GUARANTEEING SATISFACTION INVESTING TO WIN CUSTOMERS AND GROW MARKET SHARE

Transcription

1 GUARANTEEING SATISFACTION INVESTING TO WIN CUSTOMERS AND GROW MARKET SHARE

2 In the past, sales growth in retail came from developing an effective store concept and rolling it out across hundreds of locations. But many retail sectors have become saturated sales growth is now as much about finding new ways to satisfy customers as finding sites for new stores. This article explains how retailers can better understand what customers want, and invest to serve them better than the competition.

3 Today s large retailers expanded by devising bigger, more appealing, more efficient stores, then sweeping aside weaker competitors in town after town. But in many sectors and geographies this model has run out of steam: the land grab is over, and the fundamental challenge is to win customers by investing in the stores. Although it s easy to come up with ideas for attracting customers, however, it s much harder to predict which of them will be effective. And since improvements to the stores always require investment in terms of capital, lower margins, or additional operating costs it is vital to know what customers want, and how badly they want it. Those retailers who can figure out whether it s better to invest in lower prices, new products, or better stores and service have a significant advantage over their rivals. This paper explains how a retailer can answer three fundamental questions: What does satisfying customers really mean for sales performance? How can we better understand what customers really want not just what they say they want? What are the opportunities for driving growth by better satisfying customers, given the competitive landscape? It draws on our experience of working with retailers in different geographies and sectors over the past two decades. 1. KEEPING CUSTOMERS HAPPY WHAT S IT WORTH? Putting a sales value on satisfying customers requires understanding why customers choose to shop at one store rather than another. Convenience plays a major role in most retail sectors, being closest to the customer confers a significant advantage but it s obviously not the only thing that matters. Customer satisfaction is always at least as important. Measuring the relationship between customer satisfaction and a store s trading performance allows a retailer to link what customers say, to how they actually behave. Customer satisfaction can be broken down into different components, each relating to a different aspect of the retail proposition as we will describe below to allow the cost of any improvement to be compared to the sales benefits it will bring. Exhibit 1 is a disguised example from North American grocery retail. It shows the trading performance of our client ( Retailer A ) compared to one of its major competitors ( Retailer B ), after taking account of variations in real estate. It shows how differences in satisfaction with key aspects of the proposition translate into differences in sales. In this case, Retailer B was seen as offering significantly better value for money than Retailer A. Retailer A s choice, quality, and service levels were rated higher, but not enough to offset this difference. Overall, Retailer B s sales intensity was around 2% higher for a comparable site. Exhibit 1 How customer satisfaction affects sales performance 105 Customers perceive Retailer B as significantly better value, and this translates into a sales advantage of more than 3% in any given location Retailer A has a slight edge in other areas, but this is not enough to offset its value disadvantage Overall, Retailer B s stores are more attractive on average it will out-trade Retailer A by around 2% on any particular site Sales per square foot (Index Retailer A = 100) Retailer A Choice Quality Staff Stores Retailer B Aspects of the proposition 1

4 This insight relies on detailed statistical analysis of customers shopping behaviour, their satisfaction with different aspects of different retailers propositions, and their proximity to different stores. Such analysis begins with asking several thousand shoppers (hundreds of customers of each major retailer) dozens of questions to build up a detailed picture of how favourably they view each competitor. By analysing the responses, we can then distil out a small number of independent and statistically meaningful dimensions such as choice or product quality and understand how performance along each dimension affects overall satisfaction with a store. 2. WHAT DO CUSTOMERS REALLY WANT? The importance of appealing to customers is intuitively obvious. But a retailer s investment strategy must be guided by more than intuition, and based on robust analysis of what customers want not simply what they say they want. All large retailers collect data on customer perceptions and attitudes, but this doesn t automatically translate into clear guidance on how to improve the proposition. Using research to guide investment decisions is difficult, because it requires understanding what customers survey responses actually tell us about their shopping behaviour. Customers would like to see lower prices, higher quality products, and better service but there s no practical value in knowing that customers want to have their cake and eat it, while paying as little as possible for it. I Can t Get No Satisfaction provides some advice on how to use consumer research to produce genuine insights, not just data. Over the past decade, we have carried out this analysis in many different geographies and retail sectors. We have consistently found that at the simplest level, customer perceptions relate to one of two broad categories: Offer (which covers range, quality, and service), or (price, including the effect of promotions and any loyalty programs that retailers operate). Essentially, the retail proposition consists of what customers get, and what it costs them. The two dimensions can then be further broken down to identify more specific influences on store choice: for instance, separating out product quality from breadth of choice, as we did earlier in Exhibit 1. I CAN T GET NO SATISFACTION? All retailers track customer satisfaction, but few do so in a way that genuinely aids decision making. Many retail executives are understandably sceptical about whether research data can really be translated into reliable financial predictions. In our experience they can, but this isn t always straightforward. We find there are three key points to bear in mind: Raw data is useless. To provide useful management information, consumer research results need to be analysed to identify meaningful relationships. Part of the problem is that superficially detailed patterns of responses reveal only one thing: customers overall satisfaction with a retailer. Understanding how customers really feel about different aspects of the store always takes further analysis, with the ultimate goal being to identify the specific strengths and weaknesses that underlie customers' responses. What matters isn t what customers say, but what they do. Customer research is only truly valuable if it can be matched up to patterns of shopping behaviour. In practice, this means linking research responses to transaction histories (which can be created by linking credit card numbers, loyalty cards, or panel data). Although this usually involves painstaking and complex analysis, the insight it generates more than justifies the effort. In the end, matching customer perceptions of a retailer to their shopping behaviour is the key to translating customer satisfaction into sales revenue. Location, location, location. Obviously, convenience strongly influences store choice. To understand the underlying relationship between customer satisfaction and customer behaviour, this effect needs to be stripped out. The easiest way to correct for the influence of distance to the stores is usually to use the retailer s own real estate model to understand the shopping behaviour described above, and to give customers a different weight based on where they travel from relative to your stores and competitors. 2

5 Exhibits 2a and 2b show other examples of this analysis, in this case focusing on UK grocery and German home improvement retail. The charts show the relative importance of different characteristics of the store. Not surprisingly, choice, quality, and value for money strongly influence customer satisfaction. In both cases, customers see each as being of roughly equal importance, but the balance between them varies between the two markets. In addition, store brand clearly has a much more powerful influence on store choice in German home improvement than in UK grocery (this difference is due to the fundamentally different shopping behaviour that characterises these two sectors). Besides the fact that the relative importance of different aspects of the proposition is not the same in different countries and retail sectors, it is also worth noting that it changes over time. Exhibit 3 digs deeper into the UK grocery research. It shows how well the largest competitors perform on each dimension, comparing each retailer s ratings to the overall average for the market. At the end of 2010, shoppers perceived Asda, Morrisons, Sainsbury s and Tesco as being closely matched in terms of quality, choice of products, stores and service levels. Although there are meaningful differences between these retailers on each dimension, they are small compared to what we observe in other geographies. On the other hand, Asda s advantage in value perception is clearly evident, as is the fact that Sainsbury s lagged behind its main competitors on this measure. Understanding customer attitudes at this level of detail gives a comprehensive view of the strengths and weaknesses of each retailer s proposition. Such research can provide a long-term barometer for tracking the performance of the business as a whole. It allows changes in performance to be accurately compared with changes in strategy, providing an objective view on what has worked well and what hasn t. THE IMPORTANCE OF DIFFERENT ASPECTS OF THE PROPOSITION Exhibit 2a UK grocery example, Nov 2010 Offer Trust and ethics Non-food range Healthy options Stores and service level Food choice Product quality Less important Importance Important Exhibit 2b German home improvement example, Mar 2010 Offer Exhibit 3 Customer perceptions of UK grocers Offer Brand Staff and store Choice Product quality Trust and ethics Less important Ratings (Nov 2010) Importance Important Non-food range Stores and service level Food choice Product quality Weak Score Strong Morrisons Sainsbury s Tesco Asda 3

6 3. IDENTIFYING OPPORTUNITIES VALUE AND OFFER, AND THE CUSTOMER PERCEPTION MAP Detailed knowledge of how customers perceive different retailers is invaluable for understanding how the competitive landscape is changing over time. Explaining who is winning and who is losing in customers eyes and why generates clear insights into where the key opportunities and threats are likely to lie. The Customer Perception Map is a simple but powerful tool for doing this. Each retailer s rating on Offer and is plotted on the same chart, and movements can be tracked over time. Exhibit 4 shows the most recent Customer Perception Map from the UK grocery market, showing how perceptions of each retailer developed between 2006 and The most obvious change has been the convergence of all the major players along the Offer dimension, with customers now perceiving significantly less difference between them. Note in this context that the perception scores are all relative to the average for the market, so the apparent worsening of the retailers who previously had a bigger lead on Offer (Waitrose, M&S, and to a lesser extent Sainsbury s) is likely to be the result of the other chains catching up. This pattern underscores the importance of continually investing and reinvesting to win customers: relentless innovation is vital in this highly competitive market. Customer Perception Maps for different geographies and sectors look very different, but there are common patterns in how they evolve and in the long term, movements on the Map really do translate into changes in local market share. Those businesses nearer the upper right-hand corner of the Map prosper and grow rapidly, while those in the bottom left-hand corner don t tend to remain there for long: they either improve their performance or (more often) are swallowed up by more successful competitors. Retailers which are weak on both Offer and rely upon convenience to generate trade a dangerous position for businesses that aren t convenience stores. The Customer Perception Map provides valuable guidance when setting strategy. A retailer can gain market share by moving north or east on the Map, and improving customer perceptions of either or Offer: which will be more effective depends on the starting position relative to competitors. Because movements in position translate into changes in market share, the sales-driving potential of different growth strategies can be balanced against the investment they Exhibit 4 The Customer Perception Map UK grocery retail: 2006 vs Bubble size = market share Weak Offer Strong Budgens M&S Waitrose Co-Op Sainsbury s Tesco Morrisons Asda Iceland Aldi Lidl Weak Strong 4

7 will require. For example, differences in Offer perception can be compared to actual differences between retailers in the length of checkout queues. This allows a retailer to understand how increasing store labour hours would improve its position on the Customer Perception Map, what degree of competitive advantage this would be likely to produce, and what level of sales growth it would imply. CONCLUDING REMARKS A retailer which knows how favourably it is perceived relative to the competition is much better placed to improve its performance and to gain market share by moving north or east on the Customer Perception Map. In contrast, trying to appeal to customers based on intuition about their needs and perceptions is a hit and miss approach, and a retailer risks convincing itself that it is doing enough, only to discover much later that it was not. The value of a robust, consistent and up-todate view of the competitive landscape is clear. Customer satisfaction isn t the only factor affecting financial performance: changes in the store estate, the mix of products sold, or the competitor set can all have a powerful impact on sales and margins. But in the long run, the health of a retail business relies upon satisfying customers at least as well as and ideally better than the competition. Those retailers who can measure what customers really want, and are honest with themselves about how customers really perceive them, have a distinct advantage in understanding the competitive landscape. Over time, they can use this advantage to open up and maintain a gap on the competition by giving customers more of what they want, and less of what they don t. v 5

8 ABOUT OLIVER WYMAN With offices in 50+ cities across 25 countries, Oliver Wyman is a leading global management consulting firm that combines deep industry knowledge with specialised expertise in strategy, operations, risk management, organisational transformation, and leadership development. Oliver Wyman is part of Marsh & McLennan Companies [NYSE: MMC]. In the Retail practice, we draw on unrivalled customer and strategic insight and state-of-the-art analytical techniques to deliver better results for our clients. We understand what it takes to win in retail: an obsession with serving the customer, constant dedication to better execution, and a relentless drive to improve capabilities. We believe our hands-on approach to making change happen is truly unique and over the last 20 years, we ve built our business by helping retailers build theirs. FOR MORE INFORMATION PLEASE CONTACT JAMES BACOS Global Retail Practice Leader james.bacos@oliverwyman.com NICK HARRISON UK Retail Practice Leader nick.harrison@oliverwyman.com PAUL BESWICK North American Retail Practice Leader paul.beswick@oliverwyman.com SIRKO SIEMSSEN Central European Retail Practice Leader sirko.siemssen@oliverwyman.com BERNARD DEMEURE French and Iberian Retail Practice Leader bernard.demeure@oliverwyman.com RICCARDO TRENTINI Italian and Turkish Retail Practice Leader riccardo.trentini@oliverwyman.com Copyright Oliver Wyman. All rights reserved.