Inventory management specifics for the health and beauty retail industry

Taking care of beauty and well-being has become a prominent trend in recent decades. Therefore, retail stores in the health and beauty category have firmly established themselves as places where consumers spend a significant amount of money. To keep up with the times and meet the growing needs of customers, the health & beauty industry is offering an impressive variety of care products. To meet this demand, effective inventory management in this retail category becomes a significant and complex challenge. 

In this article, we will consider not only the features of inventory management in this retail industry but also modern technologies that are incredibly helpful for retailers and can significantly increase the profitability of this type of business. 

The specifics of health and beauty inventory management should be considered in the context of three aspects:

• Promotion specifics;
• Assortment structure;
• Interaction with suppliers.

A significant number of promotional activities and methods

Considering the entire range of retail stores in the health and beauty category, the share of promotional products here can sometimes reach 80%. This is the most prominent indicator among all retail industries. In the fight for the customer's attention, suppliers and the chains themselves often demonstrate not only an impressive variety of categories and SKUs under the promotion but also a variety of promotional methods that stimulate the purchase of even more products. 

For example, they are rarely limited to only attractive discounts but often use the "one plus one" promotional method. It is worth noting that this method requires exceptional management from the retailer because, here, when forecasting sales, it is not enough to take into account only the elasticity of demand and the percentage of the discount from the price. Therefore, the process of preparation and support of the promotion becomes time-consuming, and the probability of mistakes leading to lost sales or excessive balances increases exponentially.

In this case, modern solutions based on AI algorithms come to the aid of the retailer. They can automate the entire process of conducting a promotion: from forecasting and correct initial ordering of goods to tracking all key indicators in real-time and automatic replenishment during the promotion, adapting to the current dynamics of demand.

The structure of the range: slow movers, private label and similar products 

• Slow movers 

Taking into account that most of the customers of health and beauty stores are women, this imposes special requirements on the retailer for the beauty and aesthetics of the sales floor. This factor significantly affects the product display – it should not only be well organized but also sufficiently stocked and varied. But this often means  that the display cost in such stores is relatively high. If you divide the stocks into sections, then a large portion will be taken by goods that are necessary for the layout. In addition to the actual goods for sale,  testers must also be available and should not be forgotten when managing inventory.  

It goes without saying that managing the inventory of slow movers is a much more difficult task than managing items with regular sales, especially with complicating factors like seasonality and promotions. When choosing a software provider for inventory optimization, it is worth remembering that forecasting for slow movers is a specific area that the provider should account for. For example, when a product is sold once in 20 days, simply applying the seasonality or promo coefficient will not be enough. Unique approaches are needed here, not just working with coefficients. The developers from LEAFIO, one of the most innovative vendors in this market, have successfully tackled this task. 

The Leafio Inventory Optimization system is able not only to work effectively with the so-called slow movers but also to maintain a delicate balance between a wide assortment, high availability and a reduction in "dead stock", which allowed our chain to increase sales by 15%, reducing balances by 8% already in the first two months of implementation.

• Private label

Products of the chain’s brand name often occupy a prominent part of the assortment of health and beauty stores. Thus, the chain competes with brands that invest large budgets in marketing and advertising to promote their products. The competitive advantage of private labels, in this case, is mainly at the intersection of price and quality. For the health and beauty products category, this is quite a difficult task. 

To achieve high quality at a competitive price, companies resort to comprehensive measures at the production level and implement a specific private label strategy. It is worth noting that an increasing part of these measures is the implementation of modern software for optimizing stocks and merchandising, which allows you to achieve the maximum margin per shelf meter, reduce overstocks and write-offs and increase inventory turnover. This, in turn, gives the retailer considerable leverage for ensuring the optimal price with maximum profitability.

• Similar goods 

These are goods of the same category and purpose, which are present in the store's assortment, for example, different types of shampoos for blond hair of different brands. They should all be in the range, but they are analogs of each other, and there is cannibalisation of demand between them. If one product is not available, then another may increase in sales. The definition of analogues becomes especially relevant when it comes to new products. When a new product appears, it is important to forecast its primary demand until the sales history has appeared. This is why analogue goods are used. But defining them is a severe problem that only some developers of inventory management software have been able to overcome. 

"In the Leafio Inventory Optimization system, there is a functionality that, based on a machine learning model, automatically determines similar products. The solution’s value lies in the fact that when a new product appears, the manager does not need to predict the primary demand for it; somehow, the system will do it for him independently." 

–Helen Schepanyk, Product Director of LEAFIO AI Retail Solutions.

Interaction with external suppliers

The health and beauty industry has a high percentage of imported goods compared to other retail sectors, which significantly adjusts forecasting and ordering processes. If it is a foreign supplier (especially from China), then the forecasting horizon can reach 3-6 months. Therefore, taking into account this pronounced seasonality, it is important to make forecasts and send orders to suppliers in advance.

There are two main types of seasons in this category. The first is seasonality itself, which is associated with fluctuations in demand for goods throughout the year. For example, sales of sunscreen or tanning products are much higher in summer than at other times of the year. The second is sharp fluctuations in demand in the run-up to and during the holidays, when, for example, sales of perfumes or gift sets for care can increase significantly. To prepare for the first type of season, it is important to forecast the sales growth and decline factors for the soft start and exit of the season. Getting ready for the second type of season means forecasting and purchasing an increased volume of goods in advance. When forecasting sales, it is also essential to consider promotions planned for a period of increased sales. 

Related: Inventory allocation - Tips for stock optimization

Modern AI-based technologies are able to automatically calculate and apply seasonality coefficients for regular assortment (demand for which may fluctuate during the season), specific seasonal goods and goods that are added to the assortment matrix only for a limited time. This dramatically reduces the likelihood of errors in orders to foreign suppliers, which threaten the lack of goods at the peak of sales or excessive balances after it ends.

"Moving from Excel to a centralized inventory management system, Leafio Inventory Optimization, we could not have expected to get such quick results:

• the system manages 97% of our assortment;
• product stocks decreased by 7.5%;
• excess balances decreased by almost 34%,”

says a representative of a national health & beauty chain that has already implemented a cloud solution from LEAFIO.

There is no doubt that the health and beauty retail industry will continue to grow rapidly, with retailers increasingly favoring automation and modern software over complex spreadsheets and manual calculations.  Given the relatively high cost of inventory, the turnover of health and care products is much lower than, for example, in the grocery category.  This requires a more meticulous approach to inventory management,  more in-depth analytics, and accurate forecasting.