Consumer products & retail

Category profitability improvement for specialty retailer

As part of its turnaround strategy, a North American specialty retailer was focused on identifying company-wide initiatives that would improve category profitability in both the immediate and long-term. The retailer’s traditional strategy has been focused on category breadth, with most of its retail stores allocating a significant amount of space to products with low inventory turns but high gross margins percentages (up to 90%).

Challenge
Most retailers these days must adapt to the changing retail environment that’s driven primarily by advancements in technology and increased competition. The traditional retail strategy of this particular retailer has fallen short today because the market has become increasingly saturated, as products are easily accessible through multiple channels, particularly online.

The company has not adapted to the changing environment and continues to focus on its traditional strategy of category breadth. Higher margins, after all, mean nothing in the retail world if the product does not move. The challenge faced by many retailers such as this company is the fear that changes will disrupt the traditional strategy and jeopardize long-term profits and customer loyalty.

In this situation, the retailer has not been able to effectively reallocate its retail space nor optimize its pricing to maximize profits because it has been “locked” into the traditional way of doing things. And while new growth opportunities have been identified, the retailer has been slow to develop strategies and tactics to increase category penetration. Overall, the company needed the appropriate data and analytical rigor to develop new strategies to adapt and drive future growth and profitability.

Approach
A.T. Kearney helped the retailer (1) identify drivers of growth and profitability across various product categories, and (2) develop tactics that would help deliver results quickly. The team began by defining category roles for all product categories, which were then mapped to key category strategies and specific tactics. Additionally, the team also developed a fact-based approach to identify key drivers of growth in four critical areas:

Category economics provides insight into the current category performances across brands. For example, understanding GM$ per fixture or square footage helped identified space allocation opportunities.
Customer analysis allows a retailer to gain insight into consumer purchase decisions to enable effective assortment, placement and promotion tactics. For example, tracking discounts by customers revealed that unnecessary discounting (e.g., free coupons) took place with repeat customers.
Competitive assessment provides insight into competitive trends, threats and opportunities in order to develop or alter current category strategies to remain competitive. Store visits and surveys were effective means to compare pricing and assortment against that of the client to drive new tactics.
Vendor management focuses on understanding key processes and terms with vendors across categories. For the client, vendors were managed separately by each brand, and opportunities were identified by consolidating vendors across brands.

Results
Based on the analysis, the team was able to identify up to $70 million in opportunities, and they developed tactics for each category to deliver results quickly.

The category tactics primarily focus on improving store profitability by assigning additional space to categories with better profitability per square footage and optimizing pricing and promotions across stores. Other tactics were identified to help increase penetration and drive growth for smaller but higher potential product categories, including assortment, placement, and visual merchandising. A detailed implementation plan tested the tactics.