Strategic Assortment Rotation

Abstract

Frequent changes in the product assortment can increase sales, especially under the presence of variety-seeking customers. This has been observed in several settings, and in particular, it has been a driver of the recent success experienced by fast fashion retailers, such as Zara and H&M. Since rotating faster comes at an operational expense, fast fashion firms have developed flexible supply chains that minimize these costs. This has changed the fashion industry dramatically. In this paper, we establish analytically the connection between price, assortment rotation and sales, through a customer consumption model with satiation and multiple competing retailers. The model determines the customers' consumption pattern over time: the consumers end up spending a higher share of their budget at retailers that renew the assortment at a faster pace. Using the insights of the model, we analyze pricing and assortment rotation decisions of the retailers, under competition. We characterize the competitive equilibrium and find that renewing the assortment more often allows a retailer to charge a higher price. We also show that having the ability to rotate the assortment at a lower cost provides a competitive advantage when firms are non-identical. Overall, our model and analysis reveals the interplay between an operational capability (assortment rotation) and a key marketing lever (price).