February 11, 2014

A Frequent Root Cause Of Problems

 You see some quirky stuff when you work on a Merchandise Forensics project:

For instance, it is very common to observe businesses that stopped investing in new products, coming out of the recession around 2010. I get it, I do. The world was coming to an end, and you didn't want to invest, you wanted to conserve cash.

This is what it looks like when we don't invest in new products. This is a "comp segment" analysis, where we focus on customers who purchased exactly two times in the past year, measuring subsequent year spend:

This is what I see - all the time. We're doing this to ourselves. Look at the "New Item Spend" column. Comp customers really started tanking on new items, beginning in 2010. New item spend dropped from $20.50 to $19 to $17 to $15 to $13. For a period of time, the drop in new item productivity was offset by existing items ... as the businesses offered fewer and fewer new items, customers shifted more and more into existing items, driving up existing item productivity.

On the surface, Management sees this as a good thing. "Our best items continue to carry the business, we need to focus on them". So Management cuts back even further on new items.

That strategy works until existing items outlive their usefulness, which always happens. Always. It's the law of merchandising, it is unavoidable. At that point, what are the new items that replace existing items? Oh, there aren't any!

This is when productivity begins to tank. This business, featured above, is on the verge of collapse - you just can't see it yet if you look at normal business metrics.

You can see it if you run a merchandising forensics analysis.

You run the comp segment analysis, and you count the number of new items that generate at least "$x" in the first year (I usually pick a 45th to 55th percentile for all items as the cutoff).
  • 2013 = 174 new items.
  • 2012 = 196 new items.
  • 2011 = 219 new items.
  • 2010 = 233 new items.
  • 2009 = 241 new items.
  • 2008 = 254 new items.
  • 2007 = 266 new items.
  • 2006 = 255 new items.
  • 2005 = 250 new items.
Yup, we've got a collapse in new items, which yields a collapse in new item productivity, which yields a customer switch to existing items, items that eventually outlive their usefulness, yielding a business that is about to collapse.

Happens every day.

And we're doing it to ourselves.