M.Video - Success with Behavioural Clustering for ‘Built-in Appliances’
Leading electronic retailer sees significant inventory savings with a more customer focused approach to clustering.
M.Video is the largest Russian consumer electronics retail chain by revenue, providing a successful service across 379 stores across 161 cities in Russia. M.Video offers a unique store concept, providing customers with shopper friendly stores, offering the latest electronics in trend at truly great value.
Rapid Expansion: M.Video have 379 Stores
across 161 Cities in Russia
In 2010, as M.Video approached an estate exceeding 200 stores, the management quickly realised a key opportunity to group stores together according by similarities in customer behaviour to improve the management of assortment and merchandising strategy. This would enable M.Video to take the next stage in its evolution by moving away from an approach which utilised averages across the store estate, to eliminate significant issues such as having an incorrect assortment and inventory balance in each store, along with incorrect interpretation of store customer demand leading to the store manager driving inaccurate replenishment. Ultimately, providing a customer offer tailored to meet demand and driving an improved stock mix with optimised inventory to drive improved sales and profitability.
Working with consultants at Ernst & Young, in 2011 M.Video selected Galleria, a part of RELEX solutions and the leading provider of retailer and vendor optimization solutions & services to support store clustering inline with customer behaviour to drive insights for optimized assortment and space. Together with an existing project for assortment, M.Video set-out to select a partner who could support the foundation for an end-to-end solution.
A Rapid Roll-Out
After a successful pilot with top-selling destination category, televisions, in which M.Video saw significant improvements with sales increase in excess of 11% and stock turnover improvements of 12%, the team were keen to accelerate the roll-out of behavioural clustering.
M.Video quickly identified the best performing 20 categories which make up over 40% of their overall category offering and could benefit from a more tailored approach. Having the ability to conduct detailed cluster analysis in just a few days meant that M.Video could very quickly create store groupings for each category based on actual customer buying behaviour and, for very fast moving categories such as Televisions, Washing Machines and Cooling, it was now possible to refresh store cluster analysis at scheduled throughout the year to ensure that assortment and space remains continuously in-line with ever-evolving customer demand.
In addition to this, M.Video identified that Behavioural Clustering offered a key opportunity, not only with the analysis shopper behaviour across the physical bricks & mortar estate but to also drive analysis across internet sales for the category. Understanding customer buying variation across attributes such as price and brand, M.Video quickly realised significant differences in shopper patterns in physical stores v’s internet sales and as such, were able to understand similarities in demand for those shoppers entering physical stores verses those purchasing products online or utilising the click & collect service and with product delivery sourced from the most local store to better balance assortment and inventory in-line with demand.
"Galleria’s solution supports us in better understanding our customers so that we can tailor our product offering to improve their in-store experience"Egor Bakharev, Head of Competence Centre of Category Management, M.Video
Seeing the benefit with Behavioural Clustering for ‘Built-in Appliances’
A top 10 seller for M.Video, ‘Built-in Appliances’ comprises a variety of major categories including ovens, panels, extractors, dishwashers and refrigerators. Recognising a key opportunity to unlock further benefits and improve the customer experience, M.Video took top selling category ‘Ovens and Panels’ with an objective to carry out a more formalised Category Management review to tackle identified store space and demand issues, with clearly defined targets:
- 1. Devise a standardized space allocation for category space across the store estate
- 2. Understand customer demand for gas v’s electric ovens and panels and define the demand for different colours of ovens and panels
Devising a more standard space allocation
Historically, assortment and shelf space allocation had been completed at a group level however, in the absence of a formal category review process for select categories, the exact space at each store remained unknown and after calculations were carried out, M.Video calculated approximately 200 space combinations possible across the estate.
What’s more, the assortment was analysed based on group averages and as such, remained untailored to customers who shopped within each store. This led to inconsistency in the assortment offer and a lack of understanding of customer preferences at head office and therefore store level. Although store replenishment was possible, this lack of clarity meant that store managers would often misinterpret the needs of their store e.g. replenishing the store based on an assumed value led shopper when in reality, the customer requirement was more premium driven. In addition, this led to issues with chosen assortment and replenishment options e.g. selling ‘Retro’ style oven and panel products in a single store but not of the same colour which impacted the shopper experience as they could not find the two products that they want to purchase in the same colour.
As a first step to category optimisation, M.Video decided to standardise the space allocation for this category across stores by using the following approach:
- Understanding the current space allocated across the store estate
- Analysing the unique sales for the category; looking at the number of unique SKU’s sold during the month on average across both ovens and panels
- Analysing the efficiency of space bands by looking at the percentage of unique sales against the current space allocation
The optimal space bands identified are outlined in the below; labelled ‘the effective space bands’:
Table 1: The Effective Space Bands
With effective and standardised space bands identified, M.Video were quickly able to define the optimal space allocation for each store in-line with the above space options and applying store level efficiency calculations.
This initial space operation enabled M.Video to get a fast balance between operational and sales efficiency with allocated space bands. This also minimised the variation of space across the store estate to make it possible to generate a more targeted assortment mix per space band.
Understanding Customer Demand
With space identified, a key next step in the category review process was to define the level of customer demand across different product types; Gas v’s Electric and different product colours for ovens and panels.
Utilising Galleria’s Behavioural Cluster Planner to analyse customer purchasing patterns across attributes of type and colour by sales revenue, M.Video were very quickly able to identify clear variation in customer demand across the store estate for ovens and panels.
5 clear store groupings were quickly generated, represented in the table 2 below analysed against product type:
Table 2: 5 Distinct Clusters, Analysed by Type.
Cluster analysis identified a distinct group of 47 stores that showed an average mix between gas v’s electric ovens and panels, ‘Cluster 50/50’ whilst additional clusters highlighted trends such as ‘Cluster Gas’ with 68 stores with an indicative trend toward gas and ‘Cluster More Gas’ where customers show a much stronger preference for gas ovens and panels.
Working together with Category Managers, the M.Video team were able to these utilise key insights to drive the best space break allocation for these categories per store in-line with sub-category product types e.g. an even split for gas v’s electric in ‘Cluster 50-50’ v’s a higher proportion of space for electric products across the 80 stores in ‘Cluster more Electronic’.
With sub-category space allocated in-line with the trends identified for product type, M.Video were able to further optimise assortment with cluster analysis by product colour; identifying the percentage share of revenue for each product colour across each of the 5 clusters. The resultant analysis identified key customer preferences which M.Video were able to utilise to drive more targeted assortments with an optimised product mix to meet customer demand in each store grouping and improving key identified issues at store such as ovens and panels replenished with incorrect colour matched to customer preference.
"We’ve seen significant benefits with this latest review. Galleria’s solution has allowed us to quickly move from a generic approach focused on group averages to one which is tailored in-line with our customer’s needs."Egor Bakharev, Head of Competence Centre of Category Management, M.Video
The allocation of new space bands along with the use of Behavioural Cluster Planner to support the category management review for ovens and panels meant that M.Video were able to accurately allocate stores to the right cluster in-line with demand, unlocking a number of significant benefits:
- Improved understanding of customer behaviour across ovens and panels
- Improved assortment mix in-line with identified customer demand
- Improved inventory turns of up to 12% in some stores giving a total saving of over $260,000 across the store estate for the category
- Improved logistics efficiency with more accurate replenishment
- Improved customer experience at store
M.Video is one of the largest European consumer electronics retail chains with the revenue up to €2,7 billion and the annual sales growth of over 23% a year (9 months results). Total number of stores amounted to 379 in more than 161 Russian cities. Headcount equals to approx. 17000. Corporate sales per 1 sq meter amounted to €7300, that is one of the highest results in Europe.
Since 2007 M.Video has been the one and only public non-food retailer in Russia. Corporate shares are traded on RTS and MICEX stock exchanges (Ticker MVID). The main stakeholders are the founders of M.Video – Alexander Tynkovan, Mikhail Tynkovan, Pavel Breev.
According to the 9 months results total trading square of M.Video stores reached 515 000 square meters. The Company opens its stores in a united format with the average trading area of approx1400-1600 sq m. During 2012 M.Video has opened 28 new supermarkets, and is planning to open over 45 new stores total till the end of the year.
Since 2011 the company has been widely implementing the Omni-Channel strategy that includes integration of different sales channels and creation of the unique shop experience for its customers with the combination of the main business operations from the key solutions in both offline and online retail.