WRFest 20Apr08(Retail): Shocks, Performance and Localization
Unless we happen to be involved or know someone we generally take Retail for granted but it's a sector that is at the bleeding edge of the economic pain this cycle, with real retail sales down -2%. Worse there are major structural shifts that have been building for years. In an earlier WReadfest we provided another excerpt collection but also provided our framework for what a high-performance retailer ought to look like. (WRFest 2Mar08(Business): Paper, Auto and Retail News) There are going to be a lot of retailers in serious trouble this downturn even if it's as mild as the optimists think, partly because of those structural changes but also because of major performance problems.
Years ago the Grocery Industry, one of the most challenging retail environments because of the wide mix of products with exacting requirements, was enormously worried about WMT's entry into the business. So they started a massive effort called Efficient Consumer Response (ECR) to re-think how the industry was run. And they delivered one of the biggest multi-company and multi-organization collections of superb advice working the world's best consultants. It's a magnificent encyclopedia of how to run both an individual retailer and a retail value chain covering everything from Product Mangement to Store Operations to Replenishment and Logistics to Sales and Forecasting. [Fair Disclosure: I ran the Replenishment Team].
Well almost none of the reccomendations were put into practice, WMT, Sam's, Costco and Target are now major grocery retailers and the industry saw a huge re-structuring and down-sizing. But if you wonder why the variety, freshness, service and innovation of your local grocery store has gone up a couple of orders of magnitude in the last ten years the survivors did make those changes. At least some of them. Now the entire Retail Sector is facing similar challenges.
Stores have been over-built (Dept. stores in general, HD, WMT, Starbucks), service has deteriorated, supply costs are rising rapidly and general store efficiency and effectiveness leaves a lot to be desired. One chain who did re-think itself from the ground up in the late '90s was Penney's which is now facing a lot of trouble but should be able to deal with, albeit painfully. Another was Target, which was always known as high-service and high-innovation but also re-thought itself to focus on customer value. One of my favorite retailers in the whole world is Tesco's, the British grocery chain, which continues to improve, gain share, go abroad and has introduced a new approach that it's testing in SoCal. For the record I have several favorites but Zara's and Trader Joe's are high on the list. We'll leave it to you to guess why - hint...it has something to do with our model of a well-run enterprise and retailing exemplar. A good really bad example, aside from Circuit City which has blown off both its' own feet at the knee, is Macy's. Which has consolidated a lot of older and famous chains and proceeded to homogenize them into meaninglessness. Now they've suddenly discovered that discombobulated mass ain't the answer and are struggling to create the operational infrastructure to localize their product and services to particular geographies and localities. That kind of operational capability is complex, difficult, requires high skills and good people btw.
That's the same struggle that WMT is facing and not doing well on and Sears, my poster child for how to really screw up a retailer by substituting financial engineering for operational savvy and strategic adaptation. The thing that makes Tesco and Zara's so powerful and profitable is that they've created a flexible operating infrastructure that allows them to have a modular set of processes that are customizable to local conditions. And they run with tight discipline. So as you read over the following stories on Chinese retailing, Penny's, Macy's and Tesco bear all that in mind. And if you're thinking about the industry in any way...well maybe you've got a start on a blueprint for evaluation ?
UPDATE: Mickey Drexler on retailing, service, corporate culture, accounting over customer focus and other topics. IOHO a must read for anybody interested in what a good retailer ought to be doing. A Charlier Rose interview.
Retailing
J.C. Penney scales back growth plans Pointing to a tough economic environment that is clouding its outlook for the year, J. C. Penney Co. said it will open and renovate fewer stores and "de-emphasize" stock repurchases, using the savings instead to nurture opportunities such as its new American Living brand. Penney plans to open 36 new stores this year, compared with 50 last year, a reduction that'll save $200 million in capital spending this year, Chief Executive Mike Ullman said at the company's two-day analyst meeting in New York that concluded Wednesday. The number of store renovations will drop to 20 this year from 65 last year. Total capital spending will drop by about a fifth to $1 billion this year from $1.24 billion, Chief Financial Officer Bob Cavanaugh said at the meeting. "I've been in business in 39 years," Ullman said. "I don't think I've seen anything as unpredictable. Our entire business is soft because of lack of traffic. We can't give much guidance because there's no visibility." Penney described its initiatives this year as a bridge plan as it rides out the economic downturn that has hurt traffic at the malls, where most of its over 1,000 stores are based.
Scandal-wary consumers turn to foreign food retailers Seemingly endless food-safety scandals have left Chinese consumers wary and opened the door for such foreign supermarket operators as France's Carrefour, Britain's Tesco and U.S. giant Wal-Mart, writes Bruce McLaughlin, a Hong Kong analyst.
| CLOSE TO HOME |
| A look at how chains' localization strategies have evolved: 1984: Inditex, parent of the Zara apparel chain, starts work on a system that quickly gets popular items from designers to stores. 1995: Tesco uses data from its rewards program to customize stores and marketing offers. 2000: Wal-Mart launches 'Store of the Community' program to meet the diverse needs of individual neighborhoods 2004: Best Buy adapts stores to focus on the local customer segments most important to them. 2008: Macy's introduces 'My Macy's,' giving local executives leeway to tailor merchandise to the locale. Source: WSJ research; Bain & Co. |
Local Flavor Macy's ditches the nationwide cookie-cutter approach and tailors its stores for regional tastes.The sprawling Macy's on State Street building here was once the home to the premier name in Chicago retailing, Marshall Field's. But about a year and a half ago, Macy's forged one chain with one name and one much-ballyhooed national strategy out of Marshall Field's, Robinsons-May, Kaufmann's and other local icons it owned across the country. Now, after Macy Inc.'s same-store sales dropped 1.3% in 2007 from the previous year, Chief Executive Officer Terry Lundgren is changing course. He is ditching the nationwide cookie-cutter approach in favor of tailoring merchandise at the world's largest department-store chain by sales to local tastes. "What the consumer wants in the Galleria of St. Louis is different from what the consumer wants in State Street Chicago, or what the consumer wants in Portland, Oregon," Mr. Lundgren says. He now wants 15% of the merchandise in stores to reflect local preferences. The localization strategy, called "My Macy's," is a dramatic reversal for Macy's and Mr. Lundgren, who set out to end the decades-long slide of department-store retailers by creating a huge national chain that had more clout with vendors and stronger marketing, with fewer expensive local TV and print ads and more national ones.
Tesco tops, still plans U.S. push Tesco, Britain's top supermarket chain, said Tuesday its annual profit rose 12% and said it will continue expanding in the United States amid expected losses there of $200 million this year. Tesco also reported an encouraging start to the new fiscal year, saying sales in the U.K. are growing more quickly than anticipated. In Britain, same-store sales excluding fuel rose 3.5% and overall sales improved 6.7% to 37.9 billion pounds. Profit from the U.K. rose 7% to 2.05 billion pounds, helped by increased productivity and cost control. The group said in the five weeks of the new fiscal year, U.K. same-store sales excluding fuel rose over 4%. The group said it was helped by improving sales of non-food items in the U.K., which totaled 8.3 billion pounds, though at 9% the growth rate was slower than in past years. Leahy said in the current market environment its new catalog operation can gain ground. Data released by the British Retail Consortium overnight showed the first monthly same-store sales decline for the country in two years. Outside the U.K., the company recorded sales of 13.82 billion pounds, up 25% from last year, and its trading profit rose 24% to 701 million pounds, helped by performances in Korea, Thailand, Malaysia and Central Europe. It recorded a "small" trading profit in China, while "excellent" performances in Turkey and Ireland were offset by costs to open new large central distribution centers. In the heavily criticized U.S. operation, Fresh & Easy, Tesco saw a loss of 62 million pounds, a loss that will grow to around 100 million pounds this fiscal year before moderating. Tesco said it was "encouraged" by the start of the West Coast chain at its 61 stores, saying the response of customers has exceeded expectations and that sales densities are higher than the U.S. supermarket average. Its best stores exceed sales of $20 per square foot per week. It's still planning to open 150 stores this year and it's planning to expand its Riverside distribution center and kitchen operation.