RETAILNETGROUP STRATEGY ALERT No.

16 Issue Fending Off the Crisis: The Retailer Approach
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November 2008

Greetings! Last week we shared RNG's perspective on how consumers are reacting to one of the toughest economic environments we have seen in decades. The reality today is so unique that we have witnessed things that nobody could have seen coming - from bankruptcies among the largest firms on Wall Street to the lowest Dow levels in years following extreme swings in the stock market. What this new reality tells us is that we cannot measure success the same way we have in the past, and just as likely that retailers will take a new approach for solving this equation. As we near the end of 2008 we expect to see several things happen in the marketplace - some of which are already materializing. Please read on for our views on some of the key strategies retailers are taking as they seek to optimize their businesses in the face of this challenging consumer environment, and feel free to share yours. Happy Thanksgiving to everyone - enjoy the holidays! Dan O'Connor, President & CEO RetailNetGroup.com dan@retailnetgroup.com

In This Issue
Retailer vs. Consumer Approach Real Estate Changes Supply Chain Changes Retailers & Consumer Credit In-Store Merch & Marketing Trip Marketing How RNG Can Help

Store Tours
10,000+ photos Views of the most important new stores opened in North & Latin America, Europe and soon the leading Asian markets Filter by department Search/sort photos across markets and retailers by department (for brand managers looking for great ideas) "Best Ideas" galleries that highlight the very best ideas from across all of our store galleries On-Demand - Photos of any store in most parts of the world in 72 hours or less. Contact Mark Byrd to schedule a demo or request more information.

Retailer Commercial Approach vs. Shifting Consumer Behavior
We see five large overarching actions that retailers are undertaking - from re-thinking their global supply chains down to the shelf-level. But before we touch on those, there are a few examples on how retailers are reacting today to the shifts in consumer behavior we talked about last week. Most recently we have seen:

Share Grabs - HH Gregg is accepting Circuit City gift cards. Kohls is opening stores in targeted markets and upping online ad spending to gain share from Mervyns and others, even though it expects negative comps for the forseeable future. Labor Management - Labor management strategies are being intensified on all dimensions: number of associates (huge reduction in seasonal hiring), scheduling (targeting shifts to align with peak periods), and efficiency. For instance, Meijer and others are measuring individual employees' productivity).

Updated Curriculum
Subscribers to RNG can now access our newest Retail Market Development case for

Holistic Health Management Approach - Not just around health clinics, but also increasing emphasis on self-diagnostic products & services-at-home testing and online information resources. See RNG's newsletter for more info on this. Focus on Value Entertainment - Retailers are emphasizing replay value, accepting trade-ins (very big in electronics, gaming, and pawn shops), and focusing on value-added bundling (e.g. free downloads with in-store purchases).

Latin and Central America.

Prior Strategy Alerts
Retail Pricing Update Sophisticated retail pricing has emerged as a key driver of long-term growth and profitability. Wal-Mart's Marketside: A Small(er) Supermarket RNG's visit and perspecitve on Wal-Mart's new small box format Wining in a Zero-Sum Environment RNG's forecast for total chain sales, winning (and losing) market segments, and retailers' playbooks for Q4 and beyond The Legacy Store Challenge Why retailers' #1 ROI challenge is driving growth in their existing stores, and how the leaders win Goldman Sachs Global Retailing Conference Get a quick download of RNG's thoughts after hearing and meeting with leading retailers Chain Retailing 3.0 Over the next two years, branded manufacturers and retailers will be challenged to find new ways to prosper in the fastest changing food retail environment in a generation Mature Store Activation The new new thing in retail growth is old stores, and how to unlock their potential to reach new shoppers and drive wallet share with existing shoppers Social Networks

RNG expects retailers to increasingly focus on delivering solutions against practical consumer concerns in light of the tougher economic environment.

Real Estate Changes
Retailers today are challenged by a core issue that resembles what the airline and the steel industry faced decades ago: huge legacy costs. Over the last two decades retailers have invested hundreds of billions of dollars in building and expanding their store base. In addition, over the last 2-3 years real estate development has been fueled by extremely low interest rates, but as the economy slowed down, demand eased off tremendously. In addition, retailers closing down a record number of stores have added an excess real estate capacity that is bringing new dynamics to the marketplace. Retailers are now looking for different ways optimize their real estate holdings. We have highlighted many of these in the past (See RNG's Legacy Store Challenge) but in addition RNG expects that over the next 6-18 months retailers will be pushing for lease renegotiation agreements as a way to reduce their cost structures. This is not as relevant to most manufacturers, but there for those suppliers that operate their own branded stores, there is an opportunity to optimize their positioning as well.

Supply Chain
RNG sees three transformational changes occurring around supply chain that are taking place in the marketplace today: a move towards near-sourcing, increased focus on SKU rationalization and inventory destocking. I. Near-Sourcing Changes in global economic conditions and destabilized economies are leading to the transformation of current supply chains. For instance, over the last decade China became a prime spot for off-shore manufacturing of labor intensive products. Today, the gap between China and other emerging economies closer to the US has narrowed. When all costs are considered - accessibility of qualified labor, freight costs, exchange rate impact, speed to market implications, product safety/recalls - retailers and global supply chain leaders are starting to reconsider where and how they invest. Companies are already beginning to focus on repurposing labor and resources closer to consumption, a strategy we simply call near-

sourcing. Innovative companies like Alpine Access and Arise Virtual Solutions hire work-at-home employees in the US to handle call-center tasks for their clients. RNG expects to see an increase on near-sourcing employment as companies re-consider their supply chain resources and pull them closer to consumption. II. Rationalization RNG expects to see retailers to continue to rationalize their SKU assortments and vendors as a way to leverage scale and efficiencies (see figure below from Walgreens, where <1% of vendors make 80% of spend). Assortment optimization is nothing new, but we expect retailers to be even more aggressive in this area as they focus on the right categories and brand mix, including a higher penetration of private labeled items. In addition, fewer SKUs facilitate the shopping experience by improving shoppability at the shelf level and in many cases improving shoppers' perception of product variety. RNG expects shoppers to continue to buy more but smaller ticketed items vs. fewer, more expensive items.

Online social networking allows marketers to connect with new and existing customers and deepen the level of engagement Pricing Optimization Retailers are developing pricing as a strategic capability, which also raises several opportunities for CPG firms Private Label Strategic store brand programs are a significant growth strategy for retail leaders Express Stores Convenience food retailing is changing globally as consumers express their preference for healthy, fresh, and ready to go (or consume) foods

Meet Our Analysts

III. De-Stocking Retailers and suppliers will need to be more diligent than ever before around managing inventories. RNG expects to see a large influx of discounted goods injected into the economy throughout the next couple of months from liquidations of failed retailers, and expect more particularly if the holiday season falls short of retailer preparations. This will inevitably impact consumer trips as discounted products take them out of the market and will also influence how they shop the store, and how long they will spend once they're inside the store. How will this impact your products and categories?

Dan W. O'Connor is the President & CEO of the RetailNet Group. He also is the Founder of Management Ventures, Inc. (MVI), a WPP Group company. Dan is a widely known industry speaker and thought leader. LinkedIn | Email

Retailers Enabling Consumer Credit & Household Savings
We expect to increasingly see retailers become more competitive and promotional around facilitating credit for consumers & small businesses. Retailers have historically done this in the form of rebates or discounts redeemable on the next visit, and RNG expects this activity to become more aggressive during and post the holiday season. With consumers Aaron Chio is a Senior Analyst leading RNG's development of new research, insights and

focused on reducing household expenses & family related costs, retailers will need to be very tactical about pursuing opportunistic wins when and where available. After years of getting out of layaway programs, many retailers are back into it or considering it to facilitate both the sale as well as the trip when consumers come back to make payments. Retailers will focus on re-directing part of their messaging to focus on key consumer concerns. Whether it is to save money on meals or on expenses, we are already seeing this behavior occurring at retail. (See images below: Maxi Bodega's endcap (banner of Wal-Mart in Central America) with fluorescent bulbs on sale; KFC's "Brining back dinner" website; ASDA's "Staying in is the new out")

growth strategies in Latin America. LinkedIn | MSN |

Tim O'Connor is Vice President at RNG, currently responsible for RNG's Growth Strategies Curriculum and European market insights. LinkedIn |

In-Store Merchandising & Marketing Activities
Price, proximity and product availability will continue to be key success drivers at retail. Staying in-stock, having the right assortment and the right pricing will be more crucial than ever before, particularly as retailers focus on more tactical promotions to drive traffic into their stores. Keith Anderson is a Senior Analyst and responsible for RNG's North American research practice and transformational capabilities curriculum. LinkedIn | Twitter | Windows Live Messenger

Pricing in particular will continue to be a major driver of shopper behavior. Four key considerations around pricing to keep in mind:

1. 2.

Pricing will need to be targeted enough while avoiding price wars Pricing will have to enhance margins. For price competitive SKUs this highlights the need to enable cross merchandising opportunities to increase basket ring as a way to offset lower KVI Item margins Price decreases due to lower energy & commodity costs will take

3.

time to trickle down the supply chain to the consumer. Speed to market will be crucial to stay relevant and competitive.

4.

Finally, the challenge for both retailers and suppliers will be to manage a mix of aspirational brands with opening price point offerings while maintaining brand equity and clarity at the shelf level. (See image below)

Sephora "value" products rack

Trip Marketing
Retailers are increasingly focusing their efforts on what we call trip marketing - successfully channeling shoppers into the store by defining which trips to win (and which to give up on) and building an integrated strategy for winning those trips. The most important thing to know is that trip marketing assumes the retailer has already won in-store with merchandising, assortment & pricing, noting that it can't win until the shopper is in the store. Several diagnostic questions arise from this notion of trip marketing. The more shared insight retailers and suppliers have around each of these questions, the better the prospects for growth.

• • • • • • •

What are the steps that leading retailers need to take to win the trip? How can retailers/suppliers influence the First Moment of Truth for shoppers? (which one the retailers or the products?) What role do suppliers play in helping retailers achieve this goal? What does each retailer's share of trip occasion look like? (e.g. Wal-Mart might score highly on grocery stock-up, lower on grocery fill-in, and very low on one-item pickup) What are the key categories and items that drive the trips each chain wins? Can anything be done to win more of the trips each chain tends to lose? Is there an integrated strategy for winning the trip (messaging before, during, and after; merchandising support; multi-channel integration)? Where can suppliers support that strategy?

The RNG Solution
RNG is working closely with clients to diagnose shopper, trip, and basket dynamics and develop strategies to drive growth today-and in the future. Please contact us to learn more.

RetailNet Group is the leading insight and advisory firm focused on retail growth strategies and consumer-facing transformational capabilities. We are deeply experienced retail/consumer analysts and strategists working exclusively to help brand-led businesses and large-scale retailers grow. Sincerely, RetailNet Group
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