Five Pitfalls to Avoid When Creating Store Clusters

 

Insights » Whitepapers

Author: Michael Falck, President, North America, M.Sc. (Tech.)

It’s a consumer’s market. Today, shoppers have a wide array of options when it comes to shopping and no longer have to rely on local stores. Leading retailers are taking a fresh look at their merchandising strategies to cluster their stores more precisely in order to understand demand at a more granular level.

However, there are pitfalls that can sabotage any retailer’s move toward customer-centricity. We’ve listed five below.

1. Go from Store-level to Category-level Clustering

If you want to create an efficient centralized merchandising and assortment strategy it’s critical to know the difference between clustering on store-level and category-level. Historically, in pursuit of operational efficiency, retailers have tended to group their stores according to top-down constraints such as store size, total store sales volume, supply chain requirements, or by geography. For example, a retailer might put all stores larger than 5000m² (54,000 sq. ft.) in one group, and all those smaller than 3000m² (33,000 sq. ft) in another. There may be operational and supply chain efficiency benefits to such an approach but to maximize sales opportunities, it’s vital to understand your customers more deeply and cater to them more effectively through category-level clustering, while still factoring in important operational constraints. It’ll help you develop an effective customer-centric assortment and merchandising strategy based on consumer behavior. Category-level clustering enables retailers to use a variety of strategies within the same store to ensure each category operates to its full potential. For example, a category such as ready-to-eat meals may be heavily influenced by the average number of children of a store’s shoppers, while the beer, wine and spirits category in the same store may be influenced predominantly by the shopper’s income level and education.

2. Don’t Forget Category Performance

While top-down constraints are important factors to consider when clustering, using these criteria alone will not produce an effective strategy. Retailers need to begin the process by analyzing category performance to identify any similar trends and patterns across its chain. For instance, a store with less than 3000m² (33,000 sq. ft.) may have a dynamic category that sells the same mix of products at the same ratios and frequencies as a larger store. Since the category performs similarly in both stores, it would make sense to merchandise them similarly as well.

Once the store-level clusters are determined, performing a deeper analysis of how each category performs in each store is essential to aligning assortment and merchandising with customer preferences. This requires a planning solution that is able to cluster stores using a “bottom-up” approach and that can analyze individual category performance patterns based on consumer behavior data. Having arrived at a clear picture of category buying patterns across a chain, a properly customer-centric strategy can be developed. Top-down constraints can be factored in so that the cluster strategies can be effectively implemented in store while ensuring that the supply chain operates smoothly. This combination of bottom-up and top-down analysis enables retailers to capitalize on opportunities efficiently.

3. Your Vendor Partners Can Help You with Clustering

Manufacturers and suppliers can play a significant role in the clustering process by providing valuable strategic-category expertise and cross-retailer insight. Vendors will often look at their products within a category, suggest category plans to retailers and together come to an agreement on new assortment and merchandising. Collaborating with strategic partners ensures that your category clusters are based on the best available internal and external information, and category expertise.

However, to make this collaborative approach work it helps to encourage vendors to use a consistent methodology, ideally one defined by the retailer. For example, one soft drink vendor may offer a cluster plan based on pack size, while a competitor may create a plan based on sales volumes. When the same data and clustering processes are not used, it can cause confusion as the retailer is unable to compare like for like. The best solution is for the retailer to engage positively but steer the process and define clearly the methodology that suits its strategy.

When developing a clustering strategy, first analyze the data and then determine which attributes are best suited to define which clusters. Rarely will the same attribute, such as pack size, work for all categories. Once the retailer has settled on a clustering methodology for each category, it is critical that each vendor provides cluster recommendations on that basis for their category. Ultimately if a cluster strategy doesn’t work, neither retailer nor shoppers will benefit.

4. Don’t Worry about Every Category… Prioritize for Clustering

The thought of clustering at the category level may seem overwhelming. But retailers do not have to analyze the performance of every category in every store in order to create a successful strategy. Typically, the Pareto principle applies and 20% of a retailer’s categories generate 80% of its revenue. To maximize the benefits of category-level clustering, retailers should focus specifically on strategic categories that have a significant impact on sales. A good starting point is to understand which categories are dynamic, variable or basic. In dynamic categories consumers make active choices (on brand, price, flavor, color etc.), in basic categories they simply buy ‘a thing’ (‘I need matches’), while in variable categories choice is exercised with greater flexibility. For a grocery retailer, categories such as fresh produce are dynamic and benefit greatly from localized assortments. On the other hand, those such as refuse bags or bleach are basics that don’t vary much store-to-store.

5. It’s Not about Aspiring to Be in a Particular Cluster

Lastly, when naming each store cluster across the chain, don’t use letters and numbers. Store managers tend to see these as a ranking, and naturally people want to be A1 and not 5E. This can severely disrupt the entire strategy. Clusters are all about stores meeting localized demand efficiently and serving its clientele, not about competition between stores to be in a particular cluster. The best way to avoid this pitfall is by using generic names such as colors or objects.

Remember That Clustering Is a Tool, Not a Goal

Retail was once largely driven by top-down thinking such as maximizing economies of scale. In an age where consumers expect everything to be all about them and not you, that approach is no longer enough. It’s too easy for people to buy what they want somewhere else.

Effective clustering is about letting consumer behavior drive space and assortment decisions, informing your promotion and merchandising strategy, increasing sales and winning customer loyalty. It’s a way of ensuring the reality in the stores shapes your decision making. It absolutely doesn’t preclude good top down management – skillful handling of negotiations, purchasing, distributions etc. However, it does mean that all those excellent strategic management skills are directed towards the customer and not purely towards suppliers and within the business.

Above all, remember that clustering is a tool and not a goal. Prioritize the categories that need your attention most. Work with vendor partners and glean every insight you can from them. Let your system do the heavy lifting and crunch the numbers so you can use your expertise to greatest effect.

Michael Falck

Michael Falck

President, North America, M.Sc. (Tech.)

Phone+1 404 580 5399

Michael Falck is co-founder of RELEX Solutions and acts as the President in the North American markets. He has a broad academic background that he uses to help retailers to optimize their supply chains.

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