By Andrew Blatherwick, Chairman, RELEX Solutions.
Retail is one of today's most dynamic industries with a constant flow of new ideas, new products and ways to entice customers into the store.
With the entrance of a completely new channel in the form of online, retailers have had to be even more creative to understand Multi-Channel dynamics and how to get the best of their bricks and mortar investment. This increasingly complex supply chain means that retailers today can no longer rely on traditional pricing strategies in order to differentiate. Indeed, today's retail philosophy is increasingly underpinned by smart technology to help make sense of the myriad of data available and inform forecasting, pricing and promotional strategies that drive both consumer loyalty and make a positive difference to the bottom line.
To date, price has been the one constant that has been a major weapon for retailers. It is used in many different ways – from Every Day Low Pricing; promotional pricing; and loss leaders, to the myriad of promotional mechanisms around price of two for one, buy one get one free, buy one get a discount and other variations. They all revolve around price, often supported by advertising, point of sale material and shelf edge labels.
The impact Discount Grocery stores are having on the UK food retail market at the moment is huge and has really threatened the dominance of the big four retailers. However, even though they present themselves as lower price outlets, the discount sector does not rely solely on Every Day Low Pricing. They too have aggressive price promotions and to make it more exciting for consumers and attract repeat visits.
So what has all this got to do with the supply chain?
The concept of Every Day Low Pricing (EDLP) was very attractive to the retail supply chain because it meant stable and easily forecastable volumes for the full range of products on offer, enabling retailers to enjoy and even the flow of each item through the chain. Obviously seasonality still came into play but there were no massive spikes in demand caused by promotions and price drops. The supply chain could be run more efficiently and effectively, service levels could be managed and maintained at generally higher levels, and supply chain managers could sleep at night in the knowledge that most of their operations were predictable.
It is a retail philosophy that seems attractive, until someone breaks ranks and starts to promote again at which point EDLP generally breaks down. Why is this? Fundamentally, EDLP loses the excitement of shopping and retailing in general. Consumers love to get a bargain. It is part of human nature; it is much more fun to pick your way through a retailer looking for those bargains and accept that we all buy things we do not need or want simply because we could not resist the temptation.
So as Supply Chain professionals we will have to accept that whilst we may get times of stability and boredom, ultimately the retail supply chain is going to remain a roller coaster. And never more so than in today's multi-channel, highly consumer-centric environment.
Not only do we need to be able to predict, manage and react quickly to changes in demand across the whole; we also need to react to dramatic changes on a line-by-line basis. The ability to accurately forecast the demand of a major promotional item before, during, and after the promotional period can have a massive impact on the profitability and smooth operation of a retailer. If you get it wrong and the shelves, gondola ends and feature spots are empty you can seriously damage a retail brand in the eyes of the consumer. If you get it wrong and have way too much stock of a promoted item you can seriously damage the profitability and operation, particularly in foods where shelf life plays an even more important part.
If we need an accurate forecast on which to build, we then also need the capability to plan the display and flow of the items with Suppliers - through the supply chain into retail warehouses; from DC's to stores and onto the shop floor where the display needs to be carefully managed. This requires planning: the ability to utilise allocation, flow and volume planning through the supply chain, store space planning, and layout of the store in the knowledge that they will all come together to create the most successful outcome. If you cannot get this right, you will always be sub-optimal in your performance. Promotions can account for between 10 to 60% or more of a retailer's sales, that is how important this can be.
Increasingly, smart technology solutions that can truly manage promotional activity, especially in that more difficult Food retail space, can put serious points on the bottom line. Understanding the impact of seasonal swings on promotions, being able to carry out regression analysis to understand history, how different items respond in each store, even taking into account geography and customer make up. Utilising this to forecast more accurately at store level, to plan the store and layouts, through the supply chain from supplier to DC to store, in a smooth and manageable manner that will not disrupt the rest of the business, that is when you can start to see success delivered to your customers and your business.
If Every Day Low Price was able to meet customers' and retailers' expectations life would be so easy and retailers could be more efficient. However, retail is not like that. Today, price is no longer the only weapon in the armoury. It's understanding how your customers are going to react to the combination of pricing, promotions, availability and seasonality – on a store-by-store basis – that is now the key to retail efficacy, efficiency – and ultimately, success.