Retail: Best Practice Responses in a Challenging Environment

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1 Retail: Best Practice Responses in a Challenging Environment Written by Bryony Collis, Emma Johnson and Alex Whitehead A white paper focusing on best practice responses to the challenging economic and competitive environment facing the retail sector, and the implications for safeguarding profitability W h i t e S p a c e S t A l d a t e s O x f o r d O X 1 1 B T S B : F X : / 0 3 /

2 INTRODUCTION Key Aims This white paper aims to explore how retailers can best respond to the increasing pressures felt on both the supply and demand sides of the business. As consumers experience decreasing levels of disposable income and retailers face rising and volatile prices, the sector is struggling to maintain profitability. We consider how retailers have responded to trends such as the squeezing of midmarket propositions and consumers demands for increased flexibility. In addition, a case study towards the end of this paper examines a best practice response to these pressures. Representatives from across the retail sector have singled out John Lewis recent success as a result of their strategy to reposition on both price and quality, as well as their well leveraged multi-channel capability. Methodology White Space interviewed 14 market experts from across the retail sector, identifying a broad range of issues that currently have traction in the market place. These experts included leading retail consultancies and industry news specialists. In addition, industry reports from market commentators and participants were used to build a holistic overview of the sector as a whole. This approach is designed to access a broad range of views, as well as gaining deep insights into areas of particular relevance to industry segments. The resulting commentary provides a snapshot of key debates, and explores the strategic questions senior decision makers should be considering. Why White Space? White Space is a strategy and research consultancy, specialising in proposition development support and customer experience optimisation. We have significant experience working in the retail sector and related industries, with clients across grocery, electronics, fashion, online and catalogue. White Space s multi-disciplinary approach enables us to draw on relevant experience from a broad range of industries. Our years of experience in consumer research and strategy provide a valuable viewpoint on some of the hot topics currently driving the sector. Key Issues Industry experts identified a diverse range of issues affecting retailers, in particular the increasing pressures on both the demand and supply sides of the retail sector. These issues are the focus of this paper, which discusses how retailers may best react to these pressures to succeed in a challenging economic and competitive environment. Demand Side Pressures Supply Side Pressures Communicating Value Over Price Launching New Channels Leveraging Existing Channels Challenging Existing Production Models 1

3 COMMUNICATING VALUE OVER PRICE Interviews with representatives from across the retail sector emphasise the importance of responding to decreasing levels of consumer disposable income with a holistic approach to communicating value, rather than just price. The mid-market has been squeezed by the current economic conditions, as consumers have moved to either end of the market, with the value and premium product ranges performing well. An important contributing cause of this may be long term underinvestment in the mid-market proposition: There has certainly been both a neglecting of and then a squeezing of the mid-market Analyst, retail consultancy In the past, the grocery sector has been typified by a lack of investment in the mid-market Director, retail consultancy Care must be taken to ensure actual differentiation of the mid-market in order to drive sales. To warrant trading up from value goods, consumers need to feel rewarded for spending extra. If a retailer s value brand is seen as being packaged similarly to their mid-market branded goods, there is concern they may be cannibalising demand Senior Reporter, industry news specialist The view that consumers are driven by overall value, rather than price alone, appears pervasive: Retail at the moment is not about price, the value proposition has to be right Director, industry news specialist As a response to this, large retailers have begun to be more proactive by differentiating their mid-market proposition in terms of overall value. Asda and Tesco have both taken innovative yet different approaches to this issue, launching Chosen By You and Venture Brands respectively. Chosen By You is a rebranding of Asda s core range with a focus on customer endorsement, differentiating produce in terms of quality. The success of this scheme will depend heavily on to what extent consumers trust the messaging of quality. Tesco have taken a differentiated approach with their Venture Brands, developing their own goods in partnership with third parties and removing the ownlabel branding. Chokablok ice cream is one example, priced for the mid-market but branded separately from any Tesco produce. Retailers are keen to get away from price leading their sales strategy Editor, industry news specialist Retailers are recognising that to convey value to the consumer, the quality of goods and the shopping experience play an increasingly important role. This is reflected in Tesco s recent announcement of 20,000 new UK staff in order to improve customer service. The challenge to retailers facing a squeezing of the mid-market is to successfully build a proposition communicating overall value. This is only possible if the drivers behind consumer perceptions of value are fully understood. LAUNCHING NEW CHANNELS As demand side pressures decrease the level of consumer spending, meeting customer needs - particularly providing flexibility across a range of channels - is gaining importance. Single channel retailers are increasingly expanding their channel offering in order to exploit the benefits of being multichannel. Consumers value flexibility and retailers with multiple sales channels, such as bricks and mortar stores, online stores and home delivery provide their customers with a choice of shopping options, and most importantly convenience: Consumers are becoming more demanding and increasingly want convenience Assistant Editor, industry news specialist 2

4 The current economic climate is working in favour of the consumer in this respect; retailers providing multiple channels and offering the convenience that consumers desire can outperform their peers by leveraging what demand there is in the market: The advantage of using multi-channel sales is that it capitalises on the consumer wherever they are and makes the most of their spending power Director, industry news specialist Online retailers are looking for new channels; having realised the potential of a multi-channel approach they are increasingly seeking the advantages associated with multi-channel sales. For some online retailers, this has involved investing in a physical presence on the high street: Amazon s response to the demand for multi-channel sales has been to roll-out electronic lockers in public locations across London, such as shopping centres. This was implemented in late 2011 and gives consumers the convenience of click and collect without requiring diversification away from Amazon s core function as an online retailer. Innovative responses to providing multiple channels are still in their early stages; the success of Amazon s initiative will be watched with keen interest. When implementing such an approach, companies should consider building a solid understanding of exactly how consumers perceive convenience and the sorts of flexibility they value: profiling this will enable an approach tailored towards these needs. N Brown Group are a catalogue company with the SimplyBe brand, and they have moved towards having a store on the high street as they are aware that people want to be able to try things on Editor, industry news specialist However, a diversification of channels need not involve heavy investment; click and collect is a potential way to bridge this gap: There has been a realisation that consumers value click and collect as the best of both worlds Retail Expert, industry news specialist Source: LEVERAGING CHANNELS: CROSS-CHANNEL RETAILING The challenge for retailers who already have multichannel capability is to utilise these channels effectively and to address their changing functions. Click and collect has seen rapid growth as a channel; consumers are taking the best of online shopping and combining it with the convenience and immediacy of in-store shopping: Click and collect is a halfway house between convenience and control of your time MD, retail consultancy Although companies such as Home Retail Group have been successfully offering click and collect for some time, other retailers have only begun to realise the potential of this offering more recently: It took so long to realise the potential of click and collect as retailers did not appreciate the value consumers place on the convenience the approach offers Retail Expert, industry news specialist Interviews with representatives, including experts in the implementation of multi-channel systems, have indicated that a single view of both the customer and stock is integral to making multi-channel systems function operationally. The challenge of multi-channel selling is to integrate these channels to provide a seamless purchasing process for the customer. 3

5 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Price per Pound ( ) The issue here is about retailers integrating their channels and making them work together operationally. Many retailers provide multiple channels, but not everyone does it well! Marketing Manager, multi-channel software provider Representatives have commented that retailers have often experienced problems in the implementation of multi-channel systems, especially larger retailers: The big retailers are the ones who benefit most from multi-channel sales, but they are also the retailers who find it hardest to implement Director, industry news specialist One aspect of difficulty which appears pervasive is implementing a system which provides stock visibility across the entire channel portfolio. The challenge is not just to sell across all channels but to have visibility of stock across all channels Marketing Manager, multi-channel software provider By implementing a more complex multi-channel approach in this way, retailers are able to utilise all their channels effectively to best serve their customers. The children s retailer The Entertainer is a high profile example of one such implementation; the retailer recently overhauled its systems in order to be able to link its stock and delivery systems and allow options such as delivery to customers from stores. As a result of the addition and integration of new sales channels, the role of traditional high street stores is changing: As more people shop digitally, stores are becoming more like show rooms Editor, industry news specialist If consumers increasingly use click and collect as a convenient purchasing option, retailers must consider the impact this may have on the design and function of their high street and out of town stores: Retailers are re-evaluating their store portfolio and deciding where their stores should be, how many there should be and what function they should serve. Should stores act as a pick up point, or as a showroom for your products, services and brand? Assistant Editor, industry news specialist There are a number of key strategic considerations for companies, including the role and location of their stores in the future, as well as the opportunities which can be accessed from the successful integration of multiple channels. Profiling competitor best practice could be an important part of gaining the insight required to be successful in this area. CHALLENGING EXISTING PRODUCTION MODELS Retailers across the grocery, clothing and electrical goods sectors have been facing rising and volatile prices, contributing to an increase in supply side pressures. In 2011, cotton prices more than tripled over long term levels Monthly Price of Cotton 0.8 Given the struggling demand side, these input price increases have led to tight margins for retailers, with Marks & Spencer citing commodity price inflation as a cause of decreasing margin in their November half year results Source: World Bank 4

6 Interviews with representatives from across the sector have indicated that an important debate in this market is whether or not to pass increasing supply side costs onto the consumer: Many retailers have stated that they just don t feel they can pass on their cost pressures to the already struggling consumers Analyst, retail consultancy Key considerations for retailers hoping to refrain from raising prices include both the range of products available and the potential for regional pricing. In conjunction with price increases for raw materials, production in traditional markets such as India and China is now becoming more expensive. As a result, a key trend is the potential for near-shoring the manufacture of retail goods. As well as competing on cost, near-shoring can also provide increased flexibility in the supply chain; a more agile supply chain can better react to consumer trends. For some goods, production in China is now as expensive as production in Romania. In a few years time I would expect only the most basic products to be globally sourced Chair, industry body Some retailers are going even further than nearshoring in mainland Europe, assessing the potential of bringing production back to the UK. For retailers looking to join the emerging Made in UK trend, there is often more than a purely logistical or cost impact driving the decision. Some retailers have identified the manufacturing source as a marketing strategy with strong brand implications of quality and heritage. Retailers such as John Lewis and River Island are leveraging what is expected to be a strong year for the UK brand. With the Olympics and the Jubilee this is going to be a big year for UK retailers, domestically and internationally Source: John Lewis Editor, industry news specialist CASE STUDY: JOHN LEWIS BEST PRACTICE RESPONSE John Lewis Key Initiatives: Representatives from across the retail sector have singled out John Lewis recent success as an example of best practice in responding to the challenges facing both the supply and demand sides of its business. Demand Side Pressures Supply Side Pressures Communicating Value Over Price Launching New Channels Leveraging Existing Channels Challenging Existing Production Models Reposition Price and Value iphone app December 2011 Successful Multi-Channel Approach Made in UK Identifier 5

7 Reposition around price and value. John Lewis have a broad range of propositions, of which their value products are particularly interesting. These are marketed holistically, with a focus on promising the quality and service which John Lewis is famous for, at a low price. In conjunction with the company s Never Knowingly Undersold guarantee, this may explain their record Christmas sales. John Lewis has repositioned their price message without sacrificing quality MD, retail consultancy and the service and expertise our in-store Partners have to offer. This combination creates an attractive proposition that provides convenience for busy shoppers Successful multi-channel approach Press Office, John Lewis John Lewis is the best example of a retailer who does multi-channel brilliantly. They put their customers first; they are 100% customer centric Director, industry news specialist Launch of iphone app in December This was part of enhancing the retailer s multi-channel offer and allowed customers to locate their nearest store, access a full product catalogue, scan barcodes of items to access further information, and link to the online store to make purchases. Made in UK product identifier. This will appear on over 4,000 products which are manufactured in the UK, from early Investigating competitor and best practice approaches to the challenging retail environment should be an important part of a successful strategy. This is all part of a joined up multi-channel approach that complements and relies upon our physical shops, SUMMARY: LESSONS FROM BEST PRACTICE Strategic questions which senior retail decision makers should be looking to address are: What should an ideal proposition look like? How could this be differentiated by focusing not just on price, but on overall value to the consumer? What are the drivers behind consumer perceptions of value? If new channels are being explored, what would be the best form for these to take? Does this necessarily need to require high investment, or is another approach possible? Which channels do consumers value most? Are there any specific channels which are growth areas and could help organisations capitalise on the spending power of the consumer? How can an existing multi-channel capability be leveraged to provide a seamless purchasing process for the customer? What should this look like and how will this address the need for increased flexibility desired by consumers? How may the traditional role of the high street be changing? What impact will this have on retailers strategy for the future role and location of stores? How can retailers best react to increasing supply side pressures? Is it possible to fully pass these costs on to consumers? Do the flexibility of near-shoring and the marketing opportunities of Made in UK become attractive prospects when faced with rising costs? In a challenging economic and competitive environment, lessons from best practice responses within the industry could help retailers answer these questions and successfully tackle demand and supply side pressures to maintain profitability. 6

8 NEXT STEPS: FINDING THE WHITE SPACE White Space has experience working in a number of areas addressed in this white paper, including with large retailers: 1. Helping a major catalogue retailer develop a fit-forpurpose online customer service experience 2. Helping a major fashion develop a commercially optimal channel strategy in a new international market 3. Delivering a consumer pricing strategy analysis for a major grocer, in light of increasing costs and inflation 4. Identifying key drivers of customer spend and loyalty for a major electronics retailer in a key underperforming category About White Space White Space Insight is one of the UK s leading providers of research consultancy services, bridging the gap between traditional market research and management consultancy. We use cutting edge research methods and consultancy tools to help blue chip clients find answers to strategic questions. Our clients include many of the world s biggest companies, global private equity houses, top tier strategy consultancies and smaller organisations ambitious to succeed. Over 85% of clients repeat purchase to find out why, go to For further information on the themes contained within this white paper, please contact: John Bee, Director John.Bee@whitespaceinsight.com 7