Revenue streams

The third Retail Systems roundtable at the London Hilton asked how retailers can move Retail Revenue Management (RRM) from concept to execution. Alison Rawstron gives the low-down on the evenings highlights

The roundtable was introduced by John Davison, research director at GartnerG2, who established that retail revenue management (RRM) is receiving a lot of attention in the US market, with 30 to 40 retailers investigating the technology. He stated that the UK retail market would follow suit, perhaps using the technology in a slightly different way. But he emphasised that if revenue management isnt fully integrated with up-to-date robust systems, from the supply chain through to the point of sale, then it will probably fail.

JD: If you dont link RRM to customer demand you could have severe problems with your brand image. If you are not very careful with dynamic pricing it will lead you to target customers who are not price sensitive, and these are the most loyal customers. It is very dangerous ground. You cannot afford to break trust with the customer. So I recommend retailers link RRM into their Customer Relationship Management (CRM) systems. A lot of solution providers are great on the analytics side, but very few have CRM offers. Where is the connection in terms of the technology?

Retail optimisation is about making better decisions. It involves using computer systems and software, but it also should involve customer data. These systems are not going to release your staff from their roles and responsibilities. In this particular arena your buying and trading directors are still going to have to make decisions. But are you going to get the information to them in real time to make those decisions? And do you have the transaction engine in place that can cope with getting decisions made in real time? Most of the tools currently on the market are analytics tools, not executional tools.

Retailers are using rules-based systems in terms of inventory, pricing management and promotions management. Retailers operate using the 3 A rule - aggregation, allocation and averages - because it is a reasonably acceptable and easy way to understand business. I think in the future retailers will be more based on demand. Merchandising planning is a prime example of that. The general trend is moving away from rules-based to demand-based projections - moving away from intuition.

The new tools on the market will offer the ability to plan at an even more granular level, even down to product level. So if you think you have a lot of demand and supply information now, you can guess it is going to be anything from four times that amount in future. Can your systems cope with that, and are they future-proofed? If we want to get to this new world, there are major implications from an architecture and systems point of view. But a lot of the [RRM] vendors have piecemeal solutions at the moment.

If you are going to take this seriously at the executional level, do you have a transaction engine to do this? Probably not. Are you ready in-store? I seriously doubt that many retailers are ready to introduce RRM at store level at the moment. The culture just isnt there.

Asking price
SK: Retailers may be able to execute a change in price very rapidly but there is always that lead-time between changing a price and someone making the purchase.
JD: It occurs to me that the best chance for dynamic marketing is person-to-person marketing because it is easier and you overcome some of the issues from CRM. In my mind, it is almost inevitable that if we could execute this today we would be targeting the very customers we didnt want to target; we would be punishing loyal customers.
AC: Do you see this getting to the stage where you have an electronic shelf-edge label and the price may change throughout the day or do you see it where there is an individual price to that individual customer?
JD: Yes, to both. It just depends on the retailers. I think if we continue on the road we are on now we will end up with the first scenario, but I think when people think about this the impact on the customer in the second instance is infinitely more preferable. But that is even further down the road. All of the technology is driven to scenario one at the moment and that is why most of the vendors dont have solutions in the CRM space; they are not thinking about that.
It is not just about maximising margin or increasing revenue; it is back to the brand and the image of the retailer. It takes a long time to build a brand and it takes a long time to get a customer back. Yes, there is a business case for all of this. There are potential gains to be made and a lot of the figures I have seen around 15 to 40 per cent gains. However, the user interface has to be good because this involves sophisticated analysis. In some respects you are talking about moving staff from spreadsheets to sophisticated analytical tools and we are all getting more tech-savvy, but not that much. Our US research says 83 per cent of retailers are still using spreadsheets to do some form of merchandising optimisation.
JS: Of the retailers in the US what percentage would you say are still in trial mode?
JD: I would probably say it is about 80 per cent, but nonetheless, they are definitely further down the road than we are. There are points of failure for this such as the optimisation engine. Have you got the capability to cope with all this data going through your systems? Can your stores cope with it and is it going to be a usable interface for people who arent used to those types of applications? Are you going to link it into sales and customer loyalty data, because you have to integrate it with those areas if you want to make it something that doesnt turn your customers off? Very few vendors have got the complete offer available. If I was embarking down this route that would concern me more than anything else. Know what you want to do and identify your pain points. If you want to do markdowns with this then there are only two or three vendors who would be able to help you. If you want to do price and promotions then it is probably slightly better. There will be some change in business processes, both in the buying and merchandising, pricing, supply chain and at the store level. Yes, you may think if we introduce electronic shelf edge labelling we will improve the store - that is true. But there will be other things to do.

Forward planning
AR: How essential is revenue management to your organisation and how essential will it be in the next few years?
LN: As a representative of a grocer, we will look at some of these elements seriously in the next one to two years and others not so much. Waitrose is more conservative in some respects and we will be very delicate with pricing. We probably could get some benefit from basic pricing strategies and promotional strategies, which we are relatively new to. When it comes to dynamic pricing during the day, or anything that involves us putting electronic shelf edges in, I think we would need a new generation of technology before we got involved. We would be worried about what it looks like and the customer interface.
AC: I can imagine going to a grocery outlet where my trolley has some sort of output device like a GPS and tells me which products are where. If I happen to pick up a packet of spaghetti then it offers me 10 pence off a jar of pasta sauce. This will extract the maximum amount of money from my wallet by offering me add-on purchases, maybe at a slight discount.
JS: The technology fits wells with impulse and convenience, with the caveat of the danger in getting it right. How many retailers here are already in some kind of trial or are seriously considering it?
AT: Speaking from Woolworths point of view, I think we are still a bit cautious when it comes to revenue management. It is a new technology and a lot of retailers are still maximising the potential of the technology they have already purchased.
SK: Ive probably got a wish list, if that helps. One of the things that John mentioned was different types of merchandise profile and their lifecycle. I represent a fashion retailer so its all about a short lifecycle. We set the price and thereafter it is an important tool with promotions and markdowns. I think there would be some value in having a tool that would help you work out the right time to start to stimulate demand and the right point to cut the product and move on. That is really where spreadsheets come in because you extract out from that data to give you an update, and then you can do a few what-ifs on your forecast curve. If I could find some tools that would automatically tell me where I am on the curve then it would take away a chunk of work, decision-making and administration. There is still a drive on the execution side, except I wouldve used a degree of automation and sophistication to get there.
JS: In fashion, short cycle markdowns have always been a challenge. Im just wondering in some of the other sub-sectors of retail if price optimisation is a brand new concept?
PC: I think it probably has more relevance for petrol and grocery. Certainly in fashion there are things that could deliver more quickly than managing the price throughout the day. I think grocery chains are a great example of the use of revenue management or differential pricing. It is all about matching the convenience to the price, and the cost of the same item can be different in an out-of-town hypermarket, local supermarkets and city-centred commuter branches. Very different prices for the same product.

Lessons from across the Atlantic
LN: What are the figures [for RRM take-up] in grocery in the US?
JD: Well, I think you have to consider that they are still in trial stage. What you have to bear in mind in the UK is that the large grocers are more innovative and adopt new technology more quickly than those in the US. But I think it is probably the case in the US that demarcation doesnt exist; I think the non-food retailers are just as likely to use new technology.
SK: I am just a little cautious about some of the technology that comes out of the US. Its about leapfrogging them and spotting what we really need the technology to do, then adapting it so it is relevant to our market.
JD: I do think it is tying it in with CRM initiatives. CRM and revenue merchandising in so many retailers is slightly disjointed and that is probably where the benefit lies. CRM has failed to some extent. Retailers have all this data, but no-one is using it yet. A lot of UK retailers are concerned about the efficient store and the consumer experience. This [RRM] fits in there and no-one seems to be making the connection - probably because it is not a priority at the moment.
AC: The issue with CRM is that you can take it too far and turn into a stalker, and that is when you alienate your customer.
HW: I think thats why retailers are shying away, because we have got bigger fish to fry. One CRM initiative that Gap tried in the UK was taking customers around the store and advising them. But the English dont want it. So many of these things are US driven and we really have to just take what is relevant to us.
JD: There is the difference between proactively targeting the customer and targeting the retailer or member of staff. Even the UK public is concerned about the level of non-interaction. We know that self-checkouts are coming in, and that is going to be another proof point. Do we want that level of technology in the stores? Customers are increasingly concerned about the technology being brought in by retailers so the customer can do the retailers job. There could come a point where customers demand a bit more human interaction.
HW: Look at retailers like Metro in Germany, which is so heavily technical that they are taking away the entire human and personalised element. I think that is particularly relevant in food.

Pick n mix
JS: So far we have spoken about price or markdown issues, but obviously assortment optimisation is one of the components John mentioned as having a future. Are any of you using smartness in your business to work out which products should go in which stores? Is that something you see as potentially having more value-add?
PC: We have been able to divide the stores up into different clusters by investing in datawarehouses and transactional data, and we also have a very loyal penetration of the in-store credit card and that is certainly generating big improvements in the margins of certain stores. The product types you can target to the specific store types is matched better. In terms of moving on with CRM, once youve got a customer locked in, you can see their various cross-shopping patterns across the departments of the store. You start to see great big holes where you have very small cross-shopping in certain types of customer and very good cross-shopping in others, so what are the differences and how can we understand them? Im sure those are going to deliver us more improvement in revenue generation.
PG: This is an area in which we have worked extensively. Not just localisation but basic promotional strategy, around rewarding certain types of customers and not having to reward other types of customers. If you have that insight then it starts off with smarter, more tailored merchandising and ends up with more customer-specific pricing. The corollary is that in some outlets you need to give on price and in others you dont.
PC: Certain customer types are much more sensitive to price. I agree with Stewart that just having some tools that could let us know when it is time to tweak the price would be very helpful.
PG: In some of your sectors it wont be about elasticity of price as elasticity will be positive; in jewellery, and some types of apparel. They will become undesirable if they fall below a certain price. I think it would be easier to ask a simpler question. In these outlets for these customers are they price sensitive or not, is it price or choice that is driving the purchase?
HW: For a lot of fashion retailers it is all about the cost and perceived desirability of the garment, for others it is all about speed from catwalk to shop floor. It takes Zara three months to get a garment into their stores; it takes Gap 12 months.
SK: In those fashion retailer categories there is a community of consumers that aspire to the brand. They help in the mop-up process and purchase items at a cheaper price once it is falling off the fashion curve. There are tools and techniques that can play that advantage.
PG: That is what brand value is, the ability to sell things at a certain price. You have the reality of that with consumers coming through your cash tills and choosing to buy when the moment is right for them. I think that large grocers such as Waitrose are a good example - its aspirational because of the quality fruit and vegetables and the large delicatessen counter. Probably, if we asked customers they would be relatively price oblivious. But actually, in the same store, if they went to the household aisle they would still want the deal on the bleach or soap. It must be tough because you have to cater to both demands.
LN: The UK grocery market is driven largely by price. We cant avoid that but weve got a niche, we want to be the best fresh food retailer. We have to be very careful and cant assume anything. That is why I think we will be interested in RRM technology.
AC: The Marks & Spencer food range is a classic example: is it own-label or is it a brand? They have blurred the definition. But if you went in and saw a new dish you will try it because you trust the brand. Waitrose has the same loyalty. It is all down to where the retailer sees itself and where it is pitching itself.
PG: In these stores it is a challenge. You have some places where you can drive extra footfall through price. Through price you can get customers to buy complementary items to the ones they were shopping for. Through price I could know which customers are buying what. Those tasks are very different, in terms of getting people to move sideways, from just building their baskets. I think that price is quite a complicated lever, you can do all of those things that have different KPIs and you can find out how many customers you are getting in, what they are buying and how often. If you said to a retailer what is your pricing strategy, would you be able to say? It is worth taking a step back before you go pricing or promotions crazy. Which one of these things are you going to do, how will you measure it, do you know who your target audience is, and will we know when they come into the store?
ST: What Ive been hearing is not about price but about what is the offer, how does it fit in with your company strategy and how do you want to be seen? Price just becomes an enabler to achieve that sometimes, but not always.
The price is right
JD: Why isnt price the main factor? If we start changing it will the customer notice? Is it fair to say customers arent that bothered about price because generally there isnt that big a variation?
AC: I think it depends on the value of the item. If you are going to buy a cooker for example, you are going to do some research, surfing on the Internet. But not for a pint of milk.
IM: Price is important but you arent as concerned if its a low price product. For example, cigarettes are more price sensitive because they are bought on a regular basis.
HW: We have been doing some research recently and what seemed to be coming back to us was that customers would rather have better prices than loyalty card schemes. And the vast majority of card schemes have gone out of fashion.
ST: I think the consumers have wised up; they dont want to be providing all this information.
CK: Shoppers are very selective and probably only use a couple of cards regularly.
PG: And the majority of retailers that have loyalty cards dont really squeeze the data at all. There are a few retailers doing things in a very clever way. I think over the last few years a lot of retailers have got better at joining that up across categories and doing things that are more customer-centric.
JS: If you are not running price optimisation at a level that hangs off basket information, informing you about key customers, isnt it somewhat dangerous?
PG: Yes, because you will either be rewarding everybody
or nobody.
SK: Or another spin on that: say 100 customers turn up on your door, they shop and 20 or 30 of them translate into a transaction at the till. All through the rest of their journey they have shopped and looked and formed opinions. Now, just because we collect the information at the till, put it into a datawarehouse and analyse it, we think we know how those customers have behaved - yet they actually represent a small proportion of those through the door. We end up believing that those people can tell us what the 100 were trying to do in our shops. If I had to spend money then it would be in finding out why those shoppers didnt shop and how to increase the chances of them becoming a customer.
PC: One retailer who has been able to do that for years is Argos, because you had to register what you wanted and they could therefore register every out-of-stock item that was wanted.
JD: What is interesting about the Internet and web channels is that retailers can find out what the customer wants. Retailers could formalise that process in stores, through kiosks or email. The customer complaints process in most stores is laughable.
SK: Ill give you another example. A typical customer tries on many garments and buys a few. But what made them turn some items down? We need some capability to understand what stopped them from taking them to the till, and whether they enjoyed their experience. Weve got different business silos that have different business challenges.
PG: Do you have any notion ofperformance by category?
SK: Yes, aggregation and averages. Because it is expensive and difficult and it changes, that stops you from doing it. There was a time when the store manager did it. There is some prospect here, when we have really got an understanding of how these tools can help us.
PC: That is interesting because Zara is going back to that, purchasing done by the store manager. They do their own purchasing; their systems work so far in zzadvance they can do that.
AC: There is an interesting move away from centralisation to localisation, which I think could be the key. I think it is where every store might have a different promotional range based on the demographics of the people coming through the doors. I think that store specific planogramming is where it is going to be - going totally customer-centric.

Retail Systems will be holding similar events in the future. For more
information, please email alison.rawstron@retail-systems.com

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