March 5, 2004, 12:00 AM

The Price is Right

(Page 2 of 2)

As Duane Reade perfects its use of the DemandTec system, it expects to also benefit from improvements in the way it sets promotional prices and product assortments, Charboneau says. And by factoring more data on forecasted demand and impact on existing and future inventory, it can expect to operate pricing and merchandising optimization to a higher degree than under earlier systems that weren’t as comprehensive.

The vision

“The vision is that price is tied to demand chain management or inventory management,” says LeHong. “If you run a promotion that takes a product down to a certain price, you have to make sure your supply chain can handle extra volume. The vision is that a retailer should make price decisions based on the impact on the supply chain.”

In fact, while most adopters of web-based price optimization systems are starting with small bites, more retailers are thinking in terms of integrating pricing practices into broader technology applications. “We’re seeing retailers look at the whole optimization space end to end,” says Kent Allen, retail analyst for Aberdeen Group, adding that more merchants are looking at the importance of relying on more comprehensive data to produce solid pricing plans.

This growing interest among retailers is coinciding with a shift in vendors offering price and merchandise optimization systems as well as those offering supply chain technology. Vendors in the price and merchandise optimization market, including DemandTec, ProfitLogic Inc. and KhiMetrics Inc., are expanding their platforms to offer more comprehensive application suites, while companies like i2 Technologies Inc. and Manugistics Group Inc., known more for their supply chain technology, are pushing further into the price and merchandise optimization market.

No single vendor, however, can claim a complete system that covers all aspects of price and merchandise optimization as well as integration with supply chains, analysts say. “No one has a market or technological edge,” says Noha Tohamy, retail industry analyst with Forrester Research Inc.

Gartner’s LeHong says the best-of-breed players have an advantage in the retail industry because they already have retailer clients. “The retail industry edge is with the best-of-breed, because they’ve been serving retailers for three years now,” he says.

Pushed by customers

Scott Friend, president of ProfitLogic, provider of web-based price markdown optimization software used by more than 12 retailers including The Gap, Bloomingdale’s, The Home Depot and Meijer Stores, says several customers pushed ProfitLogic into offering merchandise allocation and assortment planning tools. By better allocating products and assortments among stores based on their expected demand, retailers believed they could avoid markdowns. “We realized the markdown tool was providing a forecast of how customers would respond to markdown pricing,” Friend says. “The next question was, if the technology did a good job of forecasting responses to markdowns, why not use it earlier in the cycle, when buying and allocating, so you don’t have to do so much markdowns at the end of the cycle.”

The web plays a crucial role in making the integration possible, Friend says. “The most effective and scalable way to feed all the information into the various systems that need it is the web,” he says.

The primary benefit is that the web is a common interface that allows retail managers to move from one application to another, gathering and manipulating data, Friend says. “The web enables users to jump from an allocation report to a price change request then to an order change, with the underlying application being transparent to the user,” he says. “Without the web, we’d have to hard code all the connections.”

As more retailers take that step and perform better in planning, pricing and moving products, they’ll begin to raise the bar of performance and draw more retailers into these processes, experts say. “It raises the game for every merchant, because merchants will make better decisions based on quality analysis,”  Fishback says. “If you understand demand, you make better assortment, pricing and markdown decisions.”

But getting to that point will take time, experts say. Although the vendor community is moving toward broader suites that provide multiple aspects of merchandise and price optimization for different product categories and in different stages the overall demand among retailers is expanding slowly, experts say. “We’re still seeing a lot of basic forecasting and rollups of basic spreadsheets,” Allen says.

Some retailers are beginning to take a lead in operating multiple parts of pricing and merchandising optimization systems — J.C. Penney Co. Inc. for one — but most have yet to disclose details of such projects. J.C. Penney, as part of a broad corporate plan to centralize its merchandising operations, has been working with ProfitLogic and DemandTec on price optimization and merchandise allotment and assortment optimization. J.C. Penney also uses a database management system from the TeraData Division of NCR Corp. to flow its sales data into its optimization systems. Although it sees its optimization systems as an important part of its move toward centralizing its operations, the system is still too new to discuss openly, J.C. Penney says.

Not there yet

Other ProfitLogic clients moving ahead with merchandising optimization along with markdown optimization include apparel retailer Lerner New York and Canada’s Northern Group Retail. “After applying the science of merchandise optimization to our markdown decisions, we realized we could gain additional value by using these insights earlier in the merchandising process,” says Michael Stanek, CFO of Northern Group Retail. “If you add science to the art of merchandising, you can do two things: minimize risk in the event of a bad buy or economic downturn, and maximize profits if you’re hitting everything head on.”

Northern Group says its project is too new for the Canadian retailer to comment further on its details. Most other retailers, meantime, are taking things one step at a time—though with their eyes on a grand plan of optimizing multiple pricing and merchandising variables. The game plan is to deploy optimization systems in stages, learning the ins and outs as retailers realize the results of their pricing and merchandising decisions. “Having demand forecasting and price optimization at the same time is the goal,” Allen says. “We’re not there yet.”

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