The End of the Endless Aisle

An introduction to assortment planning for physical stores: How to approach it and what factors to consider.

Physical Stores: A Tricky Place to Sell Goods

I say this only half-jokingly, as anyone who has planned, allocated, merchandised, and replenished physical stores will know – especially after a decade of decreasing footfall. Have you been building an online-only D2C brand? Are you thinking of adding physical stores to your digital-pureplay marketplace model? Read on. Even though selling in the physical world may at best seem old-school to you, don’t underestimate the task at hand. Here are the key factors to get right.

The Pilot/Test/Invest Expansion Strategy

Many years ago, as a young consultant, I was introduced to what I to this day consider one of the fundamental principles of retailing, or even of business in general: Pilot/Test/Invest.

While this may seem rudimentary, I have seen new entrants to the world of physical retailing fail miserably at it time and again. Driven by greed and the desire for fast revenue growth, many traditional wholesale fashion brands burnt money by rapidly opening too many new stores, and having to close them again when they were not commercially viable (e.g. PUMA in the late 1990s and early 2000s).

No matter how strong the pressure and temptation to launch a new physical channel of distribution, you’d be well advised to fine-tune your store model on a small scale (max. three stores) until you are certain that it can deliver a solid 4-wall profit. Only then should you think about expansion on a larger (or faster) scale.

While there are many lines to a full retail P&L, let’s have a look at some of the factors to do with assortment planning and how to fill a physical store in the most productive way possible.

A Clear Target Consumer

A clear target consumer is your basis and the compass that guides what types of merchandise you sell, at what price levels, along with many other dimensions in your assortment mix. Defining target consumers or shopper personas is worth a whole series of articles in and of itself. Suffice it to highlight here that it needs to be actionable for your buying team. If your buying team was not involved in defining consumer profiles, if they don’t feature specific product or brand preferences, they won’t be of much use and leave the door wide open to interpretation.

assortment planning consumer profile

Typical dimensions of a target consumer profile (Graphic: Christoph Berendes)

A Homogeneous Store and Location Portfolio

Once you are clear on who you want to sell to, you need to find a way to reach these consumers. What size of store in what type of location will allow you to reliably and profitably sell to your customers?

If you sell luxury goods, a location in a shopping centre or on the outskirts of town won’t usually work. If you are selling lower priced items, a prime high-street location likely won’t be affordable nor necessary. Following our pilot/test/invest mantra, you will probably have to experiment to find the most suitable location types. But once you have found them, you should keep as close to this ideal as possible when selecting future store locations.

To give you a flavour of what an excessively broad store portfolio looks like, have a look at the following example from a German retailer with a network of approximately 150 stores. Even when accounting for outliers (large flagship stores and small convenience stores in travel retail locations), the spread from smallest to largest stores is still a factor of 10, i.e. the larger stores are 10 times the size of the smaller stores.

Distribution of store sizes of a German retailer (Source: Christoph Berendes)

We can only assume how this broad store size portfolio came to be. But it certainly poses all sorts of challenges when it comes to displaying a coherent and somewhat unified assortment to the supposedly clear target consumer. Of course, real life never goes exactly to plan, and sometimes you have to compromise to get a store location in a desired city or street. But just how far should the compromising go? A healthier spread between smallest and largest stores would be a factor of 2 to 3, at most. This should allow you to display a coherent assortment that makes sense to your consumers in most locations. The assortment should be both, powerful in terms of brand recognition from a consumer perspective, and manageable from an operational planning and execution perspective.

On top of the large size range, the retailer in this example also had stores in a multitude of different location types. From inner-city high streets with 1a locations, to city shopping centres, greenfield shopping centres, and travel retail locations in train stations and airports, virtually no location type was not represented in their store portfolio. Quite the task to plan, allocate and merchandise such a portfolio. We might also question how coherent the targeted end-consumer group really was in this case.

Option Capacity per Store

The discussion around space has another, even more detailed dimension. This may come as a surprise to anyone used to ‘endless virtual showrooms’ – it’s the limited amount of selling space available to display merchandise. The number of options you can display should be the starting point for all your merchandise and assortment planning, and it depends on a variety of factors.

For instance on the type of shelving system(s) you use, on the product categories you stock, on the way you display items (folded, on a hanger, in a box, etc.), or on the time of year (winter items are bulkier than summer items). Gaining clarity on these factors for each store in your network, for each season, is a necessity to manage your stores profitably. This requires close cooperation with your store visual merchandising and real estate/architecture teams.

assortment planning product display

Visual merchandising guidelines for product display options (Source: Christoph Berendes)

When stores are refurbished, you are likely to end up with multiple rack systems in parallel use. Make sure that your option capacity data is always accurate and reflects the most recent refurbishment status. Without accurate capacity data, you are likely to over- or under-stock your stores, compromising revenue potential and frustrating store staff in the process.

As an interesting side note for anyone thinking about a hardcore version of online retail in an offline world, have a look at my recent article about the Amazon Style store. Amazon breaks with the old paradigm that goods need to be displayed in many sizes. In their Glendale store, Amazon implemented a system where only one item per style is on display on the shop floor. By scanning an item’s QR code and using the Amazon Style app, customers get their size delivered to a personal fitting room.

For now, let’s assume you are not trying to compete with Amazon on tech and stick to a more traditional approach of displaying your merchandise in stores. To do this right, let’s introduce two terms: store clustering and assortment modules.

Store Clusters and Assortment Modules for Fine-tuning

While we aim for a store portfolio as consistent in location type and size as possible, there will be noticeable differences in consumer demand based on other factors, like regional climate or clientele, even in smaller markets like the DACH-region (Germany, Austria, Switzerland). Smaller retail chains with less than 30 stores can plan for stores individually without spending too much time on it. However, for bigger chains like the one used as an example above, it makes sense to ‘cluster’ stores to reduce planning complexity.

assortment planning clustering

Store clustering in assortment planning (Source: Christoph Berendes)

Store clusters should be as internally homogeneous and as externally heterogeneous as possible. Each cluster will receive an assortment that is fine-tuned to its demand profile. Commercially relevant differences can be based on a multitude of factors: from large regional events like the Oktoberfest in Munich, to the demand for more outdoor-based apparel in rural areas compared to city areas, or regional temperature variation. These and similar factors drive differences in what sells well in a particular store or group of stores. Based on what sells well in each cluster, retailers plan assortments by store cluster rather than for each store individually. Fine-tuning for individual stores will happen at the allocation stage, when the current stock situation is clear.

Once clusters have been identified, it’s necessary to define the target assortment mix by cluster. The example below shows a retailer who uses product style groups and ‘fashion degree’ to allocate a share of the available space to each of the 12 segments. Note that this also requires assigning each brand to just one of the segments of the matrix, despite brands often fitting multiple segments.

assortment planning modules

Assortment mix by cluster (Source: Christoph Berendes)

Assortment Modules

Now that you have identified store clusters and decided how to differentiate your assortment planning by cluster, it’s time to populate the stores with products. A good way to do so pragmatically is to use so-called assortment modules. Even though you have identified groups of stores with similar demand patterns, you likely have a range of store sizes and a varying space productivity per store within each cluster. Assortment modules are set up to achieve a coherent look across stores while filling different spaces.

Buying teams often use the following principles when putting together assortment modules:

  • Definition of a ‘base assortment’, i.e. items that all stores have to carry. The base assortment reflects the target strategic assortment mix that you want to show to consumers.
  • An assortment module, i.e. a group of products that can be allocated to only one or all store clusters
  • Any given product can only be part of one specific assortment module
  • Individual products cannot be cherry-picked from an assortment module
  • Store size drives the number of assortment modules a store can receive, and thereby defines its assortment breadth
  • A store with similar size but very different space productivity gets allocated bigger lots (i.e. bigger size runs and/or more items per size).
assortment planning modules

Assortment Modules (Source: Christoph Berendes)

This high-level overview has introduced you to the key factors involved in assortment planning and buying for a network of physical stores. I hope you now have a clearer understanding of the steps to take and the complexities that need to be manoeuvred.

About the Author:

Christoph Berendes is a consultant in strategy development and process optimisation for fashion brands and retailers. He has more than 15 years of experience as a consultant, line manager in the sportswear industry and in e-commerce marketplace distribution. Read more of his work here or get in touch with him via e-mail to discuss your assortment planning.

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