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Has e-commerce turned the concept of category management upside down?

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In another exclusive article for WhichPLM, ITC Infotech discusses the effect that e-commerce has had on category management by comparing various factors in a retail setting with e-commerce. This instalment comes from Rajnish Kumar, Global Practice Head of Retail Consulting for Soft Goods at ITC Infotech, and Myrtle Surendranath, Process Consultant for Retail, Footwear and Apparel at ITC Infotech.

If we look back in time to see how retail evolved, ‘mom and pop’ stores and specialty stores are the ones that initially existed in cities and towns. These are small, independent, family-owned businesses with small catchment areas, catering to the local population. Because of the small customer base and personal interaction, these stores had an understanding of their customer’s wants and needs, and accordingly stocked items to ensure product availability. They also offered services such as line of credit and home delivery, making it extremely convenient for the customers to shop.

However, as the cities and towns became bigger and the catchment areas increased, departmental stores came into existence, and for the first time shoppers had a range of products, brands and items under one roof. The departmental stores, however, were not able to offer that personalized service element that the ‘mom and pop’ stores could …but the customer was able to find all kinds of merchandise in just one store.

Population boom and a steep growth in cities and towns, in turn, caused the demand for food and clothing to rise manifold; this period also gave birth to modernization in technology and innovations, especially in food processing and synthetic material fabrications, which led to new wave of products and services. This change in the environment resulted in cost and efficiency becoming the driving force for the next wave of retail. These developments caused the retail industry to transform their models, moving from a departmental store format to a bigger and broader form of hyper or super market. The shopping landscape hence witnessed a revolution, transforming into big box retailers.

The sheer size and volume of these big retailers gave them the advantage to be able to procure products from the best source at the best price and provide a wide array of products on display for their customers and, hence, offering them the greatest choice. While big box retailers were not able to offer the personalized servicing element that the ‘mom and pop’ stores offered, but with innovations and technology retailers were able to deploy systems to capture and access consumer demands. From the use of bar codes and scanning devices to electronic data interchange and integrated logistics solutions, technological innovation was in high use among these retailers.

The 21st century saw the arrival of internet, which gave birth to a new form of retailing called e-commerce, which took the retail industry by storm. E-commerce not only provided customers the convenience to order things from the comfort of their homes, but also to avail home deliveries and choose from a wide range of product offering.

Big box retailers and e-commerce players are the major forces of trade in today’s times; it is inevitable for them to evolve every day to be relevant to their end consumers. The success of both the big box retailers and e-commerce players hinges largely on category management. Category management is not just fulfilling the customers’ needs, but includes a broader set of know-hows to make a larger impact, which includes Strategy, Space Allocation, Budgeting, Assortment Planning, Planogramming, Price Optimization, Promotions, Inventory Management and Analytics.

Let us dive deeper into the factors driving category management and its impact in a traditional big box retailer and an e-com retailer.

Aisles

Space

With any physical store, there is a big investment into space and a retailer must look at making maximum profits with the available space, however, with e-commerce, space isn’t a constraint. Or is it?

Let’s look at some data:

According to their data from 2014, Amazon Inc. has an active sq. ft. of 107,800,000, combined in all its fulfillment centers; considering their turnover figure of $88.99 billion recorded in 2014, their revenue per square foot translates to $825.51. Compare this to Walmart’s combined active square feet of all its stores, which stands at 1,134,252,106 active square feet, and with a turnover of $482.2 billion, the revenue per square foot translates to $425.13.

So this shows that both the e-tailer and the retailer have an investment into space, but for a retailer space productivity is more crucial as the e-tailer has an advantage by promoting marketplace concepts and allowing private third party sellers to use their website, resulting in increased profits with lower investments into space.

Planogram vs. Wireframe

A retailer constantly works towards planning an effective store layout and his/her goal is to have the right product in the right place, at the right price, and at the right time. A retailer uses a planogram to create this visual representation, which will indicate the placement of products in a retail store and shelf. On average, a store display captures the shopper’s attention in the first few seconds. Hence, a planogram executed with 100% compliance can be the difference between making and losing a sale. On the other hand, an e-tailer uses a wireframe to create a visual guide that represents the skeletal framework of a website. His/Her goal is to create a wireframe and, subsequently, a product display which ensures maximum merchandise visibility on customer searches with effective display of product information.

There also lies the additional challenge of guiding the e-com consumer towards right products and offers within the limited screen size.

Inventory

For many companies, inventory represents a large (if not the largest) portion of assets and, as such, makes up an important part of their capital.

The retail inventory model revolves around consignment and outright purchase, which includes the wholesaler, manufacturer and retailer. Merchandise/Inventory that a retailer sells from the outlet either comes as a consignment or through outright purchase. Under consignment model, a manufacturer or wholesaler places some of his merchandise in the retail store and allows the retailer to sell the stock.

A brick and mortar store does not have an option but to maintain an inventory. This will involve purchasing, receiving, unpacking, displaying, storing extras and selling as quickly as possible. In the e-commerce world, the inventory processing cost is clearly eliminated; one can opt to own or rent warehouse space to store inventory, or one can create a working relationship with wholesalers or manufacturers that ship directly from their facility, which is often called drop shipping. Most of the e-commerce firms opt to maintain their own warehouse and manage their inventory in order to maximize margins and get better returns.

Inventory Categorization

Can we say that inventory is a necessary evil in any organization, be it in the e-com or at a retailer? Every unit of inventory has an economic value and is considered an asset of the organization irrespective of where the inventory is located or in which form it is available.

In most organizations inventory is categorized according to ABC Classification Method, which is based on the Pareto principle. It helps us to understand the contribution of various product lines to the profits and identify the products that are blocking the working capital because of their slow movement. The outcome is to optimize the inventory so as to have the most efficient products in line.

Inventory in a brick and mortar store is distributed in each of its facilities and an MOQ of each model has to be maintained at each store, but in an e-com there is a centralized DC and one can maintain a smaller inventory and can have it replenished at regular intervals when needed, based on sales trend. It also has an added advantage for third party sellers who need not maintain an inventory. Although, given a low inventory level, the analytics on sales trends have to be perfected so as not to lose sales or incur back orders.

Analytics: Footfalls vs. Eyeballs

Gone are those days when the retailers were only concerned about what the customers are buying and what things are attracting more customers, but now they also keep a close eye on how the customers are buying the product. Or, in short, the retailers today are more concerned about an individual customer’s behavior.

Analytics

Retail stores now track the customer flow in stores – customer flow is the movement of customers within a store from the time they enter to the time they leave.

The retail shop’s layout, design, placement of a product, discounts offered etc. are some of the important criteria that dictate a customer’s behavior in a store. In-Store Heat Maps help in proper optimization of the store. It helps the retailer identify the hot spots, dead areas and bottle-necks. The retailer, therefore, effectively manages the inventory and plans the category in each region and cluster based on this data.

E-commerce websites are also investing a lot of money and resources into analytics, which records data regarding detailed insights into customer behavior. Merchants can use data in many different scenarios. This can include comparing traffic to a particular product to the sales of that product.

E-com companies use tracking technologies such as cookies, click redirects, pixel tags, and tag containers for gathering analytics on a personal level.

Hence, analytics is now very personalized, and based on this personalized analytics, the e-tailer is able to customize the online store for each of their customers, based on individual shopping trips. Also this has less bearing on inventory as the product is shipped from the centralized warehouse. However, with physical brick and mortar stores this personalization, even at a region level, would mean a lot of investment into inventory.

Promotions

E-commerce provides a consumer with great benefits, one is able to sit comfortably at his home and compare prices and product features across websites. Hence, it’s extremely important not only to be available but also to be ready to have the best deals made available. Just selling products at extremely low prices is not going to help, as a buyer is only going to buy the products that he/she is interested in and so it becomes extremely important for the e-com category manager to (a) determine what the prospects want to buy, and (b) ensure to sell a mix of products that have a chance of achieving the target margin.

Sale

Discounts, the Primary Driver: Category Managers in e-commerce are focused on keeping a check on their competition and ensuring that best deals are made available as it’s primarily driven by deals, freebies and free shipping.

The e-commerce websites should be able to identify the interest of people within seconds of entry to the site, shopping deals and sales are said to be drawing consumers towards purchase.

Consumers are no longer influenced by the store layout, witty window display, or carefully chosen color scheme. It’s all about images and product descriptions, capturing photos that can answer people’s questions about product and consequently helping them make the purchase.

Another platform that today’s consumers are hooked onto is Social Media; consumers no longer have to walk into a physical store to check out products. It’s said that almost 20% of online purchases are accomplished after surfing through social media sites.

So, we can rightly say that the effect of promotion on category management remains the same, because in both the cases one cannot do without mindless promotion. The point to be noted is that one cannot keep selling products on discounts, because this is going to have a bearing on margins.

Though from the outside the category management for the big box retailer and e-commerce players seem to be different, in reality, when we drill down into the various aspects and principles like space, analytics and inventory that govern category management, we come to understand that the core principle of category management remains the same.

Lydia Mageean Lydia Mageean has been part of the WhichPLM team for over six years now. She has a creative and media background, and is responsible for maintaining and updating our website content, liaising with advertisers, working on special projects like the Annual Review, and more.Joining mid-2013 as our Online Editor, she has since become WhichPLM’s Editor. In addition to taking on writing and interviewing responsibilities, Lydia has also become the primary point of contact for news, events, features and other aspects of our ever-growing online content library and tools.