Leaping Into Localization

All retailers are in business to service customers—or so they say. But chains such as Best Buy Co. and Famous Footwear are moving beyond mere lip service and successfully using localized assortments to service customers and build loyalty.

Historically, chains have been stocking shelves based on a “push” methodology that allocates merchandise according to what a retailer thinks its shoppers will want. However, to become a trusted retailer of choice, chains need to revamp their merchandising strategies and create assortments based on their shoppers’ needs and preferences.

This is the key to consumer-centric merchandising. Retailers can achieve this practice by analyzing shopper demand to deliver merchandise and services to shoppers on a local level.

Best Buy, Richfield, Minn., has been a well-known proponent of this strategy. While the $36 billion company has carved a niche for itself in the consumer-electronics marketplace, Best Buy fought hard for this position.

“More than two years ago, one-third of our visits did not translate into sales,” Robert Willett, CIO, Best Buy, and CEO, Best Buy International, said at the ERI eXchange, the Conference & Expo for the Extended Retail Industry. The event, sponsored by Upper Newton Falls, Mass.-based Retail Systems Alert Group, was held in Boston last month.

“We were using a push model to merchandise our stores,” he said during the keynote session, “Locality Demand: Driving Consumer Centricity on an International Scale.”

“While it did a good job replenishing stores, it would not help us achieve our strategic vision of providing a seamless experience across our brands, channels, and geographies in real time,” he added.

That said, the chain “needed to optimize all replenishment activities to achieve a consumer-centric strategy based on a pull model,” he told Chain Store Age in a separate interview.

Best Buy employs a number of solutions to cater to customer preferences. Besides customer-segmentation tools, the chain also uses price- and space-optimization and labor-management solutions to tailor assortments and deliver merchandise that meets consumer demand.

While the company has made significant strides, Willett considers the strategy a work in progress, “We are about two-thirds of the way there,” he reported. “Best Buy passed its tipping point when we made the transition from simply being a big-box retailer to becoming a retailer that sells solutions.”

The chain’s goal is to provide a seamless experience regardless of the brand, channel or region a consumer shops in. And it plans to provide only the highest-demand merchandise and services based on using this consumer-focused strategy. The chain hopes to achieve this level within the next 18 months, Willett noted.

However, he does not discount the importance of corporate buy in to this cultural change, “from headquarters down to the ‘blue shirts,’ or associates that interact directly with the shoppers,” he said.

In fact, many of Best Buy’s executed ideas originate at store-level, “since the blue shirts have the inside track to shopper needs,” he explained.

“This strategy clearly takes a different way of thinking,” he said.

“The first 18 months were painful,” he noted.

“Any company can screw in IT systems and walk away, but bringing forth a change is another story,” Willett continued. “We learned we needed our associates to embrace and learn system changes before we loaded anything. It was a painful lesson, but this journey is all about learning—and learning together.”

Famous Footwear’s merchandising footprint: Famous Footwear realized the need for localization more than five years ago when a basic replenishment system couldn’t support its endeavors.

“Our company was eager to embark on more freshness of our product, and more velocity in turnover,” John Dembinski, the chain’s VP of merchandise planning and allocation, told Chain Store Age.

“To better service our customers in this way, we needed to do a better job at selling what they wanted to buy,” he said. “The only way to do this was to become consumer-demand driven vs. product-driven.”

That transition required a new focus on inventory-management practices and merchandise-planning strategies. However, in the fast-paced shoe industry, this is easier said than done.

“There is a lead time of approximately six months,” he explained. “This means we were developing and committing our product plans to vendor partners six months out, making it hard to maintain freshness and distribute the right product to our shoppers.”

The other factor taking a toll on operations was that Famous Footwear operates stores across all 50 states, “and the product needs across the country’s different regions can be extremely diverse,” Dembinski said. “Meanwhile, we also needed to do a better job at creating localized assortments and accommodate merchandise to fit within store-level space limitations.”

Famous Footwear was able to begin solving these issues by using a variety of components. First, the chain added the planning-and-allocation product suite from Scottsdale, Ariz.-based JDA Software Group in 2003. These solutions handle merchandise planning, assortments and allocation. Next, the retailer added ProfitLogic’s markdown-optimization solution from Oracle, Redwood Shores, Calif.

After the retailer understands its market trends, buyers and planners blend this data, as well as sales, margins and average costs, into product plans that break down a sales model on a financial level. Next, Famous Footwear uses the JDA planning software to convert product plans into unit plans per store, and then drills down to weekly levels.

The product plan is then fed into the JDA allocation solution that sorts product based on units needed in each location.

By focusing on the target customer, “We have achieved same-store sales increases for nine of the last 10 quarters,” Dembinski reported. “The first quarter of 2007 alone had a same-store sales increase of 3.4%. Clearly, we cannot base these successes solely on the strategy, but it is a critical component.”

Consumer-centric merchandising strategies are gaining more attention across the retail industry, however Famous Footwear believes its localization strategy is unique to other retailer efforts. “We are planning at a localized level. Then we use those plans to drive assortments and guide allocation,” Dembinski said.

“Without localization, we are just allocating product based on consumer history,” he said. “Determining how to fit the right level of product in specific stores is a unique component of the operation.”