To meet consumer needs, retailers must go beyond functional over-specialization, freeing merchants to see a bigger picture.
Consumers, we all know, want a frictionless experience across all touchpoints. They’re increasingly intolerant of out-of-stocks. They’ve become empowered, thanks to revolutions driven by digital technologies and the COVID-19 pandemic. Retailers, we all know, must become even more focused on meeting those ever-expanding consumer needs. But how?
Retailers need to reconceive the role of their merchants. They must reject functional silos and work across channels, activities and functions, including supply chain, finance and marketing.
When retailers take that broad view, merchants can improve profitability. Increased basket size and reduced out-of-stocks will achieve gains of 100 to 200 basis points in top-line growth. Meanwhile, streamlined supply chains and optimized cash flows will achieve an additional 200 to 500 basis points of margin expansion. But such merchant empowerment requires companywide investment in strategy, planning and cultural change.
Grasping consumer preferences
Since it launched in the late 1990s, Blue Moon beer has come to be served with a slice of orange. But the category-centric reporting data that retailers send to their separate fruit and beer buyers never showed it.
The same holds for any number of needs and trends across the basket and store. A merchant may be a great category expert in breakfast cereal or hair care, but a consumer shops for all needs, not just a specific category. Today’s good retailers do execute cross-basket promotions for predictable events such as Valentine’s Day. But tomorrow’s great retailers will see dozens more such cross-merchandising opportunities, thanks to analytics that augments merchant intelligence.
These opportunities arise when the retailer’s culture honors cross-channel and cross-basket consumer experiences. That culture should value a merchant for acting on the best signals to improve consumer experience. For example, imagine that the next trendy beer is served with a slice of watermelon. (We’re not totally crazy: For fruit-beer combos, watermelon ranks ahead of orange on one website.) What if your merchant sees this trend in the data? You can be a first mover, offering digital and in-store displays, and alerting beer buyers to a deal on mini-watermelons through a phone or an app.
Right product, right place, right time
The supply chain provides a great example of specialization as a double-edged sword. Modern supply chains are so essential, wondrous and complex that one can pursue a master’s degree in managing them. But today that complexity is too often served to merchants as a mysterious internal tax on their product rather than an opportunity to optimize service, sales and supplier engagement.
Beyond in-stock metrics, merchants generally know very little about their products’ journey to the store and associated costs. Might they make better decisions if they were more informed? For example, consider a seasonal product. If you are informed that its delivery is behind schedule, you could switch to a faster boat to deliver on time. You would pay more for logistics, but that’s still cheaper than being out of stock or scrapping your promotion.
Silos created this problem. You have one silo of training, incentives and metrics for merchants, and another silo for supply chain managers. Today’s technological tools offer opportunities to work across functions. But they succeed only if retailers commit to a culture of lowered silos.
Making a financial difference
It’s great that merchants own their own profit-and-loss statements (P&Ls). That gives them incentives to make the best decisions. But those P&Ls often exclude other financial components, such as supplier payment terms. These terms have huge impacts on retailer cash flows — but they belong to finance professionals and the balance sheet, not merchants.
Why would retailers suboptimize merchants, their best negotiators, from effectively negotiating supplier payment terms? The reasons have to do with internal accounting, budgeting and culture. But mostly, they have to do with financial visibility and incentives. If you can provide merchants incentive by including payment term impact within margin, you put them in position to improve corporate performance.
Seeing a big picture
Merchandising includes elements of creativity. For example, item selection, shelf placement and subtle forms of consumer influence are part art and part science. Can your culture galvanize that creativity and help focus it on essential problems? One way is to provide merchants with a more realistic picture of item and vendor performance.
We found a fascinating example with a sock manufacturer. As it sold different types, sizes and assortments of socks to Retailer A, it packaged them in six different cases. Retailer B, acquiring basically the same product, “needed” 41 different cases. The manufacturer charged Retailer B for the complexity of managing all that cardboard. At Retailer A, merchants were better informed about the big picture and avoided those costs, improving both its profitability and the manufacturer’s service metrics.
Good merchants know what the customer needs. Great merchants — creative merchants — can also ask what the customer doesn’t need, and how to reduce costs in those areas. This creativity is enhanced, or inhibited, by the retailer’s transparency, governance and culture.
Confidence amid chaos
Once upon a time, retailing was simpler and merchants could be generalists. They made diverse and sizable contributions to the bottom line. Then the complex opportunities of globalization and digitization forced retailers to master functional disciplines. But increasingly, new tools can drive a new (old) holistic view.
With consumer behavior becoming ever less predictable, continued chaotic conditions seem likely. Retailers need resilience — the ability to pivot quickly. To do that, they need a culture that empowers talented merchants to make bold, informed big-picture decisions.
Marybeth Hays is executive-in-residence, and Steve Cunix is a principal in the consumer practice of Kearney, a global strategy and management consulting firm. They can be reached respectively at Marybeth.Hays@kearney.com and email@example.com.