More Supply Equals More Demand, Right?

The term “second apron” should be very familiar to basketball fans.

The term refers to a provision in the NBA’s collective bargaining agreement related to a team’s salary cap. The cap is the amount of money that a team is allowed to spend on their roster.

Teams can (and do) go over the salary cap, this is done via exceptions or paying financial penalties. If teams exceed the cap, then there are thresholds that trigger the penalties. The “second apron” is an example of one of these thresholds and is the most punitive.

It would seem as though retailers and brands are embracing the idea of a salary cap.

Well, at least in theory. And, it is being applied to their product assortments.

According to the WSJ, brands are thinning out their assortments to focus on what their customers want the most and to reduce supply-chain pressure. Names like Hanesbrands, Dollar General, Under Armour and Deckers Outdoor are some that are slashing their assortments.

As stated in the article – today’s customer no longer wants an endless aisle, they want the right aisle.

Duh.

That isn’t exactly refined, cogent analysis.

Overwhelming customers with an almost endless assortment of products doesn’t mean they will buy.

In other words, more supply does not equal more demand.

At some point, the customer motivation to buy hits a plateau as the assortment grows.

Like so:

There are significant financial penalties for brands/retailers for going over the “assortment cap.” These include decreases in gross margin, reduction of full-price sales, more markdowns/discounts and de-valuation of the brand.

But here’s the thing, with brands saying the right things about maintaining operational discipline and keeping tighter assortments, will this continue over the long-term? Have executives come to terms with the fact that trying to be all things to all people is a losing proposition?

Think about it like this: cutting down assortments was done by force, not by choice. The covid pandemic is what forced brands and retailers to confront their addiction to the endless aisle. Will the learnings of the forced lesson continue to be applied? Only time will tell.

But one thing is for sure, retail’s excess inventory has repeatedly made headlines for years. That is no accident.

Perhaps a failsafe is needed to keep assortments from going out of control again. Much like the NBA, punitive measures for going above the “assortment cap” and creating bloated, unprofitable assortments might be useful.

Or, enforcing a maximum amount of allowable products in a product mix based on the extent of full-price sales. Or, creating/changing bonus structures to incentivize creating an assortment with inventory targets alongside profit targets.

It’s also possible that none of those ideas are practical.

But it is worth thinking about.

Because curated assortments with products that customers truly desire drives profitability.