PMG: It’s good to good to visit with you again, Mike. Today, we’re talking about merchandising. I mean, there’s 1001 ways to do it, I’m sure. Where do you start? How do you approach it?
Mauti: Thanks Tom, I appreciate the conversation. The first step in a successful merchandising plan is to develop a go-to-market strategy. Simply put, this means deciding on how your store is going to ‘show up’ for your customers. This includes determining which customers in your marketplace you are going to target. Because, really, you can’t appeal to everyone. The go-to-market strategy then dictates every merchandising decision going forward, or at least it should. The most basic examples include discount and conventional strategies. In a discount go-to-market strategy, the target customer will place a higher priority on paying low prices. Whereas a conventional strategy will target customers who place a higher priority on service and variety. These two priorities however, each on opposite ends of a spectrum, do not completely segment the market of produce customers. There are other go-to-market strategies including a mass strategy for customers who prioritize convenience and a one-stop shop experience, while a club strategy appeals to customers looking to save money by purchasing in large quantities, either for home or business use. Each of these go-to-market strategies will use their merchandising plan to satisfy the top priorities of their target customer.
PMG: That sounds like a decision that is made pretty high up on the food chain, what about the folks that must execute within those boundaries once set?
Mauti: That’s a good point Tom, those decisions are normally made in a boardroom somewhere, far away from the people that need to build the day to day merchandising plans. But it is important for the Category and Merchandising teams to understand what framework they are working within and from there, they can begin.
The best way to look at merchandising, in my opinion, is in a review of the 4 Ps. The 4 Ps are Product, Placement, Price and Promotion. Before going anywhere else, I like to start with the ‘what’. For merchandising, the what refers to the Product assortment available for customers to purchase and remember, the target customer is determined by the store’s go-to-market strategy. Luckily, each strategy offers clues pointing towards the right assortment needed to satisfy the priorities of the target customer. As an example, a discount go-to-market strategy will point to different assortment decisions than a conventional one. Some people might think that satisfying a discount target customer can be accomplished entirely through pricing, but assortment plays a large part too.
You can’t discuss assortment choices amongst the different go-to-market strategies without discussing costs. There are plenty of costs associated with running a retail operation and like any business, a primary goal of a retailer is to recoup those costs and turn a profit. Many of these costs are associated with managing an assortment. The first cost that comes to mind when we think of product assortment is cost of goods but there are others. Labor, being the second largest cost in a retail operation, after cost of goods, is required to manage an assortment. For example, labor costs are incurred to receive product into the store, prepare it for sale, display and replenish it. Shrink is another cost associated with assortment. Products that do not sell incur a shrink cost. Generally speaking, both labor and shrink costs will be higher with larger assortments. Naturally, that means there is a cost associated with each incremental SKU (stock keeping unit) included in an assortment.
Anyone responsible for managing products must ask themselves an important question each time they are looking to increase their assortment (i.e. list a new item). Will the benefits of increasing assortment, including sales, profit and satisfying the customer’s need for variety justify adding the incremental costs? As discussed, the go-to-market strategy offers clues on how to answer that question. As you might’ve guessed, a conventional strategy will lean more towards adding assortment, while a discount strategy will lean more towards reducing assortment.
Assortment size is just one piece of the puzzle. All sorts of other decision factors come into play including: How many brands are required per category? How many pack sizes are needed? How many flavors will drive incremental sales before they begin to cannibalize each other? I’m sure you can guess that a discount operator will answer these questions with a lower number than would a conventional operator that is looking to satisfy customer attributes other than minimizing overall basket cost.
PMG: Then there is more freedom to add new products and expand the assortment if you are a conventional retailer?
Read more of Mike Mauti's "Retail 101" interview here.