Room to Grow
Even with limited store space, specialty grocery chain Sprouts Farmers Market is mindful to provide its shoppers with the best product assortment available. By trading manual processes for a space optimization solution that creates customized planograms for its 54 stores in four southwestern states, the Arizona-based chain is improving inventory management and replenishment. As a result, it has experienced increased customer satisfaction and higher sales.
The supermarket industry undeniably sees the highest turnover of merchandise, as well as the greatest number of new product introductions. While these constant changes keep store shelves fresh, they can take a toll on retailers who rely on their supplier partners to keep them in the know when it comes to merchandise updates. Too often, however, suppliers fail to communicate these changes to retail partners, and many lack the strong merchandising disciplines in their go-to-market strategy. Both factors force retailers to determine the proper mix of merchandise on their own.
“Very few suppliers have meaningful research on consumer trends,” says John Smrekar, Sprouts’ retail consultant. “This takes a toll on retailers’ analytical capabilities and their efforts to control both [the] declining categories and stronger ones that are driving sales.”
Retailers are also challenged by fractured planning processes — their own and those of their suppliers. With a foggy view into merchandise movement and consumer demand, chains often end up with an abundance of underperforming merchandise, too few hot items — or both.
Rather than fall victim to these issues, more retailers are making an effort to improve merchandise planning and execution through the use of optimization solutions. According to “Defining Twenty-First Century Merchandising,” a benchmarking study from Miami-based Retail Systems Research, 46 percent of chains believe lifecycle price optimization is extremely important for meeting consumers’ needs, and 48 percent report that integrated merchandise planning, allocation and replenishment solutions are extremely important in their efforts.
Sprouts has become an advocate of optimization, especially since the chain historically relied on subjective decisions based on high-level sales analysis and Excel spreadsheets. Besides being cumbersome, not all categories were being reviewed or updated annually. “Heavy work requirements were required of the category managers,” Smrekar says, “and there was often a lack of skill in how to conduct effective analysis.”
This configuration also made it difficult for Sprouts to balance space-to-sales. The chain always relied on a variety of financial key performance indicators to make planning decisions; the most critical way to balance space-to-sales, however, is to incorporate analytics that optimize inventory turnover.
This also plays a role as more chains use localization as a key to differentiation in the marketplace. This effort requires that chains analyze consumer demand, so they can translate shoppers’ preferences into customized assortments on store shelves. This is the strategy that Sprouts is following.
Eager to better analyze shelf space in relation to sales, the grocer implemented the Apollo Space Optimization solution from Aldata, a collection of tools that automate the planogram production process. The analytics engine also delves into granular details to help chains accurately execute category plans and new product launches, especially those that fit the needs of customized assortments.
The solution, which resides on the chain’s corporate server, creates documents based on the company’s financial history of cost, retail and unit movement. Users import these financials into the system as needed, and then conduct queries and analysis.
“The documents are presented to the category manager for decisions,” Smrekar says. “Once the category manager’s requirements and decisions are finalized, the solution creates the ideal versions of schematics and then communicates them to the stores.”
The entire process takes approximately two hours to complete, and five analysts are using the solution, he says.
Sprouts went live with Apollo Space Optimization a little over a year ago after all schematics — more than 120 documents — were reviewed and updated over a 10-month span. Since adding the solution, “Sales have increased by double digits, and not all of these improvements were based on the results of new or discontinued item decisions,” Smrekar says. “Sprouts was also able to reduce out-of-stock levels.”
The solution also enables the chain to work more closely with suppliers, an effort that is improving the efficiency and effectiveness of the shelf merchandising process.
Sprouts isn’t alone in its venture: Nearly 60 percent of merchants realize these solutions are valuable to their business, according to “Defining Twenty-First Century Merchandising.” More than a quarter of responding companies reported that they have been using optimization solutions for more than 12 months.
“There are special opportunities for suppliers to communicate their shelf merchandising objectives and financial advantages,” Sanders reports. “Sprouts believes the use of fact-based decision tools are a strategic advantage to those suppliers who work with us using the same language and analytical insights.”
Pleased with improved item histories and reduced out-of-stocks, Sprouts is evaluating how to re-size specific categories to better support space-to-sales.
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