O.C. Tanner Institute RETAIL TODAY:

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1 O.C. Tanner Institute RETAIL TODAY: How cashing in on people strategies pays off

2 With global growth of the retail industry, competition for every purchase has never been greater. Worldwide retail sales (including both in-store and online purchases) are estimated to reach more than $28 trillion by 2018 with around 6% year-over-year growth. 1 Accompanying this steady growth, competition within the space is heating up. Purchasing from a competitor is now just a click away and tech-savvy consumers are increasingly incorporating price checking into both their pre- and post- shopping experiences. A well thought out people strategy is essential as retailers attempt to differentiate themselves. As retailers look to expand, embrace e-commerce, and effectively manage supply chain operations, productive, engaged employees will be the differentiator that gives them a competitive advantage. 2

3 State of the industry in 2015 and beyond 1 Retail expands its market Differentiation and the ability to embrace new markets will largely determine the success of future retailers. Retailers both multi-nationals and local are aggressively seeking growth. As developed markets are increasingly becoming saturated, retailers are finding success by expanding into emerging markets with a growing middle class such as Latin America and Asia-Pacific. While individuals within these regions don t have as much expendable income as consumers in developed nations, their aggregate buying power is greater. Additionally, they are still willing to purchase luxury, non-necessary items on a consistent basis. 2 To leverage these opportunities, multi-national retailers must contend with established local brands and find innovative ways to demonstrate they understand local customs and traditions. Multi-national retailers must contend with established local brands and find innovative ways to demonstrate they understand local customs and traditions. 3 In addition to expanding into new markets, many retailers are exploring new verticals within the markets they already serve and are acquiring or partnering with non-traditional retail services. This type of expansion is beyond the supercenter mentality of selling everything, and more about strategically combining traditional retail with convenient services. 3 One example of such expansion is Walmart and CVS Pharmacy entering the wellness space by opening in-store clinics that aim to treat the most common illnesses. 4 Look for retailers to continue expanding into new services markets in an effort to please and attract time-sensitive consumers. OPPORTUNITY Employees are a wealth of knowledge when it comes to understanding your customers especially when it comes to local, cultural nuances. When expanding into new markets or new verticals take advantage of their

4 knowledge by adopting feedback channels that empower employees to help your business grow. Reward employees for providing actionable insights and innovative ideas. This helps close the feedback loop as you proactively highlight changes are being implemented based on their ideas. 2 E-commerce s growth and limitations China s largest e-commerce retailer, Alibaba, broke the record for the largest initial public offering (IPO) in the world. 7 And Amazon, a leading e-commerce site in the United States, saw a 23% increase of U.S. sales between 2013 and China and the United States are the largest e-commerce hubs and made up more than 55% of total global e-commerce sales in But many emerging and smaller markets are growing fast and beginning to play a cardinal role in e-commerce. While growth is the e-commerce story worldwide, it faces strong challenges from traditional brick-and-mortar stores and logistical problems that limit its growth. A Nielsen study of 60 countries revealed that in over half of the major retail categories the amount of consumers who intend to make retail purchases online has doubled globally in just three years. 10 While e-commerce numbers are strongest in North America, the fastest growth in e-commerce is now coming from developing countries. 11 The percentage of consumers who intend to make purchases online is growing most in the developing regions of Asia-Pacific and Latin America. Explosive growth across the Asia-Pacific region, particularly in China, will allow the Asia-Pacific region to overtake North America to become the largest e-commerce hub by 2019 and the first geographic region to break $1 trillion in yearly e-commerce sales. 12 While the big numbers are coming out of Asia-Pacific, the proportions of online purchases are growing fastest within the smaller markets of Europe. In the United Kingdom, for example, e-commerce now accounts for more than 13% of total retail sales the largest proportion of any country in the world. 13 4

5 The Asia-Pacific region is slated to become the largest e-commerce hub and the first geographic region to break $1 trillion in yearly e-commerce sales. Even with explosive growth, it is important to remember the limitations of e-commerce. In 2014 online retail sales only made up 5.9% of the total worldwide retail market. While it is expected that by 2018 the e-commerce share will increase to almost 9%, it is still only a small fraction of the overall retail category. 14 The largest portion of retail sales is perishable consumables that online retailers simply haven t been able to logistically ship fast enough even in established countries to make e-commerce a viable purchasing solution. Online-only retailers are also being challenged by traditional brick-and-mortar retailers as brick-and-mortar stores are starting to establish a successful online presence. In fact, half of online sales are now captured by retailers who also have brick-and-mortar stores and two-thirds of consumers making an online purchase use a physical store either before or after their online transaction. 15 While e-commerce is growing, having an online-only or an in-store only retail strategy is very limiting. In the future, look for single-channel retailers to start embracing omni-channel methods. For example, online-only retailers such as Amazon in the United States and Zalora in Southeast Asia are already expanding into brick-and-mortar locations. Additionally, traditional in-store retail giant Walmart is aggressively growing an online presence. The future of e-commerce will likely include both household brick and mortar and traditional online-only names as market leaders from both sides expand. OPPORTUNITY Mixing online and traditional retail verticals is difficult without the right tools. Retailers face the challenge of creating teams meant to disrupt the online vertical while at the same time linking those groups into their core operations. Research from the O.C. Tanner Institute reveals that meaningful employee appreciation has a direct effect on having good work relationships. 16 In other words, employees who receive consistent recognition also have better work relationships with their colleagues. In addition, social appreciation tools give teams the opportunity to connect and collaborate with each other across different locations and geographies. In essence: employee recognition can be an effective tool in bringing together different parts of an expanding retailer s employee population, helping strengthen work relationships across the organization. 5

6 3 Inventory and logistics control Successful retailers understand the importance of knowing what is in stock and where to find it, and have been able to expand this model to include multiple ordering channels and distribution hubs across the globe. As retailers expand their product lines, they re looking for effective and efficient methods to understanding the impact on their distribution costs. Additionally, with more and more transactions happening across channels, retailers (and consumers) need full visibility into stock already in stores, stock being held at local distribution centers, and product coming off production lines. A study of 14 multinational retailers showed that the number of new products on shelves has soared by 32% since 2010 while overall sales have only expanded 4%. The study also found that the total number of new products offered nearly tripled over a five year period, but 82% of these new products have already been discontinued. 17 While retailers are looking for the next great product, it is critical to understand the costs associated with managing so many new products. Logistically, new products bring costs: new sourcing, changed inventory needs, uncertain demand, and new people to manage the process. Having a better understanding of the logistical costs of new products will help retailers decide if a new product can effectively drive revenue. The total number of new products offered nearly tripled over a five-year period, but 82% of these new products have already been discontinued. As consumers begin to use multiple channels before completing a transaction, retailers are having to meet consumers at their preferred purchase location with the item ready. While this sounds simple, the average product now has 60 data attributes that include ingredients, packaging, and necessary logistical dimensions. 6

7 Additionally, research shows that 80% of data shared between retailers and their suppliers is inconsistent. 18 In other words, retailers are trying to manage inventories of 60+ moving parts per product while 80% of the data they receive about those moving parts is inaccurate. There are significant gains available for retailers who can properly manage their logistics through the whole sales cycle. Knowing instantly how long items have been on the shelf in a particular store can help retailers know what items to put on sale in order to move them off the shelf. Additionally, knowing precisely where inventory is moving can help retailers make sure supply is landing in areas with the highest need. OPPORTUNITY Find ways to reward innovation and process improvement. Global research has shown that employees who receive strong recognition are 33% more likely to be proactively innovating, generating 2x as many ideas per month compared to those who aren t recognized well. Furthermore, companies that provide effective performance recognition are more than 2x as likely to be highly innovative. 19 7

8 Supporting a culture of appreciation As the retail industry continues to grow, where should leaders focus in order to innovate processes and maintain the highest levels of customer service? By creating and sustaining a culture of appreciation employees at all levels will be engaged and ready to make a difference. Recent research commissioned by the O.C. Tanner Institute shows that employees who receive strong performance recognition are more likely to be highly engaged, more likely to perform at their maximum output, and more likely to develop innovative ways to improve their company. 20 Additional research showed that when asked, What is the most important thing that your manager or company currently does (or could do) that would cause you to produce great work? employees most often cite employee recognition. In fact, employee recognition was cited five times as often as increased wages/ salary and was cited more than twice as often as any other category. EMPLOYEE RECOGNITION CHALLENGES UNIQUE TO THE INDUSTRY 1 Offline populations busy serving customers Many retailers find themselves in a catch-22: the employees who are interacting most with customers are also the hardest to reach with recognition. And when customers are four times more likely to go to a competitor over a service related problem than a price or product related problem, 21 it s critical to ensure frontline employees are engaged agents of the brand. But with the majority of retail employees on the floor, on the move running the cash register, stocking shelves, and interacting with customers, retailers need a combination of mobile and offline recognition solutions to allow for appreciation on the go. OPPORTUNITY Make sure employees are given the opportunity to give and receive recognition anywhere, anytime. Options include intuitive mobile apps or integration with native tools like Microsoft Outlook (or other platform), that allow for peer-to-peer social appreciation on-the-go. Appreciation stations can also be set up in common meeting areas with tangible buttons, cards, and on-the-spot coupons can be given out with access codes for redemption online. 8

9 2 Employees dispersed across several locations Retailers manage a lot of locations stores, distribution centers, multiple corporate offices, etc. Having employees so spread out makes it difficult to communicate new initiatives and ensure best practices are being followed. OPPORTUNITY Having a full-service recognition provider is key. A fully integrated tool will effectively manage a fragmented employee population. A comprehensive platform gives every employee in every location the ability to connect, give, and receive recognition. Integrated tools allow employees to easily see how recognition is flowing throughout the company. Team specific notifications let team members know when a colleague has performed great work. Additionally, world-class training on recognition best practices will further enhance the employee experience, ensuring each recognition moment is meaningful to the recipient and consistent across the company. 3 Bringing customers into the recognition mix In a world focused on customer experience, it is important to give employees an opportunity to share their great work with customers and also give customers the opportunity to recognize the great work of employees. Encourage employees to display their awards and be proud of their recognition moments. Similarly, engage your customers in letting you know when someone went above and beyond, and follow up, letting the customer know how important recognition is to the company. OPPORTUNITY More than any other industry, retail has a unique opportunity to include customers in the recognition process. Whether that means giving employee pins or other custom products that proudly portray individual accomplishments, or allowing customers themselves to get involved in the recognition process, both customers and employees stand to gain. Engaging customers in a unique way could be a brand differentiator that consumers remember. 9

10 Industry leaders: Sharing best practices CASE STUDY SPOTLIGHT: THE HOME DEPOT The Home Depot s Homer Awards were designed to build peer-to-peer connections, reinforce The Home Depot s core values, and strengthen the close-knit, family-oriented culture of North America s largest home improvement retailer. With more than 317,000 employees across 2,200 stores in the United States, Canada, and Mexico, the program provides immediate recognition through a tiered approach. When associates receive three Homer Awards they reach a milestone award level that offers an array of awards and a bonus. Twelve awards provide associates with the Platinum level, earning them a beautiful watch embossed with the company logo. After earning two Platinum awards, associates select from a catalog of beautiful gift items. And for those who earn sixty Homer Awards, Diamond status is attained. At the Diamond level, a diamond pin is given a point of pride displayed on associates aprons. In a true moment of celebration, Richard Dickie Peppin, an electrical associate in Bonita Springs, Florida s The Home Depot store, was the recipient of the 5 millionth Homer Award. Recognition The Home Depot style is given to associates for great customer service, showing an entrepreneurial spirit, pitching in on projects in the stores, and giving back to the community. I m just a regular guy doing my job, he explains, but it s so great to be recognized by the management in the store. This company takes care of people that work hard. CASE STUDY SPOTLIGHT: STATER BROS. Low prices, quality merchandise, exceptional service, convenient locations. These foundational values set the course for Stater Bros. Markets when it opened its first store in But when Chairman of the Board and CEO Jack H. Brown took the helm over 34 years ago, an essential ingredient was added to the mix: valued employees. It s always been my philosophy says Brown that if people don t feel good about themselves, they ll never 10

11 feel good about their company. My emphasis has always been on how we can improve morale and have our people take pride in themselves and everything they do. What does this mean? Treating your employees like family, all 18,000 of them. Being there for them through good times and bad. Making key management decisions and investments not for immediate gain, but because they are the right thing to do for the greater good. Honoring and celebrating loyalty to create a culture where people are engaged to bring their best every day. These old-fashioned values drive a progressive strategy that has led this $4 billion Fortune 500 Company to profitability and success. A cornerstone of Brown s philosophy has been honoring the commitment and loyalty for employee years of service. For more than 28 years, Stater Bros. has partnered with O.C. Tanner to provide high-quality symbols of recognition. Every award presentation provides a unique opportunity to reinforce what matters most. These celebration moments help connect employees to where the organization is going, calling out their individual contributions to that journey. THE BENEFITS OF AN EFFECTIVE RECOGNITION STRATEGY While retail sales are growing steadily, competition has never been so steep. The digital era has disrupted the industry and tech-savvy consumers want quality products at the lowest possible price from a brand they can relate to. As retail expands its market, embraces e-commerce, and manages its supply chain, productive, innovative, engaged employees will be the differentiator that will give successful retailers a competitive advantage. 11

12 O.C. TANNER AND THE O.C. TANNER INSTITUTE The O.C. Tanner Institute regularly commissions research and provides a global forum for exchanging ideas about recognition, engagement, leadership, culture, human values, and sound business principles. O.C. Tanner, number 40 on the 2015 FORTUNE 100 Best Companies to Work For list, helps organizations create great work environments by inspiring and appreciating great work. Thousands of clients globally use the company s cloud-based technology, tools, awards, and education services to engage talent, increase performance, drive goals, and create experiences that fuel the human spirit. Learn more at octanner.com. Outcomes are everything We d love to share what we ve helped thousands of our global clients achieve. Contact us today at octanner.com USA Canada UK +44 (0) India trillion-this-year/ the_worlds_emerging_middle_class wal-mart-wants-to-be-your-doctor/ 5 white-papers/2015_cicero_whitepaper_drivers_of_great_work.pdf nrf.com/2015/top100-table 9 trillion-this-year/ / 11 ir.nielsen.com/files/doc_financials/nielsen-global-ecommerce-report-august-2014.pdf 12 t+2014+to+2019+asia+pacific/fulltext/-/e-res trillion-this-year/ trillion-this-year/ global-retail-e-commerce-keeps-on-clicking/10192?_101_ instance_87xbennhpz3d_redirect=%2fconsumer-productsretail%2fe-commerce-index html#axzz3mbpbb9ar global-research/oct-performance-recognition-white-paper-intlupdated pdf O.C. Tanner. Photocopying or electronic storage, transmission, or reproduction of any portion of this publication is prohibited without written consent from O.C. Tanner. 12