One of the most fundamental decisions a retailer can make is what to sell. Equally important is the decision of what NOT to sell. The right choices build a business with satisfied customers who can rely on your store to carry the products and quantities they need. Inventory will turn regularly ensuring strong cash flow and a healthy growing business. Conversely, the wrong decisions will create stagnant inventory, poor cash flow, and unhappy customers. Let us break down the art and science of assortment planning to guide you through the steps of creating lasting retail success.
1. Define Your Core Customer
The first step in assortment planning is to define your ideal core customer. Identifying the customer who not only frequents your store the most but also contributes significantly to your sales. The objective is to do everything possible to delight and excite this customer and to attract more like them. For most building supply outlets, the core customer is the general contractor or builder.
2. Rank Your Product Categories
The next step is to rank your current and potential product categories from most to least important to this ideal customer. Work from the top down and assign one of the competitive strategies listed below to each category while factoring in your realities of space, location, suppliers, competition, staffing, passions, and other resources.
A dominant strategy means your customers will think of you first when deciding where to shop for that category. Your depth and breadth of product, expertise, and supporting services will be second to none in your market.
A competitive strategy means you are “in the game” and comparable to other strong players in the market.
A convenience strategy suggests you are not a destination for these products but are likely to appeal to your customers as an impulse buy or an add-on sale.
The fourth and often most important strategy decisions are which categories to avoid or eliminate. These categories may conflict with the ability to accommodate more important categories, while negatively impacting the image, reputation, and profitability of the overall business.
3. Allocate Space
Once you’ve decided on strategies, the next step is to allocate space to each. You may choose to work with an existing layout, renovate your space to create more capacity or build a new store. Although optimizing your layout is a separate topic, in each scenario, linear footage should be prioritized based on the assigned strategies. The showroom needs to represent the entire business. Displays of building materials are essential and many will sell much better if stocked in the store.
4. Select SKUs
Once space is allocated it’s time to select SKUs using the following strategies.
Minimize Program Buying
The temptation is to buy established programs from manufacturers or distributors. The challenge with this is the 80/20 rule – 80% of the SKUs deliver just 20% of the sales. Taken a step further, half of the SKUs will deliver just 5% of sales and almost certainly cost the retailer money. Program buying also drives SKU duplication as competing vendors will offer the same products as part of their assortment.
Avoid SKU Creep
Curating assortments is essential as SKU creep adds operational complexity and customer confusion. For example, when I ran a chain of building centres, our stores analyzed tape measures and discovered we had 117 different products listed. We reduced to 23 (maybe still too many) and sales went up by double digits. Sometimes having too many choices makes a customer hesitate and choose to buy nothing at all. Adhesives, utility knives, and paint brushes are examples of other products prone to SKU creep.
Focus on Quality Over Quantity
It’s best to focus assortments on higher quality products not stocked at general merchandise stores. Contractors tend to prefer better brands. They are happy to pay three times more for a blade that will last 10 times longer. Often, it’s better to skip the good and deliver a better, best assortment that can yield stronger sales and loyalty. This helps differentiate assortments from box stores and has the added benefit of attracting more serious DIY customers.
Offer Product Depth
For contractors, time is money. There is nothing more frustrating than needing 20 of something and there only being eight in stock. For them, the depth of their most used items is far more important than a broad assortment. Identifying these items and investing appropriate inventory dollars and space should always be a top priority.
Concentrate on Your Core Customer Needs
Contractors also hate tripping over the patio furniture on the way to the service desk. Trying to appeal to a wider audience with categories that don’t appeal to the core customer tends to be self-defeating. You may gain some new customers at one end while losing more profitable customers at the other.
Consider Brand Loyalty
Contractors also tend to be brand loyal. A large national chain purchased a smaller chain of lumber yards and intended to consolidate all its roofing purchases with one vendor. This extra negotiating power would deliver higher margins for the entire chain. “A shingle is a shingle” was the refrain. The blowback from customers was intense and many contractors started shopping elsewhere, resulting in them having to reverse the plan. Brand loyalty of contractors extends to categories such as paints, power tools, blades and bits, fasteners, caulking, and even drywall. This makes brand choices that fit your local market and customer base all the more important.
Make Local Product Decisions
Decisions on product assortment need to be made locally. I once visited a store in rural Saskatchewan that had just been renovated. They had delegated assortment planning to a vendor a couple of thousand miles away. There were 12’ of chainsaws and 8’ of gate hardware. Looking across the prairies, there was hardly a tree in sight and certainly no fences that needed to be locked.
Limit Dabbling in Too Many Unrelated Categories
There is always a temptation to add product lines to draw in a broader base of customers. Having a few feet of automotive, pool supplies, pet supplies, blinds, closet organizers or appliances may seem like a good idea, yet analysis almost always shows they don’t justify the space they occupy. Even electrical and plumbing perform poorly without sufficient commitment to space and inventory. Customers are likely to need to go elsewhere to find the items they need to complete their project or repair, which can negatively affect the store’s reputation.
5. Measure the Success
Now that you’ve selected SKUs, it’s key to measure the results. Gross Margin Return on Investment (GMROI) is an important measure of profitability which factors in inventory turns and margin to rank the utility of SKUs against each other. The highest-margin products are not necessarily the most profitable. A product with a 70% margin that sells once in two years is much less profitable than one with a 30% margin that turns five times in a year. Stocking the slow-moving product not only ties up cash but also takes up valuable space that could be used to sell more profitable items.
Costco has used the “less is more” concept to drive the highest sales and profit per square foot in all of retail. With less than 4,000 SKUs, inventory turns 14 times per year allowing Costco to compete at a 10.6% gross margin1. Given these turns, they can consistently pay vendors after the goods have already been sold. Ranking products based on GMROI is a great way to make decisions on where to add and delete SKUs.
Tying It All Together
In a competitive market, it’s critical for retailers to not only focus on the array of products offered, but in the strategic selection and management of inventory. By focusing on quality over quantity, understanding the specific needs of your customer base, and measuring success through metrics like GMROI, retailers can optimize their offerings, enhance customer loyalty, and achieve sustainable growth. Making informed decisions about what to sell—and what not to sell—is an art that requires continuous refinement. Making those choices with intention and a keen understanding of your market will ensure your retail business not only survives but thrives.
1 Costco. (2023, September 3). Costco 2023 Annual Report. Costco.