There have never been more choices available for consumers, which leads to massive challenges for category and assortment managers. Which means being able to predict what happens when product change decisions are made is critical.
How to Avoid Disastrous Category Management and Assortment Decisions
Category management as a discipline started to become popular in the 1980s. Fast forward to 2021, and there’s never been more choice for consumers, creating even more of a category challenge for both CPGs brands and retailers.
The number of SKUs in a given category has exploded, particularly over the last 10 years. According to Nielsen, there are 58% more baby food SKUs, with up to 300 for the largest assortments. Similarly, there are +81% coffee SKUS and +42% in healthcare.
There are new products coming into the market all the time, and making the wrong SKU rationalization decisions can be disastrous for a CPG. For the retailers carrying your products, it’s a complex situation. They want to integrate new products into their assortment, sometimes whilst maintaining the same or shrinking available shelf space. Removing a product can have unintended consequences and can lead previously-loyal shoppers of that product to ditch your entire brand for your competitor, or even leave the retailer entirely.
A retail category manager might choose to remove an obscure, low-margin, and slow-selling product variety – logic often dictates that’s the right thing to do. But that item could be the reason that some of the store’s most profitable customers visit in the first place.
One of the dangers of traditional category management for both brand and retailer is that decisions are made in a simplistic manner by looking at metrics like sell through and margin, but without looking at the assortment from a shopper’s perspective. Then there’s the highly complex task of looking at the store holistically and getting to a granular understanding of how a single change in one category can affect the performance of multiple others. Simultaneously, shopper segmentation and profiling is becoming more complex, as are their tastes, preferences, and behaviors.
It’s becoming clearer all the time that, for many established CPGs and retailers, decades-old approaches are still being used to make critical assortment decisions. Often these decisions use primarily historical data, which in today’s faster-and-faster-moving environment, is like looking in a rearview mirror.
Instead of looking back, the top CPGs use all available data, analyze it in real time, and then make well-founded decisions on which moves to make by being able to accurately predict the effects of change on sales, margins, and revenue. Understanding how categories work together and how changes to them impact consumer behavior and satisfaction are the keys to category and assortment success. Not only will your CPG come out ahead, but accurate forecasts that present the most compelling business case to your retailers and channel partners will build and strengthen hard-won, long-term relationships. Simultaneously, you’ll be able to hone in on optimal plans forpricing and promotions and know which marketing levers to pull in order to grow your market share in the respective category.
Talk to the category management experts at Insite AI to learn how our solution will give you the edge you need.
How AI Helps CPG Leaders Optimize Shelf Space
The stakes for shelf space are high, and the competition for it is fierce. Optimizing space is complex and nuanced, but using the right tools to analyze space elasticity helps CPGs win big.
Your brand of tomato ketchup – does it have a high sales velocity because of its huge on-shelf presence, or would it achieve the same sales with half the space? Does it need two facings or three? These questions have perplexed retail and brand leaders for decades. When a CPG has hundreds or even thousands of products in a single retail store, spacial decisions are crucial to maximizing sales and building brands. Position on shelf can be the difference between winning and losing, and CPGs often pay significant fees to retailers to secure prime shelf positions.
Optimizing space is complex and nuanced: too many facings could be a waste of space, whilst too few could mean risk of out-of-stocks and lost sales. There are many variables to consider when it comes to space elasticity and demand, and the top considerations are both quality and quantity of space. Space quality can include factors such as in-store location, shelf height, and which other products are in proximity. According to Nielsen, there were 20,000 new product launches in the US between 2008-2013, but 85% failed and stole spaces. In 2017, out-of-stocks led to $54 billion of missed opportunity.
So what is space elasticity exactly? Put simply, it’s the relationship between rate of sale and space allocation, but it varies across different products and categories. Elastic products show a substantial increase in sales when more space is given to them. As you allocate more space to elastic products, a point of diminishing returns is reached, where the sales increase rate drops dramatically. In contrast, inelastic products show little or no increase in sales when more space is given to them. To maximize your returns, you want to hit a sweet spot, and that can be challenging.
Optimization of this across all your SKUs can represent millions of dollars in additional revenue. With inelastic SKUs, you have the opportunity to maintain sales even after reducing footprint in store. With elastic SKUs, you want to increase their space in store to the sweet-spot point.
AI and data science are helping CPG players make these decisions fast and at scale. The right platforms incorporate spacial awareness, using computer-generated, 3D representations of stores to optimize space allocation and shelf-placement decisions. Using advanced algorithms, they crunch through millions of data points and what-if scenarios in a matter of hours, using a combination of historical sales data, EPOS data, 3rd-party data, and consumer insight data. This is done together with information about product margins and the costs of various in-store locations.
The output is tangible, optimized, go-to-market recommendations. Instead of seeing countless and meaningless possibilities, you need to get to the best decisions that will build your relationship and business case with the retailer. Further, you need to be able to understand space elasticity down to the most granular level: by SKU, by store format, andby retailer. The prize is the ability to drive millions of incremental value rapidly and at scale, driving your growth in the categories that matter.
Critical Priorities for CPGs to Maximize Omnichannel and Ecommerce Opportunities
Online shopping has seen exponential growth in the past several years, and the COVID-19 pandemic has prompted even more shoppers to look to the safety of the web for their needs. Not only is that online behavior prominent now, but many studies have shown the majority of shoppers who are doing their business online plan to continue, leaving both the CPG and retail industries changed forever. According to Boston Consulting Group, product makers are facing a radically less familiar sales environment as more shoppers turn to ecommerce and even directly to brands. In order to succeed in this transformed landscape, CPGs must nurture emerging capabilities, as well as adopt new strategies and partnerships quickly and effectively.
This means a turning point for CPGs, fundamentally changing the way they reach consumers and maximize wallet share. For many years, the growth of ecommerce could almost be ignored, with reliance on physical retail holding strong. According to BCG analysis, ecommerce only accounted for about 3% of all food and beverage sales before COVID. A small volume by most standards. However, the pandemic accelerated ecommerce to represent as much as 15% of total retail food and beverage sales. Most interestingly, the BCG analysts predict that 70% of CPG sales growth through to 2022 will come from ecommerce. This opportunity will be won by the CPGs with the most agile and sophisticated omnichannel capabilities
Online shopping increased by 50% during the pandemic (Nielsen, 2020) and social commerce grew by 37.9% (eMarketer, 2020).
In addition, the 2021 Food and Health Survey from the International Food Information Council reported that 1 in 3 Americans are shopping for groceries online more often, and that the majority of them intend to continue these habits. 1 in 3 Americans are shopping for groceries online more often, and that the majority of them intend to continue these habits.
BCG analysis reveals that 40% of the recent growth in online grocery is from people trying it for the very first time. By 2022, ecommerce’s share of grocery is expected to be as much as 3 times higher than pre-pandemic levels.
So what can you do to capitalize on these opportunities?
Accurate forecasting
An overarching theme of shopping during the pandemic has been an insufficient available product inventory. Shoppers have experienced their standard, favorite, and even second-favorite products going out of stock – sometimes for months on end. This has led shoppers to trial and shift to alternative brands, and those which have been available when needed have often seen a permanent demand shift. Even during the most normal of times, a CPG’s critical capability is to accurately predict and respond to changes in demand, ensuring stock ends up exactly where the real-time need is, whether online or offline. These predictive analytics abilities allow more inventory to be allocated accordingly, whether it’s by geographic region or channel. Are you going to rely on retailer demand forecasts? Wouldn’t it be better to have these insights available in real time and with both accuracy and granularity?
How do you adapt your marketing and assortments online?
The levers for marketing and promotion are completely different when selling online vs. in store. Instead of allocating shelf facings and space with tactical deployment of in-store gondola ends, power aisles, and POS, you are dealing with digital shelves. CPGs need to deploy strong relationships with ecommerce shops to secure online visibility and placement.Additionally, a focus on which range of SKUs in each category are essential to meet demand is imperative. It’s not always possible for a full range to be stocked, so making quick decisions on the most profitable and in-demand lines can mean the difference between winning business or losing it to a competitor.
Have a deep understanding of the online consumer
Well executed consumer activation is reliant on an understanding of the shopper. How will they find you? When someone searches for your product, how and where will you appear in the search results? Are searches being conducted by brand name? Product name? Category? Will the shopper behave differently when they have instant access to consumer-generated content and reviews from other buyers?Winning in omnichannel is no simple or easy battle: balancing retail, DTC, ecommerce, marketplaces like Amazon, and delivery partners such as Instacart keep CPGs on their toes. The most valuable tool for managing these challenges will make sense of multi-channel data and make smart, go-to-market decisions using it in real time.The good news is that technology has risen to the challenge; platforms boosted by machine learning, artificial intelligence, and data science are enabling CPGs to optimize their operations in real time, making sense of the mind-boggling combination of supply, demand, marketing, promotion, assortment, pricing, and activation metrics.
It’s the brands who can make all these complex, go-to-market decisions faster and with more accuracy that stand to grow and earn the largest share of wallet.
Is It Possible for CPGs and Retailers to Both See Profit Boosts?
Both CPGs and retailers are under immense pressures for different reasons, operating with different objectives. See how a well-built, joint business plan can deliver incremental profit pool growth for both sides.
It is if they work together.
Relations between CPGs and their retail partners have fallen to their lowest level in 5 years, according to a 2021 report by management consultants Bain & Company. According to the firm, the main cause has been a short-sighted approach on both sides that has favored short-term sales targets. CPGs and retailers alike face their share of challenges: CPGs are under immense cost pressure, especially with rising raw materials and logistics costs. Meanwhile, retailers have had to defend their market share against new entrants, such as deep discounters. In addition, the trend toward smaller store formats and the rapid growth of online commerce has further upset the balance. However, according to Bain, a well-devised, joint business plan can deliver more than 10% of incremental profit pool growth for both the brand and retailer in a single year providing they work together intelligently.
The report, which focused on CPGs and retailers in Europe, concluded that only one in four joint annual plans actually manages to create value for both parties, and that instead of building incremental value, 59% of trade promotions merely subsidize baseline sales. They suggest that the traditional, strategic moves from CPGs like launching a new, above-the-line television campaign or new brand extension, are running out of steam and losing effectiveness.
The growing friction between CPGs and retailers is real. In 2016, the UK’s largest grocery retailer, Tesco, delisted nearly all of Unilever’s products after the manufacturer asked for a 10% price increase across its iconic brand portfolio. The CPG’s price increase was blamed on the pound’s fall against the euro and the US dollar. In 2016, Unilever had a 32% share of all the UK’s ice cream and frozen dessert sales, 21% share of all table sauces, and 19% share of butter and margarine sales according to Euromonitor. The disagreement was rapidly resolved, but this example shows what can happen when negotiations fail
The only sustainable solution is to collaborate closely and grow profits together.
According to Bain & Company’s research that was published in 2021, the best CPGs are able to deliver a 10% increase in joint profit pool growth in a single year by doing 5 things differently:
The best CPGs understand both their own and their retailers’ strategies Getting deep under the skin of the retailer’s P&L enables the CPG to appreciate their business strategy, their most important KPIs, and ultimately how value is delivered to the end consumer. By listening to the other side’s needs and being able to articulate how a CPG initiative will build value is much more likely to get retailers onside.
Deliver up to 20% more incremental sales and profit for both parties through an assortment optimization program Legacy approaches to store assortment and clustering can lead to high levels of item cannibalization. Limited shelf space often means an ongoing battle between CPG and retailers on which SKUs to stock, how much space to allocate in which stores, and whether a product should be delisted.CPGs had previously been held back without the means to optimize assortments at the lowest, most granular level. However, a cloud-based platform can create optimized assortment decisions at scale, right down to individual store level. This gives clear direction on product mix, space elasticity, and pricing, and a truly optimized assortment has the potential to significantly drive volume and profit for both parties. The latest platforms are able to run millions of what-if scenarios in a matter of seconds, giving real-time insight that allows a proactive assortment approach. The results ensure customers get the value they need, whilst the CPG and the retailer can make the most out of every bit of shelf space.
Take a medium-term view to deliver a business plan Both CPGs and retailers have monthly, quarterly, and annual revenue and profit targets to hit, as well as shareholders and stakeholders to satisfy. Delivering a successful joint business plan is not a quick fix, and therefore it will take bold leaders who are prepared to invest at least a couple years in order to deliver a properly-executed joint profit plan. As a CPG, you should have a 3-year plan for each of your most important retailers with an imperative of not being distracted by only focusing on monthly sales targets.
Build trust and transparency Strong relationships are built between people. Beyond the written business plans and agreements, invest in building strong relationships with all the key people within your retail partners. Build these not only with c-suite executives or VPs, but with the people who will actually deliver the day-to-day strategy. This includes category managers, buyers, and shopper marketing directors. Build a real understanding of the KPIs they track. What does success look like to them? How are they being appraised? Then, arm yourself with data that gives them the confidence to buy into your CPG’s initiatives, whether it’s store assortment, a new range, or a price change. If you’ve got granular data to prove something, then you’re halfway there.
Break down silos within your CPG Most CPGs have teams dedicated to their most important retailers to bring people together from commercial, category, sales, marketing, manufacturing, and logistics.Whilst people from these disciplines do work together on projects, it is incredibly challenging to avoid a siloed mentality. There are many widely-cited solutions to the siloing issue, and hundreds of management books have been written about it. However, taking a pragmatic approach to ensure teams are collectively responsible for delivering the retailer’s P&L with common goals and objectives is the key. Ensure the collective responsibility is mandated from the highest level of leadership within your CPG so it has a real sense of purpose and gravitas.
How to Win with Optimal Product Assortment
Getting product assortment right isn’t easy, but it’s a major key to success for both brand and retailer. There’s an abundance of data available to support pricing and inventory management, but optimising a store’s assortment is still more often than not based on gut feel and many assumptions. As the brand, shouldn’t you have a significant voice, founded on data, on how retailers are stocking your products?
Customers prefer less cluttered stores, but removing SKUs from them often causes a decline in sales
When stores try to replace lower-selling items, they often find out (too late) that many of the eliminated products are essential to their customers, who then take business elsewhere
Localized assortments that cater to tastes can cause revenue lifts, but trying to apply the same efforts to different categories doesn’t always work
When prices shift from low to high, even with increased quality, sometimes retailers learn the hard way that price matters more
How to identify winners now
It’s not hard to spot and remove poor selling lines using data provided by retailers and 3rd-party sources. But that slow seller could be an essential to your most profitable customers. Simple changes in category and assortment can have a shockwave effect.
For years, CPGs have been using software that promised to optimize the mix of products in a category. But, this technology is largely reliant on historical sales data and is based on manual data inputs. What these systems can’t do is forecast demand for new products, entirely new categories, or account for how shoppers would behave if a particular product were dropped. If you remove one of your SKUs, will demand transfer to another product in your range, or will it be scooped up by a competitor?
The best CPGs work closely with their retailers, adding value through rigorous category management research and recommendation. They can best help retailers by answering questions like:
If slow-selling products are replaced with new ones, what will be the demand for these new SKUs?
If customers don’t find the product they are looking for, will they move to a competitor brand?
How will category sales change depending on the number of products carried?
What is the optimal way to implement store clusters: by customer demand, by geography, by size of store, by store format, or through socioeconomic factors?
For CPG companies, Insite AI can accurately answer these questions, enabling the world’s leading players to maximise the ROI of their R&D, sales, and marketing efforts.
By combining multiple data sources in real time, critical strategic decisions can be made, reducing risk, maximizing revenue, and ensuring value is added for the retailer. Insite AI’s machine learning engine processes millions of data points and combines CPG sales data, retailer EPOS, loyalty data, and 3rd-party sources. It combines this with billions of other data points such as weather forecasts, social media insights, flavor trends, website data, local happenings, and sporting events.
Using this data, Insite AI runs millions of automated what-if experiments, doing what no human category or assortment team could ever accomplish Instantly.
The outcome is accurate predictions and data, down to the most granular level.
You’ll be able to predict sales of brand new products and brand extensions with a high degree of accuracy, right down to the individual store level. You’ll understand the implications of adding or removing a product from a category. You’ll be able to game plan how your competitors will respond. Your CPG will be able to model and test millions of pricing hypotheses, knowing how one change would affect your own brand and those of your competitor.
Together, we can:
Create intelligent assortments
Delight your customers, meeting their demands
Drive brand and category growth
Keep adding more value for the retailer
Forecast accurately so sales opportunities are not missed
Keep you one step ahead of your competitors
Ensure you can take advantage of emerging trends and opportunities early on
If You’re Ready to:
Grow Topline Sales Instantly boost sales by focusing growth strategy on key value items
Improve Efficiency Improve operational efficiency by at least 10% with a low-to-no-touch solution
Optimize Bottom Line Optimize performance of long-tail SKUs by accurately anticipating and responding to demand shifts
Let’s talk! Insite AI will custom-build a solution just for you.
Every CPG strives to maximize its return on the money and effort it places into investments. The question is:
Which parts of these investments will drive the biggest and most certain returns?
Optimized category management, assortment planning, and revenue growth management are the key factors to success, profits, and market share.
Don’t take chances on your success – using artificial intelligence to make decisions ensures optimal outcomes. Here’s how CPGs are using it:
1. Category Management
Spend precious technology and data dollars on the product most likely to help you succeed. This means using a solution that continually monitors and uses data to create all outcome scenarios possible.
These scenarios use past, present, and future-possible data to show you and your retail partners which products should be on shelves and at what price.
Key benefits of AI-driven forecasting in category and assortment:
Selling the right quantity of product that accounts for upcoming sales, trends, advantage over competitors, and promotions
Better optimization of assortment ratios
Improved understanding of demand drivers and customer behavior, right down to the SKU level
Decreased lost sales / missed sales opportunities
Better alignment between products and locations where demand exists
Improved GMROI
An AI-based forecasting system, is a focused on the CPG major upgrade to existing systems where brands attempt to manually cluster and define data and patterns. Unsurprisingly, results are often disappointing and lead to lost sales and market share.
Store-level forecasting is a difficult endeavour with traditional systems, especially when CPGs are dealing with millions of possible product, price, and store combinations.
By alleviating the need for so much manual intervention and by accounting for so much information at any given time, artificial intelligence-based forecasting can deliver far more accurate decisions.
2. Revenue Growth Management
Advanced forecasting combines with historic sales with seasonality, trends, product lifecycle effects, and statistically-tested assumptions to improve accuracy. Increased accuracy is the single biggest driver of direct savings, revenue, and total return on investment. Improvements to revenue growth management will be realised in the following ways:
Customized decisions for granular levels such as individual store, SKU, particular time, price elasticity, and demand changes
Making optimal pricing decisions to make you more money and take market share away from your competitors
Opportunity for improved use of strategic discounting
3. Operational Efficiency
In the face of increasing competition, CPGs are all looking to ensure their products remain a focus over their competitors, and that their retail accounts keep them top of mind.
More accurate simulations for decisions can help CPGs optimize category, assortment, trade fund, and pricing/promotion. This is while ensuring they’re able to offer retailer partners the right discounts and provide exact pricing recommendations for optimal outcomes on either side. It’s important that assortment is accurate at individual store levels, using both micro and macro views for trends, seasons, demand, and changes to ensure customer demands are being served at a granular level. Product imbalances often occur right after seasonal peaks. One of the biggest reasons CPGs fall into this trap is because they’re often forced to act retroactively with top-up orders, transfers, or pricing changes. Providers such as Insite AI provide highly accurate, data-driven scenario decisions at store levels ahead of time to keep ahead of competitors.
Contact Us to found out how you can increase ROI with the power of AI.
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