Northern Group Retail and Anchor Blue Retail Group are two clothing retailers that are garnering success with retail profit optimization tools. The tools enable retailers to better manage the fine balance of stocking staples and seasonal items—a balance that can make or break a retailer. Retail profit optimization software applications help retailers obtain a better understanding of their inventory and price and sell it correctly. Both Northern Group Retail and Anchor Blue Retail Group utilize Oracle Retail solutions, such as Oracle Retail Profit Optimization and Oracle Retail Advanced Inventory Planning, to address merchandising challenges. Read how these tools help retailers make more profitable and smarter buying and selling decisions based on gathering data about customer spending and shopping habits.

As Published In May 2006

Smart Selling
By Karen J. Bannan

Retailers are gaining insight into customer behavior with real intelligence.

The typical Northern Group Retail customer is a mom looking for comfortable, well-made clothing, for herself or her children. The Canadian-based retailer has more than 225 ladies' Northern Reflections and children's Northern Gateway retail outlets. But there was a downside to the company's success—at the end of the day, although company executives knew how many of its more than 10,000 SKUs of clothing had been sold, they knew very little about what each customer had bought or how frequently they were shopping.

"We had historical information on how a style sold in specific stores. The view, however, was more merchant-centric than customer-centric. A buyer would be able to say, 'I bought 5,000 of this sweater and I sold 4,000 of it. Here are the stores I sold it in and here are the sizes I sold it in.' But that was all," explains Bill Booth, Northern Group's vice president of inventory management. "We used focus groups and talked to sales associates and managers to get more information, but it was all anecdotal perceptions of what was going on in the stores."

As a result, in 2001 the company experienced significant losses after making what were categorized as poorly structured markdowns; executives realized that pricing strategies weren't what they should have been. Too much merchandise was selling at a discount, and inventory wasn't turning over quickly enough. Customers weren't able to buy what they wanted when they wanted, because there wasn't enough space on the selling floor for new merchandise as the seasons changed. This meant Northern Group Retail was not only experiencing capital drain, but a drain of its customer loyalty as well.

Anchor Blue Retail Group had a similar problem. The typical Anchor Blue customer is a teenager who likes cool, casual clothing—apparel that evokes a California lifestyle even for someone who lives in the Rocky Mountains or the Arizona desert. Only 18 months ago, Anchor Blue buyers had a blind spot when it came to ordering the trendy clothing that customers wanted. The buyers used a proprietary merchandising system that made it very difficult to see what was already in the company's stores and warehouses. It was also difficult to figure out which styles and colors were selling best at each of their more than 250 stores. If executives wanted, for example, to track individual cartons of merchandise, they'd have to request custom development, which could take up to a year.

"The system we had worked fine for everyday business, but it was a very bulky and difficult system if you wanted to look at data in real time about what's selling where, in what sizes and colors. We were looking for that kind of information, plus other sorts of merchandising analysis," explains Michael Bush, Anchor Blue Retail Group's chief executive officer. The company needed a better way to see what was in its stores and distribution centers as well as what was on its way from their vendors.

Not Business As Unsual

These two companies are perfect examples of why retailers—clothing and specialty retailers such as sporting goods or mass merchants in particular—have technology needs that are very different from traditional vendors. The key factor: Retailers usually have multiple stores, which stock thousands of products and multiple styles, colors, and sizes—and on top of that, each season, year after year, the assortment changes. Clothing retailers are constantly purchasing staples, such as jeans and T-shirts, as well as seasonal items, explains Joe Skorupa, group editor of industry trade magazine RIS News. And it's those seasonal items that can mean the difference between a retailer's profits and losses, he says. "Stores are bringing in items tied to seasons and holidays—even the Super Bowl. Those are the items that make or break a planner's budget," Skorupa adds. "It's because of these pricing events that retail planners are turning to merchandise optimization tools."

Spotlight Anchor Blue Retail Group www.anchorblue.com Annual revenue: US$400 million Oracle products and services: Oracle Retail (formerly Retek), including Merchandising System, Store Inventory Management, Invoice Matching, Sales Audit, Trade Management, Allocation, Data Warehouse (excluding Microstrategy), and Integration Bus Northern Group Retail www.northernreflections.com Annual revenue: CA$180 million Oracle products and services: Oracle Retail (formerly ProfitLogic), including Price Optimization, Size Optimization, Assortment Execution

Buy too many jingle bell sweatshirts, and your store managers will be marking them down after Christmas. Buy too few, and your customers will go elsewhere. Finding the balance is key. That's where retail software comes in.

Anchor Blue and Northern Group are using technology products designed specifically for retailers. This software falls into a category called retail profit optimization, which helps retailers gain a better understanding of inventory and price and sell products accordingly. Both companies are using Oracle Retail solutions to solve their merchandising problems.

These tools, says Dave Boyce, Oracle Retail's director of marketing, help retailers make smarter and more-profitable decisions. "From planning the season through to figuring out not only what to buy but also what sizes, colors, and case packs the stores need, how to flow products, which stores to send things to, which stores need a slightly larger-skewed size profile versus a smaller-skewed size profile," Boyce explains. "Every single one of those decisions has profitability implications straight through to how retailers promote and price their merchandise."

Using such software is pretty innovative, at least today, says Rob Garf, retail director of Boston-based research firm AMR Research. It's also extremely important to the entire retail industry, he adds. "Based on a recent survey of retailers, we found that demand intelligence used to better understand consumer behavior was ranked the most important business focus to influence technology purchases," Garf emphasizes. "Even so, we are in the relatively early stages of technology investment in this area, although we see optimization as the key element of almost every software application that's being purchased."

Getting Into Her Head

Of course, figuring out what to buy and when to mark it down starts in the stores. Specifically, retailers need to predict and plan based on how they think customers will react and respond to what's available in their stores. Northern Group's Booth says his company looks at this process as a matter of achieving customer intimacy through technology.

"The word 'intimacy' may seem a little bit too strong, but it was really to understand where the customer shops, when she shops, what she's looking for, and to be able to help her," he explains. "Also, we wanted to be able to get at the triggers that would tell us when she buys merchandise at regular price, when she buys sale merchandise—all those aspects."

Northern Group Retail does this in part by using a combination of Oracle Retail software that generates additional purchasing information about its customers' spending and shopping habits, and a third-party-driven loyalty program called Northern Friends. The combination lets the retailer track every item the 1.2 million program participants have purchased, down to the color, size, and purchase date. This information lets Northern Group Retail do things such as sending customized pallets of merchandise into its stores, says Michael Stanek, Northern Group Retail's chief financial officer. "We can allocate single-size units. We can allocate to stores differently based on various attributes that the stores had," he says. "We really started to see an increase in our gross profit margin and the sales rates because of this advanced analytical work that we were doing."

It also helped the company's direct marketing efforts, says Stanek. With targeted marketing efforts, the company can focus on customers based on how they have shopped in the past. For example, a postcard can be sent to a customer who always buys full price, or a shopper who tends to buy on sale might get e-mails with notices of sales and special coupons.

Anchor Blue Retail Group's use of retail software helps the company allocate its merchandise more effectively, too, because executives can see trends as they begin as opposed to waiting until they are obvious and further along into a selling cycle, says Bush.

"It's not a situation where if girls are buying cowboy boots, they buy 1,000 cowboy boots on Monday, and then they buy zero on Tuesday," he explains. "It's a situation where maybe cowboy boots are going out of style, but purchases go from 1,000 pairs to 500, or from 400 pairs to 300. Knowing what's selling does help us predict what's going to sell in the future, because we can begin to see trends, either upward trends or downward trends, at a very low, low level in the selling pattern."

The real benefit of this type of visibility is for the customer. Retailers can provide exactly what they are looking for, making their purchase experience a positive one. Bottom line, says RIS News' Skorupa: Retail optimization can also keep retailers from running out of an item. The software can help create sales projections based on fact—not conjecture. "It lets retailers look and say, 'How many customers do we have who might buy this item? How many are in the right age range for this product? What's the minimum level we need to sell to make a decent profit?' It helps them pick an item number that's safe without being too conservative," he says.

Ringing Up More Sales

If retail optimization software is so beneficial, why aren't more retailers using it? The reasons behind the somewhat slow adoption center on money. Retail management software isn't cheap, and it can take some time to implement. Still, Skorupa says the return on investment can be quick—often within a year. Even those with more modest success will see ROI within two years. But the key to that success, like any technology implementation, is buy-in from the marketing, information technology, and corporate groups.

"The honest truth is there have been retailers who install merchandising optimization tools and are left wondering where and when the ROI comes in," says Skorupa. "The CIO is usually scratching his or her head because the retailer has not changed its business processes internally. It's not just about getting the buyer to use appropriate technology. It's about going upstream and downstream from management to fulfillment. If execution is not 100 percent perfect, then you're left wondering where the gain is."

Anchor Blue Retail Group assured its own success by installing a noncustomized version of the software and engineering a reorganization of its processes. Executives say they wanted to make sure that once they bought their new software, the organization would be ready for it.

"Oftentimes in software implementations you see companies buy a base package, but then modify the package to try to fit the system to match the way the company does things—the way the company, for example, may develop products or issue purchase orders or whatever," says Anchor Blue's Bush. "What we've tried to do here is map out how the software needed to operate from an unmodified perspective. Then we went through and changed the organization, either by changing the way people were allocated to certain roles and responsibilities or defined new job descriptions to fit the way the software wanted to work."

This meant making sure the people who interacted with the software knew exactly how to use it, and more importantly why they were using it. Northern Group's Booth says he made sure everyone on the team had some feedback into how the company would use the software and what the exact priorities and goals were for the company.

Indeed, AMR Research's Garf says the most successful companies aren't necessarily the ones that buy every retail software component out there to cover all their bases. Success, he says, comes from mixing software, change management, and a top-notch user interface at a pace that's manageable for each unique company. As a company gains experience and knowledge with one software component, it can add others successfully. This strategy can improve usage statistics and internal adoption.

Gaining An Advantage

The software is paying off, according to recent research by Oracle's customer value team, with review and accreditation by Mainstay Partners. Oracle Retail Merchandise System grocery customers are able to hold items in inventory an average of 4.2 days fewer than competitors using non-Oracle merchandise software, representing a 14.9 percent savings in inventory costs. Department store retailers using Oracle Retail Profit Optimization are 82 percent more profitable than industry peers, while using 15 percent less inventory. Oracle's core retail applications identified above are most widely used among soft lines (apparel and accessory) retailers, where market share is 32 percent by company count and 40 percent by revenues. Soft lines retailers managing their businesses with Oracle retail solutions require 17 percent less inventory, representing an average customer investment savings of over US$100 million.

Anchor Blue's Bush says that even the smallest improvements have meant big money to his company. "The software should either allow you to sell the same amount of merchandise at higher margins, because it's in the right place and you don't need to mark it down, or allow you to use those same dollars of inventory and turn your goods faster, because they're selling through better, and generate more sales—potentially even at higher margin," he says. "For a business like ours that has a few hundred million dollars of revenue, even a 1 percent increase in sales could be worth US$3 million to US$4 million gross margin."

Anchor Blue Retail Group is also seeing a boost due to merchandising. Because its store managers can see exactly what customers are buying, they can see what they are pairing together, and place those items in closer proximity to each other. "We can see what people are buying with our denim jeans. When people buy a handbag, we can estimate what else they would be buying," says Bush.

Northern Group Retail also saw a big jump in revenues. Within three months of implementation, the company realized an extensive gross margin improvement on one children's outerwear SKU. Even more impressive, Northern Group Retail hit a four-point improvement in gross margins in only two years.

Some of the increase comes from the fact that—based on data from the software—executives can make pricing changes and suggestions on a per-store and per-region basis, as opposed to across-the-board national pricing. A store that's selling plenty of black sweaters can keep prices high, while another that's got a surplus can start marking them down.

For More Information VISIT Oracle Retail

Going forward, Richard Space, Anchor Blue Retail Group's senior vice president of sourcing, logistics, and IT, says Oracle Retail software—the Oracle Retail Store Inventory Management in particular—will let the company provide even better customer service. If a customer comes into a store and can't find the right color or size, retail associates will be able to pull up inventory of all the other stores. Customers will be able to have merchandise shipped directly to their homes, or pick it up at the alternate locations, he says.

These types of innovations have propelled Anchor Blue Retail Group and Northern Group Retail ahead of their peers. And although some day soon, every retailer will be forced to implement retail optimization tools—those that don't will be leaving money on the table—there is a way to stay ahead of the crowd, says AMR Research's Garf. Companies will succeed, he says by looking forward and backward—learning from presoftware experiences as well as from the intelligence that the newly implemented software affords.

"Optimization software on its own will not differentiate a retailer," he says. "The way that retailer uses the software and its ability to make the information it gleans actionable—to give store employees better context—is going to produce the most benefit."