6782931-56_The Retail Value Chain.pdf - i The Retail Value...

Unformatted text preview: i The Retail Value Chain ii This page is intentionally left blank iii The Retail Value Chain How to gain competitive advantage through Efficient Consumer Response (ECR) strategies SAMI FINNE & HANNA SIVONEN London and Philadelphia iv Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or any of the authors. First published in Great Britain and the United States in 2009 by Kogan Page Limited Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road London N1 9JN United Kingdom 525 South 4th Street, #241 Philadelphia PA 19147 USA © Sami Finne and Hanna Sivonen, 2009 The right of Sami Finne and Hanna Sivonen to be identified as the authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN 978 0 7494 5456 2 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Finne, Sami. The retail value chain : how to gain competitive advantage through efficient consumer response (ECR) strategies / Sami Finne and Hanna Sivonen. p. cm. Includes index. ISBN 978-0-7494-5456-2 1. Retail trade--Management. 2. Consumers. 3. Competition. 4. Consolidation and merger of corporations. I. Sivonen, Hanna. II. Title. HF5429.F4973 2008 338.8⬘9--dc22 2008028275 Typeset by Saxon Graphics Ltd, Derby Printed and bound in India by Replika Press Pvt Ltd v Contents Foreword Acknowledgements Introduction vii ix 1 1 Change drivers in the retail value chain Industry consolidation Internationalization Value chain integration Convergence Consumer and product trends Sustainability E-business 5 6 11 18 21 28 37 45 2 Retail formats Chain operations Shopper segmentation and target group selection Key success factors in retailing Alternative retail strategies Summary 50 51 53 55 83 104 3 Collaboration in the retail value chain Collaboration and supply chain management Quick response (QR) Efficient consumer response (ECR) Retail partnership levels ECR as an industry community 106 107 108 110 122 127 vi Contents 4 Demand management Format development and category portfolio management Category management Space management Summary and some insights into the future 130 135 156 173 187 5 Store operations Store ordering Product replenishment process Implementation of assortment changes Campaign implementation Customer service Store management and key performance indicators (KPIs) Centralized store operations Chain-level execution Store refurbishment Supplier role in store operations Summary 188 189 192 195 198 200 205 212 213 216 219 221 6 Information technology trends in the retail value chain Main trends Key development areas of retail IT Fact-based management with shopper information Summary 223 224 234 254 277 7 Loyalty programmes and shopper information sharing Loyalty concepts Partners and joint programmes Opt-in customer clubs Use of shopper data Data sharing in the retail value chain Customer information sharing study Key future trends in customer loyalty 278 281 290 292 296 309 314 330 8 The future Globalization and consolidation Operational efficiency Fact-based management Innovation and exclusivity Customer dialogue management and service extensions Adapting to the local environment Success formats 333 334 337 340 342 344 346 348 References Index 354 355 vii Foreword If ECR is to progress beyond the considerable strides already made, then it has to focus hard on extending the search for knowledge on an industrywide basis. How do we best understand consumers’ needs? How do we operate supply chain processes to create most value and least waste? Sustainability is a key challenge for the supply chain and ECR can help attain it. At Tesco, we build our business back from the customer – but we need our supplier partners to help us to do this. Knowledge is key, but sharing the knowledge makes it useful and this is why ECR continues to be important. Sir Terry Leahy Chief Executive Tesco plc viii ix Acknowledgements The Retail Value Chain was an extensive project involving several people we would like to thank sincerely. The Retail Value Chain is largely based on an original Finnish book by Sami Finne and Tuomas Kokkonen. Special thanks to Tuomas who has been closely involved in this project, reviewing and commenting on all chapters. Your uncompromising and constructive style contributed much to the quality of the book and, as always, it has been a pleasure to work with you. The inspiration for this project came from the efficient consumer response (ECR) community. Thanks especially to Professor Saara Hyvönen from the University of Helsinki and Professor Arto Lindblom from the Helsinki School of Economics, Kristina Metso from ECR Finland and Antti Sippola, Co-chairman of ECR Finland, as well as Bernard Karli and Stephanie Pfenning from ECR Europe – your supporting comments encouraged us to undertake this project. We would also like to thank the following retail industry leaders and experts who were willing to share their experiences and views for this book: Saliha Barlatey, Chairman of ECR Operations Committee (Nestle); Kenneth Bengtsson, Chief Executive Officer and President of ICA AB; Stefan Fröberg, Supply Chain Business Unit Director for Aldata; Dr Brian Harris, Chairman of the Partnering Group; Peter Kabuth and Ralf Kern from SAP; Bernard Karli from ECR Europe; Matti Karlsson, CEO of Sello; Rob Turtle, Director of Pricing and Promotions at dunnhumby; Jenni Virnes, Product Marketing Manager of Corporate Venturing at UPMKymmene Corporation, and all 22 other interviews carried out for the original Finnish version of the book. We also thank the 16 retailers from 11 countries participating in our shopper-information sharing study, and x Acknowledgements several Capgemini colleagues who helped with the interviews on this fascinating topic and provided interesting results never seen before. As non-native speakers of English, we are grateful to many people for helping us with the language. Thanks to Maarit Tillman for the first version of the translation for most chapters. Without your help this project would not have been possible in the tight time span. Special thanks to publishing manager Priscilla Donegan from Capgemini, who has contributed greatly to the quality and readability of this book. You are absolutely great! Thanks to our commissioning editor Annie Knight and all others at Kogan Page, who stretched with our tight schedules and always had a very positive attitude. The awesome cartoons starting each chapter were drawn by Huib Jans. We have always been fans of your cartoons, so it was a great honour to have your work in this book. Special thanks for finding the time and squeezing work for our book into a very tight schedule. The biggest thanks belong to our friends and colleagues who have commented on the book, contributing considerably to the quality of the text and the richness of the content. Thanks to Olli Ek, Miia Finne, Anton Helander, Harri Hovi, Kees Jacobs, Tuomas Kokkonen, Antti Syväniemi, Päivi Vuorensyrjä and Edward Westenberg for your comments, questions and suggestions that have undoubtedly made this book significantly better. Anton also provided the case study example in Chapter 4. A great number of Capgemini colleagues around the world have contributed to this book, directly or indirectly. We want to specially thank Brian Girouard, the global leader of the Retail & Consumer Products Sector in Capgemini for support and guidance, and Vice President Jyrki Veranen and Sales Director Elja Kirjavainen for their encouragement and support for this project. Alongside these, we also thank all our colleagues in Capgemini, our customers and partners with whom we have had the honour to work. The way we see the retail industry has been significantly shaped by the experiences and lessons learned from you. The journey continues, thank you. Finally, and most importantly, we want to thank our families and friends for all the support. Warm thanks to Miia, Camilla, Melinda and Olli who have been our support and joy, and understood us during the long process. 1 Introduction The retail industry is changing all over the world at a fast pace. Internationalization, consolidation and intensive price competition, especially driven by different value retailing formats, have defined new benchmarks for competition. On the other hand, premium retailing and local initiatives are also gaining share. New, increasingly heterogenous consumer and product trends constantly set new requirements for retailers, sustainability being a major theme for both retailers and manufacturers. As convergence continues new entrants enter retailing, and many retailers also expand to new business areas such as banking, insurance, healthcare, mobile telecommunications and travel. Online retailing gains share in many categories, and personalization enabled by customer loyalty programmes transform the customer dialogue. Small micro-segments can be targeted ever-more precisely, and special assortments for them grow constantly. Retailing polarizes as some formats become more and more complex, hedonistic experience centres, and at the other end some players, such as hard discounters, count on very simplified formats and operational models. There will be several formats for success, and totally new players will also emerge. This book discusses the above topics and several other key trends occurring in the retail industry. The book is largely based on the original Finnish version Asiakaslähtöinen kaupan arvoketju – kilpailukykyä ECR-yhteistyöllä by Sami Finne and Tuomas Kokkonen, published by WSOY in 2005. Tuomas has also been heavily involved in this project, and has reviewed and commented on all chapters. The Retail Value Chain consists of the following eight chapters. Chapter 1: Change drivers in the retail value chain. The retail value chain is changing at an ever-increasing pace, as for example industry consolida- 2 The Retail Value Chain tion, internationalization, value chain integration and convergence drive the rise and fall of different players in the industry. This chapter introduces key change drivers in the retail value chain including these trends, as well as consumer behaviour and product trends and key areas of sustainability in the retail value chain. Also, the key effects of the e-business are analysed – which players will gain most using the ‘long tail’? Chapter 2: Retail formats. The best retail formats are memorable for customers and have a clear value proposition delivered consistently throughout all customer contacts – the moments of truth. There are several ways to differentiate a store in the market: service and staff, price, in-store experience and continual assortment renewal are among some of the key areas where retailers may differentiate to meet the needs of the target customer segments. This chapter focuses on key success factors of retail formats and options available for differentiation. Also, key retail format types are described, and selected retail growth areas including value retailing formats, premium grocery retailing, convenience stores and malls are discussed in more detail. Chapter 3: Collaboration in the retail value chain. This chapter introduces the key discussions in the retail value chain collaboration, such as quick response (QR) and efficient consumer response (ECR). The core areas of ECR are also presented, including the ECR scorecards. One size still doesn’t fit all – there are several types of successful retailer–manufacturer relationships. The end of the chapter covers the key retail partnership levels in retailer–manufacturer collaboration. Chapter 4: Demand management. This activity is essential for all retailers, and covers areas like how to drive value to the target shopper segments, and how to differentiate from competitors. Which categories and services should be included in the product range, and how can a retailer drive growth in different categories? These questions and several other areas of retail demand management, such as assortment management, space management, product development, new product introductions and activity management are discussed. A holistic framework for shopperoriented demand management in retail is also presented and it guides the structure of the chapter. Chapter 5: Store operations. Efficient implementation of new concepts and operational models is vital for all retailers. Most retail variable costs are personnel costs, and competence building in a low-pay industry with high employee attrition is a real challenge. However, constant concept renewal with efficient, low-cost implementation is a key sustainable competitive advantage for retailers. This chapter discusses the key store operations practices, such as product replenishment, store management, customer service, as well as campaign and assortment change implementations. In addition, the latter part of the chapter includes areas like store refurbishment, chainlevel execution and the manufacturer’s role in store operations. Introduction 3 Chapter 6: Information technology trends in the retail value chain. Retail is detail, and efficient information systems enable totally new efficiency levels in several retail processes. Customer loyalty programmes make possible the collection and analysis of data specific to the target group, increasing the possibilities for fact-based management. This chapter describes the main IT trends affecting the industry, including for example offshoring, international IT operations and the development of identification standards. Key trends in retail enterprise resource planning (ERP) and other selected solution development areas are also discussed. The chapter introduces a framework for fact-based management with shopper information, and describes its key components, which is essential for all retailers running loyalty programmes. Chapter 7: Loyalty programmes and shopper information sharing. Loyalty programmes are key differentiators for some retailers enabling, for example, personalized dialogue with customers. The programmes also enable collection and use of shopper information. The key retail customerfacing processes can be redefined to truly serve the target shopper segments when shopper data is available and actively used. This chapter examines key loyalty programme types and their core areas, and discusses the use of shopper data in retail customer portfolio management and in other key retail processes. Interesting results of the shopper information sharing study of 16 retailers from 11 countries are published and address the question: Do the retailers ‘walk the talk’ in ECR? The end of the chapter discusses future trends in customer loyalty programme development. Chapter 8: The future. The last chapter summarizes the key retail development trends and discusses the authors’ views of the future development of retailing in areas such as globalization and consolidation, operational efficiency, innovation and exclusivity and adapting to local environment. Seven possible future success formats are also described to illustrate the key development trends in practice. We wish to give a holistic and understandable big picture about the retail value chain, and the key operational models and success factors of its main players. As there are quite a few discussed topics – actually most of them would deserve their own book – only some of the areas are covered in detail. Our objective in the book is to provide a holistic description of the modern retail value chain, its players and steering models, and provide insights into successful retail formats and operational models. We are passionate about retailing, and we hope that this book will inspire others to join this interesting industry, and also provide some new insights for experienced retail practitioners. 4 This page is intentionally left blank 5 1 Change drivers in the retail value chain The retail value chain is changing all over the world. Internationalization and consolidation of retailers and manufacturers are changing the balance of power in collaboration. The key change drivers are both intra-industry and even intra-company factors, but there are also drivers outside the industry with an impact on retailing. Retailers are expanding to new areas such as banking, insurance and foodservice, and new players are also entering the retail arena. Retail infrastructure is affected by many external factors such as technology and product trends, forcing the players to rethink their conventional models. 6 The Retail Value Chain Customers are ever-more demanding and retailers are competing to please them, and the consumer demand in the market becomes increasingly heterogeneous. The internet has changed the availability of information in the retail value chain; consumers have more knowledge about products and services than ever, and can sometimes even participate in retail processes such as development of products and the choice of products offered (referred to as the assortments). The key challenge for retailers and manufacturers is to identify the most important trends affecting their operations, assess the effects and take actions to respond to them. Figure 1.1 summarizes some key trends affecting the retail value chain and its players. Some selected trends will be discussed in more detail in this chapter, and several trends relating to retail competition and format development in Chapter 2. The key retail technology trends are discussed in Chapter 6. Industry consolidation Like many other industries, retailing is facing a strong consolidation trend, affecting both retailers and suppliers. An increasingly large part of food retailing is concentrating in the hands of global giants. Retailing is a business mostly based on large volumes, and as consolidation increases volumes, retailers have a better position in negotiations with suppliers. This translates into better purchasing terms, leading to competitive advantage in the market. As for suppliers, a large size enables economies of scale in production and economies of scope, for example, in marketing. US-based Wal-Mart is a statue of the economies of scale that facilitates consolidation. With net sales of US~$345 billion in 2007, it has grown to become the largest company in the world, bigger than global giants such as General Electric or Exxon. The tremendous size of Wal-Mart can be illustrated with the help of a few comparisons. The net sales of Wal-Mart are about the size of the GDP of Austria or Saudi Arabia, and it has more employees globally than many small countries such as Iceland have inhabitants. For many product brands Wal-Mart accounts for over 20 per cent of the brands’ sales volume. Consequently, Wal-Mart plays a remarkable role as a distribution channel to suppliers. This in turn gives Wal-Mart a good negotiation position and enables even lower purchase prices. Other key retail giants include Carrefour, Metro Group, Tesco, Seven & i and Ahold. In recent years, these companies have grown agg...
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