lack of collaboration among business functions

Lack of an integrated omnichannel strategy

54%

52%

40%

38%33%

29%

What are the major gaps in the customer-centricity category focus of retailers?


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80% • The process of setting up a technologicalinfrastructure to capture real-timedata requires time, resource and cashinvestment

• Hence, many retailers resort to purchasingexternal data from vendors which is then used internally. While such data might be more generic, retailers do find value in them

of retailers purchase market data that is utilized for the category planning process

Data speaks volumes about customer purchase intent and buying behavior. So, regardless of all the challenges that data collection and processing may generate, retailers still utilize internal data sources or purchase external data to understand customers and gauge market trends and sentiments.

Despite challenges, retailers still rely on various forms of data for an efficient category planning process3

• Use of internal data is a case in pointwhen it comes to adopting local store-level strategies

• Such local-level store categorizationstrategy is meaningful as compared touniversal or cluster-based strategy

• However, close to 20% of retailers adoptall three strategies

retailers resort to local store-level category management to cater to customer needs

7 10out of

Loyalty card and POS data tends to be more specific and insightful as it captures the actual transactions in stores.

retailers also use internal sources of data including loyalty cards and PoS5 10out

of

Top 3 data sources

75%Market data

56%Loyalty card data

46%POS data

73%

48%

2%

52%

Local store-level category management

Universal category management for all stores

Store cluster-based category management

No specific strategy


To what level are you customizing your store category management and assortments that caterto the local customer needs?


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Is a customer-centric focus driving success?

Before we analyze whether the customer-centric category management focus adopted by retailers is generating the desired results, it is interesting to see what steps retailers are taking to leverage customer insights and evaluate its success.


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An integrated 360o view of customers across all channels is the key to unlocking behavioral insights of customers for planning pricing, promotions and effective marketing. This task is not easy and needs planning and effective execution. Yet if successfully implemented, it can transform the way retailers view their customers. So, how are retailers leveraging this data to gain an integrated view of customers?

Internal and external sources of data are mostly used to develop localized store marketing programs.

The other areas where some retailers leverage data include localized pricing and store space optimization.

Harnessing customer insights: The key to developing an integrated view of customers1

70% of retailers use data as a means to planstore marketing programs that target different customer segments

60% of retailers tend to use this data for eitheraccurate demand forecasting or customer-centric promotions

50% of retailers make use of data to createsegmented assortments; a task which at times can bear extremely positive results

Develop localized marketing programs

Accurate demand forecasting

Customer-centric promotions

Localized pricing

Create segmented assortments

Store space optimization

67%

56%

56%

48%

46%

33%


How do you leverage this data sources in order to gain an integrated view of your customers?


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So, has the use of multiple data sources to understand customer behavior and assisting in category and assortment localization strategy for better marketing led to tangible benefits?

Analysis from our survey shows that there has been significant performance improvements across all stores for each retailer. Surprisingly, substantial improvements have been observed in customer performance metrics as compared to operational metrics pointing to the fact that data analysis and planned localization strategy has ultimately resulted in satisfied customers.

Customer satisfaction: A result of data analysis and planned localization strategy2

2 10Retailers who are attempting to customize their processes at a local or store level are not necessarily achieving success on the operational front. For example, only 1 out of 10 retailers reported to have observed significant improvement in operational performance metrics. Hence, it can be concluded that operational inefficiencies faced in the process outweigh the overall customer satisfaction.

of retailers have observed significant to above average performance improvement in customer metrics in store

80%

retailers reported to have observed average to no change in performance improvement

out of

Significant performance improvements in all the stores44% 12%

Above average performance improvements in most stores31% 42%

Average performance improvements across most stores19% 37%

No change6% 10%


Customer performance metrics Operational performance metrics

Has your category and assortment localization strategy led to benefits in the stores?


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60% These apps convert shoppers into buyers by engaging and guiding them to products and helping with purchase decisions. It also creates operational efficiencies by giving shoppers a guided navigation tool which enhances their shopping experience.

of retailers are increasing investment on digital apps for customer in-store navigation

50% Almost half of all retailers also add value-priced product to their assortment while using dynamic product placement and assortment management and believe that centralized store planning and category management is also a vital factor.

of retailers add value priced products to their assortment

Lessons to be learnt: Best practices from retail experience3

Implement location-based clustering for merchandising / category management

Increasing investment in digital apps for customer in store navigation

Add value-priced products to product assortment mix

Using dynamic product placement and assortment management

Centralized store planning and merchandising management is effective

Category management more localized to meet customer needs

73%

60%

54%

48%

48%

31%

70%This helps them gather insights and views of the data which aids retailers in making business decisions based on key performance indicators applied to different clusters.

of retailers are implementing location based clustering for merchandising/category management

What are the best practices in merchandising, assortment and category planning that retailers recommend?


What best practices can be learnt from the retail experience when it comes to merchandising,assortment and category planning?


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Retail-CPG collaboration: Positive intent, limited

execution

In a broader sense of the term, category management is based on an efficient and mutually beneficial working relationship between CPG manufacturers and retailers. However, any veteran in the industry can quickly point to the fact that while a collaborative relationship is desirable, it is a considerable challenge to develop one. The main barrier is arriving at a common goal and executing in a timely and effective fashion. The process of feedback is also important and needs to evolve as a continuous rather than discrete process. Both retailers and CPG manufacturers have, on the whole, failed to arrive at a truly collaborative approach and have primarily co-existed in a transactional relationship.


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There are, however, a few retailers who still feel that their relationship is mostly operational with limited scope of collaboration.

retailers face challenges in collaborating in meaningful ways. A deeper look points to the fact that despite limited execution, retailers have portrayed a positive outlook

retailers currently have an operational relationship, and have initiated the process for a more collaborative approach

of retailers have pointed to the fact that they mostly apply a collaborative approach with a focus on longer term category objectives

7 10out of

5 10out of

One Third

As a solution to expand the scope of collaboration, the first step is to focus on gaining mutual trust whereby insights from the data can be shared to have a better understanding of the category performance rather than using it as a ‘secret’ for negotiation. Once this is achieved, the remaining steps such as arriving at a common goal or planning and executing to achieve the common goal are an easier proposition.

The benefits of a collaborative approach are tremendous. It often paves the way for recommendations which can be constructive when planning for category management. In fact, nearly half of retailers are open to recommendations provided by CPG manufacturers on new product introductions and SKU rationalization. Even for sensitive matters such as product pricing, retailers expect productive recommendations from CPG manufacturers during assortment reviews. Yet, retailers are less open to discussions on distribution gaps or opportunity gap assessment with manufacturers.

Retail CPG collaboration: positive intent, limited execution1

48%29%

21%

4% Currently operational but becoming more collaborative

Operational with limited collaboration

Mostly collaborative with the focus on longer term category objectives

Little involvement of CPG manufacturers in your category strategy


Category management is based on an efficient and mutually beneficial working relationship between CPG manufacturers and retailers. However, the main barrier is arriving at a common goal and executing in a timely and effective fashion.

Describe your organization's category planning/management relationship in relation to your CPG manufacturers/suppliers


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What role does technology play in customer-centric category management?

Each aspect of retailing involves technology, and category management, too, is no exception. The role of technology in category management boils down to optimizing category by size, product mix and inventory level, at a store or cluster level. New age technologies, such as cloud and artificial intelligence, help in improving turn-around time thereby increasing dexterity and scalability. The bottom-line of the application of technology is to enable better visibility and understanding of consumer demand and mapping the supply accordingly. In addition to this, recommendations on assortment, marketing, pricing, space and promotions can be made along with various category management strategies.


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While most retailers are using some basic form of technology, they plan to take advantage of next generation platforms soon:

The Role of Technology and Deployment Models1of retailers are currently using on-premise models. Within a span of 24 months, only 2 out of 10 retailers will still be using the same.

90%

• These new-age delivery technologies will help procurement teams focus moreon other business developments and challenges without having to worry aboutthe upgrades

• Cloud or SaaS based models have some distinct ROI benefits over others.They offer scalable architecture, easier on-boarding, and training and provideeasier user access. Employing cloud-based solutions enables retailers andmanufacturers to assimilate data from multiple sources, creating a singlecollaborative category management environment that provides access to asingle version of the truth. It supports decreasing the time to make decisionsand the speed to market of category initiatives

• The focus on relationships between retailers and manufacturers often overlooksthe importance of using a collaborative platform to put shared categorymanagement workflows in place. The breaking down of internal departmentalsilos which drives greater enterprise visibility, should not be underestimated.Being able to manage the workflow and task management across categorymanagement projects increases efficiency and drives employee productivity

retailers will contemplate a gradual shift towards Cloud, SaaS-based models and ASP6 10out

of


On-premise85% 15%

Software-as-a-Service (SaaS)46% 54%

Cloud44% 56%

ASP40% 60%

Currently in use Plan to use within 12-24 months

Top 3 Cloud and SaaS ROI benefits areas

49%Scalable architecture

46%Easier on-boarding and training

43%Easier user access

What are different merchandising, assortment and category management models you deploy?


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Over the last two decades, the entire category management process has evolved, improving the performance of any category followed by making room for new market trends, creativity and innovation. However, the biggest improvement has been the integration of in-depth shopper insights into category management.

The best that other retailers can do is to learn from Amazon. Given that present day retailing is tending towards complex business procedures, category management had little option but to evolve into shopper management based on customer profiling and segmentation. While much of the focus at present is on channel-centric category/product segmentation with the focal point being omni-channel commerce, the focus is shifting to a customer-centric approach.Such approaches will be instrumental in driving sales and revenue.

What retailers can do?Category management will be ‘always on the move’ where plans will be constantly refined and updated to respond to latest changes in customer shopping data. In the near future, the majority of decisions will be made through a combination of machine learning and algorithmic models. While sophisticated technologies can be deployed to build predictive models for the different category and sub-category levels, the art of taking decisions for improving category performance based on the results will lie with humans. In other words, human intervention cannot be fully wiped out even in an automated world. This will also redefine the retailer and brand relationships that will require a high degree of effort from both retailers and manufacturers in the present day.

The future aheadIn this context, it becomes imperative to cite Amazon again. Amazon’s entry into various categories including groceries is indicative of the retailer giant’s intent of diversifying categories with the objective of driving category volume and sales. Amazon has approached the problem of retail in a systematic, data-led and scientific way. Details of every customer are recorded, stored and analyzed to gain an extra edge over other retailers who fail to do so.

Amazon: Leading the way

The way forward – technology deployed for differentiation2


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Conclusion: The Amazon Effect

Redefining the basic pillars for a customer-centric category management process.To be successful in category management, a whole new set of capabilities must be put in place for an effective result:

Customer-centric focusThe need to connect with customers at all levels across various channels is an important aspect of category management. Retailers should shy away from the concept of ‘one-size-fits-all’ and static category planning concepts and focus more on customized strategies based on real-time data availability. Such re-engineering should deploy precision and category specific strategies that target Amazon’s weaker categories and locations.

While Amazon has forced retailers to come out of their comfort zone in terms of operations and customer-centricity, the Amazon effect is not only about adding or building SKUs. It is more about creating a holistic customer-centric category management approach and an analytics driven planning process. And if in the process retailers need to retrain and reconfigure other associated processes such as inventory management the recommended option will be to go ahead and adopt this approach.

Deployment of latest technologies & software that can integrate the various departments By syncing data from different sources and transforming them into formats that can enhance performance, new technologies have the ability to connect people and streamline processes across merchandising and category management.

A forward-looking category management strategy A carefully well-planned category diversification and growth strategy, which includes the right mix of products, pricing, promotions and placement, is vital for the success of the entire category management process as well as the supply chain.


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competing in the age of amazon - symphony retailai · competing in the age of amazon. 7. while...

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