Description
Effectively executing a customer-centric strategy is critical to marketplace survival and improved shareholder value. Such a strategy encompasses more than assortment planning and merchandising execution, starting with customer and productattribute management and moving all the way through the process to pricing and promotion strategy.
IBM Center for Applied Insights Smarter Retail
The Value of Smarter
Merchandising
How adopting a customer-centric merchandising strategy
can increase revenue and margins
2 The Value of Smarter Merchandising
Highlights
• Effectively executing a customer-centric strategy is
critical to marketplace survival and improved shareholder
value. Smarter merchandising is one answer.
• Smarter merchandising is a journey that retailers can
take to enhance their competency in predicting the
needs and wants of targeted customers.
• The smarter merchandising journey has three outcomes:
Sense customer buying behavior, align products and
services and deliver with consistency and agility. These
outcomes net quantifable benefts for retailers.
• Intuitively, retailers understand that there is value in
improving their business operations, but what is it
exactly? Collaborate with IBM to help quantify the
potential economic value of an investment in smarter
merchandising competencies.
New technologies and economic pressures
have reshaped buying behavior in ways
that might persist for a generation
The consumer segment has changed. Today’s discerning,
networked consumer demands a more personalized and
interactive retail relationship. To meet this demand, retailers
need a better understanding of their customers’ behavior, and
insight into what that behavior means for their business, their
products and services and their channels.
Effectively executing a customer-centric strategy is critical to
marketplace survival and improved shareholder value. Such a
strategy encompasses more than assortment planning and
merchandising execution, starting with customer and product
attribute management and moving all the way through the
process to pricing and promotion strategy. The customer is
at the center of this process as:
• Correct product information is made available at the
store-front.
• Data and information is captured using customer interactions.
• Insight into customer behavior is used to tailor assortments
and develop targeted pricing and promotional strategies.
• Day-to-day activities are optimized to deliver consistently
and with agility.
This broader view of a customer-centric merchandising
process, and our vision with respect to the competencies
needed to enable it, is what we are calling smarter
merchandising.
Corporate Marketing 3
Smarter merchandising is an analytics and insight-
driven approach to retailing
Retailers need a set of competencies that use integrated data
and information to develop deeper customer insights. With
advanced analytic capabilities, retailers can mine internal
and externally sourced customer and marketplace information
that can be used to triangulate demand forecasts with
merchandising plans and to respond in real-time to changing
market dynamics. Effectively managing the volumes of data
and related information is diffcult; however, getting it right
not only can improve operational agility, but it can also
enable analytic and insight based merchandising.
The impact of a consumer dominated
segment on retailers
Today’s consumer demands a consistent shopping experience,
forcing retailers to adapt their information architecture to
support omni-channel retailing.
4
Over the last decade
consumers have changed how, when and where they make
purchase decisions. They have shifted their buying preferences
to the value extremes, seeking either low-priced goods of
reasonable quality or premium products to which they attach
high emotional value. Readily incorporating technology into
their shopping experience, consumers are very willing to use
multiple channels to research, compare and validate their
choices, although most purchase decisions are still fnalized in
the store.
5
Today’s information and communication technologies have
enabled a smarter consumer who is instrumented, intercon-
nected and intelligent:
• Instrumented: They use technology to get instantaneous
access to information about retailers, their products and
the shopping experiences of other consumers.
• Interconnected: They are ready to use technology to
interact with retailers and other consumers.
• Intelligent: Technology and applications provide insight
that allows them to know precisely what they want from
retailers, both now and in the future.
6
The expected economic bene?t of investing in smarter
merchandising
Current economic realities dictate that companies understand
the potential beneft of any investment before it is made.
The smarter merchandising journey is no different. We have
developed a model that can help retailers determine the
potential ROI from investing in improving core merchandising
competencies and achieving smarter merchandising outcomes.
The model also provides beneft and investment details that
can be used to develop a fnancial business case.
Retailers in North America alone launch over
30,000 new products every year.
1
With this
new launch trend and the proliferation of
extended product and customer information,
they are facing a 200 percent increase in
expected product attribute data.
2
Retailers that use targeted promotions and
more effective assortment tailoring can see
increases in revenue, increased market basket
size, growth in customer volume and greater
customer loyalty.
3
4 The Value of Smarter Merchandising
These shifts in buying behavior have signifcant implications
for retailers. To adapt, retailers need a better understanding of
customer preferences and insight into what it means for their
business, their products and services and their channels.
Consumers expect personalized shopping: tailored promotions,
consistently available products and overall better quality and
value for money.
For retailers who can adapt to this changing demand, the
rewards are signifcant. Not only are most consumers willing
to collaborate with retailers, but also 61 percent of surveyed
consumers said that they would spend more money with
retailers that implement their suggestions.
7
Direct customer
collaboration such as codevelopment and testing opportunities,
along with product ratings and commentary, provides valuable
insight into a customer’s expectations.
The impact of a smarter consumer on products
and placement
Constantly evolving consumer demand and an expectation of
tailored assortments drive short product life cycles, which
means more product SKUs that have to be managed over a
narrower time horizon. According to Datamonitor’s
Productscan Online, marketers launch over 30,000 new
products each year in North America alone. This substantially
increases the data attributes and overall inventory that a
retailer has to manage throughout an increasingly complex
supply network, including private-label development and
sourcing. The result is lower in-stock rates in the store with
retailers putting $93 billion of sales at risk each year due to
out-of-stock conditions.
8
Not only are volumes increasing, but consumers are paying
more attention to product attributes when they make their
purchase decision. Whether it is for comparing features and
functions for different products, researching product
ingredients and origin or confrming product compatibility,
accurate, consistent product information is critical yet less than
25 percent of retailer-held product data matched the data from
their suppliers.
9
The impact of a smarter consumer on pricing
and promotions
The consumer’s focus on value and short product life cycles
means that retailers have to become more sophisticated in
how they set and manage prices and promotions for their
channels. With 40 percent of promotions not executed as
intended, retailers have an opportunity to capture lost sales
using more integrated planning and greater consistency and
accuracy of pricing, especially in new product launches.
10
Using customer insight to tailor promotions based on
demographics, integrating promotions with planned launches
and loyalty programs and enhancing in-store verifcation
solutions to confrm proper promotional setup will help
improve overall effectiveness.
“[The] dynamics of the shopper has changed....
Our customer is spending less time in the store
and being more discretionary when they are
in the store — to not have whatever it is we
believe in, in the store starts becoming
calculable about what we’re missing”
— VP and Fashion Director, North American retailer
Corporate Marketing 5
Understanding customer differentiation for a particular
product in a certain location and having visibility of competitor
pricing are critical insights that help retailers take advantage
of their limited sell-through windows and avoid over-stocks
that lead to increased mark-downs and reduced margins.
Assortment planning for most retailers involves spreadsheets
and a lot of art versus science.
11
Incorporating predicted
customer demand and preference insights into the planning
process supports a more tailored product selection, while
enhanced merchandising agility allows for a rapid response
when something isn’t working.
The implications for merchandising
To adapt to the changing marketplace and the empowered
consumer, retailers must be able to:
• Sense customer buying behavior and improve operational
visibility.
• Align products and services to predicted customer behavior.
• Deliver with consistency and agility.
In the day to day core merchandising activities of all
retailers, having information and being able to derive
customer insight from it are two different things. In many
cases, retailers have the data and they have the customer
and product information, but their level of understanding
is inconsistent. As one retailer put it, “In each of the stores
independently they could have been out of stock in this one
[SKU] because it wasn’t forecast properly, or too heavy in
another one because the information wasn’t correct on a price
point or whatever for that particular market.”
Today’s consumer expects personalized products and services.
The ability to tailor assortments at a cluster or location level is
critical, yet without scalability of the plans and links to
in-season forecasts, effective execution can be affected. Often
the clustering and allocation methods do not match buyer
habits, which tend to be driven more by historical results than
predicted demand. For example, one retailer explained “We
have three year plans in total but we don’t really have targets
out there by area of the business. [The buyers] are already
going out and buying. What is going to happen when I start
giving out the plans in the next four to eight weeks? They are
going to have to shoehorn it in backwards. Obviously not a
good way to do it.”
“I think that that’s a consistent challenge in
all e-commerce companies…we’ve had
instances where a new product is launching,
and the pricing has been incorrect, and as a
result, we’ve lost tremendous amount of sales
and margins.”
— Director of E-commerce, North American retailer
“The sooner you can get out of what’s not
working and get back into what’s working,
that’s key. It’s like the merchandise that’s not
working in season, are there other products
that if you react quick enough you could fow
back in before the outtake and make money?”
— Senior Buyer, multi-format retailer
6 The Value of Smarter Merchandising
Responsiveness to changing demands, agility in the
marketplace and a focus on offering the customer what they
want to buy — they all improve sales, margins and customer
satisfaction. These are recurring themes, summarized by one
merchandising executive as, “Analyze your customer purchases,
take that information, equate that to your assortment, now
your assortment’s more effcient, now your buying is more
effcient, now your inventory is used better, so you save those
dollars, so you’re increasing your sales in margin dollars while
lowering your inventory investment, increasing your turn…
that’s a huge beneft right there.”
Figure 1: Smarter merchandising competency outcome map
Source: IBM Center for Applied Insights
Questions to consider
• How has your customer changed in the last 5 years?
• What impact have changes in customer behavior had on your
business?
• When you experience unexpected demand, how agile is your
response?
Effectively executing a customer-centric
strategy is critical to marketplace survival
and improved shareholder value.
A strategic vision to achieve
merchandising excellence
Smarter merchandising is a journey that retailers can take to
enhance their competency in predicting the needs and wants
of targeted customers (Figure 1). The objective is to develop
and deliver desired products and services while optimizing
sales, profts and asset utilization.
“By understanding what customers want
to buy, and how they want to shop, we can
provide better service, convenience, products
and rewards, through a choice of formats
which deliver a consistent customer
experience.”
12
Nearly 2 million people in 30 cities and towns
were without drinking water
“A major pipe bringing water to the Boston area sprung a
’catastrophic‘ leak and is dumping eight million gallons of
water per hour into the Charles River. Governor Deval
Patrick declared a state of emergency and issued a
“boil-water” order for Boston and dozens of other
communities.”
13
Within hours, bottled water supplies in local stores ran out.
Agile retailers responded rapidly, redirecting supply from
outside the city limits to the stores in the affected areas,
while others struggled to adjust to this unexpected
demand.
Corporate Marketing 7
There are three outcomes in this journey: Sense customer
buying behavior, align products and services and deliver with
consistency and agility. Each builds on the other, and all use
their competencies,
14
to help retailers:
• Seamlessly integrate internal and external systems.
• Establish consistent trusted information.
• Deploy advanced analytics for internal and externally sourced
customer and marketplace information.
• Effectively and effciently triangulate demand forecasts with
merchandise plans.
• Respond in real-time to changing market dynamics.
By addressing underlying process execution challenges,
whether due to data inputs, people skills or enabling
technology, retailers can improve their competencies. This
improvement can be represented using a maturity spectrum
(Figure 2).
Improving business competencies and achieving the smarter
merchandising outcomes not only enhances overall operational
effectiveness, but it might also provide an economic beneft.
For the purposes of our research, we modeled a hypothetical
$25 billion retailer with a 41 percent gross margin and
5 percent operating proft and saw a potential net operating
proft beneft of 0.8 to 1.8 percent of revenue (or $210 to
$441 million). The primary drivers of this beneft include:
• Increased revenue from targeted assortments and more
effective promotions
• Increased margins resulting from better price and mark-down
management
• Reduced inventory carrying costs from more effective
inventory management
While each step adds incremental net operating proft, the
investment profle shows a positive net present value and a
131% return on invested cash.
Potential beneft amounts and the investment profle are
unique to each retailer’s situation and vary according to retailer
size (revenue), business type (for example, soft-line, grocery,
specialty goods) and degree of operational maturity (more
mature companies will have a smaller beneft opportunity).
Figure 2: Business Competency Maturity Spectrum
Source: Smart Grid Maturity Model (APQC and IBM)
8 The Value of Smarter Merchandising
The bene?ts of sensing customer buying behavior and
improving operational ef?ciency
Understanding customer behavior requires capturing necessary
data at the source and mining the data consistently using
customer, product and supplier attributes. This should not be
a brute force effort or an ad hoc exercise; instead, it should be
seamless, integrated and largely automated. The competency
spectrum runs from basic transaction data capture to more
advanced integration of supplier and third-party sourced data
from across the system landscape.
Outcome 1 Excellence: Companies that deliver effective
insight do so with standards and a highly automated metric
production process
Excellence is achieved by:
• Integrating existing solutions to provide a fexible, scalable
transaction architecture that covers both structured and
unstructured data types
• Standardizing processes
• Making real-time updates to critical data sets such as demand
forecasts and inventory fles
By automatically populating or synchronizing data attributes
in both internal and external systems, it is easier to develop
and maintain one consistent version of information. Users,
accessing this information with standard analytic tools versus
spreadsheet-based solutions, can deliver more effectively viable
insights that the business needs to plan and execute its
merchandising strategies.
Research showed that those companies with strong business
insight driven by timely metrics and strong data standards
can experience as much as 33 percent greater revenue growth.
15
In addition, retailers such as Sears
16
and the Nuance Group
reduced inventory 10 to 15 percent with better vendor
collaboration and by adopting transactional and predictive
analytic-based data in their demand forecasting processes.
17
Availability of accurate, timely product information helps
consumers make a more educated purchase decision. By
improving point of sale product information, one electronics
retailer signifcantly reduced returns because customers had a
better understanding of product features, functions and
compatibility with other devices.
The bene?ts of aligning products and services to
predicted customer behavior
By applying advanced analytics to data and information sets,
retailers can more effectively develop promotional and pricing
plans that support tailored and localized assortments. More
advanced competencies embed a degree of prediction in
planning, shifting from a predominantly historical perspective
to one that looks toward the future. By becoming more
predictive, retailers can drive greater channel impact with
increasingly targeted execution at all levels.
Corporate Marketing 9
Outcome 2 Excellence: Viable insight is a key input
to driving a more integrated planning process and
channel execution.
Integrating real-time insights into core processes can improve
pricing, promotional strategies and assortment selection.
Understanding product-to-demand relationships and being
able to monitor results dynamically can help create a greater
level of responsiveness to changing marketplace conditions.
By tightly linking demand forecasts and assortment and
merchandise plans, overall fnancial forecast estimates can be
accurate and there is a greater level of buy-in and acceptance
of the strategy.
Targeting the right products at the right place with the right
promotion can help increase in-stock rates and corresponding
sales. The efforts of a large multi-format retailer to align its
products and store placement to meet demographic demand
better are based on deeper customer insights and predictive
analytics. This tailored approach to segmentation has helped
it increase sales per square foot by more than 7 percent.
18
More effcient inventory management reduces waste and
carrying costs. OffceMax saw a 4 percent improvement in
fll-rates, a 30 percent increase in forecast accuracy and a 9
percent increase in inventory turns when it used better vendor
collaboration to help determine product demand.
19
A recent
retail study showed that increasing assortments resulted in
higher inventory carrying costs, while a 10 percent reduction
of low-volume SKUs resulted in increased sales of 4 percent
because of space reallocation.
20
The bene?ts of delivering with consistency
and agility
Building on the competencies established in outcomes one
and two, the third outcome optimizes the processes and
overall execution to deliver with consistency and agility.
Competencies include incorporating alerts to support
exception-based process monitoring; embedded triggers
automatically initiate a response to a situation such as a low
stock level, out of tolerance temperature conditions,
unexpected weather changes, competitive pricing changes
or social media events. With these competencies in place, a
retailer can respond more quickly to changes and problems,
which in turn can drive increased sales opportunities, reduced
costs and improved customer satisfaction.
Outcome 3 Excellence: Agility depends on excellent
operational integration
Incorporation of advanced, predictive analytics into planning
processes helps drive an optimal price life cycle, better aligns
assortment and space allocation, helps establish tailored plans
and enables intelligent processes. Intelligence in a process
can identify where there are macro exceptions that need
intervention, such as a viral trend or natural disaster, or more
micro, tactical exceptions, such as an out-of-stock shelf,
out-of-date goods or poor shipping or storage conditions.
The focus is on being responsive, consistent and agile by
driving planning and assortment tailoring down to a customer
or store level and positioning the company to be ahead of the
demand curve. Studies have shown that price and promotion
optimization solutions can increase gross margins by 5 percent
to 15 percent,
21
while assortment optimization can drive a sales
lift of more than 3 percent.
22
10 The Value of Smarter Merchandising
Questions to consider
• How could your merchandising outcomes be improved?
• What steps have you taken to enable an effective customer-
centric strategy?
• What are your customers saying about your products, your
services, your company?
Intuitively, retailers understand that
there is value in improving their business
operations, but what is it exactly? What
do you put into a business case? How
much investment is justi?ed and how do
you track the bene?ts as they are realized
over time?
Quantifying the value of smarter
merchandising
How do you quantify the beneft potential of an investment?
This challenging question has largely been answered in the
past using historical achievements. In today’s investment
climate, this answer isn’t good enough. What is needed is an
objective, fact-based quantifcation approach.
To help quantify the economic beneft of investing in smarter
merchandising, we developed a potential value model.
While considering primarily operational value, we found
that investments in improved competencies can also add
strategic, brand and even societal value.
26
We used adoption
or maturity profles to weight the benefts; sensitivity analysis
and statistical smoothing techniques to make the model
relevant for companies of different sizes; and the lower
quartile of each beneft range to be fnancially conservative.
Tesco: An example of customer-centric
agility
“Our core purpose is to create value for customers
to earn their lifetime loyalty.”
Tesco believes in the “power of the consumer to drive
positive change,” and acknowledges that businesses
have a critical role to play in supporting positive change.
Demonstrating its consistent agility, Tesco addressed the
recent economic challenges by expanding its product line
to include discount brands targeted to customers who
value choice and quality, but need to budget more
carefully. Expanding internationally, Tesco focuses on
?exibility—from the need to shop for extremely fresh
food several times a day in Japan to the ”hands-on”
approach to marketplace food selection of Thailand to
the American preference for larger package sizes, they
adapt with great service, choice and value.
23
Growth in Tesco’s business comes from following
the customer to new markets and using people,
processes and systems to develop competencies.
At the individual level, their Clubcard program
provides insights that help tailor promotions to speci?c
customers, while on a broader community level,
social awareness is a key part of their strategy. From
“bag-less deliveries” that reduced single-bag use by
5 billion carrier bags since 2006 to a goal of becoming
carbon-neutral while reducing each customer’s carbon
footprint in half, Tesco ?nds ways to add measurable
societal value.
24
Tesco is an example of a leading retailer who delivers
with consistency and agility. Their strategy is paying off
with sales and earnings up at least 6 percent.
26
Corporate Marketing 11
This tool makes it possible to model the potential value of
a smarter merchandising outcome. Illustrative examples
demonstrate business results that potentially could be achieved
by improving merchandising competencies and overall
operational maturity. Individual retailer results will vary based
on company size, type and degree of maturity. This tool of
course is just a model and its use doesn’t guaranty results.
Retailers can use this model to determine where they fall from
a business competency and merchandising maturity standpoint.
It can also help them make a fnancial business case to proceed
on the smarter merchandising journey.
Potential Value Model Methodology
Conducted in-depth, fact-based research:
• 16 case studies with retailers from different segments
• Incorporated data from more than 100 academic and
industry sources
Built a competency based benefts model that:
• Is based on 30 common fnancial and business model
data points
• Incorporates a merchandising maturity profle
• Uses weighting, quartiles and sensitivity to scale the
model for different retailers
Illustrating the potential economic bene?ts
To illustrate the potential benefts, we used publicly available
information from a $25 billion
27
soft-line retailer, and input
this data into the model, which provided an outcome based
quantifcation of potential benefts for a hypothetical soft-line
retailer of this size and average merchandising maturity.
Based on this sample set of data, investing in developing
smarter merchandising competencies can mean as much as
$390 million in annual economic beneft or 1.5 percent of
revenue. (Figure 3).
Figure 3: Expected annual economic bene?ts of smarter merchandising for a
illustrative department store normalized on a net operating pro?t basis
Source: IBM Center for Applied Insights
12 The Value of Smarter Merchandising
Considering a typical investment profle, we modeled the
cumulative net cash fow over a fve year investment window.
As Figure 4 shows, this investment profle produces almost
$600 million in net cash fow.
28
The incremental value-add and ROI for smarter
merchandising
Based on a hypothetical example, a smarter merchandising
investment could deliver $322 million of incremental
economic value add and a 131 percent return on invested cash,
along with these other benefts:
• Modifed internal rate of return: 76 percent
• Discounted payback period: 3 years
• ROI: 241 percent
• Net present value: $289 million
We’ve illustrated the potential benefts from investing in
smarter merchandising. An example of this type of innovative
investment is Elie Tahari, a global fashion design company.
After implementing an advanced business intelligence solution,
Elie Tahari now has greater visibility of vital business data and
has a seen a reduction in the reporting cycle from two days to
a few minutes and a signifcant reduction in supply chain and
logistics costs.
30
In summary, the potential value model illustrates that a
customer-centric approach offers quantifable benefts to
retailers by helping them increase revenue and margins, while
reducing operating costs, not just in the short-term but also
over time.
Questions to consider
• How do you rate the ability of your merchandising
organization to predict and adapt to changing market
conditions?
• How could improving your merchandising competencies
improve your operational agility and add value for your
company?
• What is your potential economic beneft?
Figure 4: Sample ?ve year cash ?ow pro?le
Source: IBM Center for Applied Insights
The discounted payback period
29
for this hypothetical
implementation is three years. Looking at the model results
through a fnancial lens, we see a positive net present value
by outcome and overall (see side bar). We modeled a
fve-year phased implementation with benefts accruing
post implementation go-live and on a ramp-up schedule.
The net cash fows were discounted back over fve years at
15 percent of capital, and we assumed a modest 5 percent
return on invested net cash fow.
Corporate Marketing 13
Consider how an insight-driven approach
helps create a customer-centric
merchandising strategy with consistency
and agility.
Explore how an investment in
merchandising might add value
for your business
Effectively executing a customer-centric strategy is critical
to marketplace survival and improved shareholder value.
The marketplace and retail industry has changed:
• Market shift from product to customer focused; shortened
product life cycles
• Demanding, informed customers
• Prevalent competition and new business models
• Growing government regulation and compliance
• Increasing commodity and energy costs
• Inconsistent data, attribute and hierarchies
• Disparate, under-performing systems
These industry trends will continue to apply operational
pressure and retailers who cannot adapt will fnd themselves
marginalized by more agile competitors. Whether you are
experiencing one or more of these challenges today, or if you
simply wish to continue optimizing your operations, we can
help you.
IBM: Right for a changing world
At IBM, we collaborate with our clients, bringing together
business insight, advanced research and technology to help
give them a distinct advantage in today’s rapidly changing
environment. With our integrated approach to business
design and execution, we help turn strategies into action.
And with expertise in 17 industries and global capabilities
that span 170 countries, we can help clients anticipate change
and proft from new opportunities.
For additional support and to conduct an in-depth full
business value assessment including benefts and costs please
contact the authors.
14 The Value of Smarter Merchandising
About the Authors
Clayton Henke is the IBM Center for Applied Insights
Industry Champion for Retail. He has over 20 years of
experience leading innovation and business transformation
strategy development with retail and consumer products
clients. Having held various leadership positions in consulting
and fnance, he brings a unique perspective to his current role
where he is focused on helping retail clients explore the value
potential of improving operational competencies in their
businesses. He can be reached at [email protected].
Cynthia Coulbourne is the Global Retail Merchandising and
Supply Networks Portfolio Leader for IBM. She has over 20
years of experience leading merchandising and supply chain
improvements for global retailers and manufacturers both in
industry and as a consultant. In her current role, Cynthia
continues to work with retailers, industry organizations,
government, solution partners and the multiple divisions of
IBM to develop innovative solutions that drive speed to value.
She can be reached at [email protected].
Key Research Analyst and ROI Model Developer
Nick Kadochnikov is a senior modeler for the IBM Center
for Applied Insights. Responsible for development of ROI
models and simulation tools Nick has over 12 years of
experience utilizing advanced data analytics to build predictive
models, including propensity to buy, wallet estimation,
and other revenue and forecasting models in B2B space.
Prior to joining IBM Nick lead the development of
e-commerce marketing strategy.
Special Acknowledgements
We’d like to acknowledge the special contributions from
our core team without whose gracious contribution of time
and expertise this work would not have been completed.
Carrie Mahon
Cheryl Patchin
Chris E Hendren
Colm O’Brien
Don E Gordon
John McVicker
Joshua Chanin
Ken Lawler
Maureen Norton
Sarang Ghatpande
Shannon Miller
Susan Confort
Susie Schiffer
Corporate Marketing 15
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5 Garf, R. and Fenella Sirkisoon. “Bridging the Merchandising and Store
Operations Divide.” AMR Research. December 2007.http://www.cisco.com/
web/strategy/docs/retail/AMR_Bridging_Merchandising_Store_Ops.pdf
6 Schaefer, M. and Laura VanTine. “Meeting the Demands of the Smarter
Consumer.” IBM Institute for Business Value. 2009.
7 Schaefer, M. and Laura VanTine. “Meeting the Demands of the Smarter
Consumer.” IBM Institute for Business Value. 2009.
8 “Store Systems Study 2008: Seizing the In-Store Opportunity.” RIS Retail
Information Systems. January 2008.http://risnews.edgl.com/retail-
research%5CStore-Systems-Study-2008--Seizing-the-In-Store-
Opportunity39141.
9 “Data Crunch Report: The Impact of Bad Data on Profts and Consumer
Service in the UK Grocery Industry.” GS1 UK. October 2009
10 Garf, R. and Fenella Sirkisoon. “Bridging the Merchandising and Store
Operations Divide.” AMR Research. December 2007.http://www.cisco.com/
web/strategy/docs/retail/AMR_Bridging_Merchandising_Store_Ops.pdf
11 Rosenblum, P. and Steve Rowen. “Customer-Centric Merchandising:
Driving Differentiation through Localization.” Retail Systems Research.2008,
http://www.retailsystemsresearch.com/_document/summary/577
12 2006 Annual Report “A New Era Begins.” Coles Myer Ltd. 2006 p.5.
http://media.corporateir.net/media_fles/irol/14/144042/2008_pro_rata_
entitlement/asx_releases/coles_acquisition/coles_shares/2006.pdf
13 ‘Boil-water’ order issued for nearly 2 million in Mass.” The Boston Globe.
May 2010.http://www.boston.com/news/local/breaking_news/2010/05/
catastrophic_le.html
14 The competencies are: fexible data capture, consistent information
management, value driven insights, integrated planning and execution,
and agile ecosystem
15 “IBM CFO Study: The New Value Integrator.” IBM Institute for
Business Value. 2010
16 Slone, Reuben and John Mentzer et al. “The New Supply Chain Agenda.”
Harvard Business Press. 2010.
17 “IBM CSCO Study: The Smarter Supply Chain of the Future, the Nuance
Group Case Study.” IBM Institute for Business Value. 2009.
18 Lee, Elizabeth, ed. “Breakthrough Insights, The Pulse of Retail Recovery.”
Kantar Retail. 2010.
Please Recycle
19 Slone, R. and John Mentzer et al. “The New Supply Chain Agenda.”
Harvard Business Press. 2010
20 Krafft, M. and Murali K. Mantrala. “Retailing in the 21st Century: Current
and Future Trends.” Springer-Verlag Publishing. 2010
21 Krafft, M. and Murali K. Mantrala. “Retailing in the 21st Century: Current
and Future Trends.” Springer-Verlag Publishing. 2010
22 Hand, L., Ivano Ortis and Alessandro Casoli. “Vendor Assessment: Retail
Demand Intelligence Vendor Maturity.” Global Retail Insights, An IDC
Company. July 2009
23 “Corporate Strategy” Tesco plc.2010http://www.tescoplc.com/plc/about_us/
strategy/community/http://www.tescoplc.com/plc/about_us/strategy/coreuk/
http://www.tescoplc.com/plc/about_us/strategy/international/
24 “2010 Corporate Responsibility Report” Tesco plc.2010http://cr2010.
tescoplc.com/country-highlights/uk.aspxhttp://cr2010.tescoplc.com/
environment.aspx
25 “2010 Annual Report: A Business for a New Decade” Tesco plc.2010
http://ar2010.tescoplc.com/a-business-for-a-new-decade/fnancial-highlights.
aspx
26 Strategic value comes from the accelerated creation or adoption of new
ideas and solutions that position a retailer for future success, such as enabling
a customer-centric business strategy, increasing marketplace agility and
responsiveness and positioning the business for growth. Brand value is created
by strengthening overall brand, reputation and infuence, using thought, market
and public leadership to attract new customers and increase customer loyalty,
acquire top work talent and improve fnancial health. Societal value derives
from the creation of social, cultural or environmental benefts, such as making
product content and origin more visible, improving availability of high demand
products (especially in crisis situations) and reducing waste and spoilage.
27 All dollar values expressed in this paper are in U.S. dollars.
28 Using a hypothetical example, we modeled the investment and beneft
cash fows for a typical program life cycle. Solutions are phased over three years,
and benefts are ramped up over time. In Phase 1, we have included a sunk cost
to implement or upgrade a core merchandising solution. We have not attributed
any benefts to this solution. Clearly, if this competency already exists, then no
further investment is needed, resulting in a shorter payback period and increased
fve-year cumulative cash fow. Although we have not refected a fnancing option
on this chart, applying fnancial leverage smoothes out the investment profle,
the result of which is an earlier break-even point, albeit with a larger overall
investment.
29 Discounted payback period is the time from project deployment until the
cumulative benefts equal the initial investment, with the benefts discounted
by the weighted average cost of capital.
30 IBM Case Study. “Elie Tahari combines fashion savvy with powerful
analytics.” International Business Machines, Inc. 09 Feb 2010. http://
www-01.ibm.com/software/success/cssdb.nsf/CS/JSTS-82HSCN?OpenDo
cument&Site=default&cty=en_us
© Copyright IBM Corporation 2011
IBM Corporate Marketing
1 New Orchard Road
Armonk, NY 10504-1722
U.S.A.
Produced in the United States of America
July 2011
All Rights Reserved
IBM, the IBM logo and ibm.com are trademarks or registered
trademarks of International Business Machines Corporation in the
United States, other countries, or both. If these and other IBM
trademarked terms are marked on their frst occurrence in this
information with a trademark symbol (® or ™), these symbols indicate
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REW03010-USEN-01
doc_969421810.pdf
Effectively executing a customer-centric strategy is critical to marketplace survival and improved shareholder value. Such a strategy encompasses more than assortment planning and merchandising execution, starting with customer and productattribute management and moving all the way through the process to pricing and promotion strategy.
IBM Center for Applied Insights Smarter Retail
The Value of Smarter
Merchandising
How adopting a customer-centric merchandising strategy
can increase revenue and margins
2 The Value of Smarter Merchandising
Highlights
• Effectively executing a customer-centric strategy is
critical to marketplace survival and improved shareholder
value. Smarter merchandising is one answer.
• Smarter merchandising is a journey that retailers can
take to enhance their competency in predicting the
needs and wants of targeted customers.
• The smarter merchandising journey has three outcomes:
Sense customer buying behavior, align products and
services and deliver with consistency and agility. These
outcomes net quantifable benefts for retailers.
• Intuitively, retailers understand that there is value in
improving their business operations, but what is it
exactly? Collaborate with IBM to help quantify the
potential economic value of an investment in smarter
merchandising competencies.
New technologies and economic pressures
have reshaped buying behavior in ways
that might persist for a generation
The consumer segment has changed. Today’s discerning,
networked consumer demands a more personalized and
interactive retail relationship. To meet this demand, retailers
need a better understanding of their customers’ behavior, and
insight into what that behavior means for their business, their
products and services and their channels.
Effectively executing a customer-centric strategy is critical to
marketplace survival and improved shareholder value. Such a
strategy encompasses more than assortment planning and
merchandising execution, starting with customer and product
attribute management and moving all the way through the
process to pricing and promotion strategy. The customer is
at the center of this process as:
• Correct product information is made available at the
store-front.
• Data and information is captured using customer interactions.
• Insight into customer behavior is used to tailor assortments
and develop targeted pricing and promotional strategies.
• Day-to-day activities are optimized to deliver consistently
and with agility.
This broader view of a customer-centric merchandising
process, and our vision with respect to the competencies
needed to enable it, is what we are calling smarter
merchandising.
Corporate Marketing 3
Smarter merchandising is an analytics and insight-
driven approach to retailing
Retailers need a set of competencies that use integrated data
and information to develop deeper customer insights. With
advanced analytic capabilities, retailers can mine internal
and externally sourced customer and marketplace information
that can be used to triangulate demand forecasts with
merchandising plans and to respond in real-time to changing
market dynamics. Effectively managing the volumes of data
and related information is diffcult; however, getting it right
not only can improve operational agility, but it can also
enable analytic and insight based merchandising.
The impact of a consumer dominated
segment on retailers
Today’s consumer demands a consistent shopping experience,
forcing retailers to adapt their information architecture to
support omni-channel retailing.
4
Over the last decade
consumers have changed how, when and where they make
purchase decisions. They have shifted their buying preferences
to the value extremes, seeking either low-priced goods of
reasonable quality or premium products to which they attach
high emotional value. Readily incorporating technology into
their shopping experience, consumers are very willing to use
multiple channels to research, compare and validate their
choices, although most purchase decisions are still fnalized in
the store.
5
Today’s information and communication technologies have
enabled a smarter consumer who is instrumented, intercon-
nected and intelligent:
• Instrumented: They use technology to get instantaneous
access to information about retailers, their products and
the shopping experiences of other consumers.
• Interconnected: They are ready to use technology to
interact with retailers and other consumers.
• Intelligent: Technology and applications provide insight
that allows them to know precisely what they want from
retailers, both now and in the future.
6
The expected economic bene?t of investing in smarter
merchandising
Current economic realities dictate that companies understand
the potential beneft of any investment before it is made.
The smarter merchandising journey is no different. We have
developed a model that can help retailers determine the
potential ROI from investing in improving core merchandising
competencies and achieving smarter merchandising outcomes.
The model also provides beneft and investment details that
can be used to develop a fnancial business case.
Retailers in North America alone launch over
30,000 new products every year.
1
With this
new launch trend and the proliferation of
extended product and customer information,
they are facing a 200 percent increase in
expected product attribute data.
2
Retailers that use targeted promotions and
more effective assortment tailoring can see
increases in revenue, increased market basket
size, growth in customer volume and greater
customer loyalty.
3
4 The Value of Smarter Merchandising
These shifts in buying behavior have signifcant implications
for retailers. To adapt, retailers need a better understanding of
customer preferences and insight into what it means for their
business, their products and services and their channels.
Consumers expect personalized shopping: tailored promotions,
consistently available products and overall better quality and
value for money.
For retailers who can adapt to this changing demand, the
rewards are signifcant. Not only are most consumers willing
to collaborate with retailers, but also 61 percent of surveyed
consumers said that they would spend more money with
retailers that implement their suggestions.
7
Direct customer
collaboration such as codevelopment and testing opportunities,
along with product ratings and commentary, provides valuable
insight into a customer’s expectations.
The impact of a smarter consumer on products
and placement
Constantly evolving consumer demand and an expectation of
tailored assortments drive short product life cycles, which
means more product SKUs that have to be managed over a
narrower time horizon. According to Datamonitor’s
Productscan Online, marketers launch over 30,000 new
products each year in North America alone. This substantially
increases the data attributes and overall inventory that a
retailer has to manage throughout an increasingly complex
supply network, including private-label development and
sourcing. The result is lower in-stock rates in the store with
retailers putting $93 billion of sales at risk each year due to
out-of-stock conditions.
8
Not only are volumes increasing, but consumers are paying
more attention to product attributes when they make their
purchase decision. Whether it is for comparing features and
functions for different products, researching product
ingredients and origin or confrming product compatibility,
accurate, consistent product information is critical yet less than
25 percent of retailer-held product data matched the data from
their suppliers.
9
The impact of a smarter consumer on pricing
and promotions
The consumer’s focus on value and short product life cycles
means that retailers have to become more sophisticated in
how they set and manage prices and promotions for their
channels. With 40 percent of promotions not executed as
intended, retailers have an opportunity to capture lost sales
using more integrated planning and greater consistency and
accuracy of pricing, especially in new product launches.
10
Using customer insight to tailor promotions based on
demographics, integrating promotions with planned launches
and loyalty programs and enhancing in-store verifcation
solutions to confrm proper promotional setup will help
improve overall effectiveness.
“[The] dynamics of the shopper has changed....
Our customer is spending less time in the store
and being more discretionary when they are
in the store — to not have whatever it is we
believe in, in the store starts becoming
calculable about what we’re missing”
— VP and Fashion Director, North American retailer
Corporate Marketing 5
Understanding customer differentiation for a particular
product in a certain location and having visibility of competitor
pricing are critical insights that help retailers take advantage
of their limited sell-through windows and avoid over-stocks
that lead to increased mark-downs and reduced margins.
Assortment planning for most retailers involves spreadsheets
and a lot of art versus science.
11
Incorporating predicted
customer demand and preference insights into the planning
process supports a more tailored product selection, while
enhanced merchandising agility allows for a rapid response
when something isn’t working.
The implications for merchandising
To adapt to the changing marketplace and the empowered
consumer, retailers must be able to:
• Sense customer buying behavior and improve operational
visibility.
• Align products and services to predicted customer behavior.
• Deliver with consistency and agility.
In the day to day core merchandising activities of all
retailers, having information and being able to derive
customer insight from it are two different things. In many
cases, retailers have the data and they have the customer
and product information, but their level of understanding
is inconsistent. As one retailer put it, “In each of the stores
independently they could have been out of stock in this one
[SKU] because it wasn’t forecast properly, or too heavy in
another one because the information wasn’t correct on a price
point or whatever for that particular market.”
Today’s consumer expects personalized products and services.
The ability to tailor assortments at a cluster or location level is
critical, yet without scalability of the plans and links to
in-season forecasts, effective execution can be affected. Often
the clustering and allocation methods do not match buyer
habits, which tend to be driven more by historical results than
predicted demand. For example, one retailer explained “We
have three year plans in total but we don’t really have targets
out there by area of the business. [The buyers] are already
going out and buying. What is going to happen when I start
giving out the plans in the next four to eight weeks? They are
going to have to shoehorn it in backwards. Obviously not a
good way to do it.”
“I think that that’s a consistent challenge in
all e-commerce companies…we’ve had
instances where a new product is launching,
and the pricing has been incorrect, and as a
result, we’ve lost tremendous amount of sales
and margins.”
— Director of E-commerce, North American retailer
“The sooner you can get out of what’s not
working and get back into what’s working,
that’s key. It’s like the merchandise that’s not
working in season, are there other products
that if you react quick enough you could fow
back in before the outtake and make money?”
— Senior Buyer, multi-format retailer
6 The Value of Smarter Merchandising
Responsiveness to changing demands, agility in the
marketplace and a focus on offering the customer what they
want to buy — they all improve sales, margins and customer
satisfaction. These are recurring themes, summarized by one
merchandising executive as, “Analyze your customer purchases,
take that information, equate that to your assortment, now
your assortment’s more effcient, now your buying is more
effcient, now your inventory is used better, so you save those
dollars, so you’re increasing your sales in margin dollars while
lowering your inventory investment, increasing your turn…
that’s a huge beneft right there.”
Figure 1: Smarter merchandising competency outcome map
Source: IBM Center for Applied Insights
Questions to consider
• How has your customer changed in the last 5 years?
• What impact have changes in customer behavior had on your
business?
• When you experience unexpected demand, how agile is your
response?
Effectively executing a customer-centric
strategy is critical to marketplace survival
and improved shareholder value.
A strategic vision to achieve
merchandising excellence
Smarter merchandising is a journey that retailers can take to
enhance their competency in predicting the needs and wants
of targeted customers (Figure 1). The objective is to develop
and deliver desired products and services while optimizing
sales, profts and asset utilization.
“By understanding what customers want
to buy, and how they want to shop, we can
provide better service, convenience, products
and rewards, through a choice of formats
which deliver a consistent customer
experience.”
12
Nearly 2 million people in 30 cities and towns
were without drinking water
“A major pipe bringing water to the Boston area sprung a
’catastrophic‘ leak and is dumping eight million gallons of
water per hour into the Charles River. Governor Deval
Patrick declared a state of emergency and issued a
“boil-water” order for Boston and dozens of other
communities.”
13
Within hours, bottled water supplies in local stores ran out.
Agile retailers responded rapidly, redirecting supply from
outside the city limits to the stores in the affected areas,
while others struggled to adjust to this unexpected
demand.
Corporate Marketing 7
There are three outcomes in this journey: Sense customer
buying behavior, align products and services and deliver with
consistency and agility. Each builds on the other, and all use
their competencies,
14
to help retailers:
• Seamlessly integrate internal and external systems.
• Establish consistent trusted information.
• Deploy advanced analytics for internal and externally sourced
customer and marketplace information.
• Effectively and effciently triangulate demand forecasts with
merchandise plans.
• Respond in real-time to changing market dynamics.
By addressing underlying process execution challenges,
whether due to data inputs, people skills or enabling
technology, retailers can improve their competencies. This
improvement can be represented using a maturity spectrum
(Figure 2).
Improving business competencies and achieving the smarter
merchandising outcomes not only enhances overall operational
effectiveness, but it might also provide an economic beneft.
For the purposes of our research, we modeled a hypothetical
$25 billion retailer with a 41 percent gross margin and
5 percent operating proft and saw a potential net operating
proft beneft of 0.8 to 1.8 percent of revenue (or $210 to
$441 million). The primary drivers of this beneft include:
• Increased revenue from targeted assortments and more
effective promotions
• Increased margins resulting from better price and mark-down
management
• Reduced inventory carrying costs from more effective
inventory management
While each step adds incremental net operating proft, the
investment profle shows a positive net present value and a
131% return on invested cash.
Potential beneft amounts and the investment profle are
unique to each retailer’s situation and vary according to retailer
size (revenue), business type (for example, soft-line, grocery,
specialty goods) and degree of operational maturity (more
mature companies will have a smaller beneft opportunity).
Figure 2: Business Competency Maturity Spectrum
Source: Smart Grid Maturity Model (APQC and IBM)
8 The Value of Smarter Merchandising
The bene?ts of sensing customer buying behavior and
improving operational ef?ciency
Understanding customer behavior requires capturing necessary
data at the source and mining the data consistently using
customer, product and supplier attributes. This should not be
a brute force effort or an ad hoc exercise; instead, it should be
seamless, integrated and largely automated. The competency
spectrum runs from basic transaction data capture to more
advanced integration of supplier and third-party sourced data
from across the system landscape.
Outcome 1 Excellence: Companies that deliver effective
insight do so with standards and a highly automated metric
production process
Excellence is achieved by:
• Integrating existing solutions to provide a fexible, scalable
transaction architecture that covers both structured and
unstructured data types
• Standardizing processes
• Making real-time updates to critical data sets such as demand
forecasts and inventory fles
By automatically populating or synchronizing data attributes
in both internal and external systems, it is easier to develop
and maintain one consistent version of information. Users,
accessing this information with standard analytic tools versus
spreadsheet-based solutions, can deliver more effectively viable
insights that the business needs to plan and execute its
merchandising strategies.
Research showed that those companies with strong business
insight driven by timely metrics and strong data standards
can experience as much as 33 percent greater revenue growth.
15
In addition, retailers such as Sears
16
and the Nuance Group
reduced inventory 10 to 15 percent with better vendor
collaboration and by adopting transactional and predictive
analytic-based data in their demand forecasting processes.
17
Availability of accurate, timely product information helps
consumers make a more educated purchase decision. By
improving point of sale product information, one electronics
retailer signifcantly reduced returns because customers had a
better understanding of product features, functions and
compatibility with other devices.
The bene?ts of aligning products and services to
predicted customer behavior
By applying advanced analytics to data and information sets,
retailers can more effectively develop promotional and pricing
plans that support tailored and localized assortments. More
advanced competencies embed a degree of prediction in
planning, shifting from a predominantly historical perspective
to one that looks toward the future. By becoming more
predictive, retailers can drive greater channel impact with
increasingly targeted execution at all levels.
Corporate Marketing 9
Outcome 2 Excellence: Viable insight is a key input
to driving a more integrated planning process and
channel execution.
Integrating real-time insights into core processes can improve
pricing, promotional strategies and assortment selection.
Understanding product-to-demand relationships and being
able to monitor results dynamically can help create a greater
level of responsiveness to changing marketplace conditions.
By tightly linking demand forecasts and assortment and
merchandise plans, overall fnancial forecast estimates can be
accurate and there is a greater level of buy-in and acceptance
of the strategy.
Targeting the right products at the right place with the right
promotion can help increase in-stock rates and corresponding
sales. The efforts of a large multi-format retailer to align its
products and store placement to meet demographic demand
better are based on deeper customer insights and predictive
analytics. This tailored approach to segmentation has helped
it increase sales per square foot by more than 7 percent.
18
More effcient inventory management reduces waste and
carrying costs. OffceMax saw a 4 percent improvement in
fll-rates, a 30 percent increase in forecast accuracy and a 9
percent increase in inventory turns when it used better vendor
collaboration to help determine product demand.
19
A recent
retail study showed that increasing assortments resulted in
higher inventory carrying costs, while a 10 percent reduction
of low-volume SKUs resulted in increased sales of 4 percent
because of space reallocation.
20
The bene?ts of delivering with consistency
and agility
Building on the competencies established in outcomes one
and two, the third outcome optimizes the processes and
overall execution to deliver with consistency and agility.
Competencies include incorporating alerts to support
exception-based process monitoring; embedded triggers
automatically initiate a response to a situation such as a low
stock level, out of tolerance temperature conditions,
unexpected weather changes, competitive pricing changes
or social media events. With these competencies in place, a
retailer can respond more quickly to changes and problems,
which in turn can drive increased sales opportunities, reduced
costs and improved customer satisfaction.
Outcome 3 Excellence: Agility depends on excellent
operational integration
Incorporation of advanced, predictive analytics into planning
processes helps drive an optimal price life cycle, better aligns
assortment and space allocation, helps establish tailored plans
and enables intelligent processes. Intelligence in a process
can identify where there are macro exceptions that need
intervention, such as a viral trend or natural disaster, or more
micro, tactical exceptions, such as an out-of-stock shelf,
out-of-date goods or poor shipping or storage conditions.
The focus is on being responsive, consistent and agile by
driving planning and assortment tailoring down to a customer
or store level and positioning the company to be ahead of the
demand curve. Studies have shown that price and promotion
optimization solutions can increase gross margins by 5 percent
to 15 percent,
21
while assortment optimization can drive a sales
lift of more than 3 percent.
22
10 The Value of Smarter Merchandising
Questions to consider
• How could your merchandising outcomes be improved?
• What steps have you taken to enable an effective customer-
centric strategy?
• What are your customers saying about your products, your
services, your company?
Intuitively, retailers understand that
there is value in improving their business
operations, but what is it exactly? What
do you put into a business case? How
much investment is justi?ed and how do
you track the bene?ts as they are realized
over time?
Quantifying the value of smarter
merchandising
How do you quantify the beneft potential of an investment?
This challenging question has largely been answered in the
past using historical achievements. In today’s investment
climate, this answer isn’t good enough. What is needed is an
objective, fact-based quantifcation approach.
To help quantify the economic beneft of investing in smarter
merchandising, we developed a potential value model.
While considering primarily operational value, we found
that investments in improved competencies can also add
strategic, brand and even societal value.
26
We used adoption
or maturity profles to weight the benefts; sensitivity analysis
and statistical smoothing techniques to make the model
relevant for companies of different sizes; and the lower
quartile of each beneft range to be fnancially conservative.
Tesco: An example of customer-centric
agility
“Our core purpose is to create value for customers
to earn their lifetime loyalty.”
Tesco believes in the “power of the consumer to drive
positive change,” and acknowledges that businesses
have a critical role to play in supporting positive change.
Demonstrating its consistent agility, Tesco addressed the
recent economic challenges by expanding its product line
to include discount brands targeted to customers who
value choice and quality, but need to budget more
carefully. Expanding internationally, Tesco focuses on
?exibility—from the need to shop for extremely fresh
food several times a day in Japan to the ”hands-on”
approach to marketplace food selection of Thailand to
the American preference for larger package sizes, they
adapt with great service, choice and value.
23
Growth in Tesco’s business comes from following
the customer to new markets and using people,
processes and systems to develop competencies.
At the individual level, their Clubcard program
provides insights that help tailor promotions to speci?c
customers, while on a broader community level,
social awareness is a key part of their strategy. From
“bag-less deliveries” that reduced single-bag use by
5 billion carrier bags since 2006 to a goal of becoming
carbon-neutral while reducing each customer’s carbon
footprint in half, Tesco ?nds ways to add measurable
societal value.
24
Tesco is an example of a leading retailer who delivers
with consistency and agility. Their strategy is paying off
with sales and earnings up at least 6 percent.
26
Corporate Marketing 11
This tool makes it possible to model the potential value of
a smarter merchandising outcome. Illustrative examples
demonstrate business results that potentially could be achieved
by improving merchandising competencies and overall
operational maturity. Individual retailer results will vary based
on company size, type and degree of maturity. This tool of
course is just a model and its use doesn’t guaranty results.
Retailers can use this model to determine where they fall from
a business competency and merchandising maturity standpoint.
It can also help them make a fnancial business case to proceed
on the smarter merchandising journey.
Potential Value Model Methodology
Conducted in-depth, fact-based research:
• 16 case studies with retailers from different segments
• Incorporated data from more than 100 academic and
industry sources
Built a competency based benefts model that:
• Is based on 30 common fnancial and business model
data points
• Incorporates a merchandising maturity profle
• Uses weighting, quartiles and sensitivity to scale the
model for different retailers
Illustrating the potential economic bene?ts
To illustrate the potential benefts, we used publicly available
information from a $25 billion
27
soft-line retailer, and input
this data into the model, which provided an outcome based
quantifcation of potential benefts for a hypothetical soft-line
retailer of this size and average merchandising maturity.
Based on this sample set of data, investing in developing
smarter merchandising competencies can mean as much as
$390 million in annual economic beneft or 1.5 percent of
revenue. (Figure 3).
Figure 3: Expected annual economic bene?ts of smarter merchandising for a
illustrative department store normalized on a net operating pro?t basis
Source: IBM Center for Applied Insights
12 The Value of Smarter Merchandising
Considering a typical investment profle, we modeled the
cumulative net cash fow over a fve year investment window.
As Figure 4 shows, this investment profle produces almost
$600 million in net cash fow.
28
The incremental value-add and ROI for smarter
merchandising
Based on a hypothetical example, a smarter merchandising
investment could deliver $322 million of incremental
economic value add and a 131 percent return on invested cash,
along with these other benefts:
• Modifed internal rate of return: 76 percent
• Discounted payback period: 3 years
• ROI: 241 percent
• Net present value: $289 million
We’ve illustrated the potential benefts from investing in
smarter merchandising. An example of this type of innovative
investment is Elie Tahari, a global fashion design company.
After implementing an advanced business intelligence solution,
Elie Tahari now has greater visibility of vital business data and
has a seen a reduction in the reporting cycle from two days to
a few minutes and a signifcant reduction in supply chain and
logistics costs.
30
In summary, the potential value model illustrates that a
customer-centric approach offers quantifable benefts to
retailers by helping them increase revenue and margins, while
reducing operating costs, not just in the short-term but also
over time.
Questions to consider
• How do you rate the ability of your merchandising
organization to predict and adapt to changing market
conditions?
• How could improving your merchandising competencies
improve your operational agility and add value for your
company?
• What is your potential economic beneft?
Figure 4: Sample ?ve year cash ?ow pro?le
Source: IBM Center for Applied Insights
The discounted payback period
29
for this hypothetical
implementation is three years. Looking at the model results
through a fnancial lens, we see a positive net present value
by outcome and overall (see side bar). We modeled a
fve-year phased implementation with benefts accruing
post implementation go-live and on a ramp-up schedule.
The net cash fows were discounted back over fve years at
15 percent of capital, and we assumed a modest 5 percent
return on invested net cash fow.
Corporate Marketing 13
Consider how an insight-driven approach
helps create a customer-centric
merchandising strategy with consistency
and agility.
Explore how an investment in
merchandising might add value
for your business
Effectively executing a customer-centric strategy is critical
to marketplace survival and improved shareholder value.
The marketplace and retail industry has changed:
• Market shift from product to customer focused; shortened
product life cycles
• Demanding, informed customers
• Prevalent competition and new business models
• Growing government regulation and compliance
• Increasing commodity and energy costs
• Inconsistent data, attribute and hierarchies
• Disparate, under-performing systems
These industry trends will continue to apply operational
pressure and retailers who cannot adapt will fnd themselves
marginalized by more agile competitors. Whether you are
experiencing one or more of these challenges today, or if you
simply wish to continue optimizing your operations, we can
help you.
IBM: Right for a changing world
At IBM, we collaborate with our clients, bringing together
business insight, advanced research and technology to help
give them a distinct advantage in today’s rapidly changing
environment. With our integrated approach to business
design and execution, we help turn strategies into action.
And with expertise in 17 industries and global capabilities
that span 170 countries, we can help clients anticipate change
and proft from new opportunities.
For additional support and to conduct an in-depth full
business value assessment including benefts and costs please
contact the authors.
14 The Value of Smarter Merchandising
About the Authors
Clayton Henke is the IBM Center for Applied Insights
Industry Champion for Retail. He has over 20 years of
experience leading innovation and business transformation
strategy development with retail and consumer products
clients. Having held various leadership positions in consulting
and fnance, he brings a unique perspective to his current role
where he is focused on helping retail clients explore the value
potential of improving operational competencies in their
businesses. He can be reached at [email protected].
Cynthia Coulbourne is the Global Retail Merchandising and
Supply Networks Portfolio Leader for IBM. She has over 20
years of experience leading merchandising and supply chain
improvements for global retailers and manufacturers both in
industry and as a consultant. In her current role, Cynthia
continues to work with retailers, industry organizations,
government, solution partners and the multiple divisions of
IBM to develop innovative solutions that drive speed to value.
She can be reached at [email protected].
Key Research Analyst and ROI Model Developer
Nick Kadochnikov is a senior modeler for the IBM Center
for Applied Insights. Responsible for development of ROI
models and simulation tools Nick has over 12 years of
experience utilizing advanced data analytics to build predictive
models, including propensity to buy, wallet estimation,
and other revenue and forecasting models in B2B space.
Prior to joining IBM Nick lead the development of
e-commerce marketing strategy.
Special Acknowledgements
We’d like to acknowledge the special contributions from
our core team without whose gracious contribution of time
and expertise this work would not have been completed.
Carrie Mahon
Cheryl Patchin
Chris E Hendren
Colm O’Brien
Don E Gordon
John McVicker
Joshua Chanin
Ken Lawler
Maureen Norton
Sarang Ghatpande
Shannon Miller
Susan Confort
Susie Schiffer
Corporate Marketing 15
Disclaimer
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26 Strategic value comes from the accelerated creation or adoption of new
ideas and solutions that position a retailer for future success, such as enabling
a customer-centric business strategy, increasing marketplace agility and
responsiveness and positioning the business for growth. Brand value is created
by strengthening overall brand, reputation and infuence, using thought, market
and public leadership to attract new customers and increase customer loyalty,
acquire top work talent and improve fnancial health. Societal value derives
from the creation of social, cultural or environmental benefts, such as making
product content and origin more visible, improving availability of high demand
products (especially in crisis situations) and reducing waste and spoilage.
27 All dollar values expressed in this paper are in U.S. dollars.
28 Using a hypothetical example, we modeled the investment and beneft
cash fows for a typical program life cycle. Solutions are phased over three years,
and benefts are ramped up over time. In Phase 1, we have included a sunk cost
to implement or upgrade a core merchandising solution. We have not attributed
any benefts to this solution. Clearly, if this competency already exists, then no
further investment is needed, resulting in a shorter payback period and increased
fve-year cumulative cash fow. Although we have not refected a fnancing option
on this chart, applying fnancial leverage smoothes out the investment profle,
the result of which is an earlier break-even point, albeit with a larger overall
investment.
29 Discounted payback period is the time from project deployment until the
cumulative benefts equal the initial investment, with the benefts discounted
by the weighted average cost of capital.
30 IBM Case Study. “Elie Tahari combines fashion savvy with powerful
analytics.” International Business Machines, Inc. 09 Feb 2010. http://
www-01.ibm.com/software/success/cssdb.nsf/CS/JSTS-82HSCN?OpenDo
cument&Site=default&cty=en_us
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