Retailers check out price optimization

Software that can help retailers set initial prices and manage their markdown cycles could see an uptick in adoption this year if the interest expressed at this week’s National Retail Federation Conference & Expo in New York in January morphs into action plans.

More than 200 attendees packed a Sunday morning conference session on merchandise optimization, and several retail executives said their companies either are piloting price optimization software or exploring its potential to assist their decision-makers, through its sophisticated mathematical modeling capabilities.

“Early results are encouraging. We think there are incremental [profit] margin opportunities associated with it,” said Stephen Sadove, vice chairman of Saks Inc., which is testing software from Spotlight Solutions Inc. in Mason, Ohio. Spotlight specializes in software designed to help a company plan the best time to discount seasonal items.

Steve Schwartz, a senior vice president of planning and allocation at Casual Male Retail Group Inc. in Canton, Mass., said markdown optimization software from ProfitLogic Inc. in Cambridge, Mass., eliminated the need for “inches thick” reports showing stock-keeping unit, sales and inventory data that “would take forever to go through.”

The men’s apparel chain initially sent two years’ worth of data to ProfitLogic and now sends weekly sales and inventory figures by store. The optimization software does the number-crunching and produces markdown recommendations based on the region where a store is located. The only IT involvement was getting the data to ProfitLogic, which hosts the software and is paid a monthly fee, Schwartz said.

Schwartz said the ProfitLogic system has helped his company improve its gross profit margin and the liquidation rate of seasonal items, but he declined to provide numbers.

Predicting demand

Another type of optimization software is aimed at helping retailers predict consumer demand and set everyday prices of merchandise, with an eye toward a sales or profit target. Two leading vendors are DemandTec Inc. in San Carlos, Calif., and KhiMetrics Inc. in Scottsdale, Ariz.

DemandTec, which claims 14 customers, points to statistics showing that Longs Drug Stores Corp. in Walnut Creek, Calif., boosted gross sales by 1.9 per cent and gross profit by 5.1 per cent after eight weeks. D’Agostino Supermarkets Inc., a grocery chain based in Larchmont, N.Y., increased revenue by 9.7 per cent, gross profit by 16.1 per cent and net profit by 1 per cent to 2 per cent, according to DemandTec.

Manugistics Group Inc. and i2 Technologies Inc. are making strides in price optimization, and retail application vendors JDA Software Group Inc. and Retek Inc. are expected to join the fray.

Price optimization is still in the early stages. Greg Girard, an analyst at AMR Research Inc. in Boston, said no more than 20 retailers have licensed the applications for enterprise rollout. The cost for implementation can soar past $1 million, so even though the return on investment may look promising, the decision can’t be taken lightly.

“I don’t think everyone’s convinced just yet that it’s going to work for them. We’re still in the learning phase,” said Chris Boone, an analyst at IDC. Plus, “implementing this requires a pretty significant cultural shift,” he added.

Only proven results

Many retailers prefer to trust seasoned employees over a black box. Plus, retailers are typically slow to adopt new technology until they see proven results from their peers. The Home Depot Inc., for instance, decided to try the software after hearing about positive results from retailers such as J.C. Penney Co. and Meijer Inc. The Atlanta-based home improvement retailer this month started running ProfitLogic in parallel with its existing markdown systems, with plans for full rollout starting this spring.

Gary Jones, director of merchandise process management at Home Depot, advised his peers to make sure they understand their companies’ current seasonal markdown processes before they explore the optimization products. He suggested that they start small and learn how the new tools can be used.

“Pilots are still churning their way through,” said Andrew White, an analyst at Gartner Inc. “I don’t think anybody is saying, hand on heart, this is the way to go. [The technology] does show great promise, but it’s still really unproven in more than just one or two implementations,” he added.