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Money Ball Retailing

By Peter Charness, SVP America's and Global CMO, TXT e-solutions [MI-TXT]

Peter Charness, SVP America's and Global CMO, TXT e-solutions [MI-TXT]

Great Assortments have to please at least 2 distinct groups. In first place, of course, are the customers who want exactly what they want, when and where they want it. Free would be a good price, but of course the lowest possible is a close second. The other group that are highly interested in Great Assortments are the shareholders in your retail business, often represented by the CFO. That Inventory Investment—after all it is an Investment—needs to be managed, and has to offer the right return (which of course is just a few more margin points than you can possibly get). So great buyers not only have to be great at fashion, timing, promoting and building consensus amongst the merchandise teams. They also have to manage the rather sizable amount of money that goes into that inventory position they sign into existence one purchase order at a time.

Taking a page from finance managers, the concept of a ‘balanced portfolio’ as a fundamental to a financial asset investment is an interesting analogy to the practices of Inventory Investment Management. Using the Stock Market as part of that analogy, a well balanced portfolio needs to meet a number of goals and objectives:

- Meet overall Investment Goals and Objectives (strategies)
- Manage the Risk Reward Tradeoff
- Deal with the changes in the market trends that may impact the forward valuations of your products and move the risk/reward ratio in a direction different than you were planning
- Follow an investment strategy that may be coupled with a philosophical bent, like only investing in ecologically sound companies, or companies with certain human resource practices

"Looking at your overall assortment with the eye of a financier can provide some interesting perspective, and guidance"

With these kinds of more strategic goals (kind of like an Assortment Strategy) in mind, the next question becomes: What is the position or role that a single stock (item) plays in your portfolio? Is it a high risk/high reward selection, or does it fill out the stable part of the portfolio, a long term low risk dividend payer, year in and year out?

Each stock that you buy has to be measured both in terms of its own potential, as well as how it fits with the rest of the portfolio. If you decide to go long on steady dividend paying utilities, for example, adding a 12th item, which may in and of itself be a high quality stock, could overweight the portfolio and create a higher risk position than you thought. Maybe basic cotton t-shirts are like steady reliable utility stocks, good to have year in and year out,  little risk that their value will go to zero, and they provide a steady return with low risk of obsolescence. That said, carrying that 7th color may be too much of a good thing, becoming a risk, as well as presenting an opportunity cost of taking up cash and space, which would have been better served with a different item altogether.

Just as products have attributes such as fabrics, price points, and styling details, they also can have an attribute that describes how they fit in the context of the investment strategy, “low risk steady performer”, “high risk, high reward”.

There is no right or wrong here, just a good way to double check your proposed assortments and determine if the proportions make sense and fit with sound investment strategies. A reality check that may help answer questions as to assortment balance, such as too tame, not enough excitement percentage, too many choices in the “good solid performer” (which creates risk of being boring and overweight in items customers don’t perceive as fresh new ideas).

And borrowing one more time from the Financial Investment world: “past performance is not indicative of future results”. In the world of Retail, the market and customers tastes are dynamic and ever changing. One criticism of assortments in today’s market is that there is a “sea of sameness”, meaning too many locations carrying more or less the same product, which offers little reason for a shopper to visit your store. Perhaps the general movement to lower inventory risk has taken some of the excitement out of assortments. After all, carrying basics is relatively safe and may not make a fortune, but won’t lose one either. Perhaps when one considers the “sea of sameness” issue, as well as the fact that basics have become an ideal online purchase (i.e. Amazon’s new button down brand”), having too many basics in your assortment portfolio is becoming a high risk option, not a low one. Looking at your overall assortment with the eye of a financier can provide some interesting perspective, and guidance.

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