Consumer-Driven Category Assortments Will Optimize Conventional Shelf Sets
By Paul Thompson, Managing Director

Consumer-driven category assortment is an "outside-in" view of categories and products that is aligned the way that consumers use and purchase products. A critical component is a behaviorally defined market structure that provides direction for key purchase drivers. This structure defines occasion usage as well loyalty and substitutability for other products and brands. This approach allows retailers to organize and allocate space based on how consumers shop that category and optimize products based on the importance of product attributes and substitutability.

Why is consumer-driven product assortment more important than other methods of assortment? Why should retailers be quizzing their category captains to make sure they are getting a consumer-centric view versus a straight line volumetric view?  What are the elements of good assortment and how should it be measured?  

In the current environment, the data for category segments may not be aligned the way the consumer organizes or shops the category. A category purchase structure derived from both consumer usage and purchase patterns is required to align segments with consumer shopping behavior An example of this is analgesics which are aligned by ingredients like ibuprofen and acetaminophen. But consumers purchase analgesics based on ailments like headaches and body aches, not based on ingredients.  

There is also a common misconception that new items are better items. For retailers to understand the effect of new items requires a working knowledge of the purchase decision hierarchy. In an effort to grow volume, manufacturers often innovate with new flavors and forms that end up cannibalizing their own portfolio. In some cases, they may trade off substituting higher velocity items for lower velocity items. The result of these redundant sizes and forms is that the volume tends to be cannibalistic instead of incremental to the category. They create clutter on the shelf, drive inefficiency, and result in consumers who are confused and sometimes frustrated.  

Consumer-driven assortment looks at where the volume flows in the category when an item is added or removed.  Does the volume stay within a given brand set, flow to a competitive brand set, or leave the category all together?   

The risk of not doing consumer-driven category assortment is that some lower velocity items that may be critical to specific consumer segments but not the highest velocity can get delisted. If that item is delisted, its volume simply leaves the category, or the consumer goes to another store to fulfill that need.   

We were able to help a client save a dinner kit product at Wal-Mart by sharing the distinct consumer segments with the buyer and demonstrating that, while this item was not the highest velocity in the category, it was the number one item in this mainstream box dinner segment. Removing this dinner kit product would have resulted lost volume for the category or -- worse -- lost customers.  

True consumer-driven category assortment captures the systematic and comprehensive volume flows to other items in the category and the impact of marketing support like trade promotion, media, and consumer promotion. Consumer-driven category assortment captures the importance of consumer preferences along with an understanding of consumer segment usage and purchase behavior. This consumer insight and organization also helps inform shelf layout and product adjacencies. Consumer-based shelf layout looks at the interaction indices between segments to understand how related they are.   

One might assume that wet and dry dog foods are very separate segments. However, when retailers understand that wet dog food is often used as a mix with dry, one could argue that a brand block with wet dog food directly above its dry counterpart could increase sales based on how it is used.  

Most current approaches to assortment rely primarily on a straight line volume and share trend of items with generic projections of product substitutability. Good consumer-based assortment consists of tools that:

• Build optimal retail assortment based on the integration of consumer preference/ switching information and considering how the segments are structured aligned with corresponding POS data.
• Optimize SKUs across key segments of the consumer purchase structure based on velocities, profitability and product loyalty.
• Incorporate consumers' actual switching behavior to track volume flow from new or deleted items.
• Produce asset management (ROI and GMROI) reports for both manufacturers and retailers.  

The goals of consumer-based category assortment are to maximize available shelf space to improve gross margin return on inventory investment (GMROII), reduce out of stocks on the shelf, and provide focus to the segments of growth within the category. For the manufacturer, rationalizing SKUs within consumer segments will improve GMROII and improve Return on Assets (ROA). There are often many internal production and supply chain efficiencies available by continually evaluating low performing or redundant SKUs within the manufacturer's own portfolio. The key is to know where the volume flows when that item goes away. Does it stay within the brand set or flow to a competitor?  

As consumer-based assortment moves to the next level, it informs assortment decisions within geographic clusters based on demographics and ethnic diversity still using that outside consumer view. Conducting consumer-based category assortment requires a usage and purchase-driven market structure that defines how the category is organized and a logic-based analytical tool that captures switching behavior and consumer preferences. The benefits are that retailers will get the most productive items on the shelf, space will be allocated based on each consumer segments contribution, and the layout will be consistent with how consumers shop that category.