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The Four P’s of Merchandising: Product, Placement, Pricing, and Promotion Part 1

Consumers eat first with their eyes. This idea creates the foundation for building both retail spaces and restaurant creations. With a little bit of focused effort, I believe we can elevate merchandising in the produce departments across our industry. Through my more-than-20-years of experience in buyer and supplier relationships, I have seen the pitfalls and the opportunities that occur at the store level. In Part 1 of this series, I’d like to address one of the first P’s of merchandising: product assortment. We’ll review some of the components of a great assortment and introduce the start of a roadmap to create one. The four P’s can be prioritized based on the needs of your store but, for me, there is no better way to kick off this series than with a key to the foundation.

Product assortment is the cornerstone of any retail merchandising strategy. Considering that the first goal of a retail business is to sell products to customers, it stands to reason that the collection of all those products holds a special place in the overall strategy. One might ask, “Why is assortment so important?” or “Can’t you just sell what the customers are buying?” These are interesting questions and they answer themselves. The purpose of an assortment is to offer customers the products they want to buy.  

The assortment is made of all the products available for sale, and each individual item—sometimes referred to as a Stock Keeping Unit, or SKU—is considered a product. The challenge for retailers and suppliers is to select the right collection of products, which, as you’ve likely guessed, is easier said than done. Several factors come into play, including the targeted market segment. Typical questions that need to be answered include, “Are you trying to attract an affluent or cost-conscious customer?” and “Is your potential customer a foodie or someone who eats merely for the sustenance?” as well as “Is it a cook who loves to experiment that will shop your store or a time-starved family looking for a quick meal?” A time-starved, cost-conscious foodie will demand a different assortment than an affluent cook.

Another factor is the cost required to maintain the assortment. Each product has numerous costs associated with it over and above the cost of goods. It costs a retailer money in the form of labor to order, receive, stock, rotate, and, if necessary, cull each product. And speaking of culling, every product contributes some amount of shrink to a retailer’s cost-side of the profit and loss (P&L). Needless to say, the more products in an assortment, the more cost to the retailer. The million-dollar-question is, therefore, “At what point does the incremental cost associated with more and more assortment outweigh the incremental revenue of offering more choice?” Not an easy question to answer, but there are clues offered by your target market. If your target market is a cost-conscious group, chances are they are willing to give up choice for a lower price, while a more affluent customer is more apt to pay a little more to have a choice of brands, sizes, and formats. But the target market only offers clues—after all, limited choice is not no choice, and lots of choice is not every product under the sun. Sophisticated analytics can help turn the clues offered by your target market into actionable insights and recommended assortments. Execulytics Consulting offers a product called Assort-a-Lytics, which can help turn those hints into an assortment. This analytics software, as a service, can be useful for retailers and suppliers alike by creating a user defined, custom algorithm that will rank items. The output from that ranking can be used to create the assortment.

The lifecycle of a fresh produce item travels on a continuum that begins with fresh and ends with spoiled. The further along in that continuum, the lower the quality.

Even sophisticated analytics cannot provide all the answers, though. This is especially true in fresh produce, where product turns are a very important piece of the puzzle. Let’s pretend you are managing the assortment in a shelf-stable department. Imagine you have selected to carry a new canned soup product and estimate it will sell 10 units per day. To manage your anticipated demand, you order enough product to cover you for seven days. Now pretend your estimates are way off and instead of 10 units per day you sell 10 units per week. Your seven-day inventory has just turned into seven weeks. This is not a deal breaker for the canned soup merchant, but imagine what it would be like for the bagged salad merchant. The salad would spoil long before actual demand catches up to supply and shrink would go through the roof. The bagged salad merchant would most certainly second guess the decision to add this product to the assortment. Although avoiding this scenario may seem elementary, there are many assortments that do not sufficiently take product turns into account. Unfortunately, shrink is not the only negative effect; on-shelf quality can also suffer.

The lifecycle of a fresh produce item travels on a continuum that begins with fresh and ends with spoiled. The further along in that continuum, the lower the quality. The slower a produce department turns over its product, the further along that continuum all products will be. Chances are, all things being equal, more assortment usually leads to slower turns. These are concerns not shared by the canned soup merchant (although don’t kid yourself; canned soup merchants have their own concerns).

The key takeaway in all of this is: it is extremely important to select your best assortment. It’s not easy and you won’t always be right, but you are better off with an assortment strategy than trying to sell every item available in the market. And in the current retail environment where buying and merchandising groups are getting leaner and meaner, it pays for a supplier to have a turn-key assortment strategy for each of their customer formats.

Read Part 2

Mike Mauti, Managing Partner, Execulytics ConsultingMike Mauti is the Managing Partner and Senior Vice President of Execulytics Consulting, a firm catering to produce suppliers and independent retailers. With over two decades of experience navigating the Canadian retail scene as a buyer, merchant, and operator, he certainly qualifies as an expert. And with much of that time spent in produce, he has the goods to deliver on his promise to bridge the gap between growers and retailers. Check out www.execulytics.ca to learn more about the company’s signature products: The Retail 101 Seminar and Canadian Intelligence Services.