“Like Godzilla through Tokyo or King Kong climbing the Empire State Building, the dreaded Assortment Creep terrorized the Company, consuming valuable dollars, unbalancing the Balance Sheet, and causing panic in the streets.”
Well, not exactly… although a recent client engagement reminded me of the negative impact that assortment creep can have on a retailer and the productivity of its inventory investment.
First, let’s start by defining assortment creep. No, it’s not a creature out of a bad sci-fi movie from the 1950’s. Assortment creep is, in fact, a problem which impacts many smaller retailers. It is the slow, steady, almost imperceptible addition of items and categories to existing merchandise and product assortments, which adds to inventory levels, but not significantly to sales, thus tying up valuable cash and diluting overall inventory productivity. The gradual increase in SKU counts, and inventories to support those SKU’s, without a corresponding increase in sales, quickly becomes a cash drain on any smaller retailer.
It is important to note that not all new SKU’s or categories lead to assortment creep. It is critically necessary for every smaller retailer and wholesaler to test and introduce new items and categories to keep their assortments fresh. But when new items or categories are added that don’t sell and turn over at the rate of existing items, and other weaker selling items are not discontinued, when SKU counts are continually increasing, then the negative impact on cash flows can be significant.
How does this happen?
One form of assortment creep can occur when a retailer seeks to leverage a strong market position in their core items or categories by expanding into what they believe are related or complementary items or categories. It is a perfectly reasonable strategy to increase sales and grow the business But it can be full of risk.
I recently worked with a retailer of high-end furniture and related home furnishings. One of their accessory categories is crystal vases and bowls, which accented their offerings of dining and occasional tables. When they expanded their crystal assortments into stemware and glassware, however, they found that the incremental increase in inventory did not generate anywhere near the return on inventory investment that vases and bowls did. In fact, the inventory hardly turned at all.
Crystal stemware and glassware is not their business. There are other types of retailers, such as jewelry stores, who are far better positioned to sell crystal stemware and glassware. And where crystal vases and bowls naturally complement and accessorize their tables, stemware and glassware turn out not to be a natural complement at all.
Another form of assortment creep can occur when the SKU counts within a category are allowed to increase without carefully analyzing the productivity of the current assortment. This occurs when a small retailer tries to capture the sale in a category by having every possible option a customer might want.
I started my career as a retail buyer, and one of the categories I bought was men's sportswear. I remember the lesson well. It didn’t matter if I bought a particular shirt in four, six, eight or ten colors, the best four colors would sell well, and the other colors would require markdowns to finally sell through.
Let me be specific. If the buy was six dozen shirts in the best four colors, it would almost always sell through without having to take significant markdowns. But if I increased the buy by even another three dozen over the next best four colors, inventory would increase by 50%, while overall sales, before markdowns, might increase by 10%. Not very productive. Yes, I would pick up additional sales, but I would invariably give the gross profit dollars from those sales back in all the markdowns I ended up having to take. I quickly learned to focus my buying on the best colors in the best styles.
Avoiding assortment creep
Here are several keys to preventing your assortments from growing unproductively and chewing up valuable cash:
1. Stay focused. It is essential to maintain a clear-eyed focus on the core mission of your company, who your customers are, how they perceive you, and what they expect from you. Your assortments must clearly reflect this focus.
2. Talk to your customers. Never presume that you know what your customers want, or how they perceive you. Ask them. Be careful, though. If you ask them if they’d buy an item from you if you carried it, they’ll probably tell you they would. Better to ask them where they would go to buy an item you’re considering, and why. Then you know who your competition would be.
3. Test before you leap. Test early, test often, test always. An on-going, continual program of testing new items and categories and lines allows you to learn about the potential sales volume, inventory productivity and impact on existing items and categories in a controlled way, prior to making a full fledged commitment. If you’re a retailer with multiple stores, you can easily test in one or two stores. If you are a small retailer with only a single store, test in limited quantities, pause, analyze the performance and impact, plan the rollout, and then proceed.
4. The place where solid merchandising decisions meets effective inventory management is quantitative sales and inventory analysis. For many small retailers, performing detailed sales contribution and inventory productivity analysis by item and category may seem like something they simply don’t have the time for, but without this analysis it’s not possible to make informed merchandising and inventory decisions.
It may be easier to sell your existing customers new items than it is to find new customers for your existing items, but in selecting those new items it is critical that you are actually growing sales and not just your inventory. Don’t let the dreaded Assortment Creep chew up all of your cash!
© Ted Hurlbut 2004