Data deals: 9 little-known but highly profitable retail insights
Any retailer who has been around the aisles a few times knows the old chestnut about diapers and beer. But kielbasa and lemon curd, or Coke and … a lot more Coke?
These unorthodox retail pairings are the kinds that become clear through rigorous purchase data analysis, and they can lead to significant sales increases. While the average response rate to consumer promotions is 2 percent, leaders in supermarket data analysis realize an average customer response rate of 10 to 15 percent, according to our research.
Curious to know what these grocery leaders are doing right, I reached out to colleagues Brian Ross and Graeme McVie at Precima, a retail analytics provider, and asked what they believe are the most overlooked but highly profitable retail insights. Following are their observations (and yes, kielbasa factors in).
Don’t promote underperformers: In-store promotions are a conundrum. They are relied on heavily, yet 20 to 50 percent generate no noticeable sales lift, according to the Boston Consulting Group. Another 20 to 30 percent dilute margins. One reason is that retailers are trained to promote underperforming items, thinking discounts will move them. Instead, if retailers shifted their promotional dollars to best-performing items, they could realize a 10 to 15 percent increase in gross profits.
Cultural preferences have many roots: Ethnic food preferences cross nationalities, as realized by one grocery store that began stocking foods to appeal to a nearby Polish American population. The foods sold well enough that a company analyst looked into it. "He analyzed other items of those who purchased the Polish items, noting the consistencies," McVie said. "He then analyzed other stores to locate high proportions of baskets containing the same set of non-Polish items." The grocer introduced the Polish products to these other stores, and they sold well. The lesson: What made the foods appealing was their uniqueness. The other stores did not operate within large Polish communities, but they included large numbers of adventurous customers who purchased non-traditional and international products.
High value is 20-20: In retail, the old 80-20 rule — or Pareto Principle — really plays out more like 60-20. Twenty percent of customers generate 60 percent of sales and 75 percent of profits. That customers are not equal in value is just one part of the equation. Not only do better customers spend more, they buy different categories, different brands, shop different stores, different days and have varying preferences on quality, selection, service, convenience and price. Identifying and analyzing those can inform pricing, promotion and assortment decisions that can result in a 1 to 3 percent increase in sales and profits above organic growth.
SKUs skew profit: The irony of choice is that it has the opposite effect with many consumers; faced with shelves stocked to the gills with products, brands and features, customers actually spend less. Walmart, in an effort to make its stores easier to navigate, in 2015 removed about 2,500 items from its shelves. By using purchase data to identify which products, features and brands matter to which customers, retailers can rationalize assortment and actually grow sales. "We recently recommended to one of our clients that they reduce assortment by 10 percent and they saw category sales increase by 4.6 percent as a result, while making room to expand other categories," Ross said.
Compliance makes money:Many retailers would be shocked to discover they aren't pricing the way they think they are. "In our experience, a retailer complies with its pricing strategy or policy on about 75 percent of prices or stores," Ross said, "That means that 25 percent of prices are not aligned, leading to inconsistent strategy, customer confusion and lost sales and/or margin." By using the necessary tools to better assess, manage and execute pricing strategy, retailers can strive for consistency that typically leads to better customer price perceptions and sales gains.
Many loss-leaders are losers: All retailers know the promise of loss-leaders. Promote a price-sensitive item (think soft drinks or milk) and while the retailer loses on the promoted item, the promise is that it will lure more customers, and those customers will ultimately spend more on other items like chips and cereal. The Boise chain WinCo, for instance, charges 99 cents for eggs.
It sounds so logical. In reality, generally 25 to 50 percent of loss leaders don’t actually increase traffic or lead to ancillary purchases — they can actually lose money. Customer and basket data are key to understanding which loss leaders are losers and which are winners.
Price sensitivity trumps competition: For many retailers, pricing strategy is based on the competitive price index. The retailer identifies a key competitive set and, often arbitrarily, establishes a target price position relative to the competitor — for example, pricing within 5 percent of Walmart. The problem is this approach is not based on data and it treats all categories and items the same. Customer insights on price sensitivity, in combination with competitive price information and price compliance, would enable a data-driven pricing strategy, allowing retailers to best meet customer demands, Ross said.
Temporary behavior shifts are big opportunities:A merchandising analyst noticed sales from high-value customers decreased sharply at its primary location during the summer months. Further analyses revealed some customers were making purchases from stores more than 100 miles away, in beach communities. "Their baskets were very different, particularly when it came to pack sizes," McVie said. "It was easy to conclude these shoppers were on vacation, and that they were not spending as much as they would have at the primary store." To increase sales, the grocer sent shoppers information about the secondary stores as well as offers for smaller pack sizes and vacation items such as sunscreen. The result: The number of vacationers who shopped the secondary stores rose, and their baskets were bigger.
Private matters: For many retailers, the typical approach to merchandising a private brand is to position it as a value-based alternative to major brands, establishing price points that are a percentage below the nationals. This is a sound strategy, but is not always enough. In many cases, private brands are in enough demand to warrant price-parity. Even when positioning the store brand as a value option, a better understanding of customer expectations and preference should result in more lucrative pricing. The Kroger Co., for example, stocks 14,000 private label items that are primarily produced in three tiers — value, banner and premium — and priced accordingly.
My takeaway from all of these: Look for the unexpected. The combination of customer insights derived from digital interactions, in-store technology and loyalty programs is unearthing new pearls of wisdom, and they are ours for the taking.
Bryan Pearson Bryan Pearson is President and CEO of LoyaltyOne Inc. and the author of the best-selling book The Loyalty Leap: Turning Customer Information into Customer Intimacy. www