Buying power is changing hands. As millennials and Generation Z command an ever-increasing share of spending dollars, retailers must tune their sales growth and assortment strategies to better serve this new cohort's values and lifestyles. These young consumers are hungry for newness in their closets but also want to be environmentally conscious in the process. While never repeating an "outfit of the day" on social media may have once meant endless runs to the mall to pick up the latest in fast fashion, today's consumers think twice about their impact on the environment before purchasing clothing that is easily disposed of.
As a result, the resale market, where preowned goods are repurposed and sold at lower prices than original, continues to grow. Over the last three years, the resale market grew 21 times faster than the overall retail market, according to GlobalData, with predictions that it will more than double in size to $51 billion from the current $24 billion in the next four. And it’s not just vintage handbags that sell on these marketplaces. When one of the world's largest retailers and most dominant brands – Apple – includes a resale component in its business model, every retailer can benefit from assessing if and how to take advantage of the trend and reduce the amount of completely new assortment.
But a more diverse assortment, even when it includes resale items, requires reevaluating how to better use the available physical space – whether that's warehouses for digital fulfillment or brick and mortar stores for in-person customer service. And space can’t simply grow proportionately to assortment breadth – resale or new. In fact, retailers that are progressive in their thinking are adopting a "less is more" mindset when it comes to how much and what type of physical space they need to connect with and serve customers. As a result, retail footprints that are nontraditional in nature are becoming more common. Target, Whole Foods, Ikea, and Sephora are among retailers aggressively growing their small-format stores and increasing their per foot profitability. Target's new stores, which can be a third of the square footage of the traditional size, have performed better than the overall firm average when it comes to comparable sales growth.
The one-size-fits-all store approach is no longer the norm. In the past, retailers would develop a new-store prototype that would lend itself to a common assortment and directions for execution. Retailers today, however, are trying to balance the bespoke needs and assortment expectations of the millennial and Generation Z consumer, increasing rents for the most desirable locations, and internal pressures to keep expense overhead in check. This means that they are increasingly turning to new technologies to better align smaller store sizes with assortments that are designed to match customer demographics, sales opportunities, and the available space.
These technologies and tools leverage historical data and trends to help merchants and planners make smarter assortment decisions to support margin expansion and improve inventory productivity. One powerful performance indicator is gross margin return on investment (GMROI), which is an effective measure to evaluate the overall productivity of inventory investment and is determined by dividing the annual gross margin by average inventory cost.
In the example in Figure 1, GMROI set against investment across product categories allows assortment teams to identify where category investments misalign with returns. High inventory categories that are delivering a low GMROI must be analyzed for opportunities to reduce assortment breadth and/or inventory depth to free up space, increase working capital, or reinvest in more productive departments. On the other end, the analysis identifies areas that would benefit from larger inventory investments.
Such tools and analyses aid in making the "less is more" decisions indispensable in today's retail environment that demands razor-sharp efficiency, but simultaneously, retailers must consider the following recommendations:
- Assess how macro retail trends such as resale can be tested in small formats in the business in order to get results indicative of the potential large-scale benefits
- Maximize assortment opportunities with scalable investments in new tools designed to enable bespoke execution in stores that can increase the leverage of the merchandising and planning team
- Examine the assortment process from an outside-in perspective to determine what can be streamlined or eliminated in order to focus the teams on a continual assessment of the category strategy. This helps internal teams invest dedicated time in aggressively pushing the winning categories and throwing out the losers
- Consider adding an online marketplace that allows retailers to offer third-party products, thereby supplementing online offerings seamlessly without holding extra inventory and related overhead
Given the current hyper-competitive retail landscape, retailers need to think deeply about how they can get better leverage from everything they do. Whether expanding into previously unconventional revenue streams or experimenting with store formats, retailers must ensure they have the right tools and analytics to make objective and accurate decisions.