Extreme Weather Has Become the New Normal: Do You Have the Right Retail Strategies in Place to Sustain Profitability?–Part 2

Extreme Weather Has Become the New Normal: Do You Have the Right Retail Strategies in Place to Sustain Profitability?–Part 2
October 23, 2012 Revionics

(This is the second blog in a two part series that provides retailers with the retail strategies necessary to navigate the global retail industry’s New Normal, which is expecting and preparing for extreme weather worldwide that will substantially impact their costs)

As we pointed out in the first blog of this series, with extreme weather becoming the New Normal for the retail industry it is important that retailers are able to respond and prepare for this type of weather volatility with price, promotion, space allocation and assortment strategies and tactics. This will enable retailers to maximize return on investment, respond to the inflationary impact and address the subsequent changes to consumer demand patterns.

In this blog we will touch on how you can deepen customer loyalty, sharpen your competitive edge and refine your merchandising strategy through the use of predictive data models, key value item and market basket analysis, and what-if simulations. In addition, we will cover key ways to differentiate from the competition using image enhancers as well as the optimal use of demand forecasts in assortment and space decisions when there are product scarcity issues.

Strageic Pricing Approaches:

The options mentioned in the first blog of this series will help move retailers to short-term pricing strategies that can reap long-term rewards. So, what’s the best way to assess whether such strategies will provide anticipated gains in times of flux?

One effective and proven way is to leverage Predictive Data Models, which Revionics’ optimization technology offers. This technology provides weekly updates, or even more frequently for some products, allowing retailers to quickly evaluate the impact of changing competitor prices and frequent costs changes. This empowers them to immediately respond and decide what the best course of action is for price, promotion and markdown recommendations.

Retailers should also conduct more frequent Key Value Item and Market Basket Analysis. These help to establish a baseline from which they can quickly identify and understand changing shopping behaviors, shifting loyalties and consumer sentiments in order to make fact-based modifications to pricing and assortment strategies and tactics.

Retail is an industry where it takes years to build an image and days to destroy one. What-If Simulation (a form of Gaming Strategy) can help retailers to: evaluate various alternatives for pricing strategies prior to implementation; anticipate possible competitor responses and/or pressures; and determine the best timing and increments for price modifications based on future cost changes.

Brand Image Enhancers:

A way that retailers can continue to gain market share, even during difficult times, is to differentiate themselves from the competition through brand image enhancers, including:

  • Sympathizing with the customer’s plight. There are different types of messages and value propositions that retailers can develop — such as an entire campaign around letting their customers know that they understand the impact that higher prices are having on them and how they are helping to ease the “price pain” for their customers.
  • Being a helpful resource. Image enhancing messaging could include providing helpful tips to consumers such as recipes that highlight substitutable items that are not drought impacted or ways that drought impacted bulk purchases should be stored to maintain quality and freshness.
  • Offering real solutions. Establish “Meal Solution Centers,” which offer the opportunity to cross merchandise products in order to mitigate the impact of the severe drought on food supplies and their retail prices.
  • Introducing lower priced, private label products. Offering private label products in categories and subcategories affected by the extreme weather ensures that there is always a price-conscious alternative, which helps thwart loss of market share to low-end retailers.
  • Thinking bulk. Create alternative pack-sizing and attractive pricing on bulk purchases to support customers who are stockpiling.

Demand Forecasts, Assortment and Space Solutions:

Revionics Assortment & Space solution’s unique capabilities empowers retailers to leverage science and fact-based decision support, which not only recognizes loyalty, demand patterns and market shifts when making assortment rationalization recommendations, but also simultaneously identifies the appropriate space allocations and adjacencies for products, categories and departments.

Consider these approaches:

  • What-if simulation of space allocations can be highly valuable in determining the impact of cost and demand changes on profitability. This modeling can further offer insight into the best space allocation shifts and reductions in order to maximize the return on investment for both inventory and space.
  • Demand forecasts used in optimization models — when combined with future drought-related impacts — help predict the impact not only on categories that are directly affected by events, like the drought, but also on those that are indirectly affected. As a result, optimal tradeoffs in space and inventory at the item, category and store level can be understood in advance of actual demand shifts. This reduces the risk of out-of-stock and excess stock conditions.
  • Display and location/placement optimization can be used to influence consumers to purchase substitutes for products affected by commodity shortages. In this way, the negative impact of lost sales for products affected by shortages and price spikes can be offset by demand transference to other less impacted, higher margin products.

The New Normal:

According to Planalytics, weather volatility of this nature will persist on a global scale, with more intense flooding, heat and drought and larger, more violent storms.

To succeed in today’s New Normal and continue to gain a powerful competitive edge, retailers need to adopt demand-based predictive analytics and apply optimization intelligence to price, promotion, assortment and space decisions.

Leveraging solutions like these will provide retailers with the strategies and tools necessary to combat these present day and future challenges.