This article is Part 1 of a 2 part series that covers the importance of business intelligence and predictive analytics and how they can be used by liquor retailers. Click here for Part 2.
Data is the unseen force that moves every kind of business in the 21st century. In today’s competitive retail environment, it can decide the fate of liquor retailers that previously thrived based on years of accumulated intuition and the ability to acquire successful products at a good deal. Now, the complexity of diverse consumer preferences and buying habits are more and more central to store operations. That poses a dilemma for many retailers who are beginning to incorporate data more directly into their businesses. We love to help retailers with data, so we put together a series on approaches to overcoming the dilemma. The series begins with this piece on business intelligence followed by an equally informative report on business analytics, and then wraps up with a post on data visualization. We hope you will be as excited as us about data in the retail beer, wine, and spirits arena. Enjoy!
Total Wine opens its doors down the street from you. Walmart expands first into groceries and then beverage alcohol. Amazon opens up a nationwide opportunity to sell alcohol through its acquisition of Whole Foods. Laws change and online delivery steals away your regulars. Have you ever wondered where all of that explosive growth comes from? Your thoughts may first go to brand and buying power, but as the reality of the looming competitive threats takes hold, you should come to understand intuitively that the driver behind this growth is information.
I know what you’re thinking. You’ve been running your business for going on two or three decades now, and you know what happens in it. And, you’re not wrong; intuition has a place in making decisions about store plans, pricing changes, and promotional events among many other choices you make each day running the store.
But, here’s the thing. As humans, we struggle innately with evaluating our situations within the context of greater forces at work, ones like markets and consumer trends shifting wildly and unexpectedly. When you make decisions on intuition alone (which, strictly speaking, is impossible since our intuition is informed by data every moment of the day), you are deciding based on the way things always were (again, at least as our brain has over time reconstructed the past). This is where Business Intelligence — or BI as it is more commonly known — can help.
What is Business Intelligence?
The role of BI is to provide an objective picture of the present based on the past that you can use with your intuition to interpret and act more accurately within a fast-changing marketplace.
To be more precise, we can consider what it means from a technology perspective, too. One definition sets it apart clearly from business (or predictive) analytics: “Business intelligence leverages software and services to transform data into actionable intelligence that informs an organization’s strategic and tactical business decisions … it describes a past or current state” or condition that the business is in (M. Pratt, CIO, Sep 2017). In this way, it is different from business analytics that provides predictive or prescriptive insights into strategy and operations.
Phew. Now that we have definitions out of the way, what exactly does BI mean for running an independent beer, wine and spirits store, or a chain of them? Think about this problem for the moment. Perhaps a store manager has been ordering a leading domestic corn-based vodka predictably and increasingly for the last two years. Which means that the trucks keep showing up every week or two with a dozen cases. Demand for the product may be dropping, but the manager doesn’t see it because the decline occurs slowly over time. So, the ordering continues. After a few weeks, the cases are stacking up, so the manager orders a little less. At the same time, the manager isn’t completely willing to believe the change in the growth trend when it is revealed one data point at a time — the week-ending report showing that the store is another few bottles off prior weeks’ sales. Academics and consultants call this the Bullwhip Effect, a supply chain problem.
The example above also reveals a decision-making weakness called conformity bias that we all experience at one level or another. We seek information that validates what we already believe and disregard evidence that refutes our beliefs. The forward-thinking business owner turns to BI as an ally at this point, hoping to diffuse the impact of the bullwhip and conformity bias that may have seeped in. BI can help us remove the decision-making noise that clouds our judgment and reveals the patterns inherent in our businesses’ operations.
BI enables decisions made on data rather than emotion. It provides a multifaceted view of whatever product or operational problem you are tackling, so that you can take action on insights that are drawn from several perspectives. Much like turning up the gain on your amplifier, BI extracts the signal from “noisy” operations to simplify your decision-making. BI enhances the impact of intuition by delivering multiple points of view driven by data collected from several sources to ensure we have considered other options and evaluated a range of potential outcomes rationally before making difficult or weighty decisions. Wow, what does that mean? It means BI forces you to look first at data, then incorporate more selectively your objectives, assumptions and biases, and act.Business Intelligence enables decisions made on data rather than emotion. Click To Tweet
BI delivers an even more powerful impact for the responsive store owner or manager when it provides data not available through the store’s system — product and customer data that spans stores, markets, and demographics. BI does not make the decisions; it just frames them for those who are willing to pay attention. So, if you find inventory stacking up or margins slipping on products that are supposed to be trending, the explanations can be found in the intelligence you can gather.
In fact, there are three important considerations to building a BI capability that you can use to run the business.
1. What questions are you answering?
There is not enough time or space to list the questions you could be answering largely because your store is unique. It sits within a distinct market defined by demographics, regulations, competition, social conditions and economic forces. Your store comes with its own unique customer base and product inventory, factors that come with histories that affect their trajectory. However, BI can help you understand the influences that all of these factor levy on your business’s ability to compete and grow.
Instead, let’s talk about how to orient your thinking about the questions you ask about running the business. Most store operations can be broken conveniently into front-of-store (i.e. customers, sales, product mix, and promotions) and back-of-store (store plan, inventory, procurement, and management). These divisions coincide with a business view that emphasizes both revenues and profitability. As you know well, the front of the store typically produces the revenues, while the efficiency and effectiveness of back-office operations determines the overall profitability. Before you react to that, we agree this is undeniably simplified as there is a significant grey area here. For argument’s sake let us stay with my proposition for the moment.
BI provides insights into both the front and the back of the store; it measures both revenue productivity and profit-generating capacity of your business. You should consider several dimensions when putting together an approach for using BI in your business. These include time, geography, product categories and brands, competition, and locations among other possibilities. As you develop the questions you want to answer, consider which dimensions matter most to your situation. Is your store’s revenue slowing? Has new competition moved in? Is the neighborhood changing? What products travel together in customers’ baskets or offer the largest opportunities for margin improvement? Once you settle on important questions to examine your business, you can more readily identify the measurements to take.BI provides insights into both the front and the back of the store; it measures both revenue productivity and profit-generating capacity of your business. Click To Tweet
2. What are you measuring?
BI examines the choices you can make to increase your margins or provide lifts in sales. For example, looking at store sales overtime on a daily or hourly basis can reveal patterns that let you rethink store promotions, operating hours, or other adjustments affected by the time of day. Reporting can also reveal the relationship between products moving through your store not in terms of total bottles sold weekly, but rather which products left the store together in customers’ shopping bags.
Because BI is a historic look at your business’ performance, the key measurements or variables include elements that tie to aspects of the business that you have an intuition for already. Sales performance, product sales, and your regular customers’ purchase habits are the types of information that you know or at least think you do.
Much of BI sits under the surface. That is, it is masked by small changes in the variables of your business on a day-to-day or hour-to-hour level, which is how you typically experience the store. So, you have to pick the measurements that reveal hidden trends and patterns. These variables fall into four categories: product sales, market conditions, marketing and promotion effectiveness, and customer behavior. You can undertake BI on your own with basic tools like spreadsheets and data from your Point-of-Sale machines, but the results will often be limited by the richness of available data. Several commercial tools are becoming available in the market to help guide you through the analytics of store performance, whether looking at product depletion, customer profiles through receipt scanning, or sampling to measure product demand or marketing effectiveness. All tools have their places, but they will only be as good as your reasons for using them are. So, putting thought upfront into how BI can help you will steer you to the variables and tools that will prove most useful to your analyses, but its ultimate effectiveness is determined by the quality of your data.
3. How good is the data from the measurement?
Using BI successfully depends upon effectively choosing the variables you are most interested in understanding. Time-based trends require data from consistent sources over long periods of time — several weeks, months or years. The time span dictates the degree to which you can interpret changes from the trend. They also need to have maintained a consistent means for being measured over that period. Similarly, comparison of markets based on demographic differences requires you to have large enough samples that removed biases from the data. In fact, every approach to BI has specific statistical and analytical requirements to ensure accurate representation of the trends and performance of your business. The choice of the approach depends both on the questions asked and the data available to answer these questions. In other words, the BI approaches you use requires that you obtain high-quality data regarding sales, products, customers, and operations.
Data quality can be determined by looking at the condition of a set of measurements. High-quality data exist when they are fit for the use intended by the analyst. Fit for use, hmm? When one engages in BI analytics the focus is on comparing like with like in order to draw conclusions that address the original question. So, data that are clean, organized, measured consistently and represent the variables being tested (e.g., the question you asked) are high quality. When significant estimation, extrapolation or modification is required, the quality of the data declines.
To conclude, when you are able to clearly identify questions you want to know about the operation of your business, choose the methods to use in order to answer those questions, and obtain high-quality data that represents the measurements required for those answers, BI can provide useful insights into how you should think about growing the business.
Sometimes, BI reinforces the understanding you have for how the store runs, but more often than not it shows you a different picture from you would expect. Therein lies its power — shedding light on results you have otherwise missed, passing over opportunities to increase sales and improve profitability.