Retail Pricing & Merchandizing Strategies

A Case Study from Central America

CASE STUDY
2012
CUSTOLOGIX INC CONFIDENTIAL 1
Retail Pricing & Merchandizing Strategies
A Case Study from Central America
The Retail Client:
The retail client* is one of the largest retail chains in Central America. With over 900 stores, the chain
has stores throughout Mexico and seven other countries in Central and South American, including Peru,
Guatemala, Honduras, and El Salvador. The stores sell a mix of consumer electronics, appliances,
computers, and furniture under several banners.
*Retail client does not wish to share credentials
The Business Challenge:
The retail company needed a solution that could improve pricing strategy for category management to remain
competitive, increase proftability and grow market share. The company also wanted to explore the proft
impact of having different pricing and merchandizing zones across the various geographies.
A large amount of available data was not being put to use to make analytics based decision. The pricing,
promotion and markdown decisions were being taken by category directors independently and were not in
alignment with the overall company objective. The requirement was for a solution that would use the avail-
able data and to craft a company and category level strategy that would give a solid direction to the various
aspects of merchandizing such as pricing, promotion, assortment, inventory and customer loyalty.
Some of the questions the retailer was trying to answer were:
u What is the ideal strategy for each of my categories? What role should each of them play?
u How competitive should we be in the market?
u Who should we compete against?
u How should I create store clusters to maximize proftability?
u What is the optimal price for every product at each store?
u Who are my target customers and how can I make them happy?
u How can I bundle my products/ cross promote products?
u Which products should I promote and when is the best time to do so?

u Am I carrying too much or too little inventory? How can I optimize this?
u How can I optimize my assortment to maximize space utilization and increase proftability?
Retail Pricing & Merchandizing Strategies
A Case Study from Central America
CUSTOLOGIX INC CONFIDENTIAL 2
The Solution:
An initial round of interviews with all the stakeholders revealed the exact extent of the challenges at hand.
The interviews conducted were done so by expert retail strategy consultants and project directors. The
stakeholders interviewed included the upper level management, category directors, managers, analysts,
database managers, inventory analysts and store managers. A project plan was then drafted which included
the various parts of the project including data transfer, validation, modeling, analysis, strategy formulation
and execution.
The main stages of the category management project are explained below:
1. DATA COLLECTION AND PREPARATION
2. ANALYSIS & STRATEGY FORMULATION
3. STRATEGIC RECOMMENDATIONS & EXECUTION
Retail Pricing & Merchandizing Strategies
A Case Study from Central America
CUSTOLOGIX INC CONFIDENTIAL 3
1. DATA COLLECTION AND PREPARATION:
Various types of data were collected at the beginning of the analysis. The source of the data and the method
of data collection/ transfer is explained in the table below.
The data gathering transfer, clean up and preparation took approximately 4 weeks. Once the data was
prepared, it was validated and any missing data was imputed. This data was then handed over to the
mathematicians and business analysts for data mining and model building.
Process Flow Diagram:
Retail Pricing & Merchandizing Strategies
A Case Study from Central America
CUSTOLOGIX INC CONFIDENTIAL 4
2. ANALYSIS & STRATEGY FORMULATION:
Data Analysis:
The data prepared from the previous step was used to prepare insights and mathematical models. This
involved careful alignment of the mathematical and statistical knowledge of our team with the requirement
and the questions that needed to be addressed. While the team members still had the room to use their
creative analysis on the available data, the fnal direction of the analysis was always guided by the initial
guidelines. The results of the analysis as presented by the business analysts and mathematicians were
evaluated by experienced retail strategy analysts before being presented to the stake holders.
The results of the analysis that was delivered by the team included the following components:
u Descriptive statistics on the SKUs, Category and the overall Company

u Graphics on trends, seasonality, forecasts, revenue share and transaction analysis

u Breakdown on sales by category, brands, features and vendors

u Analysis of price elasticity, promotion response and clearance sales

u Integration of demographics to sales patterns
u Current inventory/ optimal inventory analysis and comparison by store/ zone/ geographies
u Store clustering/ store zone classifcation and defnitions
u Market basket analysis/ correlation analysis and cross selling opportunity identifcation
u Revenue spread analysis, identifcation of opportunities to reduce products in the assortment

u Product life cycle analysis, life cycle pricing opportunity identifcation
u Competitive analysis by category, sub category, brand and geography
u Customer survey analysis to identify customer preferences and brand image
Strategy Formulation:
This formed the most important phase of the entire project. The results of the analysis and the outputs of the
mathematical models were analyzed with context to the retailers challenges and past experiences. Any dis-
agreements over the results of the analysis were further investigated and validated. The results of the fnd-
ings were initially presented to the various category directors and managers to get their input on the strategy
formulation process. Finally a meeting was conducted with the strategy consultants, the management and
the other stake holders to fnalize the strategic plan for each category along with the other strategic guidelines.
Retail Pricing & Merchandizing Strategies
A Case Study from Central America
CUSTOLOGIX INC CONFIDENTIAL 5
3. FINAL RESULTS & STRATEGY EXECUTION:
The fnal deliverables of the category management exercises were formalized into a set of documents and
delivered to the various departments. The strategic recommendations identifed the overall brand image/
position in the market the retailer should be targeting. Further each of the areas of retail merchandizing such
as pricing, promotion, markdowns, assortment, inventory and logistics were aligned with each other to achieve
common objectives that were unique for each of the categories. The strategic recommendation guidelines thus
laid the framework needed to execute the recommendations on the various merchandizing levers to achieve
long term growth, proftability and market share.
The various components of the strategic recommendations delivered are listed in the table below:
Conclusion:
Overall the project was well received with great interest. This project provided the perfect platform to launch
the various merchandizing strategies which are key to increasing proftability, competitiveness and market-
share. The next steps on the project include the determination of optimal price points, promotions, markdown
schedules and other merchandizing strategies as per the strategic recommendations.
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STRATEGIC RECOMMENDATIONS:
Defnite roles for each categories were defned based on the share of revenue,
gross margins achieved, % of sales on credit and average price elasticity.
The competitive strategy for each category, sub category, brand and the top SKUs
was defned based on category role, elasticity and current competitive position.
The overall marketing positioning and image for the company was redefned based on
customer perception, company strengths and desired competitive position.
The price optimization goals for each category, sub category, Brand and SKUs
were defned based on category objective and long term proft maximization.
Analysis of past promotions at various aggregations by using decomposition models
provided a guideline for best candidates and dates for future promotions.
Review of the performance of sub categories alongside with demographics revealed
the ideal store clustering that maximizes proft and plan assortment.
Zone level analysis of the demand for product features with respect to local
demographics helped formulate a lean assortment strategy that maximizes profts.
Classifcation of demand with various sub categories by Good/Better/Best
helped create a comprehensive pricing strategy to maximize profts.
Various opportunities were identifed at the sub category segment level to introduce
or grow the private label brand.
Each category was analyzed for the value each SKUs was adding to the overall
assortment. Duplicate/low volume items were dropped for a cleaner assortment.
CATEGORY ROLE DEFINITION
PRICE OPTIMIZATION GUIDELIES
ASSORTMENT OPTIMIZATION
COMPETITIVE STRATEGY
PROMOTION PLANNING
GOOD/BETTER/BEST STRATEGY
MARKETING STRATEGY
STORE CLUSTERING
PRIVATE LABEL STRATEGY
SKU RATIONALIZATION
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