Managing Retailing, Wholesaling, and Logistics
Managing Retailing, Wholesaling, and Logistics
中国经济管理大学/中國經濟管理大學
I.
Retailing and wholesaling consists of many organizations designed to bring goods and services from the point of production to the point of use. Retailing includes all the activities involved in selling goods or services directly to final consumers for their personal, non-business use. Retailers can be classified in terms of store retailers, non-store retailing, and retail organizations.
Store retailers include many types, such as specialty stores, department stores, supermarkets, convenience stores, superstores, combination stores, hypermarkets, discount stores, warehouse stores, and catalog showrooms. These store forms have had different longevities and are at different stages of the retail life cycle. Depending on the wheel-of-retailing, some will go out of existence because they cannot compete on a quality, service, or price basis.
Non-store retailing is growing more rapidly than store retailing. It includes direct selling (door-to-door, party selling), direct marketing, automatic vending, and buying services.
Much of retailing is in the hands of large retail organizations such as corporate chains, voluntary chain and retailer cooperatives, consumer cooperatives, franchise organizations, and merchandising conglomerates. More retail chains are now sponsoring diversified retailing lines and forms instead of sticking to one form such as the department store.
Retailers, like manufacturers, must prepare marketing plans that include decisions on target markets, product assortment and services, store atmosphere, pricing, promotion, and place. Retailers are showing strong signs of improving their professional management and their productivity, in the face of such trends as shortening retail life cycles, new retail forms, increasing intertype competition, polarity of retailing, new retail technologies, and many others.
Wholesaling includes all the activities involved in selling goods or services to those who are buying for the purpose of resale or for business use. Wholesalers help manufacturers deliver their products efficiently to the many retailers and industrial users across the nation. Wholesalers perform many functions, including selling and promoting, buying and assortment-building, bulk-breaking, warehousing, transporting, financing, risk bearing, supplying market information, and providing management services and counseling.
Wholesalers fall into four groups. Merchant wholesalers take possession of the goods and include full-service wholesalers (wholesale merchants, industrial distributors) and limited-service wholesalers (cash-and-carry wholesalers, truck wholesalers, drop shippers, rack jobbers, producers’ cooperatives, and mail-order wholesalers). Agents and brokers do not take possession of the goods but are paid a commission for facilitating buying and selling. Manufacturers’ and retailers’ branches and offices are wholesaling operations conducted by nonwholesalers to bypass the wholesalers. Miscellaneous wholesalers include agricultural assemblers, petroleum bulk plants and terminals, and auction companies.
Wholesalers also must make decisions on their target market, product assortment and services, pricing, promotion, and place. Wholesalers who fail to carry adequate assortments and inventory and provide satisfactory service are likely to be bypassed by manufacturers. Progressive wholesalers, on the other hand, adapt marketing concepts and streamline their costs of doing business.
The marketing concept calls for paying increased attention to marketing logistics, an area of potentially high cost savings and improved customer satisfaction. When order processors, warehouse planners, inventory managers, and transportation managers make decisions, they affect each other’s costs and demand-creation capacity. The physical-distribution concept calls for treating all these decisions within a unified framework. The task becomes that of designing physical-distribution arrangements that minimize the total cost of providing a desired level of customer service.
· Learn how to classify marketing intermediaries that occupy this sector.
· Identify the major trends with marketing intermediaries.
· Discover what the future holds for Private Brands
I. Introduction - Considering the strategies of the members of the channels, as viewed by those organizations. Example of Zappos’s focus on superior customer service is the opening discussion of this chapter. Zappos spends half of the new employee interview process determining whether the candidate posses the people skills to deal with customers.
II. Retailing - Includes all the activities involved in selling goods and services directly to consumers for their personal, non-business use
A. Types of Retailers – Refer to Table 14.1 for Major Types of Store Retailers
1. Four Levels of service
a) Self-service: customers perform locate/compare/selection steps
b) Self-selection: customers find their own goods
c) Limited service: more shopping goods and services available and more assistance granted to customer
d) Full service: salesperson performs all customer functions, increase in amount of specialty goods but at high retail cost
2. Non-store Retailing has four main categories and is growing faster than traditional retail
a) Direct selling (e.g. Avon with door to door)
b) Direct Marketing which includes direct-mail, catalog, telemarketing, television direct-response, electronic and wireless shopping
c) Automatic vending
d) Buying service: store-less retailer serving specific customer group such as an organization’s employees via membership
3. Corporate retailing - economies of scale, greater purchasing power, wider brand recognition and better-trained employees (refer to table 14.2 for definitions of the following corporate retail types)
a) Corporate Chain store
b) Voluntary chain
c) Retailer cooperative
d) Consumer cooperative
e) Franchise organization
f) Merchandising conglomerate
B. The New Retail Environment
1. Updated ambiance and product lines
2. Brick and mortar retailers adding online component, in-bound telemarketing for order taking and mail-order catalogs for buying and selling
3. Addition of temporary outlets to serve seasonal needs
4. Supermarkets battling superstores by adding specialty products and consumer focused services
C. Retailer Marketing Decisions
1. Target-market - until the target market is defined, the retailer cannot make consistent decisions on product assortment, store decor, advertising message, and media, price levels, etc. Too many retailers have not defined their target markets
2. Channels – Building on target market analysis from Chapter 13, identify ways to integrate multiple channels.
3. Product Assortment
a) Retailer’s product assortment must match the target market’s shopping expectations in breadth and depth.
b) Develop product differentiation strategy by offering brands not available at competing stores. Main methods include: usage of private brands, distinctive marketing, frequent changes to product assortments and customized experiences.
4. Procurement - Growing use of Direct Product Profitability (DPP) measurement to measure product’s handling costs from the time it leaves the warehouse to customer in-store purchase.
5. Prices
a) Key positioning factor related to the target market, product/service assortment mix and competition
b) Retailers generally fall into one of two groups:
(1) High-markup, lower volume
(2) Low-markup, higher volume
6. Services – retailers must define services mix. Pre-purchase, post purchase and ancillary services
7. Storemosphere - Use creative physical dynamics to help differentiate the store.
8. Store Activities and Experiences - brick and mortar entities creating experiences that cannot be reproduced on the Internet to differentiate themselves from the Internet. Refer to insert “Marketing Skills: Experience Marketing”.
9. Communications –
a) Various tools used to generate traffic and support image positioning
b) Work closely with suppliers to produce P.O.S materials that reflect retailer as well as manufacture’s image
c) Increased use of interactive and social media to convey information and create brand communities.
10. Location - location, location, location - central business district, regional shopping center, community shopping center, shopping strip, or within a larger store.
III. Private Labels (brand developed and owned by resellers, retailer, wholesalers, and distributors). Account for 1 out of 4 items sold. Do not usually exceed 50% due to consumer preferences for national brands.
A. Role of Private Labels
1. More profitable for retailer
2. Marketing mix cost lower
3. Lower price to consumer
4. Generic brand prices even lower
B. Private Label Success Factors
1. Retailers charge slot fee for new national brand requiring new shelf space
2. Retailers display their own brands more prominently than national brands
3. Lower prices appeal to consumer especially when value is close or same as national brand
4. National brands have price constraints as marketing mix costs command a higher margin, which creates higher prices
5. Refer to “Marketing Insight: Manufacturers respond to the Private Label Threat”.
IV. Wholesaling - Includes all activities involved in selling goods or services to those who buy for resale or business use. Major wholesaler types are listed in table 14.3 with respective definitions.
A. Wholesalers differ from retailers in three major ways.
1. They pay less attention to retail functions such as promotion, atmosphere and location as they deal with business rather than consumers
2. They conduct larger transactions with their customers, i.e. retailers, and cover a larger trade area.
3. They comply with different legal regulations and taxes
B. Wholesaler functions
1. Selling and promoting – utilization of their sales force helps manufacturers reach small businesses at a lower cost
2. Buying and assortment building
3. Bulk breaking
4. Warehousing
5. Transportation
6. Financing: finance customers
7. Risk bearing: share risk by taking title and bearing some costs
8. Market information provided for retailers and customers
9. Management services and consulting (e.g. training, planning, technical services)
C. Trends in Wholesaling
1. Wholesalers facing increased pressures from competition, demanding customers, new technology and more direct-buying programs by large buyers
2. Manufacturers pressuring wholesalers to do a better job pushing their products
3. Wholesalers are revisiting 4P decisions, increasing asset productivity by better managing inventory and receivables and investing more in technology and information systems
4. Strengthening Channel Relationships
a) Seek clear agreement with manufacturers about their expected functions in the channel
b) Visit manufacturers’ facilities and attend industry events to gain insights
c) Fulfill requirements reliably and provide customer feedback to manufacturers
d) Offer value-added services to manufacturers
V. Market Logistics - The process of getting goods to customers, use of supply chain management (SCM), demand chain planning and integrated logistics systems. Involves planning, implementing and controlling the physical flows of materials and final goods from points of origin to points of use to meet customer requirements at a profit
A. Market logistics planning steps
1. Decide on value proposition to customers
2. Select best channel design and network strategy for reaching customers
3. Develop operational excellence in sales forecasting, warehouse, transportation and materials management
4. Optimize solution with best IT systems, equipment, policies and procedures
B. Integrated Logistics Systems (ILS)
1. Utilize information technology to enhance efforts in linking materials management, material flow systems, and physical distribution
2. Market logistics increasing in costs which can amount to 30% - 40% of the product’s cost. There is much room for cost reduction efforts
C. Market-logistics objectives –
1. Getting the right goods to the right places at the right time for the least cost.
2. Make decisions on a total-system basis. M =T+FW+VW+S
a) T = total freight cost of proposed system
b) FW = total fixed warehouse cost of proposed system
c) VW = total variable costs (including inventory) of proposed system
d) S = total cost of lost sales due to average delivery delay under proposed system
D. Market-Logistics Decisions
1. Order Processing - goal is to shorten order-to-payment cycle
2. Warehousing - storage of finished goods. Distribution warehouses receive goods from various company plants and suppliers and move them out as soon as possible
3. Inventory - growing interest in “just in time” production to offset the costs of carrying inventory
a) Inventory cost increases at an accelerating rate as the customer-service level approaches 100%
b) Identify optimal level of inventory with promise of faster order fulfillment times. Figure 14.1 is an illustration of Determining Optimal Order Quantity
c) Avoid stock outs by determining when to place new order for more inventory. This stock level called the order or reorder point.
d) Balance order processing costs and inventory-carrying costs
(1) Order-processing costs – setup costs and running costs
(2) Inventory-carrying costs – storage charges, cost-of-capital, taxes and insurance, depreciation and obsolescence
e) Reduce inventory costs by distinguishing between:
(1) Bottleneck items – high-risk, low-opportunity
(2) Critical items – high-risk, high-opportunity
(3) Commodities – low-risk, high-opportunity
4. Transportation - choices affect product pricing, on-time delivery performance, and condition of goods upon arrival
a) Five modes - rail, air, trucks, waterways, and pipelines.
b) Shippers consider speed, frequency, dependability, capability, availability, traceability and cost. For speed, best choices are air, rail and truck. For low cost, best choices are water or pipeline.
c) Combining transportation modes via containerization – goods in boxes or trailers that are easy to transfer between two transportation modes.
(1) Piggyback – use of rail and trucks
(2) Fishyback – use of water and trucks
d) Carrier types:
(1) Private – shipper owns own vehicle of transportation
(2) Contract – independent organization selling transportation services to others on a contract basis
(3) Common – provides services between predetermined points on a scheduled basis and available to al shippers at standard rates
E. Organizational Lessons - experience with market logistics has taught executives many lessons regarding the value of good logistics
1. Must be derived form business strategies rather than solely from cost
2. Must be information-intensive and establish electronic links among all significant parties
3. Set logistic goals to match or exceed competitors’’ service standards and should involve members of all relevant teams in the planning process
VI. Executive Summary
The focus is on retailing strategy in the modern marketing environment. In addition, there is emphasis on the role and value of understanding the history and role of retailing in the larger scheme of the overall marketing process and strategy. It is useful to update the examples so that students will be able to identify readily with this concept based on their general knowledge of the companies and products involved in the lecture / discussion.
Teaching Objectives
· To stimulate students to think about the important retailing issues.
· Points to consider in analyzing the changes in retail pricing strategy.
· Achieving a balanced position in a changing retail environment, especially in terms of the consumer, the competition and the technology driving the changes.
Discussion
Introduction
The key changes in the retailing field are a result of, or a by-product of, the changes in our population, in where and how people live, work, and buy. During the next decades the trends will continue, but most changes will come via the technological revolution (handling information, communication, management, and in serving the needs of customers).
The major retailers must develop responses to include:
· Revive the shrinking profits by improvement of man and machine in store systems.
· Take advantage of the trend to service-oriented society by offering new and more profitable services (the boutique concept, etc.), and also store image management and creativity.
· Department stores will have to face up to the increase in competition from discounters, specialty stores, food and drug chains, and direct marketing (shuffling the merchandise mix).
Economic Forces
Economic forces are changing the way retailers must react. While many retailers expect volume to grow despite the birth rate decline and the fact that the total population will not decline, there are some pros and cons to consider. Real family income is not increasing, but there are trends related to a growing demand for quality, value, and specialty merchandise. Also, despite the self-service and online trends, there are indications of higher demand for increased customer service in certain retail categories.
Interestingly, most retailers are not now planning for future developments. Why? Various studies seem to indicate that there is a general view among many retailers that affluence, education, and aspirations will continue to grow and accordingly will aid in the growth of their area of retailing. This viewpoint indicates the general optimism held by most retailers as sales-oriented marketers.
Social Forces
There is some optimism, a minority view, that there will be a solution to urban ghettos and a revival of the core cities. While this has occurred, to some degree, completion of the process is still some years in the future. Mass transit is in the same category because many retail analysts feel that consumer mobility will change little in the coming years. Obviously, mobility would mean there is more demand for household-type goods to enable mobility to continue to increase (example: household cleaning products, etc.).
Employment Patterns
There is a continuing trend toward a four-day workweek, more part-timers, and 365 day, 24 hour per day openings, but retailers apparently do not see the need to plan for this development. There will be more women in the labor market, more Sunday openings, more late openings, and more convenience store growth. Employee turnover remains a big problem for retailers, but retailers are not ready to pursue actively a course of change. However, the Internet gradually is forcing them to change or lose their customers.
Technological Innovations
Cable TV has had a tremendous impact on non-store promotion and sales methods. The Internet, interactive TV, and broadband will continue to be a wave of the future. Cable opened up the arena of in-home shopping, and in-store computerized information (via scanners, etc.) brought an end to the centralization of decision-making in the large retail chains.
There has been a push to reduce transaction time, consumer anxiety, and customer inconvenience. With the existence of the nationwide centralized credit and banking systems, there is an increased reduction in store and brand loyalty. The rise in the number and sales volume at the so-called wholesale clubs (Sam’s Club, Price Club and BJ’s Wholesale Club) has been both a symptom and a cause in this area. The Internet is bringing the possibility of general buying facilities or cooperatives with central buying capabilities. This could become an important wave of the future.
Store Operations
There is a continuing trend toward shrinking profit margins on most primary or utilitarian retail items. This, in turn, requires tighter internal cost controls, promotion of higher margin products and services, and elimination of unprofitable items. Most retail operations have eliminated free home delivery and ended real estate ownership, leasing instead. At the same time the number of stores is coming down all the time, with the volume for the remaining operations rising.
The question is: Will the changes in the future allow the same volume with 25 percent fewer stores and with a 20 percent decline in the number of items carried. For example, 10 years ago, stores with $25 million in sales averaged over 100,000 items on the shelves. Today, the number of items carried has dropped and is continuing to drop, with just-in-time (effectively 1-2 delay) inventory activities on the rise in many retail categories. Likewise, productivity levels have changed dramatically, requiring even greater flexibility in store layouts. One reason for this is the growth in the number of self-service racks, automatic vending machines, and similar developments.
In the mid 1980s, approximately 50 percent of all department store volume was self-service; it is estimated that currently the number is in excess of 60 percent. This trend will continue. Much of this is due to standardized packaging units in modular form. While this occurred originally to simplify the warehousing, handling, and inventory control, the process has been equally accepted in the retail arena. Despite this, there has been no decrease in specialty and high fashion merchandise volume, only now there is more flexibility in the fashion business, especially within retail chains, both general and specialty operations. With the evolution of more scrambled merchandising and competition, and more geographical spread, suburban discounters and warehouse selling centers, the lines between budget and upscale have become increasingly blurred.
There’s no doubt that retailers need to go through a shakeout before the industry can prosper again. With over 19 square feet of space for every person in the country, more than double the level of 20 years ago, there are simply too many stores. In 1974, each square foot generated an average of $175 a year in sales. Now, each square foot brings in only about $166.
Competitive Trends
With cable TV home shopping networks, catalog stores, direct mail, telemarketing, etc., it does not appear that as much merchandise activity will be in the stores. In 1984, less than one-third of all retail business was conducted outside the retail store; in 2001 it was estimated that in excess of 55 percent of retail business was conducted outside the store. This trend has continued, due to such developments as stronger warranties a rising image of quality, and with many of the non-store online, etc., options. However, there are areas, such as appliances and furniture, where the trend toward non-store growth may not develop in the near future. A similar trend is occurring in the discount area, with discount retailers reaching over 27 percent of total retail volume by 2002. There appears to be an opposite reaction taking place with the department store. In addition, the one-stop shopping orientation continues in the United States and many other developed countries.
The trend to specialization and “category killers” began in the 1980s. Today, following on the precepts of the “Wheel of Retailing,” the general merchandisers continue to develop boutique and specialty shop areas within department stores. Even more important is the trend toward more and more focus and size in specialty categories, ranging from pet products to sports clothing.
Future Strategies
Retailing faces some fundamental problems. This is an industry that has lost touch with its customers. The consumers who made shopping a recreational sport in the 1980s now have less time, less money, and less stomach for the whole experience. With 75 percent of women working full or part time and still shouldering most of the family chores, consumers have become precision shoppers. Over the past 15 years, they have cut down from three mall visits a month to 1.6. And instead of stopping by seven stores at a clip, they’re down to just three. The consumer today is not only tightfisted but also increasingly stressed out and has lower tolerance for all the imperfections found in retailing.
In almost every category, the answer to the question of what the consumer wants is disarmingly simple: more for less. Wal-Mart and Home Depot became national powerhouses based on this simple insight. They did it by relentlessly cutting costs at every stage, from manufacturer to store shelf, and by demanding help from their suppliers who became increasingly dependent on them as they grew in size and clout. Since 1984, Wal-Mart’s expenses have shrunk from 19.1 percent of sales to just above 15.5 percent. With yearly sales well over $100 billion, slated to grow to $200 billion in coming years, those savings add up fast. The contrast between the quick and near dead in retailing is stark indeed. Bankrupt Bradlees, had an expense ratio of 29.4 percent; Caldor Corp., also bankrupt, had a 24.4 percent expense ratio. Likewise Kmart Corp. devoted 22.2 percent of its sales to expenses and went into bankruptcy during January 2002.
There is no one formula for retailing success. Some hyper-efficient operators, such as Wal-Mart Stores Inc. and Home Depot Inc., have expanded their offerings and reduced their prices. Single-minded specialists, meanwhile, dominate narrow categories such as sunglasses or pet specialties with the deepest selections and competitive prices. Still other retailers are staking their claim to convenience, whether it’s McDonald’s Corp., making sure you can buy a Big Mac wherever you happen to be, or other firms that let you shop by phone or Internet for everything from a new car to a vacation. There are even signs of life among department stores, especially those with successful Internet business-to-consumer sites. It appears that for the time being they have pared down their operations and have fought to a standstill with the specialty retailers.
Some other examples include retailers who have never been considered efficient or interesting. Such formats as supermarkets, hardware stores, discount stores, travel agencies and car dealerships are being transformed or superseded. From vast megastores to tiny one-product kiosks, new kinds of outlets are springing up that look nothing like the stores of 10 years ago. The innovative retailers are taking market share from everybody else. Not all of these new formats will succeed, but as retailers grapple with change these innovators point the way to the possible “re-storing” of America.
Even as the number of stores declines, those that remain will get bigger. The “big box” or “category killer” has already made its mark in some segments, such as home-improvement, discounting and toys. Now, the approach of offering mind-boggling assortments of a familiar product at a reasonable price is spreading to some surprising categories. Superstores devoted to single lines, from baby items to books, abound. Where does their market share come from? Their share comes out of the hides of traditional stores that have already ceded entire departments such as appliances, books, and sporting goods. The same thing will happen to other categories.
Online retailing is still impacting retailers, but since the smartest physical retailers have responded to the challenge, it is possible they will remain in the game. The number and dollar-value of products ordered online from home has continued to rise every year and is expected to continue for the indefinite future.
Note to the Instructor: Ask students what they would do to encourage consumers to spend more time in-store shopping.
The focus is on the increasing level of cross-border retailing that is significantly changing the modern marketing environment. There is emphasis also on the role of retailing in the larger scheme of the overall marketing process and strategy. It is useful to update the examples so that students will be able to identify readily with this concept based on their general knowledge of the companies and products involved in the lecture / discussion.
Teaching Objectives
· Stimulate students to think about important international retailing actions that impact society.
· Help students to learn more about the sophisticated techniques and abilities that multinational retailers possess and how they use them to gain competitive advantage.
· Make clear to students the high level of knowledge-intensity required to compete in markets at home and around the globe.
Discussion
Introduction
“I remain adamant that consumers, products, and communication will always be local.” That comment, made by the CEO of Nestle, may seem unusual for the leader of a global giant. But many agree with him.
From one point of view, despite the talk of globalization, there is no such thing as a global consumer. Most large companies are well aware of the necessity to adapt their products to differing regional or national tastes and needs.
However, based on research conducted over the past three years by Ernst & Young with more than 10,000 consumers, there is also a universal desire to be treated with respect, courtesy, and honesty, regardless of the product purchased or the retail channel shopped. It is clear that global retailers understand the need to provide local content in their commercial offerings while at the same time surrounding those offerings with the kind of contextual values desired by consumers.
This formula explains the global success of companies such as Wal-Mart. Consider that in less than a decade since Wal-Mart opened its first store outside the United States, the company has become the world’s largest retailer, with more than 1,100 stores in nine countries in addition to its 3,200-plus units in the United States. There’s little denying that retailing rapidly has become a global business.
Trends
Retailers often are the first to recognize the actual trends among billions of consumers. Wal-Mart and others are building their retail operations beyond their home base. German-based Metro AG, the fifth-largest global retailer, now operates in 20 countries through its Metro Cash & Carry subsidiary, which achieves 75 percent of its sales abroad. Similarly, Cologne-based Rewet Retail Group, No. 11 on the list of leading global retailers, operates in 11 European countries that account for 20 percent of the company’s total sales.
European retail giant SPAR, operating 16,800 stores on five continents, moved into the Russian market in 2001, opening its first store in Moscow. The Home Depot, headquartered in Atlanta, bowed out of Chile and Argentina due to the lingering recession in those nations, but it expanded its operations through its acquisition of Total Home, a Mexico-based home center retailer.
In terms of global ranking, Wal-Mart and French hypermarket operator Carrefour are No. 1 and 2, followed by Kroger and Home Depot. Then there are two big European firms, followed by Kmart, Albertson’s, Sears, and Target (the top 10 in the world). Other significant international retailers include electronics retailer Best Buy, office products retailer Staples, and Swedish-based furniture chain IKEA.
Tech support
What does it take to succeed as a global retailer? Let’s start with technology. Recent retail growth largely reflects the benefits from the introduction of electronic-data interchange, barcode developments, radio-frequency gun screening and improved inventory management. Such developments, together with Information Technology (IT) and, of course, the quality of management, are the keys to raising productivity.
The emergence of virtual business-to-business marketplaces, including CPG Markets, Transora, GlobalNetXchange, and the WorldWide Retail Exchange, are another major development. These e-marketplaces potentially can play a vital role in a global-retailing environment because they also give rise to the need for standards. To maximize the potential of these exchanges, we need to speak one language across our worldwide sector.
Work on such standards predates the B2B exchange. In late 1999, the Global Commerce Initiative (GCI), which consists of representatives from more than 45 retail and manufacturing companies doing business across continents or via global supply chains, was formed. The voluntary body was designed to improve the performance of the international supply chain for consumer goods through the collaborative development and endorsement of recommended standards and key business processes.
The chairman and CEO of U.K.-based Marks & Spencer pointed to the accelerated pace of change in global retailing. Today, with the rapid emergence of the Internet, exchanges, and improved information technology, the pressure to develop a common language of business is more intense and more immediate than anyone imagined just a few years ago.
The search is on for a unifying force to bring manufacturers and retailers together on a worldwide parity basis to simplify global commerce and improve consumer value in the overall retail supply chain. Proponents point out that standardization will not only improve efficiency in the supply chain, but it also will decrease the waste of raw materials and consumer products, through better and faster combinations of supply and demand. These developments will turn many logistical dreams into daily reality: having the right product at the right place at the right time.
After all, should this not be the goal of any global retailer? Regardless of what technology applications retailers are investing in, the critical criterion should be on those systems that support a company’s consumer-centric strategy. Too often, IT applications do not align with a company’s strategic framework, resulting in misdirected investments. This becomes a critical issue as companies face increasing cost pressures in the weakening global economy.
Successful global retailers recognize the need for alignment between their strategy and their technology. Consider The Home Depot, whose business strategy focuses first on product and second on service. The home-improvement giant has staked out its competitive ground by offering a broad assortment of nearly every type of hardware, lumber, and gardening product consumers might need and offering superior service. IT activity clearly is designed to support the service aspect of Home Depot’s strategy. In 2001, for instance, the company introduced a new wireless scanner, called Unleashed. With it Home Depot Associates scan and record the customers’ purchases while they’re in line. Once they get to the checkout counter, the cashier electronically retrieves the purchase record. The customer then pays and is out the door. Nobody likes waiting in line. Anything we can do to expedite this process makes customers happier.
Knowledge and Accountability
Global retailers also are beginning to recognize that their business is more knowledge-intensive than they may previously have thought. This led some operators to eMBArk upon applied knowledge-management projects within their worldwide operations. Analysts estimate that sharing best practices throughout their far-flung organizations can contribute as much as 1 to 2 percent to the bottom line. The challenge comes in determining how to capture the best practices, how to share the information and how to implement it. In fact, implementation and execution remain key challenges in the retail sector, leading some global companies to consider strategic outsourcing relationships for IT knowledge-management applications, as well as other technology systems.
Global retailers also are emphasizing corporate social responsibility and environmental policies and practices. Consumers and consumer groups increasingly make their choices, positively and negatively, based on the social reputations of companies, and governments are acting to hold companies accountable for their behavior everywhere in the world. All of this translates into a need for companies to operate in a more transparent manner and to report on their social and environmental policies and practices. Many believe that retailers should take the lead in demonstrating and reporting on corporate social responsibility. Why? They are closest to consumers.
Research has indicated that executives of global companies confirm that social accountability and corporate responsibility have become increasingly important aspects of business. This is for good reason. These are issues that matter to today’s consumers. Customers are looking for commercial offerings to reflect fundamental human values, such as trust, respect, dignity, and fairness (i.e., the context surrounding a transaction), and not simply the products and services themselves (the content of the transaction). The results of this consumer research formed the foundation for the book The Myth of Excellence, published in July 2001. For more information, visit www.us.cgey.com/consumerelevancy.
An example of the responsibility theme is Stop & Shop. The firm recently opened a new low-energy superstore in Foxboro, MA. The project was the result of three years of research and development aimed at reducing the energy usage of a single store by 30 percent. Energy-saving features include skylights, dimming controls, high-efficiency luminaries, state-of-the-art refrigeration systems, rooftop insulation and reflective paint, and construction materials selected for their environmental performance and recycled content. By using innovative methods to cut energy use, the company argues that it drives significant costs out of the business and at the same time demonstrates a high level of commitment on the issue. Studies indicate that their customers appreciate this.
The increasing consumer focus on value and values in commercial transactions is also one of the drivers behind the growth of the so-called organic-products business. This fact has not been lost on global retailers that have begun to devote more attention to the organic segment. As a sign of its commitment to the organic market, British retailer Tesco recently announced a new program to build its organic business to a level where it would account for at least 5 percent of all food sold at the company’s stores. To reach that goal, the retailer plans to introduce hundreds of new organic products in a wide variety of categories. “Our research has highlighted a demand for change,” said the Tesco CEO when he announced the new program. He went on to say, “Tesco’s success is based on understanding that change and making it happen. They (customers) tell us that the main barriers preventing them from buying more are availability and affordability. We are determined to act on these concerns.”
Food-safety issues also have clearly become top-of-mind in the global economy and are reflected in the planned establishment of expanded food safety controls in the United States and elsewhere. Executives from several European companies have listed food safety as the No. 1 issue facing their business. In the United States, food safety was also among the leading concerns, although executives in the Asia Pacific region did not rank it quite as high on the list.
The emerging food-safety benchmarks provide standard against which existing standards can be checked and validated. The effort involves retailers representing nearly two-thirds of food retail revenue worldwide. The task force appointed by these retailers has identified four goals:
· To have global food-safety standards as a benchmark model everywhere in the world.
· To maintain an early-warning system to avoid spillover into food-safety incidents that could impact the consumer.
· To develop joint food-safety initiatives with governments and organizations, ensuring that safety practices are in place, and that they are properly controlled.
· To inform consumers about food safety.
Key to food-safety initiatives is the growing role played by IT applications. Technology will be a primary enabler of programs that focus on tracking and traceability and early-warning systems, particularly in a global environment where the need to process food-safety information quickly and effectively is crucial. Getting IT systems up to speed to handle these kinds of applications will be of paramount importance.
The Future
Looking ahead, many global retailers anticipate continuing to expand into new international markets and to increase their global sourcing. As the marketplace evolves, one thing is certain: Change will continue to occur at a rapid pace and those retailers that respond to consumers in a fast and relevant fashion stand to succeed in the global economy.
Source: Chain Store Age Executive, December 2001.
: Retailing in the New Economy
Target Corp. wants its “expect more, pay less” message to ring clear across three technology initiatives that are separate but closely linked to each other and the overall Target brand: eTarget—its online selling arm that will soon integrate all Target-owned properties online, the Target Smart Card Visa, and an enhanced category management strategy called Guest
Relationship Management (GRM).
These initiatives support what the president of Target.direct, labels as “Target’s six strategic imperatives”: ascendance of the Target brand, improving the profit formula, consistent guest experience, reinforcing price perception without sacrificing differentiation, sustaining a world class team, and growing through multidimensional integration.
“We must have a vision that reinforces our core strategy,” says the head of the division. “A retailer must achieve and convey a clear understanding of the what, why, and how of each project. No experience is less important than another. This means consistent cross-channel delivery. Technology also requires top management engagement.”
Via e-Target, a business arm that covers B2B, B2C and internal technologies, is spearheading an online, cross-brand effort called Target.common. Each of the corporation’s store chains and other sub-brands will retain its original URL. When a consumer logs on under an individual name, he or she will automatically be linked to all selling channels. When a customer searches for a product, all resources will be scanned. One online shopping basket will collect purchases from multiple online sources. Target wants to create one basket, one search, and one experience, and Channels owned by Target Corp. include Target, Mervyn’s and Marshall Fields, the Clubb Wedd and Lullaby Club girl registries, Target Pharmacy, guest cards as well as catalogs, and selections of books, music, and videos.
The concept reflects “the reality” of the fact that consumers shop multiple channels. While Target’s Web sites use Amazon.com as a platform, target.direct “owns the customer” with regard to collecting data and other initiatives. Created in early 2000, target.direct offers over 15,000 products and services.
With Smart Card, the Minneapolis-based retailer aims to be on the forefront of this burgeoning data collection/consumer payment technology. Participating guests even receive a Smart Card reader for their home computers. By November 2002, every store will also have a Smart Card reader. When consumers use Smart Cards online and in stores, they can receive 10 percent off a purchase of $500 or more. Vendors may partner with Smart Card on special offers. Consumers will be able to access Smart Card accounts via Target’s Web sites.
Launched September 2001, Target’s Smart Card is now the 11th largest VISA card in the United States and is the country’s first Smart Card, says the executive. The cards are embedded with a special chip that allows both purchasing and consumer data collection. Target must identify, acquire and retain guests while enabling personalized communication.
The Smart Card is becoming part of three-year-old GRM. This company-wide project pulls together all databases, allowing Target to make business decisions and investments based on correlations found across various consumer behaviors. While Target is “already running data,” it will be another two or three years before GRM is implemented into the total store execution plan.
The obvious goal is to drive sales frequency by improving Target’s ability to deliver shopper preferences to vendors. GRM could impact store layouts and the designated customer targets of new products.
IV.
HBS Case: 500-081 TN: 500-106
Teaching Perspectives
The case traces the evolution of RadioShack through each of its strategic transformations— from a connector of things (via its parts and accessories business), to a connector of people (through its telecommunications business), and to a connector of places (with its forthcoming Internet strategy). It also provides insight into the arrival of Len Roberts and the subsequent turnaround of the operations. Further, it describes the unique sales process at play at the RadioShack stores and its importance in the company’s ability to execute its Internet strategy.
Students gain a perspective into the strategic evolution at RadioShack and the progress of the company into a “service model” under Len Roberts’ leadership. They must assess the strategy and RadioShack’s ability to implement it. Further, the case is structured for students to analyze the rollout of the installation business and its positioning as a profit center or a break-even operation used to drive the Internet strategy.
In the winter of 1999, RadioShack’s CEO Len Roberts, provided the outline of a new, five-year strategy for the ubiquitous electronics retailer that had 7,000 outlets in the United States. This new strategy was aimed at providing Internet service for consumers. It offered an integrated approach whereby RadioShack customers could come into a store and select the way that the Internet would come into their homes, choose an Internet service provider (ISP), and have the entire package installed by trained RadioShack personnel. Roberts believed that this integrated approach was critical in the emerging Internet space.
At present, customers didn’t know whether they needed one of the new broadband technologies that allowed faster connection speeds or traditional telephone modem connections. They also didn’t have insight into how to choose among the myriad of ISPs. Then they faced yet another obstacle in getting the whole package up and running. Coming on board in 1993 Len Roberts had successfully re-asserted RadioShack as a leading electronics retailer using the mantra of “You’ve Got Questions, We’ve Got Answers” with the purpose of “demystifying terminology” for the mass market. He had found great success in demystifying the wireless telephone market and believed that it was now time to demystify the Internet. This was especially important with the oncoming of the “everyday web.” That is web users were expected to explode from 20 million to 100 million households by 2005.
RadioShack had already taken preliminary steps to make its strategy a reality. Recognizing a lack of experience in installation, RadioShack had purchased Amerilink an installation company with offices in 23 U.S. cities. Also aware that it would need even more coverage, RadioShack had also considered several alternatives regarding the installation service. One involved the full ownership of the service business (by leasing vans and hiring employees), while the other model was based on the creation of a franchised installation business. Additionally, RadioShack had signed an agreement with Microsoft for the provision of Internet service. However, as indicated in the case, Microsoft later quickly announced a succession of ISP deals with other retailers. On the broadband front, RadioShack had made an investment in Northpoint, a leading DSL provider, but had yet to sign an agreement with a cable modem provider.
Analysis Perspectives
About 95 percent of U.S. consumers live within five minutes of a RadioShack store. Approximately 1 million customers walk through its doors every day—creating a unique retail electronic opportunity.
The company earns 12 percent gross margins, a strong return in the cutthroat electronics retailing environment. This high profitability is achieved mainly through parts and service, both of which fetch a high gross margin. But the consumer is willing to pay the price because “availability” not “price” is the key buying criteria. RadioShack’s market coverage draws the customer in the door and its unique sales process closes the sale.
The company’s reputation has been built on its ability to sell and have in stock a variety of parts and accessories needed to connect electronics equipment. High margin, low turnover, parts and accessories have historically accounted for 30 percent of sales and earned 65 percent gross profit. But having the goods in stock is only one component of the sale. RadioShack also has a well-trained, knowledgeable, and trusted sales force. The consumer comes into the RadioShack store expecting the sales associate to understand what needs to be connected and the parts that are needed to do it. At this point, RadioShack’s sales magic begins to kick in. The first is product training. Sales associates are trained and certified in specific product areas, so that they know what their customers need. This is a key component of demystifying technology for the customer and building trust.
RadioShack is exceptionally effective in helping the customer meet his or her current need, using the visit as an opportunity to sell the customer an additional product or service, and then using the visit as an opportunity to tell the customer about a new RadioShack offering. RadioShack is able to increase the dollar value of the sale by “accessorizing” the sale (selling not only the batteries, but also headphones, and potentially a new Walkman) and/or by selling another item such as a wireless telephone. As stated in the case, about half of the customers that bought a cellular telephone did not walk into a RadioShack store with the intention to buy. This also means that RadioShack’s sales associates are used to spending time with customers who may want to buy a $7 connector cable. They are more than willing to spend even more time with a customer who might be sold on even higher priced and higher absolute margin products.
Questions
1. Assess RadioShack’s five-year strategy of “Connecting Places.”
2. What are the key success factors in making the strategy work?
3. How should RadioShack go about implementing its high bandwidth service installation concept?
4. What is your assessment of the broadband strategy? Will it succeed? If not, what else should Radio Shack do?
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