This article originally appeared in the 2011, No.
3, issue of
The journal of high-performance business
Industry Report | Retail
Up close and personal
By M. Reaves Wimbush and Christopher R. Roark
With such formidable competitors as Amazon and Apple successfully invading their space, many traditional retailers will struggle to keep pace over the next decade unless they can swiftly develop a deeper, more intimate and long-term relationship with consumers.
It may sound too good to be true: A one-stop shop for almost all of consumers’ everyday needs—from groceries to bill payments, mail services to cell phone top-ups, travel tickets to bank loans. Practically at your doorstep and accessible 24/7. In fact, it’s up and running—in Mexico. OXXO, Latin America’s largest convenience store chain, with more than 6.5 million transactions each day, provides these necessities via some 8,600 locations across Mexico. The secret of the Monterreybased behemoth’s success: a corporate strategy and positioning fully aligned with a complete understanding of its customers’ most important needs. In the retail industry as a whole, however, such strategic alignment is all too rare. Most retailers still define their operating model in terms of product categories or store formats, not customers. They manage tactically, for the short term, and season to season. And because of their structural shortcomings, they have been remarkably slow to innovate. Which is why consumers, empowered by technology that gives them unprecedented choice and price transparency, have turned increasingly to more agile and creative interlopers. Among manufacturers, for example, Apple has redefined expectations in consumer electronics by offering
iconic product and service experiences across all channels. And online pure plays such as Amazon. com can meet consumer needs in a range of segments more quickly, cheaply and conveniently than most retailers can. Amazon, indeed, has effectively reinvented the retail value proposition itself. With no stores to staff or maintain, Amazon’s operating costs are significantly lower than those of most brick-and-mortar retailers. Indeed, its SG&A expenses are 300 basis points lower than those of many traditional multichannel retailers, and as much as 700 basis points lower than category-focused competitors. It is these efficiencies that give Amazon the flexibility to invest in getting to know consumers, making acquisitions to fulfill their unmet needs and spending on R&D to develop such groundbreaking products as the Kindle e-reader. More broadly, the new entrants have changed the name of the retail game thanks to an astute combination of sophisticated insight and superior execution— accurately identifying customers’ unmet commercial and emotional needs, and then figuring out how best to fulfill them. Now, recognizing the urgency of the threat these challengers pose, a few leading retailers have started to try to emulate their example. Such companies typically focus on addressing three specific questions.
1. How can we understand customers well enough to be truly authentic in meeting their needs?
Most retailers’ perceptions of their customers are incomplete. They rely on such rudimentary demo-
graphic data as loyalty cards and basket analysis, ad hoc qualitative assessments or generalized second-
ary market research—not enough to develop the holistic customer view they need to create highly relevant offerings. But by supplementing their point-of-sale data with primary research and predictive analytics, they would be able to segment customers into more robust behavioral profiles, incorporating not only today’s core customer base but also the shoppers who will drive tomorrow’s growth. Consider one large airline, which has leveraged analytics to optimize marketing campaigns, reduce churn and build richer dialogs with key customers. The company’s satisfaction surveys, for instance, solicit customer feedback on such critical issues as on-time departures and the length of check-in lines, as well as perspectives on in-flight entertainment and service. The surveys have helped the company’s strategy team determine just how and where to innovate the customer experience. And not only for those with first-class tickets—thanks to its intense customer focus, the company was one of the first airlines to recognize that passengers in all classes appreciate a little pampering. By being an early adopter of personal TVs for every seat, as well as allowing passengers to use onboard SMS messaging and personal electronic devices with a “safe flight” mode, the company developed deep customer loyalty.
Retailers can learn about their customers not only through their own research but also by tapping into the wealth of knowledge that their suppliers possess. As vendors, for the most part, of other people’s brands, retailers have had few reasons to make the hefty investments in R&D or fixed assets that sustain both the superior strategic planning and superior innovation capabilities of consumer products players. But by collaborating with manufacturers, they can gain access to these players’ broad, cross-category customer insights—and vice versa. Indeed, both parties can benefit from shared insights. One large retail drug chain, for example, has used a third-party tool that develops a 360-degree, multichannel view of its customers by integrating online, mobile and in-store data. By sharing consumer data with a manufacturer, this retailer has illuminated opportunities to create products that more perfectly meet consumer needs. And together with one of its suppliers, the company has developed a testing approach to ensure it gets products right before distributing them. Collaboration can be an especially attractive option if a strategic gap in the marketplace has been identified but the retailer is unsure about how best to fill it. This could mean pushing a private-label option, for example, or deciding to rely on national brands (see sidebar, page 4).
2. How can we earn the trust and loyalty of consumers by making their lives easier?
Today’s customers place a high value on offerings that make their lives easier. And retailers that leverage analytics to discover how
they can help relieve the pressures and frictions of everyday life have gained significant competitive advantage. PetSmart, for example,
has become the leading pet supply retailer in the United States by recognizing that pet owners who treat their animals like family want a convenient, care-based shopping experience that meets a pet’s total needs. The company created an offering that combines the widest possible selection of quality goods at a reasonable price with a coordinated suite of veterinary, training, grooming and other ancillary services provided by associates who can answer questions and anticipate customer needs—an experience far superior to anything available through discounters or most other retailers, groomers or veterinarians. As a result, the Arizona-based company established an intimate, long-term relationship with America’s doting “pet parents,” as it calls them. What’s more, this strategy, which encompasses the total cost of pet ownership, tripled the size of PetSmart’s potential market. Similarly, Carrefour, Europe’s leading retailer, recognized that the same customers can have different needs depending on the time of day or day of the week. So it offered
different retail alternatives—hypermarkets, supermarkets, convenience stores, cash and carry franchises, and ecommerce shopping—each designed to meet specific needs. For example, Carrefour Planet stores, which are revamped hypermarkets, offer numerous services—such as regional tasting sessions, haircuts and free clothing alterations—that encourage customers to linger. All of which goes to show, of course, that despite the surge in online shopping, physical stores are still highly relevant. Indeed, some consumer needs can actually be met more effectively in a physical setting. Witness, for example, how OXXO identified a customer need in the mobile phone space and successfully met it. In Mexico, where prepaid cell phone services predominate, consumers want to be able to buy minutes swiftly, securely and conveniently. At the checkout in their local OXXO store, all consumers need to replenish their phone service is the bar code on their OXXO identification card. The company, meanwhile, benefits from the additional and more frequent purchases that such customers make while in the store.
3. Do we have champions who can carry out a long-term plan to pursue consumer interests?
Leading companies know that a longer-term, customer-centric approach requires champions—a team of value-focused and experienced individuals responsible for pursuing the differentiated growth opportunities that emerge as a result of full visibility into the customer value chain. Led by a senior executive for corporate strategy and planning, who reports directly to the CEO, this team can identify which customer opportunities to act upon, and how to pursue and manage them most effectively. In order to be able to prioritize opportunities, the strategic planning team keeps a close eye on the evolving desires of customers, current and future. It also requires a sophisticated understanding of the context in which the retailer
For further reading
“Blurring borders,” Outlook 2011, No. 3 For this and other articles, please visit accenture.com/Outlook
operates, including such constraints as its supply chain, pricing and channel limitations. And once an opportunity has been evaluated, the team must determine if fulfilling this particular customer need will reinforce the retailer’s brand positioning—not only over the next quarter or so, which is the focus for most retailers, but also several years down the line. At one apparel retailer in the United States, the head of strategy looks across multiple quarters to evaluate how merchant operations and buying, business information and process execution unite to meet consumer needs. The market has rewarded the company for its keen ability to understand future consumer needs and how these will influence the way the company manages its strategic positioning with a share price that reflects a multiple higher than its peers.
Any retail strategy team is responsible for determining how to set and execute a plan that boosts both shareholder value and customer intimacy—a tall order indeed. Should the retailer invest to build new capabilities, acquire additional capabilities or collaborate with others to create them? How will it ensure effective category management—a discipline that requires bringing a cross-functional perspective to all relevant areas, from allocating funding to managing the customer experience? These decisions will vary in complexity, depending on the individual retailer. But they will always involve a complex set of choices around such issues as whether or not pushing the retail brand too far from its core by launching a new concept will end up confusing consumers rather than pleasing them (see sidebar, page 6).
Getting closer to their customers will be a challenging prospect for many retailers, and any call to action inevitably involves dramatic changes in the way they think, organize and behave. But change the retail industry must. Indeed, with manufacturers and online competitors encroaching relentlessly on their traditional turf and anticipating and meeting consumer needs ever more effectively, no retailer, in any segment, can afford to flinch from the undertaking.
Private label: A collaborative approach
By Robert E. Berkey and Lori Baran There was a time when private label was synonymous with second best—a low-cost, low-value option for cash-strapped consumers who couldn’t afford the real thing. No longer. The recent recession and anemic recovery have turned consumers worldwide into enthusiastic buyers of retailers’ own branded goods across a widening range of categories— and not just because they are usually cheaper than nationally branded products. The quality of private-label products has improved so much and retailers have become so sophisticated in positioning them with a diversity of customer segments that some have
become sought-after brands in their own right. Consider, for example, the popularity among premium UK shoppers of Tesco’s Finest specialty food range. But striking the right balance between private label and national brands can be tricky. Consumers want both. But if retailers place too much emphasis on private label—especially if they rationalize SKUs at the same time, as many have done—they run the risk of frustrating shoppers, as well as alienating suppliers already concerned about the threat that private label poses to their margins. Walmart, for example,
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Private label: A collaborative approach
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was forced to revisit its private-label strategy in the United States when customers complained that the retailer’s own Great Value brand was crowding out the national brands they were looking for. So how do retailers determine if private-label products really are meeting customer needs better than national brands— or just driving down what the average customer spends and overcomplicating the shopping experience?
exactly which categories were best served by private label and which SKUs really belong on the shelf, and manufacturers would not waste time and resources competing with privatelabel goods for shelf space in a particular store. Product innovation is another area where manufacturers and retailers could benefit by collaborating. New products or enhancements would offer opportunities for retailers to grow categories, while manufacturers would get the chance to boost return on innovation investment by becoming more relevant and improving speed to market. Starbucks Corp., for example, has combined its coffee expertise with Unilever’s capabilities as the leading global maker and marketer of ice cream to create a dessert of choice in the super-premium segment of the $17 billion North American ice-cream market. Moreover, working together on marketing and promotions, pairing retailers’ shopper loyalty data with manufacturers’ deeper marketing budgets, can enhance understanding of the impact of promotions on specific consumer segments and help boost category sales overall. To be sure, successful collaboration requires willing participants. Manufacturers in particular will have to weigh their options carefully, category by category and retailer by retailer, to determine when it makes sense to collaborate and when their own brands should continue to compete head-on with private label. Even when collaboration does make sense, both parties confront challenges around trust—though thanks to leading-edge approaches, these are by no means insurmountable. Creating a clean room environment for collaboration, managed by a third party, would help overcome mutual suspicions about sharing data, for example; and having a third party create a tool to facilitate transparent, shared access could be a cost-effective alternative to a hefty investment in additional technology or headcount. It’s clear that collaboration can deliver significant mutual benefits. And for retailers, its potential as a driver of value across all categories—national brands and private label—is persuasive indeed as the industry battles to retain relevance with today’s demanding and elusive consumers (see story).
Collaboration across the value chain could be the key to making the right choice. Indeed, a joint approach, combining the complementary capabilities of retailers and manufacturers in the four key, demand-side areas that drive the most value— consumer insight, assortment planning, innovation, and marketing and promotion—can be a win-win for both parties. Take consumer insight—the key to understanding the relevance of private label for a particular category or store. Thanks to their view across retailers, manufacturers boast the cross-category, cross-format and cross-location insights that individual retailers typically lack. By combining such broad analytical intelligence with its own wealth of point-of-sale transactional and customer loyalty data, a retailer would gain a more holistic view of the consumer and could target specific, high-value customer segments more effectively with the right combination of private-label and national brand products. Manufacturers, meanwhile, would boost their influence with retailers and, armed with richer customer analytics, could enhance the ability of branded products to satisfy unmet needs. Joint assortment planning could deliver similarly mutual benefits, driving differentiation for the retailer and potentially boosting category share for manufacturers. Right now, the typical retail shelf is packed with a mix of national brands and private labels vying to satisfy similar consumer needs—a recipe for category erosion. But by collaborating on assortment planning, leveraging such stateof-the-art capabilities as attribute-based demand analysis to determine the product characteristics that consumers most value, both parties could gain. Retailers would understand
New concepts: How to pick the winners
By Peter K. Madden and George L. Coleman Investing in new retail concepts is a high-risk exercise. As de facto startups, they target new customers and typically involve new channels, new formats, new selling models and new brands, which can often add up to whole new businesses—and a formidable challenge. To be successful, new concepts must capture the imagination of today’s fickle shoppers. And not surprisingly, many fail to do so. In the United States, the Census Bureau estimates that fewer than half of all new businesses survive for longer than five years. Yet successful new concepts can drive growth, profitability and high performance—a tantalizing prospect for mature players struggling to retain relevance with consumers increasingly inclined to buy from online pure plays or directly from the manufacturer (see story). Abercrombie & Fitch’s Hollister label, for example, which launched in 2000 with lower price points and stores themed around a sexy surfing lifestyle positioned to appeal to a younger demographic, is now a $1 billion-plus business. Success hinges on the disciplined application of four principles: launch the new concept for the right reasons; incubate it as a separate entity; know when to fold it; and create and perfect the new-concept playbook. The four principles are both interrelated and interdependent. Even a concept launched for all the right reasons will require committed nurturing as an independent business. And if new-concept development is to fulfill its potential as a driver of future growth, a playbook that helps identify what works and what doesn’t will be indispensable. To be successful, new concepts must offer a truly captivating customer experience. The best approach to picking winners is to keep exploring new concepts as an ongoing exercise— a competency in and of itself, and one that will keep the retailer on its toes in today’s fast-changing marketplace. Gap’s Forth & Towne concept, for example, was shuttered in 2007 after failing to win the hearts and minds of the over-35 women it targeted. But that didn’t stop the company from continuing new-concept experimentation, and with some success—witness the women’s accessories concept, Piperlime, launched in 2006, and the acquisition of Athleta, the sports outfitter for women, in 2008. Launching a new concept is much like launching a new company. And without a targeted customer base, adequate capital, experienced management and focus, the best ideas can be doomed from the start. New retail concepts have the best chance of success when they are established as separate entities that still enjoy parental support if and when they need it. Limited Brands, for example, which has launched Victoria’s Secret, Bath & Body Works and La Senza, among other successful concepts, incubates new brands as standalone businesses that still benefit from the product development, sourcing and logistics teams behind the Limited’s frequent and innovative product launches. Winning new concepts benefit from other core capabilities as well—notably the analytics-driven consumer insights that help retailers determine whether or not a new concept is delighting or dismaying its target market. Delighted consumers drive dynamic growth. But if a new concept has failed to please customers enough to grow quickly within two to three years (sufficient time to fix deficiencies in terms of location, offering and price), the retailer should acknowledge defeat and fold it. Similarly, volatile or even average performance within the same time frame is sufficient grounds to make the same decision, especially if no discernible future direction has emerged. Failed concepts can be bitter blows, but documenting and codifying the criteria, guidelines and protocols for concept innovation—without sacrificing speed of decision making— embeds rigor into the concept innovation process and
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Successfully applying these principles can involve some complex choices. Take launching for the right reasons. It sounds straightforward enough—but timing can be tricky. After all, why place a risky bet on a new concept if simply extending an existing business line could satisfy emerging consumer needs just as well? Retailers need to understand the acceptable boundaries of existing products and services, and when pushing the brand too far from its core will alienate or confuse consumers—which can sometimes happen if, for example, low-cost brands try to go upmarket. They should also recognize that brand concepts have natural lifecycles in terms of growth and returns, and that while some new consumer segments may offer attractive growth prospects, they could still prove prohibitively expensive to develop.
New concepts: How to pick the winners
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minimizes the chances of going wrong. Limited Brands, for instance, focuses on a set of key strategic imperatives— attracting top talent and maintaining superior support capabilities, among them—in pursuit of its mission to build a family of the world’s best fashion retail brands. By creating and perfecting such a playbook, retailers can establish a pattern that reduces complexity, provides strategic
clarity for both employees and investors, and helps focus the organization as a whole on improving the ROI from new-concept development. Indeed, a playbook helps institutionalize concept innovation processes, deepening a retailer’s understanding of its customers and building the ability to think several moves ahead—the key to sustainable new-concept development and competitive advantage in today’s fastchanging markets.
About the authors
M. Reaves Wimbish is a senior executive in Accenture’s US Retail Strategy group. In her 14 years with the company, she has worked with hardlines, apparel and drugstore retailers worldwide to help them with broad-scale transformation. Ms. Wimbish is based in Chicago. firstname.lastname@example.org Christopher R. Roark is a Chicago-based senior manager in Accenture’s Management Consulting group. Mr. Roark focuses on enterprise transformation and operational excellence in retail and consumer related clients. email@example.com
Outlook is published by Accenture. © 2011 Accenture. All rights reserved. The views and opinions in this article should not be viewed as professional advice with respect to your business. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. The use herein of trademarks that may be owned by others is not an assertion of ownership of such trademarks by Accenture nor intended to imply an association between Accenture and the lawful owners of such trademarks.
Chicago-based Peter K. Madden is a senior manager in Accenture Strategy, working with retailers across a variety of strategy and operations projects. firstname.lastname@example.org George L. Coleman is a New York-based senior executive in Accenture Strategy, responsible for the company’s Pricing and Profit Optimization group in North America. He has worked with a wide range of retailers on pricing, marketing and consumer strategies. email@example.com New York-based Robert E. Berkey is a senior manager in Accenture Strategy, focused primarily on sales and marketing initiatives with consumer goods and services clients. firstname.lastname@example.org
For more information about Accenture, please visit www.accenture.com
Lori Baran is a senior manager in the Accenture Products industry group, working primarily on SAP implementations for consumer packaged goods clients. She is based in Kansas City. email@example.com