By Ann Train
Retailers now ramping up for the year-end holiday season need to also chart a course for the coming year. And pressures on profit margins can make this task daunting, especially given the proliferation of retail channels today. Meanwhile, advancements in technology are changing how merchants approach business, and they must leave no stone unturned in profit-sensitive areas such as pricing, merchandising, even chargebacks.
Recent studies show evidence of retailers refreshing large-scale merchandising systems, right down to core systems. "And this is something that retailers don't undertake lightly, because it's very disruptive to the enterprise, but we are absolutely seeing it coming," said Paula Rosenblum, Analyst for RSR Research LLC in a retail trends analysis.
R. "Ray" Wang, Principal Analyst and founder of Constellation Research Inc., agrees that retailers with antiquated systems have been reluctant to invest in new retail systems until recently. "Most retailers have cobbled together a hodgepodge of retail solutions architected in the past century," he said, noting that retailers want more than just the latest technology; they want to bring the content, network and technology together to transform their business models.
"When you think about new systems, of course they work in the cloud and they're mobile ready, but then in intelligence, what's really important is to figure out all the different attributes and how they tie back to the item, what patterns are happening, and in what kind of context," Wang said. "That's where artificial intelligence and machine learning start coming together."
For the payments industry, long familiar with the learning curves inherent with change, incorporating these new developments in retail science with the stream of POS upgrades being deployed to support both contact and contactless payments could make the transition to integrated automation far more efficient for retailers than would a single-systems approach.
Cognizant noted that its surveys consistently show that pricing remains top of mind for consumers, so retailers need to be mindful of this. And greater transparency from online channels has forced brick-and-mortar merchants to more accurately pinpoint pricing as consumers vote with their wallets while comparing prices on mobile devices.
"Price is important," said Karen Dutch, Senior Vice President of Marketing at Revionics Inc., a global provider of end-to-end merchandise optimization solutions for retailers. "Shoppers do expect retailers to get the price right, and it's your biggest margin lever." For those who get it wrong, price matching has proven ineffective. For two-thirds of merchants this strategy has resulted in lost business, she said.
Experts believe an effective strategy should reflect a retailer's brand and be spot on for its target shoppers, which are goals optimization tools can easily accommodate. "What demand sensing science, optimization and predictive analytics is all about is sensing and understanding what that shopper signal is actually saying," Dutch said. "Optimization products take in incredible volumes of data to really understand that."
Such data includes collecting information from POS systems for every store and every product. Optimization tools can also gather competitive data. Some merchants use the products to track seasonality, going so far as to monitor weather data to predict shopper preferences regionally.
"One of the things that optimization can do for you is localize it," Dutch said. "Most retailers have some concept of zones, but what we do is layer on with advanced analytics. If you look at that demand signal from the shoppers across all stores, is that still the right zoning from a pricing perspective? If a competitor lowers their price, how does that impact your shopper?"
Differences in shopper demographics and fluctuations in competitive landscapes also impact price sensitivity. "We've had cases where Wal-Mart dropped a store into an area where they had never been before and all of a sudden they became an incredible threat to some stores that really didn't need to think about it in the past," Dutch said.
In situations like this, she advises merchants to review key value items (KVIs), the handful of ultra price-sensitive products everyday shoppers are attuned to and to keep that list lean. "We've had customers that literally had 800 KVIs, and science said it's actually more like 200: here they are," Dutch said. "With that alone they grew margin by 2 to 3 percent, just by taking products off the KVI list."
Another reason ISOs should encourage merchants to support a data-driven approach is that there is simply too much data and not enough time. "That's why we have grid computing and these massive servers, multicore, because you need that to get through all the data and do something intelligent with it," Dutch said, noting that one of Revionics' core missions has been to make the science available to all retailers and easy to integrate.
"We have a lot of experience with smaller retailers," she said. "Just the fact that they're automating everything across all products, all prices, all stores, when they were doing this manually has made a huge difference. It's surgical pricing , really knowing where you need to be competitive and how competitive, and then finding those opportunities where you can drive a little bit more margin, where there is money on the table, and being able to capture that."
To this end some retailers have converted from paper labels to electronic shelf labels. "It's much more popular in Europe than it is in the United States, but again it's making it more seamless and certainly speeding up the time between when a recommendation is made and when it can be executed at the shelf, because you're not having to print paper labels and have people hang them, which takes time," Dutch said, adding that this helps reduce associated labor costs.
Most merchants have a financial plan, but not every merchant can link daily sales activity patterns to it, and merchants who continue to rely on disconnected legacy systems are at an extreme financial disadvantage, industry observers believe. Understanding this problem, Atlanta-based Logility Inc. developed a system that automates merchandise planning and allocation channel wide, start to finish, based on that plan.
"It takes that financial monetary plan and converts it to a merchandise plan, and then based on your merchandise assortment for the portfolio of products you're going to have for the next season, it will help you to position that at the right retail locations," said Karin Bursa, Executive Vice President of Marketing at Logility.
Bursa believes that monitoring POS data is critical. "That's actually the most current demand signal that you have," she said. "When you look at the POS data, what sold last night or the night before at a particular retail location, that's giving you a great read on your business, and that also helps identify how you need to replenish your store."
Replenishment schedules can range from several times daily for mall kiosks with little storage space to less frequently for larger retail spaces. "What happens with your daily POS sales data, if the merchandise is a replenishable item, it will automatically generate your replenishment orders for that store location," Bursa said. "We refer to that as a demand, pull-based replenishment."
With this type of system, products are shipped only as needed, which helps merchants, especially those with multiple locations, preserve profit margin by reducing the markdowns that typically occur when products are overstocked. By migrating from manual to automated systems, item replenishments can be precisely timed and targeted.
"You want to keep that merchandise moving, especially in those seasonal businesses, where the merchandise is what I refer to as perishable inventory," Bursa said. "You only have a certain window to sell seasonal items, so you need to really maximize the velocity during that period of time."
Managing that velocity also requires understanding the unique attributes of each location. Naturally, stores with a larger footprint operating 24/7 are more likely to have higher sales volumes than stores with smaller footprint stores operating fewer hours. But even stores with similar footprints can have different inventory requirements.
"One of our fashion customers revealed that they're actually holding back more inventory on their initial allocation," Bursa said. "They used to allocate 70 percent of a collection on the first allocation push. What they do now is allocate roughly 50 percent of what they source, and then they hold back the other 50 percent to replenish, based on demand," which she said has improved overall margin for this merchant and reduced markdown levels.
Another variable is whether the merchant has multiple sets of product offerings, where budgets and margins are spread across multiple departments, such as linens, housewares and furniture, for example. Or the merchant may have more focused offerings, such as women's apparel, where clothing and accessories are the two primaries. Different sets of rules would apply to merchandise optimization in each case.
"The ability of a retail optimization solution will help you automate all of that and ensure that when you have a bath towel, you have a washcloth and a hand towel available, so that one store isn't getting all bath towels and another store is getting all hand towels," Bursa said. "You want them, in that collection, together in some presentation at every retail location."
Her advice to ISOs working with merchants interested in expanding their footprint over time is to focus on how to improve margins. "Think about efficiency," she said. "Think about getting rid of the spreadsheets where possible because they can be error prone on their own. … And think about automating your replenishment process as much as possible. There is software to do all of those things."
Another company that hopes to unify all merchant processes is New York-based Infor, which is expected to bring to market in 2016, the Infor CloudSuite Retail. It is a series of enterprise applications for item, inventory, order, price and promotion, cost, stock ledger and sales audit, replenishment and allocation, and integrated planning management functions all rolled into one system.
Once merchants have a firm grasp of what optimized pricing and merchandising systems can do for them, the next step in protecting margins is to implement a chargeback plan with automated fraud filters. Excessive chargebacks have been known to quickly erode profits, especially during the holiday season when buyer's remorse tends to be highest.
Monica Eaton-Cardone, Chief Operating Officer of dispute mitigation and loss prevention firm Chargebacks911, advises merchants to think long-term on chargeback policies rather than reactively make short-term decisions. "When they start changing what worked consistently for them in the past, they start getting further away from best practices," she said, which can create inconsistency and open the door to liability.
Her company offers manual reviews to merchants and, through its Intelligent Source Detection system, delivers 106-point diagnostic reviews of merchant systems. "We help merchants to set up quality control for their businesses and diagnose tiny errors and glitches," she said. "We found that there are over 100 of them that have a way of causing chargebacks or decreasing revenue."
With automated fraud filters, which Eaton-Cardone highly recommends, it's best to take a conservative approach to identify true fraud and not trigger false positives, which can alienate customers. "In order to solve your chargebacks, don't look at a solution as being 'stop sales,'" she said. "Instead, look at a solution as identifying all the possible threats and making sure that you're not your own worst enemy behind the scenes." Rules-based principles also apply to this type of automated system, she noted.
A good fraud filter culls data from thousands of entries and narrows the field of potential declines for manual review. "Automated systems can help us refine thousands of sales down to just 100," Eaton-Cardone said. "But with human logic, you can refine those 100 all the way down to just 30, and now you have a pretty good idea those 30 are fraud; the other 70, chances are those were false positives. That's going to help increase your revenues."
Two comprehensive chargeback prevention products have recently entered the market. One is from Chargeback Gurus, which launched its 360-degree online fraud and chargeback prevention solution during the 2015 Money20/20 event in Las Vegas. And Global Risk Technologies, in collaboration with Inform GmbH, now offers end-to-end chargeback compliance to merchants and acquirers across the United States and Europe.
As part of the monitoring process, systems should be in place to identify friendly fraud, including a clear return policy. "What we see is any type of electronics product, like smartphones, because those have a quick resale value on the street, so it's easy to transfer those into cash," Eaton-Cardone said. Friendly fraud could also involve a mixer, for example, purchased online that is later returned to an unrelated physical store for a refund without a receipt.
Failure to test the delivery rate of emails can result in hidden chargebacks for online merchants. "A lot of merchants use the same SMPT (simple mail transfer protocol) server to send email confirmation for shipments as they do for confirmation emails used for email marketing," Eaton-Cardone said, adding that this is a problem because often the shipping confirmation is marked as Spam, the customer never sees it, cancels the order and requests a refund.
Like others, Eaton-Cardone is a firm believer in establishing redundancy at every level of business so that when complaints occur, merchants can handle them before they hit the bank as chargebacks. This reduces refunds linked to products ordered but temporarily out of stock, especially in multichannel environments where merchandize optimization is so important, she noted.
Returning to basics, brick-and-mortar merchants who have dedicated quality control people responsible for overseeing in-store processes can greatly reduce returns on products that might otherwise pass with minimal or no inspection.
Perhaps the best advice experts have given to help merchants transition smoothly from this holiday season to a profitable new year is to prepare for the unexpected events that inevitably happen by establishing integrated systems across the board. Chances are that a well-programmed, automated system will spot and prevent profit loss issues that merchants using legacy systems would be hard pressed to find.
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