REALISING RETAIL CHAIN ADVANTAGES QUARTZ+CO VIEWPOINT By Jeppe Winther
www.quartzco.com
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CONTENTS PREFACE ................................................................................................................................................................ 2 THE QUARTZ+CO RETAIL MODEL ....................................................................................................................... 3 THE QUARTZ+CO RETAIL MODEL .................................................................................................................... 3 STRATEGIC PLANNING ..................................................................................................................................... 4 HQ SUPPORT AREAS ........................................................................................................................................ 4 SHOP EXECUTION AND CONCEPT COMPLIANCE .......................................................................................... 4 UNDERSTANDING THE QUARTZ+CO RETAIL MODEL .................................................................................... 5 WHOLESALER RETAILING................................................................................................................................. 5 ONLINE RETAILING ............................................................................................................................................ 5 INTEGRATION ISSUES ....................................................................................................................................... 6 TAKING IT TO THE QUARTZ+CO RETAIL MODEL ........................................................................................... 7 VISION, STRATEGY AND TARGETS ..................................................................................................................... 8 LOCATIONS AND FORMATS ................................................................................................................................. 9 BUSINESS MODEL ............................................................................................................................................... 10 ORGANISATION, CULTURE AND PEOPLE ......................................................................................................... 11 ASSORTMENT AND SALES ................................................................................................................................. 12 ORDERING AND SUPPLY .................................................................................................................................... 13 OPERATIONS ....................................................................................................................................................... 14 IT............................................................................................................................................................................ 15 HR AND TRAINING ............................................................................................................................................... 16 FITTINGS, IN-STORE AND VISUAL MERCHANDISING ...................................................................................... 17 MARKETING AND PROMOTIONS........................................................................................................................ 18 IF YOU WOULD LIKE TO KNOW MORE .......................................................................................................... 19
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PREFACE Through many years of working with retail chains across the globe, Quartz+Co has amassed a wealth of expertise in the field. Retailers face different challenges depending on their geography, size, age and markets. This article explores ways to exploit the synergies and operational advantages that are possible when working as a chain rather than a string of stand-alone shops. Collaboration between head office and the outlets is the key to success in this respect. Quartz+Co is proud to present our approach to the challenges facing retail chains and share some of the solutions we have successfully implemented for our clients. This article should be viewed as inspiration for retailers and other practitioners in the field. It is not meant as a complete guide to retailing, but summarises some of the most important tools for retail success. We hope you will enjoy and be inspired by it. Quartz+Co
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THE QUARTZ+CO RETAIL MODEL Quartz+Co specialises in helping its customers understand and excel at disciplines crucial to success in retailing. Our deep industry insight and proven problem-solving approaches are the result of experience from working with a wide variety of highprofile brands, including Cartier, LEGO, Nokia, Kellogg's, Bestseller, IC Companys, Carlsberg, BTX, and ECCO. Through our extensive experience we have developed a conceptual model – the Quartz+Co Retail Model – which captures the key disciplines in realising chain advantages and becoming a successful retailer.
Shop execution and concept compliance
Marketing, campaigns and CRM
Fittings, in-store and VM
HR and training
IT
Operations
Ordering and supply
Assortment and sales
Execution
Shop
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By supporting shops best possible in the Support Areas, HQ can release the shop personnel from administrative tasks so they can concentrate on selling
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Establishment of a process of knowledge sharing and an organisational setup that ensure that the concept is complied in shops according to HQ guidelines
HQ support areas (the advantage of being many) §
The support areas are the main levers of chain advantages as economies of scale and optimization efforts have vast impact on profitability, brand positioning and competitiveness
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The support areas involve all parts of running a successful retail business: filling the shelves with attractive goods, measuring performance, training the staff, decorating the shops and launching effective campaigns
Organisation, culture and people Strategic planning
Planning
Locations and formats Business model
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A well-defined strategic plan ensures an aligned direction for the entire chain and a suitable expansion pace
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The strategic planning includes defining the retail concept (business model, location and formats) and mobilisation of the organisation
Vision, strategy and targets
THE QUARTZ+CO RETAIL MODEL The Quartz+Co Retail Model consists of three conceptual levels: (1) Strategic Planning, (2) HQ Support Areas and (3) Shop Execution and Concept compliance. Each level comprises disciplines that are vital in order to work efficiently and obtain the synergies of working as a chain rather than a string of stand-alone shops.
direction and a set of common guidelines, but are nonetheless lifted to success by virtue of timing and the general buoyancy of the business cycle. However, as retail chains professionalise, competition intensifies and consumers become more demanding, retail chains must adopt a more strategic approach if they are to remain
Many retailers experience fleeting success through opportunity-driven management. They lack clear strategic
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afloat. Exploring synergies and obtaining chain advantages are central for continued growth and success in retail.
STRATEGIC PLANNING To begin with, a retail chain in any industry or geography must define a clear goal of where it wants to go, a vision. It must also have a plan for how to get there, a strategy. The overall goal must be broken down into targets for revenues, competition, products, organisation and staff. Central to any strategy is a strong retail concept. This concept addresses the business model (voluntary chain, franchise and corporate chain), location of outlets (main street, shopping mall) as well as outlet format (shop size, shop appearance). The retail concept must also address how the firm's organisation, culture and people will be aligned to support the development and growth of the retail chain. The organisation should be geared to meet expected challenges going forward – i.e. improving the existing business and excelling in the retail disciplines illustrated in the figure above. If strategic planning is the chain's point of differentiation, then the Support Areas take this strength to the consumers. Retail chains should continuously consider how to profit from operating multiple outlets. Chain advantages include reduced shop overheads, scale in procurement and the ability to identify under-performing shops and build on best practices.
HQ SUPPORT AREAS Once the strategy is formulated, the HQ Support Areas are the tools for translating the overall retail strategy to the shop level. The HQ Support Areas cover the seven most important focus areas for operating a successful retail chain: Assortment and Sales: Proper management of assortment categories and size in order to optimise the sales potential within specific target groups, geographies and seasonal fluctuations. Ordering and Supply: Optimising ordering processes and maximising shop inventory turnover in order to ensure
product availability and to offer only what the customer demands, reducing stock writedowns. Operations: Support related to operating a shop and sharing best practices for purchasing and assortment selection, inventory management, budget planning and shop finance, staff, IT, refurbishing, etc. IT: Computer systems and information sharing are indispensable tools for managing products, supplies, budgets, results, tools, etc. and for sharing best practices. HR and Training: Guiding, counselling and developing staff skills. HR refers to the help and support provided in relation to staff counselling and recruitment. Training refers to developing staff skills vis-Ă -vis products, selling, shop management and motivation. Fittings, In-store and VM: Giving the customer a unique experience by continuously developing the shop furniture concept as well as the selection, placement and presentation of products. Marketing, Campaigns and CRM: Promoting the shop locally and regionally as well as generating customer loyalty and repeat consumers.
SHOP EXECUTION AND CONCEPT COMPLIANCE The shop is the frontline vis-Ă -vis the consumers and the third element of the Quartz+Co Retail Model. Shop execution and concept compliance ensure a unique shopping experience, thus generating sales. If this stage of the Retail Model fails to deliver, even the best conceived strategic planning and the strongest HQ support will have no effect on the chain's top or bottom line. In order to realise chain advantages, headquarters, shop managers and staff must be closely aligned. However, these relationships are often plagued by a lack of communication and misunderstanding. A common failing is the lack of clear guidelines from headquarters. Few chains have an operations manual clearly outlining how to execute the chain's specific retail concept. Even chains with a good operations manual still face difficulties. The main challenges are (1) inadequate
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training, (2) the manual's usability (communication channel) and (3) staff incentives to use the material. If HQ Support Areas are not implemented correctly in the shops, the results are generally poor. Shop appearances will be divergent and muddled, the overall shop concept will be vague or missing and sales will suffer. Translating and anchoring the HQ Support Areas in the shops is thus a critical task for the head office. Generally, we find that shop personnel spend too little time on their primary task: selling. In order to realise the advantages that can flow from chain membership, shop staff must be released from complex decision-making and routine tasks that are ultimately better executed by head office.
UNDERSTANDING THE QUARTZ+CO RETAIL MODEL In the following pages, we will explore the aspects of the Quartz+Co Retail Model outlined above. This document is not an exhaustive “how-to" manual on chain retailing. It is designed to help retail professionals and those who are considering entering the field to understand the key challenges facing retailers – and identify them in their own organisation. This document is also a catalogue of the expertise Quartz+Co has amassed in the field, which we are eager to impart to you. Before delving into the specific issues, we will introduce three themes that affect many retailers and are important for understanding the pages that follow. The first two themes have become hot topics in the last decade or so. Wholesaler retailing is an industry trend that poses special challenges for the companies that practice this approach. Online retailing represents the influence of an overall business trend that has particular relevance for retail. The third theme is a challenge for all retail organisations that struggle to define or adjust their business model and ownership structures. Integrating a formerly disparate group of stores into a strong, concept-driven chain requires owners and managers to make many practical considerations. But just as important is a conversion of the mindset and culture in the organisation.
WHOLESALER RETAILING An increasing number of retailers are former wholesale companies who have expanded into retail. They do so to improve control over sales and brand identity. However, the core competences for wholesaling are fundamentally divergent from retailing competences. Retail skills. Organisations built around wholesale lack many of the skills essential for retailing success: focus on customer behaviour, shop intelligence, category management, assortment management, etc. Many wholesale retailers are not fully dedicated to retail and thus fail to stick to the retail strategy. Without proper attention, wholesalers' retail operations can end up being a distraction that muddles the brand without advancing sales. Daily operations focus. Running a retail chain while also serving wholesale consumers is no small task. Successful wholesalers are adept at channelling their products to a large number of multi-brand shops. But retail success requires headquarters to keep tabs on daily operations at the shop level. Retail also requires closer contact with and more intimate knowledge of the end users and thus a different mindset internally in the organisation. Organisational conflict. Many wholesale companies entering retail struggle with the inherent conflict between the wholesale organisation and the retail organisation. Wholesalers are geared for moving units into shops, while retailers focus on moving units out of the shop and minimising shelf time. Wholesalers that move into retail must keep this in mind when reviewing how sales force performance is measured and rewarded. Despite these challenges, we see an increasing number of wholesalers venturing into retail. Where the issues outlined below have particular relevance for wholesale retailers, we will draw the reader's attention to these issues.
ONLINE RETAILING Most branded retailers are already present online in some form; most, however, only with a website. The reason for this kind of online presence is to present the company and to take advantage of an added marketing and branding channel.
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Online sales are currently dominated by retailers such as amazon.com who exclusively operate online as well as catalogue retailers. For catalogue retailers, the transition to online retailing is straightforward. They are accustomed to selling products to customers at a distance, and their customers are thus used to long-distance buying. Furthermore, the companies already have the necessary organisational set-up. There are many reasons for opening an online store. We will briefly discuss two of the main approaches: (1) Online stores can drive sales and profits; (2) Online stores can advance the brand. Driving sales. Some online retailers derive substantial turnover and profit from their online operations. Online retailers often differentiate themselves by price. Sometimes their price advantage derives from a relatively simple logistical set-up and low overhead. Others acquire out-of-stock items which are sold at a steep discount (online outlets). Advancing the brand. It is important to note that adding a new sales channel is not necessarily the primary purpose of an online store. As with flagship stores and sponsorships, the primary purpose of the channel may be to drive sales through other retail channels by promoting the brand generally. In closing, it should be mentioned that for most brands an online presence is a prerequisite for doing business. Consumers expect most brands to have an online presence and to be able to find some sort of information about the brand on the website. Not being present is hopelessly old-fashioned and degrades the brand. For more information and insight into online retailing, see the forthcoming Quartz+Co article “Mastering online retailing."
INTEGRATION ISSUES The pages below outline the practical challenges facing most retailers. These issues are particularly pressing for retailers that are planning to integrate from a loose confederation or purchasing co-op to a centrally owned corporate chain. Integration naturally requires retailers to overcome practical challenges such as logistics, information technology and brand control. Just as important, however, is the cultural transformation that must take place if these
practical initiatives are to take root and help the chain meet its strategic goals. The entrepreneurial spirit. Many of our customers work in voluntary chains where each shop is owned by a dynamic, individualistic entrepreneur. The chain is not a true chain but a loose-knit co-operative, where each partner enjoys a large degree of freedom. When this group of owners agrees to integrate into a corporate chain, they need to understand that they will lose many of their liberties and responsibilities. Decisions will less frequently be made locally, so owners must be ready to cede control over many aspects of daily operations. A main challenge when integrating such a chain is to redirect the original owners' competitive instincts so they no longer compete with each other but present a united front against competitors outside the chain. Store managers must learn to lead with the head rather than with the gut. At the same time, it is important to continually nurture the entrepreneurial spirit and sense of ownership. The many new routines and procedures that follow from integration only function well if they are “owned" up and down the chain. Without this ownership, each new initiative feels like a demoralising, unilateral directive from head office. Scaling up. Integration often involves shifting focus from the domestic market to an international scope. This requires more careful planning of many aspects of the business. Consider delivery errors. In a small, domestic chain, sending the wrong product to one shop causes irritation but only minor expense, and it is quickly remedied through informal or ad hoc solutions. In an international chain, the cost of such an error is compounded exponentially and far-flung branches may face severe delays. Information and IT. The amount and quality of information required to run a corporate chain far exceeds the demands of a single shop. Successful chains track and trend key performance indicators regarding sales and profits, personnel performance, assortment etc. Doing so requires an integrated, centrally anchored IT solution as well as dedicated analysts. Setting up and running such a system is typically beyond the capabilities of the original owners, and it may be a challenge to make them understand why supporting the system is valuable. Brand and concept. Finally, realising the advantages of chain integration requires more meticulous control of the brand and concept than under a voluntary chain structure.
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The chain's strategy may require a superior brand position relative to that of competitors, and decisions affecting the brand will be made at the head office. Even basic decisions such as the layout of the store, an important aspect of concept management, will no longer rest in the shop managers' hands. Establishing a superior brand position and streamlining the store concept are naturally complicated when dealing with a group of stores that are accustomed to and comfortable with doing it alone.
TAKING IT TO THE QUARTZ+CO RETAIL MODEL The discussion above introduces some of the overriding challenges facing retailers today. Now we will turn to the Quartz+Co Retail Model and discuss specific hurdles that a chain must overcome in order to thrive in today's market.
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STRATEGIC PLANNING STEPS
VISION, STRATEGY AND TARGETS The VISION, STRATEGY AND TARGETS are tools for setting one direction for decision-making at all levels in a retail chain. The vision statement aligns all stakeholders in a given retailer (from board and top management to shop staff) to a common purpose. The vision must be defined clearly and unambiguously to avoid misconceptions and misunderstandings throughout the organisation. A strong vision statement generally addresses specific parameters for the company to pursue, such as markets, sectors, target groups (age and gender), business models and core competences. When defined, the vision statement should be employed forever – only radical changes of the industry or company are reasons for redefinitions. A retail strategy is a plan identifying for example target markets, segments, retail formats, financials and competitive advantages. Strategic planning is generally based on one of two basic strategic mindsets: cost leadership or product differentiation. Today, most retailers focus on differentiation which forces competitors to follow the leader or innovate own product development. A strategy normally seeks to guide the retail chain through a 3 to 5-year period with regular updates. TODAY, many retail chains fail to define a strategy or even a vision. The ones who do not often work as defined in the strategy and change direction, eliminating the meaning of a vision. This happens when the strategy is not communicated to the retail organisation but kept a secret in the management team. THE KEY CHALLENGE in formulating a vision, strategy and targets is often to discover and communicate the inner mindscape of the founder/CEO. This is often a charismatic individual who has nursed the company from a one-shop business into a retail chain more or less single-handedly, making all vital business decisions unilaterally along the way. As the organisation reaches critical mass, staff at all levels necessarily find their own ways of working and may pull the company in a direction counter to the leader's vision. If the leader is unable to communicate his/her vision and cede responsibility for its
implementation, he/she will be unable to expand the chain beyond a certain level. The vision and strategy, with their clearly defined targets, are essential to avoiding this situation. While most retailers want to expand their businesses, they lack core competences or the time to engage in a strategy development process. New market entries and other initiatives become based on gut feeling rather than facts and analysis. New shops may be located where facilities are available but unattractive. This muddles the brand and concept profile, undercutting sales. Even when retailers invest time and resources in developing a strategy, they still face the challenge of implementing and executing the strategy throughout the organisation. The distance from chain management at headquarters to floor management in shops can indeed be very long! OUR ADVICE is that retailers take one step back before taking two steps forward. They must ask themselves difficult questions: What is the company's reason for being? Where do we want to go? And how do we get there? Management should develop a comprehensive strategy addressing direction and crucial decisions regarding the company's future operations. The strategy should allow the inherently entrepreneurial spirit of the store owners and managers to flourish and capitalise on that energy. Defining the strategy is only the first step in a successful business; implementation and execution are just as important.
KEY TASKS • Collect company insights (financial statements, organisation) • Conduct market prioritisation • Strategic clarification (company vision and mission) • Launch projects and activities (roles, responsibilities) • Make action plans (translate, execute, anchor strategy)
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STRATEGIC PLANNING STEPS
LOCATIONS AND FORMATS LOCATIONS AND FORMATS are vital to create a unique physical appearance of a retail chain.
another. In some cases only small adjustments are necessary, such as finding alternate locations. But more comprehensive changes are needed, such as adjusting the shop size, layout, fittings and ambience. In the extreme, a retailer's model is fundamentally unsuited to the market at hand, as witnessed by Wal-Mart's recent failed venture into Germany.
The location is the venue for the interaction between brand and consumer – often referred to as the point of purchase. Choosing the right location to reach a given target group is a key task in creating a successful sales channel.
Another KEY CHALLENGE is that shop formats often do not live up to chain intentions or guidelines. Communication often breaks down between headquarters and shop managers, resulting in a shop format dictated by the shop manager's personal style and preferences. This confuses the consumers and reduces brand value.
Once the consumer has found and entered the shop, the quality of the shopping experience helps trigger purchases and generates loyal consumers. In general, more unique shopping experiences generate higher sales and more repeat customers. Creating a unique shopping experience requires careful consideration of shop size, layout, fittings, ambiance (music, light, scent and temperature), colours and brand exposure.
OUR ADVICE is that retailers devise a roll-out plan including key markets, cities, formats and place of opening. A location pipeline should be developed with potential shop sites that meet pre-defined requirements concerning the target group (size of city, shopping mall vs main street, etc.) New markets should be entered in clusters in order to maximise chain advantages (logistics, warehousing, support, customer service, etc.).
The format comprises the physical elements which, when aligned throughout the entire retail chain, build and maintain brand value. Alignment of formats does not mean that all shops must be identical: every shop could be different if that is a strategic decision. Alignment merely implies that all outlets comply with head office guidelines.
Formats must be carefully conceived at headquarters and subsequently implemented (and continuously refitted) in shops. A governance model should ensure format alignment throughout the retail chain.
TODAY, many retailers are unstructured in their choices regarding location and format. Shops are opened in locations dissociated from the target group and other traffic. Given the fierce competition for prime locations, it is tempting to settle for second best. However, opening in unattractive locations will reduce shop performance, chain earnings and brand value.
KEY TASKS • Define management principles for selecting locations • Define shop locations (city, shopping mall, retail parks) • Define existing and new market potential • Define governance model for format compliance • Define retail concepts • Build a location pipeline (multi-channel)
When expanding internationally many retailers lack key information about the target markets. Main street may be a prime location in one country or region, but less desirable in another. The same is true of malls and shopping centres. A KEY CHALLENGE is selecting the right locations when going into new markets. Finding the right location requires extensive collection and analysis of data about the country or region and target group. Many retailers erroneously believe that a successful retail concept in one country will automatically translate into
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STRATEGIC PLANNING STEPS
BUSINESS MODEL THE BUSINESS MODEL describes how the chain will be an attractive business for the company's owners, operators and in some cases the franchisees. Successful retailers profit from different business models. 7-Eleven earns money from its franchising fees, not sales, while ECCO shoes profits from sales and not franchise fees. Bestseller has no franchise fee. The business model addresses ownership issues by defining whether the chain should be company-operated (a corporate chain), based on franchise or some mixture of the two. Franchising can be an attractive opportunity as it provides fast and effective expansion into new markets, committed and motivated operation and low risk for headquarters. The business model should describe (1) who is in charge of establishing shops, (2) any franchise fees and (3) what the franchise fee entitles franchisees to (IT, training, marketing, etc.). The business model should also define whether the company will focus solely on retail or develop as an integrated wholesale retail concept. TODAY, many retail companies are fully owned and operated by the CEO or founder. This leader is exposed to considerable risk associated with the sizeable investments required for international expansion. As a result, this business model often suffers slower growth than franchise chains, where risk is shared among franchisees and headquarters, or chains owned by equity funds. In the US, one third of all retail sales is made by franchise chains, while the share is significantly lower (but rising) in Europe.
Wholesale is about sales into the shops, while retail is about sales to the end customers. These are two different sets of competences of which most retail chains underestimate the potential conflict. Focusing on wholesale typically means that companies profit from pushing as many products as possible into the shops, while the shop owners carry the loss if end customers do not buy them all. Many retail chains fail to design and build franchise contracts that in detail specify the requirements and standards of the chain. This results in great divergence in the shop profiles, standards and service levels. Retail chains using a franchise model often have to deal with powerful franchisees – “local kings" – who resist changes to the business model and refuse new franchising contracts. Furthermore, it can be difficult to determine where profits should accumulate and how transparent the headquarters' business case should be. OUR ADVICE is that retailers decide definitively whether to support retail exclusively or include wholesale as well and subsequently build the business model around the logic of that direction. Prior to expanding the chain, retailers should define required competences, shared services, ownership principles, speed of expansion, risk profile and risk appetite. Only after taking these steps can the business model be developed and implemented. A rule of thumb in Quartz+Co is that franchisees should be offered the same services and requirements as own operated shops. KEY TASKS • Mobilisation (store visits, company overview) • Identify key elements in business model • Co-operation and organisation (strengths, weakness) • Risk-sharing model (distribute earnings, break even period) • Finalise business model
Many retailers operate without a deliberate business model. This limits scalability. The balance of franchise and corporate ownership must ensure profits for the headquarters as well as attractive conditions and profits for the franchisees. The KEY CHALLENGES when developing the business model are the combination of wholesale and retail, reduced headquarter control of outlets and how to manage the so-called “local kings."
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STRATEGIC PLANNING STEPS
ORGANISATION, CULTURE AND PEOPLE ORGANISATION, CULTURE AND PEOPLE are the pillars that support the business model and reflect the competitive advantages of the retailer. A retailer can only stay ahead by supporting the shop staff in daily operations, merchandise management, visual merchandising, etc. This support is essential in motivating people and developing a unique culture which, in turn, helps create a unique shopping experience. Delivering a unique shopping experience is especially difficult for wholesalers who are new at the retailing game. Retail requires closer contact with and knowledge of the end users. The number of customers a wholesaler has to service and please is dwarfed by the number in retailing. The heightened level of service can overwhelm the resources of a wholesaling operation. TODAY, wholesale retailers seek to improve control over sales and brand identity. However, they lack the skills essential for retailing success: focus on customer behaviour, shop intelligence, category management, assortment management, etc. Many existing retailers have expanded their chain into remote markets but failed to keep close watch of local conditions. New markets are often opened by sales superstars, who have successfully created a customer portfolio and a brand name for themselves rather than the company. Distance and lack of control also give free rein to local kings, who disassociate themselves from headquarters. Such kings have superior local knowledge and build their own organisations with a high degree of independence from the headquarters.
Wholesalers must rebalance their staff and organisation when moving into retail. Wholesaling is dominated by designers, purchasers, brand managers and sales staff. Retailing draws on the skills of retail managers, merchandisers and shop managers. These two groupings often pursue divergent and sometimes conflicting goals. Local kings quickly conquer new markets and therefore initially enjoy hero status at headquarters. In time, however, they increasingly dissociate from headquarters and become difficult to control. This complicates alignment of the retail concept and decentralises decision-making. Finally, headquarters are often hopelessly understaffed with regard to the scope of the expansion strategy. Analysts are often missing, and staff turnover is generally very high. Sales staff, designers, merchandisers, purchasers and shop staff are all in high demand and will readily defect to a competitor unless the retailer offers a unique career experience. Differentiating the brand and concept will help the retailer offer such opportunities. OUR ADVICE is that retailers decide definitively whether to support retail exclusively or include wholesale as well and subsequently design the organisation for this focus. A strong organisation is only one part of a successful business. Communication, implementation and operational support are just as important in creating a unique brand culture and holding on to key staff.
KEY TASKS • Define key activities in the organisation • Define key processes • Define conceptual organisation • Define roles and responsibilities • Design organisation chart • Communicate and implement new organisation
The KEY CHALLENGES in building a successful organisation are the wholesale/retail conflict, local kings and understaffing.
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• SUPPORT AREAS
ASSORTMENT AND SALES ASSORTMENT AND SALES planning comprise the disciplines of sales excellence and choosing the right assortment. This planning is typically undertaken by purchasers, merchandise managers or shop managers. This includes managing sales performance and tracking best-selling items. When products perform poorly, they should be taken out of the assortment quickly or marked down so shelf space can be dedicated to better selling merchandise. Assortment management is the art of offering the right quantity of the right merchandise in the right place at the right time. Successful management requires accurately forecasting category sales, developing an assortment plan and determining appropriate inventory levels. It also involves identifying and re-launching bestsellers. Merchandise managers seek to increase sales and inventory turnover by setting the right breadth and depth of products. In this way, assortment management is central to the chain's market strategy. Target, an American discounter, offers a wide variety of merchandise categories but focuses on the most popular stock-keeping units in each category. Circuit City, an electronics specialist, focuses instead on one category (narrower breadth) but offers great depth. TODAY, retailers have limited insight into which products sell the best and why. This inflates the chain's fixed costs, since shelf space is expensive. Products that do not move should be replaced by those that do – unless they have a strategic reason for being there!
KEY CHALLENGES are developing routines for monitoring turnover, selecting the right assortment and building and implementing a sales excellence framework. In addition, few retail chains have standardised approaches to sales; inefficient sales processes result in poor sales performance. Retail chains rarely use business intelligence to optimise sales and monitor in-shop stock. Building these tools and routines requires resources which for most retailers are in scarce supply; even where such resources exist, it can be a tough sell to allocate them to the task. OUR ADVICE is that retailers gather and process the necessary data and start engaging in the discipline of Retail Assortment Management – cf. the list below. Retailers should tailor their sales excellence programme based on best practices to differentiate themselves from competitors. A successful programme will bring into play key sales processes, tools and systems, incentive programmes and training.
KEY TASKS • See overall strategy and retail concept • Develop dedicated assortment management organisation • Define scorecard and follow-up • Shop layout design (fittings, traffic optimisation) • Establish assortment planning process • Establish shop purchase or allocation process • Shop optimisation (visual, space, routines)
Retailers' data banks are often underdeveloped, and retailers lack analysts to process the data to manage assortment and sales. Data should constitute the basis of informed decisions about the breadth and depth in each category, the split between brands, the use of private labels and the most appropriate physical placement of the merchandise. Moreover, retailers often have a desultory approach to merchandising management, based on untried assumptions and gut feeling rather than facts. Retailers are uncertain about the best breadth and depth of their assortment and the need for local adaptation. 12
SUPPORT AREAS
ORDERING AND SUPPLY ORDERING AND SUPPLY is a two-sided discipline. The first step is to ensure an efficient supply chain from suppliers through headquarters to shops. The second step is to educate shops on the best use of the ordering process to meet customer demands. Supply chain management is becoming increasingly important as product life cycles shorten. This is particularly true in fashion retailing, where companies like Zara set the standards with short idea-to-rack life cycles. A short product life cycle is no longer a competitive advantage; it is a prerequisite for survival. If the ordering process is not centralised at the head office, shops can use continuous ordering to meet shortterm demand fluctuations. But the head office must bear in mind that the success of a decentralised ordering process depends on the skills of the individual shop manager. Modern point-of-sale and back-office systems are designed to support the ordering process and ensure efficient inventory management. However, in our experience retailers fail to exploit these systems' potential for forecasting and providing ordering guidelines. TODAY, many retailers still think of supply chain management as moving boxes from A to B. They are either unaware of the potential cost reductions from efficient supply chain management, or believe the upside to be insignificant. Yet the latter point has been disproved exhaustively in recent years. The extreme example is of course Wal-Mart, which has invested heavily in developing and implementing information and supply chain management systems which allow the company to reduce prices significantly. We see retailers struggle to forecast demand accurately, support shop ordering and provide adequate shop inventory guidelines (correct shelf space, shelf stocking frequency and avoiding congested backroom).
Purchasers and supply chain managers typically have poor communication with shop managers. They lack shoplevel data and customer insight. This handicaps their ability to choose the right products in the right size, style and quantity. In voluntary chains that integrate to corporate chains, many shop managers feel their entire reason for being is stripped away when they can no longer order their own stock. Implementing information systems to support the supply chain is an expensive and cumbersome affair. But chains that choose not to centralise their purchasing miss out on a wealth of invaluable data about their customers. Many retailers work with a large number of suppliers. Our experience is that 80% of sales are often generated from 20% of the suppliers. The excess of suppliers complicates ordering processes and logistics and reduces bargaining power. OUR ADVICE is that retailers leverage their size to cut costs. This requires reviewing and renegotiating supplier contracts, investing in an information system, developing a data warehouse and training shop managers to follow ordering guidelines. Retailers should also develop a supply chain strategy addressing preferred suppliers, the use of distribution centres and warehouses and optimisation of transportation routes. We expect that carbon management and demands for reducing greenhouse emissions significantly will influence future supply chain management.
KEY TASKS • Establish SCM strategy • Re-visit supplier set-up • Invest in information systems • Develop data warehouse (process, personnel) • Initiate CO2 reduction
The KEY CHALLENGES are to bridge the gap between purchasers and shops, gather sufficient knowledge about the consumers and limit the number of suppliers.
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SUPPORT AREAS
OPERATIONS OPERATIONS support is the art of managing the stores to reap the advantages of being a chain rather than a string of stand-alone shops. This requires identifying and distributing best practices to raise the bar for all shops. As competition intensifies and more chains offer the same brands, it becomes increasingly difficult to develop a strategic advantage. Retailers have the advantage of being able to differentiate with regard to customer experience and level of service. Shop managers are central to executing retail strategies. Operations support involves mastering the fundamental disciplines of managing a successful shop: (1) managing shop staff, (2) controlling costs, (3) managing merchandise and shop appearance and (4) providing customer service. Operations should receive support from a dedicated Retail Operation Manager (ROM) at headquarters as well as other support systems. Shop managers are responsible for increasing the productivity of two of the most valuable assets in retailing: staff and shop. Shop managers are responsible for recruiting, motivating and rewarding staff. Moreover, they are responsible for minimising shrinkage, planning and managing special events, marking down merchandise and keeping the shop looking good. But they are also responsible for serving the customers!
Retailers often fail to allocate sufficient time to support shops through shop visits or phone conference. Many chains have no dedicated ROM. Few have a hotline where shop staff can always find answers to key questions. Where it exists, operations support often fails to deliver the desired impact because of a lack of standards and an unstructured approach. The frequency of the shop visits is too often erratic and inefficient. OUR ADVICE is that retailers develop a retail management guide to help shop managers and personnel run a successful business. Moreover, the ROM should visit shops frequently and train personnel in IT, systems, space management, visual merchandising, phase-in and phase-out of new products, product knowledge, promotions and staff management as well as sales optimisation. To discover the most effective channels for support, headquarters should develop a schedule for shop visits as well as Key Performance Indicators (KPIs) to evaluate shop performance at regular intervals (e.g. weekly).
KEY TASKS • Improve managing of shop staff • Start controlling costs • Manage merchandise and shop appearance • Improve customer service
TODAY, many retail headquarters are dissociated from the shops. There are insufficient governance structures to ensure alignment and concept compliance among all shops in the chain. We often see retail chains whose headquarters fail to support the shops either by personal visits, by phone or by e-mail. In international chains, support consultants tend to favour local shops at the expense of shops in more farflung markets. This is a paradox, as shops closer to headquarters are often the oldest ones with the best established routines, while shops in distant markets in fact need more support. KEY CHALLENGES are a lack of resources allocated to shop support as well as a lack of tools to improve shop performance.
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SUPPORT AREAS
IT IT plays an important role for retail at three levels: (1) Point-of-sales (POS), (2) Back office within individual shops and (3) Headquarters. Choosing and implementing the right system is vital, but so is establishing routines for using the system and managing and storing the data stream. Different systems fit different retailers, and the chosen IT system should obviously reflect individual needs and requirements. The right IT system is an expensive but indispensable investment for running a successful retail chain. Such systems are necessary for benchmarking and optimising business performance, but also for streamlining daily operations such as ordering. The ideal system should allow retailers to constantly evaluate each store in real time based on key indicators such as traffic, hit rate and basket size. IT is the area in which retailers struggle the most. Even retailers with state-of-the-art systems often fail to capitalise on the data stream. Key processes are simply not implemented. TODAY, retailers fail to prioritise investing in the right IT system because the cost is too daunting. Often retail chains have grown so quickly that they fail to implement information systems at an early stage. This naturally complicates implementation. On the other hand, many retailers suffer because they choose the wrong system. An inadequate system for the scale of the business puts a drag on sales because of system breakdowns. An inappropriate system will not generate data for analysis to optimise shop performance. Such missteps breed frustration among shop staff. Shop data (traffic, sales, stock, etc.) that should be collected by headquarters daily is often not used properly. The result is low shop performance. Integrating the IT system with suppliers is another area in which most retailers fail to reap chain advantages. This results in stock shortages and reduced sales.
Most small retailers operate with decentralised databases for bookkeeping purposes only, requiring the most complex IT systems. This makes chain benchmarks, category management and general chain management extremely difficult. Moreover, when selecting a vendor, many retailers choose the cheapest solution possible, resulting in low business intelligence functionality and scalability. The implementation of an IT system is more complex than most retailers expect. Successful implementation requires many resources and extensive knowledge of how to process and work with data. Efficient exchange of data requires close interaction between headquarters and shops. OUR ADVICE is that at first retailers thoroughly define the needs and requirements of an IT system prior to an investment. Get it right the first time. Even if extensive planning seems expensive, it will pay off in the long run. In our experience, it is best to choose a vendor who works for retail companies and can make sure that things work from the beginning. High-tier and mid-tier vendors are stronger in supporting and installing systems internationally and have better competences in consolidation to headquarters. It is important to define a long-term IT strategy which supports the retail chain development in a period of up to 5 to 10 years. Changing an IT system is expensive and requires a lot of work. Moreover, the IT system should be purchased from a vendor who can support the long-term strategy.
KEY TASKS • Define IT needs and requirements • Screen market for IT vendors • Define terms and conditions
KEY CHALLENGES are defining needs, selecting a provider, implementation and data exchange between headquarters and shops.
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SUPPORT AREAS
HR AND TRAINING
Too many retailers do not realise the importance of training. Training may require closing the shop for a day, but the increased sales from training more than compensate for the sales foregone during training.
HR AND TRAINING is about improving people skills throughout the retail organisation. In relation to the Quartz+Co Retail Model the key is raising the competences of the shop staff within key retail disciplines such as sales, staff administration (recruitment, development and layoffs), motivation and shop operation. Retail training can be carried out centrally, locally or by elearning modules depending on geography and the number of participants.
OUR ADVICE is to build a training programme with mandatory modules for the different members of the organisation ranging from Shop Managers, Shop Assistants, Retail Operation Managers, and Visual Merchandisers, etc.
Training shop staff is a cornerstone in running a retail chain because staff have direct contact with consumers and control the shopping experience and play an important role in brand perception in the market. An essential part of retail training sessions should be sharing of best practices. This gives the staff an opportunity to learn from the best-in-class. Peer learning is more effective than top-down instruction.
Training sessions should include a best practice sharing module. Our experience is that the sharing of experiences and good ways of working is an extremely effective tool to raise the overall service level and motivation of staff.
TODAY, many retailers invest too little effort in raising the bar and educating the shop staff, not realising the importance of the service level and the staff influence on brand perception among consumers. Too many retailers rely solely on coaching by shop managers as the key training method. Shop assistants tend to pick up managers' bad habits as readily as their good ones. This approach also means that the service levels across the country or region will be very different, to say nothing of the variation around the globe.
Training is an effective tool to anchor the retail concept in the organisation and improve employee satisfaction and staff retention.
KEY TASKS Educate staff in: • Company and product knowledge • Sales and service • Finance and performance management • Inventory and purchasing • Marketing and merchandising • Staff merchandising and recruitment • Administration • Visual merchandising
KEY CHALLENGES are high staff churn, definition of a service level standard and low priority of training sessions. Many retailers struggle with high staff churn due to a young staff, a low degree of loyalty and competition for qualified shop managers and assistants. Retailers have problems converting staff into ambassadors of the retail chain and ensuring concept compliance. Retailers often do not realise the importance of the service level. They believe that the products sell themselves if they deliver value for money. However, this is not the case in retail. The shop staff should be ambassadors for the brands and act accordingly to persuade consumers to complete a purchase.
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SUPPORT AREAS
FITTINGS, IN-STORE AND VISUAL MERCHANDISING FITTINGS, IN-STORE AND VISUAL MERCHANDISING involves developing a unique shopping environment and retail concept. Fittings and in-store refer to the continuous development of a shop furniture concept. Doing so optimises shop sales, brand values and awareness. Visual Merchandising (VM) deals with the selection, placement and presentation of products. Through spacing, product exposure, packaging, graphics, in-store promotions, etc., retailers arrange products to offer shoppers a recognisable, enticing display. Visual merchandisers adjust fittings, posters and mannequins according to the retail concept to stimulate sales. The store layout and fittings not only give the shop the desired appearance, but also control the traffic flow and boost sales. Examples from grocery stores abound. Popular items like dairy and eggs are placed furthest from the door to increase shoppers' dwell time. Fresh produce are displayed near the entrance to entice the shopper and simultaneously ease his/her conscience, allowing him/her to splurge on junk food later in her visit. Display, access and effective storage are key elements in ensuring shopping convenience and pleasure. For multi-brand retailers, VM also includes defining the division between different or competing brands. VM is thus closely related to assortment and sales. Visual merchandisers also play an important role in ensuring that promotions are effectuated in the shops, ensuring the return on investment of marketing efforts.
It is our experience that many retailers underestimate the task of keeping their shops attractive and fresh-looking. Cleanliness and order are just the first steps. THE CHALLENGE for retailers is to build an efficient process around fittings, re-fittings, updating store layouts and using and educating visual merchandisers. The bigger the retail chain, the greater the need for process optimisation. Too often retailers experience a long opening and refitting process due to poorly defined processes, poor preparation and unsuccessful co-operation with the fitting suppliers. OUR ADVICE is that the retailers develop a detailed, orchestrated process to address physical re-fitting, updating of store layouts and design, in-store activation of promotions and training of visual merchandisers. We find that fitting suppliers are often not sufficiently involved in improving the shop interior. Suppliers can be valuable partners in conceptualising and executing attractive fittings. Head office should consider dedicating resources to supporting opening or renovating shops. In addition to sharing best practices, this will reduce the partners' workload considerably and ensure continued focus on driving sales.
KEY TASKS • See overall strategy and retail concept • Develop unique in-store shopping environment • Develop opening and refitting process • Educate visual merchandisers • Define visual merchandiser visit process
TODAY, the shop environment is changing ever faster to keep pace with increasing stock turnovers. Impatient consumers look for unique shopping experiences and expect to be entertained in one way or another. This puts pressure on retailers to keep shops from looking old and tired. This is a difficult task if you have 500 shops worldwide operating on franchising agreements!
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SUPPORT AREAS
MARKETING AND PROMOTIONS MARKETING AND PROMOTIONS is about increasing sales and customer traffic by ensuring a clear brand profile which supports the retail brand value and concept strengths. Marketing investments must be used where they generate the highest return on investment. In order to get the most of marketing expenditures, retail chains must be able to measure their impact. Some forms of marketing such as members' clubs can help build brand loyalty and generate repeat business. Information gathered from these sales is particularly valuable as it allows retailers to track their customers' habits and preferences over time. A retail chain must find the right level of marketing and the right balance between marketing and promotions. Marketing includes national, local and shopper marketing, whereas promotions include in-store events and local events. Until recently, TV and newspaper advertising and direct marketing (i.e. mail and e-mail) were the most common forms of marketing in retail. In-store marketing, originally pioneered in the fast moving consumer goods segment, has spread to most other retail segments in the last few years. TODAY, many chains still focus on shop-level marketing and promotions of the kind often seen in voluntary chains. This makes it difficult to control the brand and image. This approach works for some chains, but in general divergent and conflicting marketing signals hamper chains from growing nationally and internationally.
obtain better marketing terms. Scale discounts are common in TV and newspaper advertisement as well as the production of ad flyers and in-store promotion material. Chains spend up to 30% of turnover on marketing, so cost benefits can significantly reduce ad costs. Chains can also coordinate their marketing activities to avoid shops cannibalising each other's sales. Retail chains that fail to manage marketing and promotions optimally will lose the battle for the customer. OUR ADVICE is to centralise marketing and promotions at the head office to ensure brand integrity, increase ad volume and obtain discounts. Retailers differ in sector, size, price segment, target group, etc. Each retail chain must therefore develop its own marketing strategy to reach their specific target customers. Some marketing can be locally driven, but only with clear guidelines on how to present the products, shop or brand in a given marketing channel. An important tool in this respect is a picture library to ensure that local management presents the products in a manner consistent with the brand strategy. Retailers must develop ways to measure the impact of marketing activities in order to ensure effective marketing.
KEY TASKS • Branding (name, term, symbol, design) • Website (layout, usability, products) • CRM programmes (offers, loyalty card and newsletters) • Co-ordination with advertising agency • Marketing guidelines • Campaign guidelines • Production picture library • Measuring impact (traffic, sales and brand equity)
Most retail chains have realised the importance of marketing. Unfortunately, too often the return on investment in marketing is not measured, leading to inefficient allocation of marketing resources. THE CHALLENGE is that retail chains are growing and stand-alone shops are increasingly integrated into retail chains – but they fail to leverage their increased size to
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M: + 47 995 56 486 E: jeppe.winther@quartzco.com W: www.quartzco.com
IF YOU WOULD LIKE TO KNOW MORE
Jeppe Winther . Jeppe is a member of the retail team at Quartz+Co and has extensive experience from working with retailers globally. His specialises in strategy, business development, concept development and commercial due diligence
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