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Unformatted text preview: i The Retail
Value Chain ii This page is intentionally left blank iii The Retail
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
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
The retail value chain : how to gain competitive advantage through efficient consumer
response (ECR) strategies / Sami Finne and Hanna Sivonen.
1. Retail trade--Management. 2. Consumers. 3. Competition. 4. Consolidation and
merger of corporations. I. Sivonen, Hanna. II. Title.
Typeset by Saxon Graphics Ltd, Derby
Printed and bound in India by Replika Press Pvt Ltd v Contents Foreword
1 1 Change drivers in the retail value chain
Value chain integration
Consumer and product trends
45 2 Retail formats
Shopper segmentation and target group selection
Key success factors in retailing
Alternative retail strategies
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
127 vi Contents
4 Demand management
Format development and category portfolio management
Summary and some insights into the future 130
187 5 Store operations
Product replenishment process
Implementation of assortment changes
Store management and key performance indicators (KPIs)
Centralized store operations
Supplier role in store operations
221 6 Information technology trends in the retail value chain
Key development areas of retail IT
Fact-based management with shopper information
277 7 Loyalty programmes and shopper information sharing
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
330 8 The future
Globalization and consolidation
Innovation and exclusivity
Customer dialogue management and service extensions
Adapting to the local environment
Success formats 333
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
Sir Terry Leahy
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
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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