Omni-channel strategy: what role do category managers play?

What challenges do retailers face?

Retailers that were established in the online environment, the so-called “pure players”, now compete with directly with traditional retailers. While very different in terms of business models and the revenue structures, all retailers are ultimately chasing the bounty presented by the end consumer. The problem however, is that the lines between pure online retailers and traditional bricks ‘n’ mortar retailers are becoming increasing more blurred.

Without shelf space to contend with, online retailers often offer huge assortments. Consequently, inventory optimisation must go beyond simply determining the optimal levels of inventory. For these retailers, determining which items they themselves should or should not stock is an important question. In order to make such decisions, effective product life cycle management is essential here.

On the other hand, for retailers with physical stores, the challenge is less about assortment management and more about managing the distribution process between warehouses and retail locations. After all, demand patterns for a store in the centre of a major city will be very different to another store located in the countryside.

Given that pure players generally invest in a much broader range of items in much smaller quantities in comparison to traditional retailers, margins tend to be lower. Furthermore, with a high level of price transparency, online retailers are under constant pressure to keep prices competitive. With the additional requirement for effective SEO and paid click campaigns, marketing costs can also be much higher.

Fulfilment costs for online retailers are driven up by the fact that the end consumers order goods in individual units. However, personnel and location costs are but a fraction of the costs faced by a traditional retailer. After all, an online store has no real need for presentation stock!

Although, out of stocks have a big impact on the processes of traditional retailers, it can be very difficult to measure. For example, regardless of whether a customer’s purchase decision is influenced by a store assistant or not, in a physical store environment, the chance of product substitution is high. For online stores however, the internet has brought about much greater transparency. Within a matter of seconds, a customer can now easily find five different webshops, each offering the same product with the right price, delivery time and, of course, availability. Consequently, no stock means ‘no sale’.

Managing the long tail

Many webshops depend on their broad and deep assortments to provide a unique selling point. Within these large assortments, many different product variants are offered. This in turn can often mean that the famous 80:20 rule can sometimes shift more towards a 90:10 rule. However, while the percentage of articles within the assortment that bring in the bulk of the turnover is admittedly smaller, as the entire assortment grows, in absolute terms the total number of articles that contribute to the bulk of the turnover will only continue to increase. The tail of the assortment can also create value: given that price-based competition is much lower for these items, long tail products can demand much higher margins.

Many physical retailers also make their assortment available via an online channel. As part of their web shops, many blended retailers also try to offer an extensive long tail. However, unlike pure players, traditional retailers often attempt to integrate their online operations with their physical store processes. This provides the ability to encompass local non-moving items which would not normally sell into the assortment. However, this raises an interesting question: Which articles should be made available in physical stores and which should only be offered via the online channel online?

Whereas pure players are experienced when it comes to managing an extensive assortment with a high degree of rationality and extensive or advanced automation, the traditional category manager is not as familiar with this. As a result, in many cases, the long tail does not get the attention it requires which can have a direct impact on margin.

Turnover per m2 v.s sales by product per channel

The traditional category manager is always trying to achieve the right assortment for the space available: ensuring that the assortment is in line with both the store format as well as the requirement for presentation stock. The merchandiser is then responsible for translating the proposed assortment in an optimal planogram or shelf plan. The operational impact of a shelf change is so large that, on average, this can often only be done one or two times a year. Consequently, this can often result in suboptimal results from day one!

The product manager of a webshop is typically more focused on the performance of an individual item rather than the entire assortment. The responsibility of the product manager is to check on a daily or even hourly basis if an item is still profitable. Given that margins are much smaller, product life cycle management is even more important here.

Furthermore, to compete with webshops, category managers within traditional retailers also need to maximise the revenue yield at both a product and a channel level. Being able to differentiate the strategic approach for each shop and channel is an important prerequisite for a solid Omni-channel strategy. With the support of detailed data, the category managers can make fact-based decisions far more easily. However, this requires additional system support and a greater requirement for the work of analysts.

From ‘gut feeling’ to ‘fact based’ decisions

The decision processes behind inventory and assortment management are becoming increasingly more fact-based. All departments within a retail organisation are under more and more pressure to become leaner and more efficient. However, Omni channel retailing demands bigger assortments. This in turn means that even more people have to make quicker and more frequent decisions. As a result, automated ‘business rules’ and ‘situational awareness’ are becoming more and more important.

The second competency retailers have to develop, is the ability to extract valuable information from ‘big data’. All channels provide an incredible amount of data, of which the potential is far from being fully exploited. A lot of retailers are already able to see exactly how much revenue they have achieved in a particular store in the last 5 minutes for instance. However, few retailers are able to combine this information with data from other sources such as Google or Facebook through utilising smart algorithms and scenario planning in order to forecast what the future will bring.