It seems like just yesterday that I remember reading that Costco was going to sell caskets. In the industry, pundits laughed and shook it off, not sure if it would be right for their customer base. Though I don’t remember how the sales panned out, I remember Costco’s effort and the reaction to such an assortment building.

In the past, when it came to assortments, it was simple. Some stores like mass merchants and department stores had more and mostly specialty stores had less. Online retailers added products incrementally as it made sense for their businesses or to test opportunities. At first, it was perishable goods and mattresses, then accessories and ultimately, category add-ons that were more mainstream. I wanted to put this story in context so I reached out to Frank Poore, founder and CEO of CommerceHub, whose company was a pioneer in drop-shipping and vendor networks.

COVID-19 accelerated these initiatives. The supply chain was disrupted. In some cases, Amazon was taking 10 days to two weeks to deliver its goods. A perfect example of retailers seeking growth opportunities were home retailers who wanted to expand into home office goods as soon as possible, despite currently only having a few products to sell. According to Poore, the beauty of the home retailer model was that it was possible now.

As a former merchandiser, I sometimes have difficulty accepting that the art of merchandising has given way to the science faster than I might like. Amazon is selling 300-400 million SKUs via its marketplace and it’s all about the algorithm. When you think about who is expanding their assortments, Poore broke it down as follows. After Amazon, there are a handful of retailers selling tens of millions of products and from there, the next group of retailers are each selling a few million.

Poore sees the retailer’s job as two fold. “It is to attract and then satisfy customers.” He knows that assortment matters dramatically in the acquisition of customers; Summing things up, “more SKUs equals more tickets in the lottery.”

He also believes the nature of a retailer’s business may afford it the opportunity to add almost unlimited SKUs, which he sees working for companies like The Home Depot or Lowe’s. For others like Dick’s Sporting Goods, the category and customer expectations may suggest a more limited SKU count.

How are retailers able to expand their assortments effectively?

Physical stores are limited by their footprint, but the virtual world has endless possibilities and retailers are seizing the moment.

Many retailers are facing challenging times and growing one’s assortment does not involve a capital outlay. Technology is a major enabler of assortment growth across retailers. To be fair, Poore alludes to the fact that there are costs in terms of onboarding products and creating the digital assets, and every retailer has its own set of rules for data manipulation. That also means integrating with a disparate system of suppliers and meeting the service level agreements (SLAs) of retailers. Regardless of this cost factor, CommerceHub is in a position to bring up a supplier in a day or two. Perhaps the most interesting topic on the table was that technology enables retailers to monitor like big brother. That includes immediate information on shipping and delivery so retailers are basically managing the exceptions.

Early on, convincing brands to drop-ship was challenging and he notes they even gave some warehouse managements systems. But drop-ship is seriously growing, Poore suggested that for some retailers, more than half of their business comes via drop-shippers.

Once again, I put on my merchant hat, inquiring about margin. Poore quickly chimed in, “Retailers are margin hunters.” He divided up their approaches starting with the head. That represented high volume SKUs with frequent inventory turn as those they buy and stock. The body are products retailers want but that may not be as popular. Imagine, a shoe style that wasn’t a top seller or one that was in extended sizes. Retailers can drop-ship those that are not as popular and there may be a minimal charge of $1-$1.50. There’s no risk and the retailer receives incremental revenue and margin. He then ends with the “CRAP” that was popularized by Amazon (Can’t Realize a Profit). It has chosen to allow a seller to sell it and take a commission of 10%.

Now, we are living in two parallel universes. One universe is focused on direct-to-consumer brands controlling their brands with a more finite inventory and a goal of providing an on brand best-in-class experience. For top-tier brands, that control was always critical.

The other retailers appear to be following Amazon’s lead, building assortments to try and attract the attention of prospects and customers alike. As Poore reminds us, Amazon set the pace as more than half of its revenue comes from third-party marketplace sellers. Others realized they couldn’t compete as they saw those dominating categories (e.g. they had more toys than Toys R Us). Retailers needed levers to turn and investing in warehouses or owning product was not fiscally possible with their current balance sheets.

During these times, CommerceHub went from being a technology vendor to a strategic partner. For some of its large customers, as much as 50-70% of gross margin value (GMV) is done through its platform (virtual inventory/drop-shipping).

Assortment expansion alternatives

It’s all about the eyeballs and wanting to ensure that shoppers find what they are looking for. The user experience still has a role to play. It’s about getting leverage out of existing customer bases. Most importantly, it’s about becoming a destination and smartly expanding the brand’s definition.

Category extensions are an obvious business add-on. Shopping patterns have changed in a work-from-home model altering the needs of customers in profound ways. Savvy retailers will tweak their assortments to capitalize on these opportunities. It will be interesting to see if customers take their cues.

Kohl’s is attempting to capitalize on current athleisure sales and an increasing work-from-home population. In our Digital Commerce 360/Bizrate Insights 2020 Apparel survey of 1,000 online shoppers, 14% indicated they had purchased comfortable clothes during the pandemic including athleisure or pajamas supporting this trend.

Another group of retailers is looking to boldly expand their assortment. Lowe’s is one of the retailers that is expanding assortments and capitalizing on its business model. It is hoping to stretch who its customer might be, taking the category or meaning of “home” to a new level.

Information powers expansion

The word “destination” comes to mind as retailers like Wayfair and others seek to capitalize on their traffic and expanding their assortments online. My sense is that it’s not about owning inventory but instead delivering an experience for their customers. That includes the use of private label, taking advantage of drop-ship and leveraging technology to smartly expand assortments. All play critical roles.

As Wayfair seeks to satisfy their shoppers, its navigation and curation of products leverages technology to showcase 14 million SKUs. “It’s really about the customer being able to find what resonates with her. We’re able to have such a wide category because of the navigation experience where we collect a lot of data about the products and information the customer needs in the purchasing process. We’re capturing that even before we add the items, so as a consumer, I’m able to go and be able to pick.”

Jon Abt, co-president of abt electronics, discussed the retailer’s approach to the assortment. It has always used the web to test products before putting them in the stores. He was honest in saying it has had both successes and misses. The misses usually stem from a lack of communication with the sales and merchandising teams whose education is integral to the abt electronics shopping experience. Often times, over its 84-year history, expansion of the assortment has come from listening to its customers who want to know why it doesn’t sell a particular product.

When asked about the business model, he specified that 80% was typically drop-ship. It is also trying to stock the product at retail as its brick-and-mortar customer expects it to be on hand. “We know that if we can get it in a couple of days, it typically works as less inventory always means less risk” Abt says.

In the end, he concludes, “We’re always open to trying new things. It’s a mixed bag where we learn and adjust. We tend to perform better when the products are anything for your home, though he chimes in that luggage has been a great performer.” Lastly, he notes that often times it takes it to the market differently as was the case with mattresses.

The retail perspective adds another dimension: The marketplace factor

According to Digital Commerce’s 360’s 2020 Marketplace survey of 118 retailers, marketplaces currently represent 35% of ecommerce for respondents and 71% expect an increase in the coming year. Getting more specific, growth was the order of the day on Amazon Marketplace during COVID-19, according to 66% of surveyed retailers. Reasons to sell on marketplaces reveal that growing sales is the obvious answer at 74%, yet giving customers a chance for better product discovery matters for 42% of retailers. Growing assortments are inevitable and retailers are focused on that better discovery, leveraging vendor networks, drop-shippers and technology.

This growth potential plays out for 37% of survey respondents who indicate they will expand the number of marketplaces they sell on in 2020. As was noted in Wayfair’s press release, data is a driving force behind the expansion. 36% of retailers surveyed indicated they too analyzed the data. Perhaps it is the power of the data that ultimately fuels growth.

After a bit of introspection and a lengthy discussion with Poore, I couldn’t help but accept that technology is curating the customer experience. He was spot on in saying that, “the internet curates for you.” There is an endless aisle because of what you know about the customer.

You will hear retailers refer to the “Macy’s” customer but the days of curating generically for specific demographics may be merchandising in the past tense. Additionally, retailers often refer to their customers as “she” with a generic point-of-view of who that represents. But what we have learned is that “she” is not a single customer base but in reality represents many types of shoppers with distinct behavior patterns.

The shopper perspective

It seems there are two types of shoppers: those who do extensive hunting and those who zero-in on their selections, preferring a more curated model.

I thought it might be interesting to also share some of Digital Commerce 360’s 2020 pre-holiday research on the shopper. When asked to select the most important factors in choosing an online retailer when shopping for the holidays, 20% of the 1,000 respondents to our Digital Commerce 360/Bizrate Insights Pre-holiday survey suggested that product selection, including exclusive items, was important. One can see that this falls behind 11 other aspects from free shipping to competitive prices and logistics including product in stock and ready to ship along with speed of delivery. Maybe the behind-the-scenes nature of showcasing a broad assortment is a given for the seasoned online shopper.

Marketplace purchasing plays a critical role

Taking it one step further, we knew it was important to address marketplaces as their growth has skyrocketed in 2020. In May 2020, Digital Commerce 360 and Bizrate Insights surveyed 1,000 online shoppers and 93% report buying from marketplaces. 40% zeroed in on the ability to find very specific items while 25% touched on unique products as factors in deciding to make a purchase from a marketplace versus directly from a retailer. One can’t help but conclude that shoppers who seek broad assortments are comfortable with marketplaces. Heightened consumer interest means endless growth possibilities.

The Amazon Influence

A look back at the Digital Commerce 360/Bizrate Insights June Amazon survey of 1,000 online shoppers reinforces the retailer’s ability to capture the attention of online shoppers, which continues to be unprecedented.

• 61% of online shoppers have made a purchase from Amazon or a seller on its marketplace in the past year.
• Amazon shoppers are active with one in three purchasing at least weekly.
• While just over half of Amazon shoppers expect no change in spending, 32% project an increase in 2021.
• 43% find Amazon a more important resource post-pandemic.
• 59% reinforce that retail fundamentals including wide selection and low prices drive purchasing.
• 31% cite the breadth of assortment on Amazon as one of the top five reasons they purchase on Amazon.

Retailers are going to push the envelope and expand their assortments. While in the past such an effort was often seen as monumental and risky, technology has altered the balance of power. Retailers can test and assess how their customers respond and curate stores for shoppers that had never before been possible. Paying attention to the fundamentals still matters and delivering an appropriate customer experience remains crucial. We will all learn about expanding assortments during this unusual holiday season and the results will set the pace for 2021.