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The retail industry is adjusting to a new reality. Soaring energy costs,
turbulent nancial markets and a sluggish economy are causingretailers to revise their bottom-line projections. Many rms havestopped reporting monthly sales. Consumers have put the brakes onspending, leading stores to tighten inventory, improve spaceallocations, and give merchants and associates volume-based
incentives.
Executives are rethinking their capital projects even as pressurecontinues to achieve speedy return on investment. Store openingsare proceeding at a much slower pace, despite the fact that anengaging store experience connects emotionally with customers andhelps maintain margins. Even the most price-sensitive consumerlooks forward to a little shopping excitement—an importantconsideration, as shoppers are beginning to adjust to gas and foodprices by becoming more organized, consolidating shopping tripsand spending more time in the store.“In spite of all the belt tightening, retailers don’t have to give up onimproving the store experience in favor of lower prices,” says RayFaustman, senior vice president of sourcing and implementation forDesign Forum. “You can still get greater value from time and moneyby applying best practices in supply chain management.”ooking to make a splash with a new or improved store, businesseswho’ve saved millions without sacricing speed or quality think it’sa very hot idea. In addition, selecting vendors and suppliers anddeveloping protable long-term relationships with them will becritical going forward, in good economic times or bad. Top-rankedcompanies point to their strategic procurement efforts as pivotal in
their success.
Sourcing and procurement directly impact all the value drivers in anorganization. Using them with a strategic plan can help rms tacklethe 10 to 15 percent increase in the cost of building materials, theimpact of higher energy expenditures, as well as the average time itnow takes to complete a new store—31 weeks up from 29 weeks.And it tracks and measures performance.“In our experience, retail rollouts can save an average of 21 percentwhen they take the time to develop a strategy and avail themselvesof the specialized digital sourcing tools available today,” saysFaustman. “That’s across just facility-related expenses alone. Butyou can put your team to work on energy management services,building maintenance and custodial service as well. All indirectspend categories should be looked at.”In good or bad times, today’s consumer-driven multi-channelmarketplace and the intense competition between retailers meansthat companies must grow and refresh their stores with increasingregularity. Setting aside money for expansion, design anddevelopment has a signicant potential upside. Companies just needto be smart about how they do it.Narrowing the assortment is another way to gain an immediatecapital release. Stores are cutting back on inventories to avoidmarkdowns. For optimal results, they are putting shoppers at thecenter of their thinking and strategy, and making choices alignedwith their brand. Successful companies know how to concentrateinvestments on the customer touchpoints that will have the greatestimpact on protable demand. Right now that might be private labelbrands or prepared meals. Today’s powerful and unbiased analytictools are helping stores address the sometimes disruptive challengesthat occur in the attempt to rationalize assortments.Everyone is under pressure to innovate and offer new services anddepartments that better t their new and particular markets. But withretailers facing both economic and real estate constraints, store squarefootage is not going up. Selling space must be analyzed forperformance, and optimized. Companies are focusing their spendingon areas with the most potential for customer engagement, andimprovement to the experience of the store.With capital allocation and efciency at the top of the list today, morecompanies are turning to the new modeling and simulation tools thatcan save time and money when it comes to innovating around space,brand and assortments. These algorithmic wonders put speed,creativity and cost-effectiveness at your ngertips.“And if you take advantage of strategic sourcing methods, the moneyyou save on implementation can be spent to explore that kind of newthinking. Or to elevate the brand standard in terms of differentiation ordevelopment. Let’s say you want to put eco-friendly elements andbrand-unique features in the store,” says Faustman. “You will probablybe able to nd a way to afford them.”The businesses performing well right now are the value merchants,warehouse clubs and drugstores. And the low-end is beginning toinvest more in the store experience, putting pressure on the middle andhigh end to kick their brand experience up another notch to justifytheir higher margins. The secret to high-performing stores is stayingfocused on the brand experience when there’s pressure to make it allabout price—and there’s a strong signal coming from the consumerthat price is king.“You have more choices than you know,” says Faustman. “Tightbudgets do not need to drag down a company’s performance andprotability. You can institute strategic sourcing. You caninexpensively model different space allocation plans that maximize thebenet for the customer, and do the same thing with capital allocationplans that will keep the business from overspending sometimes 25 to50 percent. There’s always a better way to do things, rather than justcutting the budget on capital projects—a method sorely lacking inprocess and measurable results.”
May/June 2008
A Retail Publication by 
Tough Times
 
Allocation Strategies in
 
A Retail Publication by:
7575 Paragon Road, Dayton, Ohio 45459Phone: 937.439.4400 Fax: 937.439.4340Email: retail@designorum.comBranch Ofces: London,Los Angeles, New York, Paris,San FranciscoD. Lee Carpenter, Chairman & CEOJill Davis, EditorMeredith Patrick, Design/ProductionFor more inormation or to be placedon our mailing list, visit out website,www.designorum.comand complete the contact orm.Reprints o articles or excerpts without the express written permissiono Design Forum is prohibited.Ideations is printed bimonthly.Subscriptions: $125 annually in the U.S.;$150 elsewhere.© May/June 2008
Chairman’s Commentary 
Preparing for Good Times
After the end of what felt like the lengthiestprimary season ever, we’ve nally narroweddown the presidential candidates. You couldalmost hear the country’s collective sigh of relief. Now the race can focus while we get ahandle on some clear objectives from thenominees. People are ready for change. Theyrespond to clean, simple messages. Retailworks the same way.Shoppers look across the eld of retail optionsto judge which brand propositions relate mostclosely to themselves and their values. They weigh the experienceand narrow their choices. Clear alternatives are more important tothem now, given the burdens of time constraints, economicpressures and the uncertain future. Smart companies will nd thecapital to explore opportunities for connecting with customersduring this transitional time. And it won’t be by copycatting. Retailbrands need to look, feel, sound and smellcompletely different from their competitors.
It needs to be a clear choice.
Shoppers expect retailers to understand their needs, and right nowthey need lower prices. However, when
everyone
competes onprice, consumers become more particular. And they are much lesstolerant of poor service and indifferent shopping experiences.The Home Depot sees the current economic downturn as a time of lower risk. It is investing $3 billion over two years to develop newsystems, store improvements, and the hiring of skilled associates.CEO Frank Blake nds that this is one of the rare times a companyas large as his is willing to accept and push for change, because theupside is so clear. The plan is to renovate stores for easiernavigation, and add more training to turn around Home Depot’sreputation for poor customer service. When the economy picks upagain, ush customers will be able to speak with knowledgeabletradespeople and rest assured the merchandise they are looking foris in stock. I noticed the company didn’t share any plans to cutprices, only to improve experience.Most bricks-and-clicks retailers are part of the social web throughcustomer reviews. If you have yet to establish an ongoing conversationwith customers through your website or marketing research efforts,now’s the time to initiate one. Ask consumers what they like/want/needvia shopping intercepts and interviews, using the sophisticatedtechniques available today for pinpointing robust, actionable insights.It’s a great time to get back some of your entrepreneurial spirit and usenew knowledge to innovate around the store.Although it is often accused of being stodgy, Wal-Mart has been one of the most aggressive retailers in terms of renovating and testing newstore experiences and conversing with customers. There’s a Wal-Martblog! Most recently, the company took a few knocks for theirlackluster fashion apparel launch, and it’s still low on the fashionlearning curve. But it has taken a stand in consumer electronics,completing a department redesign in stores nationwide that addressescustomers’ issues with its merchandising. Bentonville is also at workintegrating the online experience in the store, at the shopper’s request.And of course, it made headlines for leading the
way on green through energy conservation, and
are now in hot pursuit of sustainable packaging.We’re in a bi-polar economy. It’s a difcult market right now and atthe same time it’s not. When you look across all categories, forinstance, home-related stores are most affected and apparel is slowingdown, but some categories like supermarkets and value stores are
doing great.
Drop prices if you must, but heighten the experience absolutely.Remember, strapped for cash or not, people still choose based onemotion and they shop with a sense of anticipation and fun. We’re in aslowdown, not a recession. Take the optimistic view on the long term,and invest now in the store experience so you can come out aheadwhen things turn around. I’ve heard it said, and from thirty years’experience I wholeheartedly agree: a slowdown is a terrible thing to
waste.
Thoughtfully,D. Lee Carpenter 
Chairman & CEO
 
We’re in abi-polar economy.
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