How can retailers transform losses into profits? External economic factors, such as fluctuating interest rates, an unpredictable housing market and persistent inflation have prompted consumers to rethink their spending habits. As a result, profitability is now a top priority for retail CEOs.
Faced with shifting economic and consumer dynamics, retail leaders strive to unlock strategies that turn losses into profits. A critical area of focus is transforming their business into more profitable omnichannel platforms. Despite the appeal and growth of ecommerce, retail profitability has been on a decline. Since 2012, the median EBITDA for publicly traded retailers was 9.8%, according to Deloitte. In 2019, it declined to 6.7% and modestly rebounded to 8.6% in 2022 amidst the pandemic. This downturn persisted even as ecommerce evolved into a mobile-first business over the decade.
Ironically, ecommerce might be part of the profitability problem. While brick-and-mortar stores continue to command 80% of global sales, a significant portion of retail CEOs are investing heavily in enhancing online shopping experiences. In fact, 49% of retail executives said that they would be spending more on ecommerce investment and less in-store for 2023. The costs tied to ecommerce – from technology and app development to fast, free shipping and returns – can be daunting and may be exacerbating profitability challenges.
A more nefarious culprit may be at the heart of the matter. A surprising number of top retailers still rely on their gut instinct to make key buying decisions. Equally alarming, they continue to make today’s and tomorrow’s decisions based on yesterday’s data, jeopardizing profitability with the potential of excessive or inadequate inventory. This reactive approach is a shortcut to a retail death spiral.
The antidote to these problems? Smart merchandise and assortment decisions driven by the voice of the customer and aimed at profitability.
The Customer at the Center
Using predictive analytics for decision-making is one strategy merchants can adopt to enhance profitability. Simply reviewing historical and present sales data won’t cut it. The voice of the customer – data coming directly from shoppers – is vital for making accurate forecasting and buying decisions. With the rapid rise of AI-powered platforms reshaping business operations, including retail, combining predictive analytics with customer input can optimize merchandise assortments.
Start with Customer-Informed Concepts
Involving customers at the ideation stage of product design can help reduce the risk of creating items that don’t resonate with the market. It’s crucial to stay apprised of shifts in consumer behavior and purchasing drivers. Testing fabrics, materials, colors and technology according to customer feedback leads to better sourcing and price optimization from the outset. Collecting actionable data from target consumers about their needs and trends responses allows retailers to design products that align with the market’s future, not the past.
Manufacturing Desirable Products
Testing early digital versions of products with customers before moving to manufacturing is another way to maximize profits while also eliminating costly and time consuming in-store testing. Placing the customer at the center of product development aligns retailers with consumer sentiments and needs, substantially reducing the risk of producing too much of the wrong product or too little of the right one. This customer-centric approach not only boosts profitability but also minimizes waste and bolsters sustainability efforts. Equipped with the right software and predictive tools, designers can make better decisions about new items and attributes — even across multiple regions, countries and target personas.
Creating Winning Assortments
Instead of relying on secondary trend information or internal opinions, ask shoppers directly how they feel about potential new products. Testing assortments before financially committing to them can significantly improve decision-making around which items to keep, expand or drop. Listening to the customer can guide buyers and merchants in building more successful assortments, optimizing inventory, sales, full-price sell-through and gross margin ROI.
Optimizing Assortments for Profit
Testing assortments with targeted customers allows merchants to optimize future inventories with data showing which items shoppers prefer and which they might buy in multiples. These insights allow retailers and brands to weed out underperformers before they hit the floor, leading to a more demand-aligned allocation of buying budgets.
By prioritizing the voice of the customer and integrating it with AI-driven predictive analytics, retailers can drive improved profitability through smarter merchandise assortments. Using actionable consumer insights instead of instinct aligns retailers with customer preferences, leading to more informed decisions. Applying customer insights to predictive analytics sets the stage for significantly more profitable merchandise assortments, fostering consumer loyalty and long-term success.
Viki Zabala, SVP of Marketing at First Insight, is a recognized authority in tech innovation with over 19 years of experience. She leverages her deep understanding of digital transformation and AI-driven strategies to redefine profitability and smart merchandising in the retail sector. Her role at First Insight, a leading Voice of the Customer platform and AI company, coupled with her strategic vision, makes her a trusted voice in shaping the future of retail.