Inventory management challenges of drogerie stores

Introduced in Germany in the 1970s, these days, the drogerie store format is popular worldwide. This is not surprising because here anyone can find their everyday essentials: cosmetics, hygiene products, household cleaning products, prescriptions, over-the-counter medications, and dietary supplements. But the nature of the market, assortment, suppliers and target audience cause specific challenges for retailers in this industry.

In today’s article, we will consider these features and tools to overcome them in more detail. 

The high share of slow movers

Most of the drogerie products belong to low-demand categories or the so called “slow movers.” Experienced retailers know that this category is much more challenging to manage than products with regular sales. When there are complicating factors, such as seasonality or promotions, it becomes quite tricky to predict demand for slow movers, and, accordingly, sales. This process involves studying the sales history and numerous analytical reports. Given the large number of SKUs, this is not only very labor-intensive but doesn’t exclude gross errors and miscalculations. If one item is sold  in 20 days, then applying the seasonal or promo coefficients will not be enough. 

To build an accurate forecast for such goods, it is important to factor in sales statistics for a more extended period, use unique approaches to applying seasonality and promotional factors, and be careful when planning safety stocks and merchandising layout. If there are items with pronounced seasonal demand among such goods, then inventory management of this category becomes even more tricky. AI-based solutions, such as LEAFIO, are most successful with such tasks, as all these (and even more) factors are already considered in the system’s algorithms.

Leafio Inventory Optimization has helped us improve our efficiency with slow movers by balancing service levels and reducing dead stock. This allowed our chain to increase sales by 13% and reduce stocks by 9% already in the first three months of implementation.

Display aesthetics and fullness 

Most drugstore clients are women.  This means retailers have to pay special attention to the design of the display and the aesthetics of the sales area. People often visit these stores to make complex purchases: replenish household cleansers, hygiene products, personal care products, as well as cosmetics. Even if buyers come for one product, they are very likely to purchase more  because of a promotion, hidden needs, or just impulse buying). In drogerie stores, customers expect to see a wide range so they can find everything they need in one place. Filled shelves give the impression of a rich selection, but only if they are filled with what is in demand.

Therefore, it is vital for the retailer to accurately forecast the demand and take this data into account when placing orders. Otherwise, empty spaces may appear on the shelf, or, conversely, part of the stock may be frozen in the display. In addition to the actual product for sale, testers play an important role for selling some products. Therefore, it’s important not to forget about them when organizing stocks.

To cope with these tasks, retailers prefer to implement specialized auto-replenishment software. Such a system will independently track the level of stocks for each SKU in each storage location, including those necessary to create the display and meet the expected demand. It will automatically order what’s needed in advance, which will increase turnover and control costs.

The high share of promotions

The share of promotional goods in drogerie can reach 80%, the highest among all retail industries. Moreover, some products won’t sell well if they’re not on sale. This often applies to large economy goods (e.g. laundry detergent,  liquid soap, diapers). The buyer is always interested in saving money. If they don’t find promotions for the goods they need in one store, they will most likely go to another drogerie or supermarket.

To attract and retain customers, drogerie retailers often use various promotional mechanics. They offer buyers discounts and encourage purchases with a second or third product as a gift: the buy one, get one free technique. The complexity of managing this mechanic lies in the fact that when forecasting sales, considering only the elasticity of demand and the percentage of discount from the price is not enough. 

Here again, AI-powered solutions such as LEAFIO Promotion Intelligence come to the aid of the retailer. They allow you to automate the entire promotion process: from forecasting and initial auto-ordering to tracking all key indicators in real-time and automatic replenishment during the promotion process, adjusting to the current demand dynamics. 

Similar product families 

Similar product families are goods that serve the same purpose according to their similarity and interchangeability. Firstly, such a combination is used for goods that fill open baskets or gondolas on the sales floor – the so-called "products in range". It can be, for example, red nail polish in five different shades, wet wipes with different scents, packs of cotton balls, etc. Since different products may be available for the supplier to order at different times, appropriate accounting and replenishment are carried out, taking into account all the products included in the family. 

The same principle applies when changing the supplier’s assortment for a particular item. For example, a manufacturer replaces 3.75 oz of soap with 3.17 (or 100 grams with 90). In this case, the principle “parent” – “child” is used (goods from the old and new assortment, respectively). It is important to introduce a new product only after the old one is sold out. 

Modern AI-based auto-ordering systems, such as LEAFIO, helps you work effectively with similar product families and correctly change the assortment. If the product is delivered through the DC, then the parent product will be delivered to the stores, even if the DC already has a new generation product. A new product will automatically be delivered to the stores only after the parent product has sold out (without manual intervention). To predict the demand for a new product, the system's algorithms use the sales history of the "parent", which allows you to avoid shortages or surpluses of goods.

Related: Grocery inventory management: specifics for retail

Analog goods

In addition to alternative families, so-called analog goods are inherent in drogerie stores. These are goods in the same category that serve the same purpose, which are present in the store’s assortment. For example, different hair conditioners and  laundry detergents. All of them should be in range, but they are analogs to each other and there is a cannibalization of demand between them. If one product is not available, then another may increase in sales. When a completely new product appears (there is no “parent” product), it is pretty challenging to predict its initial demand since there is no sales history yet. In this case, the demand for a new product is forecasted based on sales of its analog. But defining them is a rather complex task that only a few inventory management software developers have been able to overcome. Machine learning is the best solution for this task.

“The Leafio Inventory Optimization system automatically determines analog products based on cluster analysis and a machine learning model. The value of the solution lies in the fact that when a new product appears, the manager does not need to predict the priority demand for it; the system will do it for them.”, Helen Kom, Product Director of LEAFIO AI Retail Solutions

Private label and brand competition 

Private label products often occupy a prominent part of the drogerie store assortment. Thus, the chain competes with brands that usually have more financial opportunities for marketing promotion of their products. In this case, private label products can compete due to display, as well as good quality at an affordable price. To achieve this ratio, companies often resort to complex measures at the production level and the overall private labels strategy.  Increasingly, part of this strategy is implementing modern software for inventory optimization and merchandising, which achieves a maximum margin per shelf meter, reduces inventory and write-offs and increases inventory turnover. For example, the LEAFIO AI RETAIL PLATFORM optimizes both shelf space planning and inventory management processes simultaneously. This, in turn, gives the retailer a significant advantage in providing the best price while maximizing profitability.

External suppliers and seasonality

The drogerie industry has a high percentage of imported goods compared to other verticals. For import suppliers, considering the lead time, the forecasting horizon can reach 3-6 months. In conditions of pronounced seasonality, the timely creation and sending of orders to suppliers play a critical role. There are two types of seasonality in drogerie:

1. Seasonality is associated with fluctuations in demand for goods during the year. For example, sales of sunscreen products are considerably higher in summer than in other seasons; tea for colds is more in demand in winter. To prepare for a season of this type, it is necessary to apply the coefficients of growth and decline in sales for a soft start and exit from the season.
2. There are sharp demand peaks just before and during the holidays, when, for example, sales of perfumes or care gift sets increase significantly. To get ready, you need to forecast demand and purchase an increased volume of goods in advance. When forecasting sales, it is critical to take into account promotions planned for a period of increased sales. 

AI-based technologies can automatically calculate and apply seasonality factors for regular assortment (demand for which may fluctuate during the season), specific seasonal products and products that are added to the assortment matrix only for a limited time. For imported products, the software pre-orders the required goods based on demand and delivery time, so that the required goods are available when they are needed. This dramatically reduces the possibility of errors, which can lead to a shortage of goods at the peak of sales or excessive balances after it ends.

“We used to use Excel to manage inventory. When scaling the business, this became utterly inefficient. With Leafio Inventory Optimization, after half a year we achieved excellent results:

• the system manages 98% of our entire range;
• stocks are reduced by 8%;
• surpluses are down by almost 30%,” says a spokesman for a national drogerie chain, which uses LEAFIO's cloud solution.

Omni-channel аs a necessity

In recent years, a multi-channel sales model has evolved from an option to a critical necessity. drogerie, the average online sales are  several times higher than physical stores. Many customers find it more convenient to make a large purchase online with delivery: people buy diapers, laundry detergent and other goods in bulk that are inconvenient to carry from the store. In addition, exclusives are often available in an online store, which is not on the shelves in physical stores. 

Despite its clear advantages, this model also has specific difficulties. For example, it is important to accurately track the movement of goods and current stocks across all channels. When a customer makes a complex purchase on the site, and it turns out that a product is unavailable, they are very likely to cancel the entire order. This can lead not only to a one-time loss of a sale but to the permanent loss of the customer.

Modern cloud platforms are not only able to automate inventory management across all channels fully but also to provide comprehensive analytics, hints and recommendations for decision-making and business development.

Conclusion

The drogerie industry is quite competitive. Chains are “fighting for customers”, not only within the industry but also with supermarkets and marketplaces. Under these conditions, a retailer must have a competitive advantage in all aspects – price, assortment and service. In the modern world, this is impossible to achieve without investments in innovation and high-tech solutions that give an additional advantage in accurate ordering,  eliminating the mistakes of the human factor, and speed of decision-making. 

Thus, the LEAFIO AI RETAIL PLATFORM, which includes Inventory Optimization and Shelf Efficiency products, works with drogeries’ challenges as efficiently and autonomously as possible – from assortment analysis and auto-ordering to the most profitable display of goods on the shelves. This transforms the management of the entire chain of goods from spontaneous and time-consuming to a predictable and controlled process.