Retail's New Horizons

Retailers need to decode the desires of a consumer who hops out of a new Infiniti strewn with Burger King wrappers, marches into their store brimming with insight gleaned from product-review sites, and then expects an overmatched sales associate to beat a price from a competitor's online store.

The world's top retailer can attest to the contradictory retail landscape. In recent months, Wal-Mart pulled out of Germany (ending a nine-year expansion effort there), revamped its one-size-fits-all model in certain stores by tailoring merchandising mixes to match local characteristics, and, no doubt, considered a response to Tesco's arrival next year on American soil.

At the same time, numerous U.S. retailers continue to battle Wal-Mart's market share and price advantage — primarily through consolidation (which promises scale and better prices) or greater specialization and localization.

All of this change and confusion, of course, translates to opportunities for consultants who serve the retail sector. A study completed by the research unit of Kennedy Information (Consulting Magazine's parent company) reports that the retail consulting market, which was roughly $12.7 billion in 2004, will post a compound annual growth rate (CAGR) of 3.68 percent through 2008, when it will reach approximately $14.6 billion. This might seem paltry when compared to healthcare's wide strides.

Some of the largest retailers have invested or will invest in projects involving radio frequency identification (RFID) and electronic product codes (EPC), but the bulk of retailers will focus their attention and consulting dollars on other areas. Kennedy Information's 2006 report identifies six major trends in the retail sector: new store openings as an essential driver of revenue growth; international expansion into emerging markets; consolidation; the need to "differentiate consumer experiences to combat blurring retail categories"; the use of analytics to move toward greater customer centricity; and real-time supply chain visibility.

Dispatches from retail consultants in the field confirm those trends and flesh out other forces shaping retail consulting.

Out Here in the Middle

In Portland, OR, some shoppers happily pay a premium for organic produce and dairy offered by local farmers. Others, notes Portland-based Steve Brook, a senior associate with Point B Solutions Group, "will buy their eggs anywhere" as long as the price is low. "If a retailer is trying to compete in both places," Brook says, "it is going to get beat by the big guy on price and by the little guy on quality and service."

The opening chapter of Silverstein's new book is titled "The Bifurcating Market." In it, he describes how a married couple with three children and a total annual household income of $100,000 scrimped on food and other household expenses to afford a 32-inch flat panel TFT-LCD television. Conversely, many households occupying the upper reaches of the middle class are trading down, as Silverstein writes: "Our definition of the middle class includes the $150,000-a-year professional who buys $19 jeans at Target, flies AirTran, splurges on shoes at Neiman-Marcus, travels 50 miles to a Coach outlet store to buy a handbag, and pays $100 for her dog to have a 'beauty treatment.'"

The forking of U.S. consumers to both ends of the price spectrum presents a problem for many retailers that occupy the thinning middle ground. "We see almost every single product, brand, and service splitting into this bifurcated marketplace," says Fred Balboni, global retail leader for IBM Global Business Services in New York.

For example, supermarkets that have not distinguished their offering as high-relationship or low-cost have posted flat or negative revenue growth rates in recent years, Balboni reports. "Many retailers are rapidly moving to the left or rapidly moving to the right," he adds. "And that makes the retail market really, really exciting." In a few cases, companies are moving in both directions. Toyota and Korea-based consumer electronics giant LG "span the poles," Silverstein writes, by succeeding at both the high end and the low end of their markets.

Consultants and other professional services providers should be excited by this movement: transforming a brand identity, merchandising mix, and service strategy requires assistance. Regardless of which bifurcation response a retailer chooses, "they need to work through a transition," Brook says. "The people running the organizations are not in the business of managing the transition. They are in the business of managing the operation."  
 

Lost in Translation

The polarization pushes retailers toward greater specialization or greater scale (or, in the case of Wal-Mart, both). Consolidation and expansion, particularly into emerging markets, remain the most common methods of achieving scale.

The largest U.S. retailers can slash prices, which drives store traffic and provides more revenue to invest in new business models and overseas expansion — both of which can help drive greater efficiency.

#boxred { width: 335px; margin: 0 95px; padding: 1.5em; text-align:center; }

"When we work on an M&A, it's not just the strategist piece. Obviously, we look at how to consolidate IT and finance, and those pieces. Typically, our work unfolds into a series of projects, which would include supply chain initiatives.  Finally, we look at the future opportunity and set a growth agenda so that the approach is a holistic one," Hoffman explains. (See related interview.)

This overseas expansion of "mega-retailers" has turned up the heat on local retailing rivals, yet many international excursions by U.S. retailers end unhappily.

Consider Wal-Mart's troubles in Germany, which, according to the snippy headlines and juicy reporting, were caused by cultural problems: Germans supposedly found the sales associates' frequent smiling to be distastefully flirtatious, and sales associates were creeped out by singing the company song each morning. Despite the attention Wal-Mart's "German Retreat" garnered in the press, the cause of the failure was straightforward. Germany, with an imposing collection of strong retailers and highly price-sensitive consumers with unique shopping habits, is a very difficult market to crack, even for companies from other European countries.

"U.S. retailers have had a pretty hard time coming into Europe," says Tory Frame, a Lon-don-based Bain & Company partner who leads the firm's Euro-pean consumer products & retail practice. Bain research conducted late last year found that fewer than one in three retail expansions into Europe by U.S. companies succeeded in establishing a foothold. "This is not to say that U.S. companies are having all of the trouble," Frame adds. "European players confront equally difficult issues when entering new European
markets."

The Bain research identified three commonalities among the third of U.S. retailers whose European expansions have succeeded:

1. They build a winning formula that is close to their core and repeatable.
2. They avoid entering large markets that are too price-sensitive.
3. They avoid markets where a big, nasty gorilla already dominates.

Retailers also need local assistance to maneuver the unique complexities of the European markets (each of which, Frame emphasizes, differs from the others) as well as Asian and Latin and South American markets.

"This is where joint ventures and other partnerships really come into play," Frame says, noting that the collaboration can help companies address location, hiring, supply chain, and regulatory issues.

For example, a U.S. retailer targeting London's glamorous Oxford Street area ought to know that the north side of Oxford Street, the sunny side, attracts much more foot traffic (and boasts much higher rents, notes Frame) than the south side.

Those nuances often take a backseat in developing markets, such as Eastern Europe, China, Russia, Brazil, and Argentina, to more formidable obstacles. "The primary problems facing companies in these high-growth, developing markets include building infrastructure and being able to understand the unique and ever-changing government restrictions," reports Mike Klaus, vice president and global leader, EDS consumer industries and retail, and a frequent visitor to the Far East. Savvy U.S. retailers, he says, tend to join forces with another retailer, a manufacturer, or even an investment firm that can help it ease into the markets.

#boxred { width: 335px; margin: 0 95px; padding: 1.5em; text-align:center; }

For example, shortly after Avon began to notch some success with its direct sales model in China, the government told Avon that its model was no longer allowed.

Avon turned on a dime and moved into department stores, where it succeeded in running a "counter" sales model. About 18 months ago, the government lifted the restriction on direct sales, and Avon changed course again, says Klaus.

It could do so for numerous reasons, including its lengthy experience in China, a joint venture relationship there, and its access to EDS's local infrastructure and knowledge.

A New Form of Purchasing Power

Retailers also need help in dealing with newly empowered consumers.

"In the past five years, the balance of power has shifted from the retailer to the consumer," says Balboni. Sales associates need to shepherd buyers through the pros and cons of various brands or models much less frequently. In some cases, a knowledgeable salesperson "represents an aggravation" to well-informed shoppers, Balboni explains. "This creates an entirely new phenomenon for retailers to deal with." It presents challenges and opportunities, such as self-service offerings, for retailers that have significantly trimmed sales staffs in recent years.

Other new consumer phenomena include the growth of consumer tribes who identify themselves with brands (Harley Davidson, Jeep owners, or Mac diehards, for example) or product qualities or categories (the "it" handbag, free-trade coffee, or cruelty-free cosmetics, for example).

Retailers who occupy the high end of the price spectrum "need to aggressively understand the exact needs of customers and how they can better serve them," says Balboni. "If you continue to receive the absolute best customer service, you don't begrudge the retailer its extra margin points."

This need generates customer centricity–related consulting engagements. IBM's retail business intelligence services and systems, for example, help customers use customer information to inform decisions around merchandising, loyalty programs, pricing, and related areas. For example, this customer information might alert a supermarket that customers who traditionally buy name-brand coffee would switch to private-label coffee if the price savings were 30 percent. This consumer demand insight then influences how the supermarket prices its merchandise, optimizes shelf space, and adjusts cost to ultimately boost profit
margin.

"The largest retailers in the country are doing that," says Bal-boni. "And the systems and pro-cesses used to do so are so complicated that they hurt your brain."

Channel Surfing

In describing how he unearthed the foundations of an article that led to his best-selling book The Long Tail: Why the Future of Business is Selling Less of More (Hyperion, 2006), Wired magazine editor-in-chief Chris Anderson writes, "there has never been more data available. The secrets of 21st-century economics lie in the servers of the companies that are all around us, from eBay to Wal-Mart. Although it's not always easy to get the raw numbers, the executives at those companies swim in that data every day and have a great institutive feel for what's meaningful and what isn't."

Some of those executives have better instincts than others, yet all of them would highly value better data mining, analysis, and delivery capabilities. Online retail revenue remains a steadily growing but relatively small portion of total retail revenue. In this case, though, the numbers do not tell the entire story. Dale Miyakawa, vice president, EDS consumer industries and retail, notes that online interactions (even those that do not involve transactions) represent an increasingly influential component of consumer decision-making. This means, Miyakawa adds, that retailers need to ensure "holistic and consistent service" regardless of which channel a consumer happens to be using at any point in time.

Two of IBM's primary retail offerings address this area. Balboni says that the multichannel service area is designed based on the premise that retailers need to provide customers with a seamless and integrated customer experience regardless of whether the customer is using an online channel, a call center, or a physical store. The firm's "total store" service involves collaboration with software providers designed to integrate point-of-sales devices with a range of back-end systems to drive greater revenue and loyalty.

Jacks of All Trades

They may occupy the less flashy side of the offering spectrum, but good old-fashioned supply chain efficiency improvements also rank as a strong need — particularly among retailers serving consumers eager to trade down.

Some current projects offer a combination of traditional process improvement with a stimulating collection of gee-whiz elements. IBM's work with Circuit City, Balboni notes, involves "a complete transformation in terms of the way the company approaches customers and the customers' in-store experience." The work involves significant improvements to essential merchandising, purchasing, and replenishment systems, as well as sales-incentive programs and supply chain improvements.

"So many forces are driving change in the retail sector," says Balboni, "and I love that, because we're in the business of helping clients to make that transition."

He's not alone. Consultants who serve the retail sector tend to speak passionately regardless of whether they're talking about back-end systems, regional body-shape differences in Europe, demographic projections, staffing challenges, data mining, social economics, the Chinese government, or biodegradable cell phones. This passion, as well as those diverse areas of expertise, should prove valuable: The forces transforming the retail sector show no signs of slowing.