Teck-Hua Ho is a big fan of Ben & Jerry's Chunky Monkey ice cream. So big a fan, in fact, that the University of California Berkeley Haas School of Business professor says he shops only at grocery stores where it is carried.
Such "lost sales" are nothing new to grocery retailers. With limited shelf space, thousands of products to choose from and rapidly changing consumer tastes, grocery managers are unable to cater to every consumer. Hence, Ho says, they are constantly adding and removing products in a never-ending quest to maximize the revenue by finding the product mix that sells best. So if Chunky Monkey is not among the best-selling brands or flavors, wouldn't it make sense that not every retailer carries it?
Not necessarily. By leaving Chunky Monkey out of the freezer case, grocery stores forfeit not only Ho's $3 to $5 ice cream sale, but also his entire $200 grocery order.
Is it worth carrying a single product, possibly even a slow-selling product, if it means keeping a customer?
That's the question Ho, with partners Christopher Tang of the Anderson Graduate School of Management at the University of California Los Angeles and Juin-Kuan Chong of the Business School at the National University of Singapore, addressed as part of a study on category assortment planning. The trio analyzed the effect of product turnover at grocery stores as part of a look at category management and set out to quantify exactly how much lost category sales affect profits.
In category management, product assortment decisions usually are based on the performance of the entire category rather than on individual products, according to Washington, D.C.-based Food Marketing Institute. Typically, consumer-purchase data are compiled by scanners at the check-out stand; that information is then sent into a category management software program that analyzes which products customers are buying and which ones they're leaving on the shelves. The idea is that such analysis helps grocery buyers figure out which products are most appealing to consumers within any given product category.
As a result, Ho says, most category management activities have centered around stocking shelves with popular, fast-selling items and pulling slow-selling items off the shelf and replacing them with something else.
And that approach turns out to be the problem, Ho and his colleagues concluded.
By simply tallying product category sales to determine "hot" products rather than looking in detail at what consumers want and trying to understand the possible relationship between the products they buy, food retailers may actually end up losing other product sales.
It's not just about carrying a particular flavor of ice cream, Ho says. If a consumer consistently buys a particular type of slow-selling soup that will be used in a recipe that requires many other ingredients, for instance, pulling the slow-selling soup off the shelf can actually hurt sales of other products—even though category management analysis says pull it off the shelf to make way for another product.
In a study reported in the January 2002 issue of the trade journal Manufacturing and Service Operations Management, the researchers looked at the consumer purchase records of 60,000 shopping trips at five major Chicago grocery stores over a two-year period. Ho and his partners found the stores sacrificed between 1 percent and 10.2 percent of sales in each of eight key categories by denying consumers the variety of products they crave.
There is a solution, Ho says. Stores can increase their category profits as much as 25.1 percent by changing the assortment of products they carry to not only include top sellers but also less popular and even niche or specialty goods. In looking at eight categories—including ice cream, coffee, cereal and yogurt—the researchers found consumers wanted more variety within categories. For example, customers desired many different flavors of ice cream, rather than more brands of similar products.
"Picking out the top 10 products in a category is easy," Ho says. "It's picking out the other 100 products in that category that's hard. The key is to see what consumers prefer over time and to look at their purchases over time rather than look at store-level sales in the aggregate."
Looking at what products consumers like and what products they buy in relation to other products—as opposed to picking best-selling SKUs—turns out to be a somewhat revolutionary concept in food retailing. To help convince grocery managers of the advantages of their approach, the researchers laid out formulas that can be used to help those managers calculate lost sales in particular categories and to reconfigure their category assortment to boost profits.
"Some people might come to the store and still not find the right item, but there might be some other products they are willing to try because they can pick from a variety of types rather than brands," Ho says. "That goes back to understanding the consumers in depth, and understanding what kinds of products they like."
"A" Is For Ambiance
Consumer likes and dislikes are only part of any successful retail equation, says Kevin Kelley, principal at Shook Design Group in Charlotte, N.C., and an expert in designing food and retail environments. Kelley says that today's food retailers also need to understand the myriad approaches that consumers take to shopping. "When we look at stores, we approach it like sociology or retail anthropology. The demographics aren't as interesting to us—you can take the same three families, demographically speaking, and they will all shop very differently."
One family, Kelley says, might shop conspicuously—looking for certain brands and specific products. Another might want products paired to make it easy for them as they shop—for example, stocking soft drinks near the frozen pizza. Other consumers are insulted by obvious attempts to package items. These are the mavens, the experts in the product categories in which they are interested, who take pride in picking out individual products on their own, he explains.
So what's a retailer to do? Kelley says the key to retail success is as much about the consumers' attitude and perception of the retail environment as it is about the individual products. "We start by asking 'who is the customer? What is their attitude and values toward the products? What will trigger them to buy?'"
Shook Design's research has shown that the "purchase equation becomes bigger than the product. It's also about the environment and the experience" the retailer creates through signage, store layout and decor, and even the look of the nametags worn by employees, Kelley says.
After environment and the shopping experience, consumers are next motivated by community. "Loneliness is a big problem in society. Retailers who can convey to their customers that they are offering a way for them to be part of a community—for natural and organic sellers it's the health food community—will be more successful than those who just pile products on their shelves," he says.
As for category management, Kelley adds that retailers must avoid the "lumber yard" mentality, according to which products are stocked with like products and the retailer views itself as a distribution center.
"We want them to stop thinking like a lumber yard [and more] like a lifestyle store," Kelley says, explaining that consumers are getting confused about the role of the grocery store in a marketplace filled with so many competitors, including specialty stores. "Consumers are looking at stores and saying, 'What's your story? Why should I buy your meats, your produce?' Retailers need to decide what their brand means, and they have to manage that meaning and tell their story in each aisle."
To help tell that story, Kelley says retailers should work on three things:
- First, make sure that consumers are quickly oriented when they walk in. "On a human level, we all need orientation. Consumers want you to tell them where the 50-yard line is as soon as they walk in—where's the produce, where's the dairy?"
- Second, retailers must work on their credibility. If you stock grass-fed meats and poultry, use signage and posters that convey that. If you offer high-quality products, tell that to your customers and show them by means of visual aids and decor that cues and triggers them.
- Lastly, have an ongoing dialogue with customers. This can be achieved through signage and decoration—including how food is displayed and presented.
Gena Vonderschmidt of the St. Louis-based Nu-Era Group, which offers retail store fixtures and supplies, says retailers, as part of self-assessment, should role-play. "Pose as the customer. Walk in your front door with no general desire for natural/ organic products. Take two steps inside and note your first impression. What is the first thing you see? What area of your store do you tend to gravitate toward first?"
She adds that products should be displayed according to their functional use rather than by brand name. "Perhaps your overhead signage reads something like this: Heart Healthy, Vitamin Supplements, Hygiene/Personal Care," she says. "This trend is based on the fact that brand names are becoming more and more saturated by competitors, making it difficult to tell one product line from another. It's also a result of consumers' needs for quick and easy information, and most importantly, for convenient shopping."
She also says that retailers should think outside of the box—or shelf—when displaying products. Multilevel bins, for instance, work well for bulk displays. Having a family of signage that leads consumers to products and areas of special interest and that emphasizes promotions and communicates product benefits is also key.
"Your in-store signage campaign will become your silent salesperson," Vonderschmidt says.
Connie Gugielmo is a freelance writer in Los Altos, Calif.
Natural Foods Merchandiser volume XXIV/number 3/p. 60, 62
Natural Foods Merchandiser volume XXIV/number 3/p. 60