Wholesale Changes

Wholesale Changes Retailers were being forced to rethink their fundamental business models before the recession. Now, shifting demographics, over expansion and debt-weary consumers plague the sector.

By Eric Krell

Not to discount a bruising recession, but the economy represents only one of several major challenges shoving the retail industry into a period of wholesale changes. Big box retailers are opening smaller stores in malls. Microsoft is entering the retail business. Saks is slashing prices.

“The way retailers operated in past is not yielding results any more,” notes Fred Balboni, IBM Global Business Services partner and the firm’s global retail industry leader. “The old business models are not creating value the way they used to.”

The U.S. retail sector has thrived for the past quarter century as it enjoyed steady (and, more recently, breakneck) expansion, relatively inexpensive energy prices, minimal trade restrictions and an ever-expanding population of shopaholics. This beneficial climate crashed with the economy last year. However, other forces besides the plummeting global economy—including shifting demographics, volatile energy prices and the industry’s own insatiable appetite for new retail space—also lined up to force the “over-stored” retail industry to address a new reality.

“Consumers are of the mindset that credit-based consumption is out while personal savings, debt reduction and value shopping are in,” notes John Karonis, president of Kurt Salmon Associates’ (KSA) consumer products division. “More and more consumers are shopping in their closets and cupboards… Simply put, there are less consumer dollars being spent on retail goods. It sounds obvious, but that’s the root issue that retailers are dealing with.”

Other issues pose additional obstacles. “Look at the demographics,” suggests John Rooney, retail sector lead for Deloitte Consulting. “As baby boomers move into their 60s and start to consume less, there just aren’t enough people behind them to pick up the slack of their consumption.” Discussions and insights you hear from the next generation of consumers, Rooney adds, indicate that “large-scale consumption is becoming less popular.”

A significant contraction in retail consumption along with a major change in how consumers shop represents the sort of fundamental disruption that gets the consulting juices flowing. And it has. Veteran retail consultants sound genuinely excited—even optimistic—about the approaches and solutions they’re selling to retail companies, which, as Balboni points out, “are not engineered to take the kind of body blows” the current economy is dishing out.

Balboni and his team surveyed 30,000 shoppers late last year to identify how retail clients can better leverage business processes and performance analytics to retain advocates (loyal shoppers) and lure shifters (high-spending free agents).

At Deloitte, Rooney is focused on helping clients weather the downturn while also preparing to compete in a fundamentally different consumer landscape once the economic skies clear. KSA (localization), Accenture (a new retail outsourcing model) and other firms and retail practices recently have hatched similarly innovative and ambitious approaches (see Could the Worst of Times Bring Out the Best Ideas? on page 15).

In fact, there may be no better bargain in the retail industry right now than external consulting services. Oliver Wyman partner Paul Beswick describes the importance of delivering a “powerful