Why should retailers care about

retail analytics?
It’s really quite simple.

There are a million things retailers have to stay on top of in the digital age, and simply
not enough time in the day.

Today’s retailers are facing a bevy of new challenges, including declining sales, fierce
competition from online-only stores, and changing consumer preferences. Yet, despite
these challenges, some traditional retailers are managing to grow year-over-year,
shredding previous sales records.

The winners are doing something different, something that not only helps them survive
but also thrive in this quickly unfolding retail apocalypse – advanced retail analytics.

According to McKinsey & Company, the reason some retailers are winning (while others
struggle) is advanced analytics. New research says that retailers using advanced
analytics outperform the competition by 68% in earnings — and the disparity is growing
exponentially.
But what exactly is “advanced analytics,” and how does it differ from regular old Excel
analysis?

To explain what makes advanced analytics in the retail industry so special, we need to
start at the beginning.

What is Retail Data Analytics?

Retail data analytics is the process of collecting and studying retail data (like sales,
inventory, pricing, etc.) to discover trends, predict outcomes, and make better business
decisions. Done well, data analytics allows retailers to get more insight into the
performance of their stores, products, customers, and vendors — and use that insight to
grow profits.

Virtually all retailers are doing some form of data analytics — even if they’re only
reviewing sales numbers on Excel. But there is a very big difference between an analyst
firing up Excel to sift through spreadsheets and using purpose-built AI to analyze billions
of data points at once.

To understand this difference, you first need to understand the 4 different types of retail
data analytics.
 What are the Types of Retail Data
Analytics?
There are four types of retail data analytics that each play an important role in providing
today’s retailers with key insights into their business operations. The four different types
are;

 Descriptive Analytics
 Diagnostic Analytics
 Predictive Analytics
 Prescriptive Analytics

1. Descriptive Analytics Definition

The most common type of data analytics, descriptive analytics helps retailers organize
their data to tell a story.

It works by bringing in raw data from multiple sources (POS terminals, inventory
systems, OMS, ERPs, etc.) to generate valuable insights into past and present
performance.

Traditionally, analysts did this manually in Excel; gathering data from different sources,
formatting it, charting it, etc. Today, a lot of this data gathering and reporting work can
be automated with BI tools and integrations.

Simply put, descriptive analytics uses data to describe “what” is happening in your
business. But it doesn’t do much to answer the “why” — unless combined with other
types of data analytics that can show patterns and correlations.

2. Diagnostic Analytics Definition

The simplest form of “advanced” analytics — diagnostic analytics helps retailers use
data to answer the “why” of specific business problems.

Taking the same raw data used in descriptive analytics, diagnostic analytics uses
statistical analysis, algorithms, and sometimes, machine learning, to drill deeper into the
data and find correlations between data points.

Diagnostic analytics can also be used to find anomalies and flag potential problems as
they happen (if results do not match pre-programmed benchmarks and business rules).

Historically, the most accomplished analysts did all of this manually. They would sift
through data, apply statistical models, look for patterns, and find correlations.
But in today’s data-heavy world, this is nearly impossible for a human to do. With
billions of data points and increasing complexity, larger retailers can’t effectively use
diagnostic analytics without machine learning and AI.

As you’ll find below, there are virtually no standalone “diagnostics” solutions for
retailers. This is because the fundamentals of diagnostic analytics (discovering hidden
relationships between variables in your business) is much better used to predict the
future and automate complex analysis.

3. Predictive Analytics Definition

If descriptive analytics shows you the “what” of what’s happening in your business, and
diagnostic analytics tells you the “why” — predictive analytics tells you “what’s next.”
This is the second most advanced type of analytics.

Effective predictive analytics uses findings from both descriptive and diagnostic
analytics to forecast the future. This is because to accurately predict what happens
next, you must first understand what’s already happened and what caused it.
Predictive analytics automatically detects clusters and exceptions and uses complex
algorithms and statistical methods to predict future trends.

Like other types of analytics, many retailers attempt to manually do this work, with
analysts compiling data in Excel and applying generic statistical models to project
trends into the future.

Unfortunately, retail businesses are very complex, and there are too many correlations
between factors (demand, price, inventory, product assortment, competitors, consumer
behaviour, etc.) for any human to account for all of them manually. That’s why simple
sales forecasts are much less accurate than demand forecasts.

Thus, to accurately forecast the future and account for the most important correlations,
retail predictive analytics must use a combination of AI, advanced mathematics, and
intelligent automation.

4. Prescriptive Analytics Definition

Prescriptive analytics is the final frontier of analytics, and also the most advanced type.

The previous types of analytics can tell retailers “what” is happening, “why” it happened,
and “what will happen next.” Prescriptive analytics can tell retailers “what you should do
next” to get the best results.
 To make good recommendations, a prescriptive analytics system needs to not only
know what is likely to happen in the future but also needs to know what actions will lead
to the best possible future outcome.

This is a difficult proposition because there are a nearly infinite number of actions a
business can take to generate some change in the numbers.

There are multiple approaches:

 Running simulations on a finite number of different initial conditions (different

assortment, allocation, pricing, etc.) and choosing the conditions that lead to
the highest profit
 Using algorithmic AI, purpose-built for retail to make recommendations that
lead to the best possible mathematical outcome (profit, GMROI, etc.)
 Teaching a machine learning program to identify patterns and clusters of
actions that lead to the best outcomes
Of course, the specific way different analytics companies achieve this is a closely
guarded secret. But fundamentally, the process needs to generate recommendations
that retailers can confidently follow 99% of the time.

Examples of Retail Data Analytics

Applications
One of the biggest reasons to use data analytics to guide decision-making is to ensure
your decisions are based on actual truth (cold, hard numbers), not just someone’s
perception of reality.

Analytics can also help you understand what’s going on with your business in much
greater detail than you could otherwise.

Practically speaking, a retailer can use data analytics to:

 Understand the value and number of products sold in an average order
 Recognize which products sell the most, the least, and everything in-between
 Identify your most valuable customers
 Discover what your true demand was as well as past lost sales
 Determine optimal suggested order quantities and recommend purchase
quantities and allocations
 Establish the optimal price point for a specific product at any specific location
These (and other) insights can equip you to better understand the metrics of your
business and implement strategies that help you get to where you want to go.

As you grow, analyzing data needs to become a core part of your business to improve
decision-making and come up with effective retailing strategies.

It’s no surprise then, that there exists a massive, thriving industry for retail analytics
solutions. Below, we’ll discuss some of these applications, how they work, and what
benefits you could see from using them.

1. Business Intelligence
To effectively manage and organize their data, many businesses turn to Business
Intelligence tools. Because BI tools help you structure and visualize your data, they are
an example of descriptive analytics.

Many retailers conduct basic BI using native features in their ERP (Enterprise Resource
Planning) system, or by importing data directly into Microsoft Excel.

Slightly more sophisticated retailers will use dedicated BI software like:

 Power BI
 Tableau
 SAP
 QlikView
 Apache Spark
These applications support multiple data sources, appealing visualizations, and some
degree of data manipulation.

The most sophisticated BI usually involves data scientists that use programming
languages (like Python) that give them a greater degree of flexibility for data
manipulation, data visualization, and data modelling.

While valuable, all of the examples above require a lot of human input and are quite
time-consuming to manage. This is especially true for medium to large retailers running
hundreds or thousands of stores (and tens or hundreds of thousands of products). This
is why many retailers have dedicated teams of analysts in most departments to
generate reports.
 By their sophistication, advanced analytics solutions like Retalon can often automate
most of the manual, repetitive tasks associated with traditional BI practices.

2. Sales Forecasting Software

Another common application of data analytics in retail is forecasting sales.

Simply put, sales forecasting is the process of looking at historical sales data, finding
trends, and projecting them into the future to predict sales.

This helps retailers with everything from purchasing inventory and managing their OTB
budgets to setting high-level financial targets for the company.

As the name suggests, sales forecasting is predictive in nature — and it is the most
rudimentary type of predictive analytics used by retailers.

Because businesses have been attempting to forecast sales for centuries, there are
many different approaches to doing so:

 Using last year’s numbers to estimate sales for this year

 Market research (surveys, observation, etc.)
 Pundit estimates
 Statistical models in Excel
 Dedicated software
Many retailers have their own homegrown solution to predicting future sales, usually
combining dozens (if not hundreds) of Excel sheets, ERP features, dedicated software,
and teams of analysts.

While sales forecasting is the backbone of many retail planning processes — this is
perhaps the biggest area of data analytics in need of an overhaul. This is because sales
forecasting is quite often inaccurate, and fails to account for the complexity of the retail
business.

For example, if retailers sold out of a product last year, most sales forecasting methods
would lead them to make the same mistake — even if they could potentially sell
substantially more.

For this reason, most sales forecasting has fallen out of vogue, replaced by more
sophisticated predictive analytics.
 3. Demand Forecasting Software
As mentioned above, demand forecasting is a much more sophisticated type of
predictive analytics in use by retailers.
Rather than attempting to predict sales using merely historical sales data, demand
forecasting uses a much broader range of data to calculate the demand of each
product, at each store, at specific time intervals. This makes demand forecasting much
more accurate than traditional sales forecasting.

Read more about sales forecasting vs. demand forecasting here.

In short, the main benefits of this type of retail analytics are:

 More accurate prediction of the future state of the business

 The creation of simulations or “what-if” scenarios
 Ability to adjust on the fly as things change as on the ground
 Unification of key retail functions (eg. Promotions and inventory management)
As always, there are multiple ways to forecast demand. In increasing order of
sophistication, retailers can use:

 MS Excel with statistical models

 Generic statistical modelling/analytics software
 Retail-specific analytics software with AI
While the two former options can be enough for smaller retailers — they become
cumbersome (if not impossible) to use with very large data sets (like those found in
medium to large retailers). This is because demand forecasting doesn’t just look at
sales data. A good demand forecast will also make use of data from:

 Historical pricing
 Historical inventory
 Assortment breadth and depth
 Product clusters and families
 Seasonality
 Supply chain variability
 Competitor activity
 Consumer trends
 Etc.
You can imagine how difficult it would be to manually compile, analyze, and model all of
this data for billions of unique Store / SKU combinations.

The best way retailers have to make use of demand forecasting is to find a retail
predictive analytics software vendor with a proven track record of working with
retailers in their vertical.
Using specialized software like this gives retailers a slew of benefits.

For example, you can test changing individual variables such as product price, new
store openings, new product launches (and others) to see the impact this might have on
your bottom line metrics — and adjust your inventory, prices or marketing strategy
accordingly.

4. Unified Advanced Retail Analytics

This is the most powerful form of analytics that can produce the highest ROI if applied
correctly.

Falling under the final type of analytics (prescriptive analytics), unified advanced
analytics aims to combine the benefits of business intelligence, powerful diagnostics,
and accurate demand forecasting with intelligent automation that recommends the most
profitable actions across the business.

You can expect a good unified analytics software to:

 Automate reporting and data visualization

 Accurately forecast demand for every product at every store at specific time
frames
 Allow for flexible simulations and “what-if” scenarios for new product launches,
store openings, etc.
 Automatically recommend thousands (if not millions) of micro-optimizations
across assortment, allocation, pricing, etc.
 Reconcile all changes and updates across all departments and data sources
By its complexity and specialization, this type of analytics can only be provided by
software vendors that specialize in advanced retail analytics.
With it, you can not only automate hundreds of repetitive tasks (compiling reports,
consolidating data between departments, analyzing etc.) but also optimize at a
granularity that human analysts are simply not capable of.

Various solutions provide this level of advanced data analytics including Retalon’s retail
analytics platform, which leverages highly accurate demand forecast and advanced AI
to generate hundreds, thousands, or even millions of granular optimizations that
improve the bottom line.

Furthermore, this type of software is fully customizable and can be configured to auto-
accept certain suggestions or require human approval for others for more control.