Leveraging the Halo Effect in All Aspects of Merchandise Planning
Margin pressures are challenging brick-and-mortar retailers at a level unlike any other time in history. As the world returns to a new normal post COVID-19, the retail space will become more competitive and retailers will be challenged to keep pace with the rapidly changing industry.
Halo merchandising, which focuses on understanding and leveraging the relationships between products, ensures that retailers will, not only remain competitive, but also increase profitability and meet customer needs. However, understanding the halo effect, and reaping its benefits, requires sophisticated AI technology and automation. When leveraged in all aspects of merchandise planning, AI ensures that retailers can fully leverage the halo effect, securing their survival in the retail space.
Understanding the Halo Effect
The halo effect is caused by customer choice and behavior. Customers buy full meals, not items. This fact creates relationships between products, which includes associated sales, cannibalization, and pantry loading or pull-forward.
A customer who is buying ground beef for a pasta dinner, will also buy cheese, bread and pasta sauce (i.e., associated sales). A customer who buys Coca Cola often won’t buy Pepsi (i.e., cannibalization). Purchasing products like condiments, which have a long shelf life, will keep customers out of the market for these products in the weeks to come. Similarly, non-perishable sale items, such as toilet paper, may cause customers to stock up while the item is at a good price, once again keeping customers out of the market. This is referred to as pantry loading or pull-forward.
Halo effects are crucial to the merchandise planning process as they inform what products should be promoted or not promoted to drive bigger baskets and subsequently maximize profits. For example, promoting ground beef, which is a halo driving item, will result in a greater number of sales. This is because, as aforementioned, customers will buy multiple products in addition to the beef to complete their solution, i.e., a pasta dinner. Whereas, promoting a case of water will not drive the same number of sales as water does not require any other products to complete the customer’s solution.
When retailers fully understand and plan for the halo, they can take advantage of these relationships to drive larger baskets, increase sales and in turn maximize profits. Promoting the right items also aligns retailers with the solutions their customers are seeking, this means better meeting customer needs and both gaining and retaining customers.
Ultimately, in an ever changing and challenging retail environment, understanding and reaping the benefits of the halo effect in all aspects of merchandise planning will ensure retailers remain competitive. It cannot be stressed enough: leveraging the halo effect through automation and AI is a crucial component in the merchandise planning arsenal and is ultimately necessary for continued survival.
Why Is Automation Required to Leverage Halo Effects
Though the halo effect is an intuitive concept, and a typical retailer will qualitatively understand all of the halo effects described above, it is simply beyond human ability to consider all of the halo effects for all of the products in a retail store.
A typical high-frequency retail store has around 50,000 SKUs. If a retailer were to pick 2,000 of those SKUs to promote in a month, which is typical, that would amount to 103600 possible combinations that must be evaluated. That is more than the number of atoms in the universe and is simply far too complex for human beings to consider. AI, however, is capable of making millions of decisions on items and price points and can precisely forecast the impact of these decisions across an entire organization.
Furthermore, to fully benefit from these halo effects requires quantitative understanding. For example, it is not sufficient to only understand that promoting one item (e.g., ground beef) will also grow another (e.g., pasta sauce). In addition to that understanding, we must also know the answers to questions such as: What other items does ground beef affect? What are the cannibalization effects caused by each kind of ground beef? Etcetera. Knowing the answers to these questions for one item is a difficult task in and of itself. This task becomes exponentially more challenging when we must know these answers for the thousands of different products in a retail store. It is also not enough to only consider the halo effects for a few items. To maximize the profitability of assessing halo effects requires understanding and actioning of all the effects, not just a few per category.
Thus, it is inescapable: AI technology is far more effective at identifying and understanding the halo effects that exist across an entire store and must be used to make them actionable and effective.
One thing is clear: Leveraging the halo effect using automation and AI is necessary for continued survival. In an environment that is quickly transforming, and only becoming more competitive, retailers must assume a competitive edge to keep pace in the industry; the halo effect and AI offer just that. Though planning for the halo and implementing AI can be a daunting and challenging initiative, it simply cannot be overlooked.
