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SAP Analytics
Thought Leadership

Retail Analytics: Understanding The Weather

Posted by Jamison Chochrek on Tue, Dec 11, 2012 @ 09:12 AM

crystal ballIn a previous post, I discussed how top storage vendors believe that global data stores are doubling every few hours or weeks, and how this problem can be turned into an opportunity in almost every vertical or field of work. Today, let's focus on one of the retail sector's larger data opportunities, and how this data can increase profitability for organizations who deploy retail analytics.

Seasonality, new products, changing margins, social media trends, surpluses, constraints, hot weather, and day of the week are all aspects of the retail environment that can impact sales. The impact is dual: how an organization behaves and how the customer behaves. The merger of the two behaviors yields profit or loss on the income statement, and having an understanding of this two-sided relationship enables business leaders to influence the outcome of a profit over a loss. Your purchasing behavior has some predictability. For example, you are more likely to buy shorts in the spring and summer than in the fall and winter. Likewise, you are more likely to buy milk once a week vs. once a quarter (assuming you drink milk).

Knowing these types of information allows retailers to manage their supply chains, offer promotions, and manage their pricing. This is almost entirely done now with a discipline called retail analytics. By leveraging all that data, retailers, suppliers, distributors, and manufacturers can bring stability to their business by predicting what will happen based on what has happened.

Retail's Crystal Ball: Actionable Key Performance Indicators

They accomplish this via actionable key performance indicators (AKPIs). Examples are:
  • Market basket analysis: Connecting the dots between items in a shopping basket for an attach rate. In other words, how often do you buy milk and cereal together?
  • Attach rate: How many non-primary goods are sold for each primary product.
With just these two AKPIs, a category manager or retail professional can begin to decide where products should be placed to increase sales, and ideally margins, for the organization. Milk is one of these primary products, and that's why it's in the back of the grocery store -- you have to walk past the other items, thus increasing the odds you will buy more than just milk. If the milk were at the front of the store, many customers would likely purchase less in general, as they would grab the milk and fail to walk around the store, making impulse buys and seeing items you forgot to add to your list. If you notice your typical retailers, the primary products are anchored at the four corners of the store. This usually means the customer will traverse the entire store (or most of it) to collect the anchor products: dairy, meat, bread, fruits and vegetables, and sometimes pharmacy. The non-primary products are all in the middle, and strategically placed near their primary products to increase the attach rate. Think about it: How often is the cereal near the pharmacy aisle?

Other Types of Retail Analytics

Far beyond product placement and store location are a multitude of other retail analytics that can be leveraged by a retail organization. Other such AKPIs include:
  • Average sales per customer transaction
  • Sell through % (# of units sold/the beginning on-hand inventory.)
  • Sales per hour
  • GMROI - gross margin return on investment (sales margin/time)/inventory cost
These types of retail key performance indicators are also very actionable, and allow for understanding of what is happening in your business operations. Your organization likely has goals to increase sales and/or margins. Perhaps you have an initiative to increase how much each customer buys and/or how many customers buy from you. You could accomplish increased profitability in five major ways:
  1. Increase the number of customers
  2. Increase the spend of existing customers
  3. Increase the mix of higher margin items to existing sales
  4. Decrease costs
  5. A mix of the above
With just the six AKPIs provided in this post, an organization would have the tools needed to understand customer behavior that is largely out of the control of the retailer. There is a key principle in retail: If you cannot control it; understand it! It is important to note that, while a retailer cannot control the weather, the day of the week, or the season, they can control how they act and react with product placement, coupons, and so forth. The key to successfully increasing profitability is by setting goals, understanding the behavior of the customer, and taking action to track the success of such initiatives. Unless you are deeply experienced at this effort, your organization may be best served by leveraging analytics experts such as Column5. We have the experience to enable this type of analysis, and most important, to enable your organization to plan/forecast the strategy so that it can manage to the planned success. Column5 has helped multibillion dollar organizations with global reach -- and we can help you as well.

Topics: Enterprise Performance Management (EPM), Performance, Implementation, Data


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