The retail industry is undergoing significant changes in the merchandising process--at least, so says a recent survey by retail consulting firm RSR. The best of the national performers have picked up on a crucial strategy: Target your store's selection of goods to the needs and interests of specific communities. It's better for sales and for controlling costs. The savviest retailers know this and they're using technology to help give them edge.

How High-tech Has Changed the Game

According to the survey, firms that outperform industry averages for annual same-store sales comparisons tend to use and understand specialized computer software tools to manage specific aspects of merchandising. The most important tool was forecasting. Such systems help predict what goods customers might want and stocking patterns to satisfy customer demand while minimizing the amount of capital invested in excess inventory. Three quarters of the retailers surveyed said that retail forecasting is "extremely important" to financial success.

This is an interesting shift. In the past, forecasting systems were largely seen as supply chain management tools, where the focus was on reducing operational costs. Now such systems and techniques have become important to expand sales opportunities, moving from a strictly bottom-line focus to a top-line one. As RSR says, "Advances in hardware computing power make sku-level forecasts not only feasible, but imperative."

Almost equally as important as demand forecasting is customer analytics. This makes a great deal of sense. You can't create a good demand forecast without understanding your customers and what they might want. About 34% of the respondents plan to optimize product assortment for key customer segments this year.

Winners & Laggards

The study focused on the differences between what it called "'Retail Winners,' judged by year-over-year comparable store/channel sales improvements," the "Average" performers that hit industry average 3 percent growth in comparable store and channel sales growth, and "Laggards" that saw lower growth.

The winners had an edge not in being better at the same activities as the average and laggard performers, but in putting more emphasis on different aspects of their businesses. For example, RSR asked participants to rate themselves as having a solid understanding of specific merchandising tools and techniques. The chart below shows some of the differences.

The different groups of retailers were roughly equal in how they rated the importance of these tools. The big difference is in how well they thought they understood them. As RSR puts it:

"Operationally, the best performers 'know what they don't know,' and have a generally better understanding of what they need to change to improve their merchandising strategies; by comparison, laggards are asking for more customer segmentation information, but at the same time, citing stalled performance on their inability to identify new merchandising ideas that would appeal to new customer preferences quickly."

Laggards tended to see lower growth because they fall into a self-perpetuating cycle of increased promotional activities to bring in revenue and stay afloat. The constant parade of sales and specials, however, has a negative effect on gross margins.

Mid-market retailers might have some of the biggest problems going forward. Although 51% of big retailers and 44% of small ones implement analytics, which can help them understand their customers' behavior, none of the mid-market retailers used the technology. Furthermore, mid-market retailers had significantly less interest in using either customer segmentation or planogram optimization, which can help improve shelf layout and product placement to improve sales.