The asset optimization challenge: Retail design, layout & merchandising.

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1 page 1 The asset optimization challenge: Retail design, layout & merchandising. Reach the optimal balance. a West Monroe Partners white paper by Nathalie Brunet

2 page 2 This article initially appeared in CQCD's Le Détaillant magazine, published in December Putting together a new store or retail concept is an art where it is important to leverage science as a creative tool. Reducing the total operating costs throughout the entire life cycle of the point of sale is bound to be a strategic issue. In Canada, a significant percentage of investments are infrastructure-related. According to Statistics Canada, more than $2.7 billion of the $5.5 billion spent in 2010 on infrastructure was related to shopping malls or centers and retail outlets, and this trend is increasing. Hence, analyzing various factors of the total surface area of the point of sale is key to a sound operation This article is written in the context of optimizing a layout after a site has been retained.

3 page 3 Anyone can stress the importance of innovation, standing out from the competition, personalizing service, creating a fun and stimulating work environment and optimizing productivity. The real question remains: How? And, above all, how do you create a solution such that, in the end, employees and customers are so impressed and thrilled by the new concept that they share this experience with other customers, thus creating new growth opportunities? This WOW effect is one of the most sought after targets when assembling a customer experience strategy. Nevertheless, in a real estate project, one must also balance this target with other targets such as profitability and financial sustainability. As stated in the 2010 Canadian Report on the State of Retail, the average retail business in the Canadian market will generally have a 5% net profit margin. Retail is a sector where profit margins are rather low. Therefore, controlling operating costs will inevitably have a considerable impact over the short, medium and long term profitability of the project. One must then define precisely the right target from the beginning the planning and design phases of an improvement project or a new construction project. Minimizing the devastating impacts of a bad decision, whether it concerns design, store layout/reorganization or products and services merchandising, is a determining factor in the total cost of a project. Aberdeen has clearly established this rule by observing the impact that changes made throughout a project have on the final costs of that project. This is where science can play its role best, leveraging a holistic optimization approach, regardless of the type of project, whether it be a store redesign, a new building or a complete renovation project. Scientific approach The scientific approach is especially appropriate at the design phase of a project. A scientific approach helps when optimally reshaping known selling surfaces. For already existing stores, the challenge is to maximize the performance of the available retail space (since it is no secret that it is much more difficult to enlarge or modify an already existing building). The objective is to optimize the already existing space and layout to maximize sales and ensure customer loyalty. The design phase of a project should target the use of space in an "optimal" manner, not in a "maximal" manner. A scientific design approach will minimize the distance traveled by employees, equipment and goods. A scientific approach will also encompass the different facets of merchandising, such as organizational merchandising (relative positioning of departments in the store, signage concepts and design), management merchandising (sales optimization by a proper selection of goods and optimal linear space allocation for each item) and seduction merchandising (promoting impulse buying). To these points, one must add the analysis of the relationships between various groups of employees and customers as well as ensuring the complete satisfaction and safety of the customers. Products safety issues (i.e., thefts, damages, etc.) should not be overlooked. There are also a number of strategic aspects that should not be set aside at the design stage, such as favoring layouts that can evolve should there be new growth objectives or changes in the socio economic marketing environment (e.g., increased demand, changes in the competitor landscape, and economic recession). Qualitative and Scientific Method There are two different design approaches: the qualitative method and the scientific method. The qualitative method generates a layout locating departments with high movement flow and logical relationships close to each other (i.e., intensity of the flow of goods between the two departments, similarity of constraints or surveillance requirements, etc.). This technique generally refers to the SLP technique for «Systematic Layout Planning».

4 page 4 Mathematical Model There is also a mathematical modeling approach, resulting in a layout that represents the best compromise given a variety of factors. The first step is to collect displacement statistics or assumptions of goods, employees and/or customers between two different zones to create a quantitative analysis of the frequency and inter departmental distances over a period of time. The objective of the mathematical model will be to minimize global travel over a period of time. The model will calculate a "score", defined by the distance traveled by goods or humans on a straight line joining the various centroids of each zone, depending on their geometry. Constraints are also taken into account (fixed objects, obstacles, one way alleys, rules forbidding locating one zone near another, etc.). The model is then solved with the help of a mathematical solver using the simplex method or, when the model is highly complex, not linear or combinatorial; the use of metaheuristics is advised to compute a solution in a reasonable amount of time. Evaluating Intrinsic Operations Costs To evaluate the intrinsic operating costs of the retained layout, one can use a scientific approach to measure the required work and efforts, thus allowing a comparison of the operating costs of multiple layout possibilities in a precise manner. Generally speaking, the complexity of evaluating the commercial costs increases as one considers the "moving costs", i.e., the costs of moving goods or humans from one floor to another between the various departments. For example, if an elevator is the only way to reach a department, then the costs of waiting for the elevator, as well as the maintenance, usage and repair costs must be considered. The mathematical model should include and represent such information. The scientific measurement of work and effort allows decision makers to achieve the most cost effective scenario for a given project through the systematic comparison of the commercial operating costs of the complete set of processes implied by any given layout. Nevertheless, the reward of all these efforts will never replace the sheer excitement and enthusiasm of a speechless customer entering your store or boutique, and simply saying "Wow!" The final value of the design efforts can only be revealed once the maintenance/renovation project becomes available to customers. This is the ultimate test of the true value of all these efforts aimed at creating a successful store did it work? It is a well proven fact that risks of failing to obtain the expected profitability can be minimized right at the design phase if an approach combining art and science is used. Let science be the key to success in your retail operations! Chart 1: Costs of modifying a project as a function of where the modifications arise

5 page 5 Contact For more information, please contact: Nathalie Brunet nbrunet@westmonroepartners.com About West Monroe Partners West Monroe Partners is a North American business and technology consulting firm focused on guiding organizations through projects that fundamentally transform their business. With the experience to create the most ambitious visions as well as the skills to implement the smallest details of our clients most critical projects, West Monroe Partners is a proven provider of growth and efficiency to large enterprises, as well as more nimble middle market organizations. Our more than 350 consulting professionals drive better business results by harnessing our collective experience across a range of industries, serving clients out of offices across the United States and Canada.