Optimizing markdowns to reduce retail waste

Foreword

When we talk about the future of retail, and in particular, grocery retail, we tend to focus exclusively on the radical shifts required to compete in this disrupted market.

Things have changed. Brick-and-mortar shops have embraced the digital space and continue to develop and invest in omnichannel to communicate offerings with customers and drive loyalty. Getting the balance right in-store and online is challenging and requires significant investments in technology, capability, and cultural change. However, quick wins can be achieved by focusing on the last 50 yards of retail.

For most grocery retailers, the potential to extract value exists everywhere and can be realized by taking iterative steps to achieve fully optimized and preventative solutions. 

Dr David Waters, Chief Product Officer at Retail Insight, says, “Obviously, there is a lot you can do to minimize the impact of out-of-stocks and waste through a more carefully designed and joined-up plan on range, space, pricing, forecasting, distribution, and labor. But that is a big plan requiring significant coordination and change management. It could stretch into years of effort. Meanwhile, there is value to go after right now.”

The UK government-funded Waste and Resources Action Programme (WRAP) estimates that at least 1.3 billion metric tons of food is wasted globally each year.¹ Action reducing or preventing food waste could save retailers more than $19 billion annually.² 

Striking a balance

Getting the balance right between product availability and waste prevention and between long-term and short-term goals is no easy feat. And that’s only agreeing on the goals before attempting to build the technologies required to deliver a total preventative solution. However, it is not impossible, and there are many steps along the way that can drive value and impact.

Data-driven expiration date visibility, availability measurement, and actionable markdown alerts can help close gaps tactically and systemically. Implementing a markdown system allows you to prevent food from going to waste. This system analyzes current sales rates, inventory levels, and the impact price movements might have to recommend the optimal markdown pricing to clear stock before it becomes unsellable.

However, most retailers must take advantage of this simple step to build a more effective preventative system. As Waters explains, “When retailers mark stock down, if at all, usually it is in simple increments: first by 25%, then 50%, and to clear at 75% off. Introducing the ability to apply an item-store-optimized price reduction can be done quickly and automatically by adapting price reductions using factors such as stock-on-hand, time of day, and store sell-through trends. This can happen without the need for heavy resource investment on the retailer side, and the returns have proven to be huge in every market launched.

“But right now, there is long-term value in prevention and short-term value in reduction, so in this time of disruption and margin pressure, let us take as much benefit today so we can fight on tomorrow.”

In the case of the continued retail challenge of balancing fresh produce availability and waste reduction, the ultimate aim is always to have enough availability with little to no food waste. But this is a complex stakeholder challenge to consider with many competing objectives:

• When entering most grocery stores, shoppers are faced with walls of fresh produce. Their presentation and availability typically set the scene for the shopper’s experience of the store. If they cannot find what they want on the right date, will they turn and leave?
• Can this availability be guaranteed at all costs when considering the retail operation? When everything is supplied in excess to guarantee availability, are we prepared to pay the waste bill? Our research shows that waste accounts for up to 4% of revenue.
• From a corporate stakeholder perspective, are we considering our corporate social responsibility objectives? Do our customers believe we have the view of society and the environment in mind in general? Are we making and disposing of too much?

Start small, think big

Paul Boyle, CEO at Retail Insight, explains, “Sometimes the desire to deliver the perfect solution to the problem acts as a paralyzing factor. Perfect is the enemy of good.”

“Start with an appropriate data-based target,” he continues, “then develop a robust measure and put a simple plan in place to capture quick value. If we only ever wanted an optimized solution from day one, I think we would be waiting a long time for that day to come.”

The best approach to start small is with a markdown strategy that uses technology to enhance productivity and promotes actionable prevention at the right time and in the right place, using data-driven insights. 

To conclude, Dr David Waters adds, “Again, this is one of those examples where you apply the right mathematics at the right level and get the desired result in very short order. Sure, we can throw AI at the forecasting problem long-term to achieve a near-perfect balance of availability and waste, and we believe we have the foundational models to achieve that.”