I had the opportunity last week to moderate a day-long summit in London on the state of buying and merchandising processes in Retail. The context for the Buying & Merchandising Summit (developed by Legend Exhibitions, who also produce the annual Retail Business & Technology Expo (RBTE) in London) was that merchants need to realign their organizations and processes to accommodate the radical changes that have occurred on the customer-facing side of the retail business model, triggered by consumers’ “omni-channel ” behaviors.

Moving from a purely product-centric approach that uses transaction history and market metrics to forecast demand and plan assortments, to one that also considers new customer centric demand signals from the digital domain, is a huge change for all retailers that affects the very basics of the retail operating model. RSR’s February 2015 benchmark study on merchandising (Modern Merchandising: Managing Complexity With New Tools And Techniques) clearly identifies “understanding customer preferences ” as a top business challenge for merchants, superseding concerns about underperforming inventory and out-of-stocks (two perennial top concerns for retailers). The research also showed that retailers are on the cusp of major changes. In fact, the benchmark revealed that 44% of retailers with revenue in the $1-5B range, and 26% of retailers with earnings greater than $5B are planning to refresh their core merchandising systems. RSR partner Paula Rosenblum opined that this is “the moral equivalent of replacing a battleship engine while on the high seas “, and she might have been understating the difficulty.

How To Be Profitable In Today’s Selling Environment?

And so, with “change ” as the underlying premise of the conference, over 100 retailers came to hear from their peers in the industry. The agenda was packed with 20 speakers representing UK retailers such as Net-A-Porter, Maplin Electronics, White Stuff, Jigsaw UK, Tesco, Topps Tiles, Levis Strauss, Lyle & Scott, Thomas Pinkand, and several others. The keynote speaker was George Adams, an industry veteran currently advising Victoria Plum, a UK-based online retailer specializing in bathroom fixtures and accessories (formerly, Mr. Adams held CEO positions at Spicers Europe, Maxida DY, and Kingfisher).

His topic, “Driving Profit Through Delivering For the Customer “, got right to the heart of the matter. Adams rhetorically asked the audience, “how do you become a profitable omni-channel retailer? “, pointing out that the costs of running an online business (marketing, distribution, and the reverse logistics and handling associated with high return rates) aren’t necessarily lower than the costs associated with running stores. The speaker’s message was that retailers have to use the data generated by the digital selling environment to measure the operational effectiveness of an “omni-channel ” selling environment, and that means a new set of operational KPIs.

Listening to Mr. Adams, I was reminded of a factoid from a recent CEO study conducted by JDA (http://blog.jda.com/ceo-survey-says-revenues-are-growing-profitability-not-so-much/) that indicated that a very high percentage (in fact, 84%) of CEO’s are not confident that they can deliver omni-channel fulfillment profitably. Adams reminded the listeners that the P&L still matters, and that the only way to measure the profitability of omni-channel selling is by establishing new measures based on new data from new processes.

The “data ” theme would come up several more times during the conference. For example, Rajesh Kumar, the VP of Merchandising – Concept To Consumer at Adidas, underlined the need to analyze both the transactional and non-transactional data from the digital & physical selling environments to achieve key merchandising insights. Mr. Kumar stressed that three key data sources – customer data from CRM, ERP and POS transactional data, and social media data, are required to forecast demand, plan assortments and allocations, and engage in dynamic pricing, in today’s customer-centric retail world.

Mr. Kumar also pointed out that in Retail, data analysis tends to be “70% hindsight, 24% insight, and only 6% foresight “, and that those ratios need to almost be flipped if retailers are to move to a more agile business model – with the emphasis on “foresight “. But he warned that too often, analyses can miss the good in the pursuit of perfection, and that retailers need to focus on the “80% ‘A’ inventory in an ABC analysis ” – the 20% of inventory that create 80% of sales, not the 15% ‘B’ or 5% ‘C’ inventory.

Visibility To Give Customers Control

Jeff Bee, the Merchandising Director at Bonmarché, a UK-based clothier with 240 stores, focused on having the right inventory and making that inventory visible throughout its lifecycle. “Product availability is still ‘king’ “, he declared, and then went on to describe how the company over time had “bolted on ” supplies to accommodate new selling channels. The result was too much inventory in multiple locations, each with their discreet stock files- and that in turn resulted in problems “seeing ” available-to-sell inventory for online customer orders. But the merchant described how, even if all that inventory had been visible, there was still a chance that customer orders still wouldn’t be fulfilled, because of issues with inventory accuracy.

But complete and accurate inventory information may not be enough; Bee recommended that the best way to satisfy customers is to “give them control “, making the entire supply chain available to them during the selling process and allowing them to choose how they would like their orders to be fulfilled (for example, by choosing fulfillment from currently on-order quantity if they don’t need the product “now “). To that end, the retailer said that Bonmarché is working to create visibility all the way to on-order quantities, enabling the customer to choose between waiting for product to arrive at the DC, or substituting the product or abandoning the order.

Wall-To-Wall Changes Required?

As mentioned earlier, RSR’s recent studies clearly indicate that a fundamental merchandising process and system refresh is right around the corner for many retailers. Louise Baker, the Head of Inventory Management at Sally Beauty UK & Ireland, a beauty supply retailer, gave her own company as a case study in what that means. In her presentation, entitled, “Boosting Sales Through Taking An Omni-Channel Approach To Inventory Management “, she said that company’s merchandising objective is to be able to optimize the balance between service and supply. Echoing Bonmarche’s Jeff Bee, Ms. Baker said that it’s essential to achieve “real time data inventory accuracy “, in the stores, in the DCs, in-transit, and on-order. To accomplish that objective, Sally Beauty is in the process of a systems overhaul that even includes next-generation point-of-sale, to “close the holes ” where data can become inaccurate.

Ms. Baker also mentioned that Sally Beauty is pursuing a data-driven collaboration framework called “flowcasting “. Flowcasting is a process developed in the early 2000’s by Andre Martin, Mike Doherty, Jeff Harrop, and Darryl Landavater. In a flowcasting environment, every player in the supply chain works off of the same forecast developed with granular and unaggregated demand data from the selling environment. According to the retailer, flowcasting enables “one forecast and one inventory plan ” and addresses the nagging issues of out-of-stocks, overstocks, lost customers, and lost sales.

Baker also addressed the growing problem of returns in an omni-channel selling environment, stressing that retailers need to implement an automated root cause analysis capability to help operators quickly determine whether to return items to stock, mark them down, or write them off. The only way for retailers “to handle the new complexities of omni-channel retailing is to manage by exception “, she advised, and echoing Mr. Adam’s and Mr. Kumar’s earlier comments, recommended that retailers “manage the important 20% of your KPIs “.

Final Thoughts

If you accept the notion that consumers’ digitally empowered shopping behaviors have fundamentally changed how retailers sell to them, then it follows that there are more changes in the offing than just in the selling environment. The two other building blocks of any retail business, the “buy side ” (supply chain) and “operational engine ” of the business (merchandising, marketing, HR, Finance, IT, etc.) are in for big changes too.

The industry has focused much of its attention in the last five years on the customer-facing “selling side “, because customers have demanded new levels of service. The result has been net positive: the integration of digital channels into the rest of the selling environment and the reinvigoration of the stores. But that’s just the beginning – now comes the hard part. Just as RSR partner Paula Rosenblum said, now it’s time to change the engine – while it’s running.

It’s great that organizations like Legend Exhibitions are creating a forum for retailers to talk to and learn from each other about how to navigate these difficult challenges. Right now, all retailers are facing the same issues, but there will come a time when a new set of Winners emerges, those early adopters who’ve done the hard work. And my guess is that they won’t be so willing to share, because they will have achieved competitive advantages resulting from that hard work and a willingness to take risks.

So how soon will that new set of leaders emerge? According to a panel of retailers at the end of the summit, many retailers will still be working on the challenges created by omni-channel selling three years from now, but the leaders will have already created distance between themselves and their lesser performing competition.

But will the topics of 2018 be about “omni-channel “? “I hope not! “, exclaimed Paul Horsfield, the Merchandising Director at boohoo.com. “It’s just Retail. “