webloyalty retail research - winning propositions

4. Winning propositions

23 The future of retail: the supply picture Prepared for Webloyalty by Conlumino August 2013

The future of retail

The supply picture

Winning propositions Introduction

•  The frivolous, carefree consumerism of the past has given way to a more considered mindset, where retail is losing out to spending on other priorities. Therefore, success is becoming increasingly reliant on stimulating spend through highly targeted propositions.

•  The key for retailers will be to make people want things that they don’t necessarily need. To do this requires very different selling skills. Part of the change will involve understanding the consumer and engaging with their values.

•  Consumer demand has become increasingly fragmented and it has become less viable to go after the whole market. Retailers must break down and segment their ranges into discrete areas that have relevance to individual consumer groups, ensuring that they are offering compelling products.

•  It today’s retail economy, retailers need to make their pitches more aggressively, more cleverly and more compellingly. Their brands are essential, not merely for identification but as banners representing their entire proposition.

•  Non-retail activities are increasingly attracting the attention of consumers and distracting them from traditional retailing. Retailers need to explore how they can tap into this.

•  The role of stores is evolving, both of terms of the role they play in the purchase journey and in terms of the importance of location, with ‘destination appeal’ increasingly important in order to overcome regional variations.

•  The internet will continue to grow rapidly during the slowdown; retailers that do not have an online presence will not benefit from this lucrative channel. Yet, online retailing is more demanding and new strategies are required to succeed, as well as closer integration between stores and online.

•  Retailers need to cut costs in an intelligent way. Retail is a lean business and most UK retailers are already pretty efficient. This makes further cost cutting very challenging. As such ‘creativity’ is the watchword in successfully managing this downturn: retailers need to think beyond cutting costs to strategies which can help defend their top lines and market shares.

THINGS TO CONSIDER

•  Persuade consumers to buy. Retailers must inspire people to ‘want’ things, in other words, to really sell to them. This requires a very different retail model, with a different selling skill set to drive it, than many retailers are used to.

•  Offer compelling product. Target your consumers and clearly segment, catering to different price points and values.

•  Adapt the store portfolio. In a time of slowdown when the performance of each and every store becomes paramount, retailers need to ensure that all stores are trading well. This means moving away from a ‘one-size fits all’ store portfolio to ensure local demand is met.

•  Build synergies between channels. Physical retailers can leverage their store estate to offer customers a more complete service. Central to this is a holistic multichannel offer empowering customers to make purchases through a variety and mix of channels.

•  Making intelligent savings without damaging the business. Potentially attractive savings can often damage future growth prospects and retailers must think about the long term implications of cutting costs and ensure future prospects are not damaged.

Section 4

Winning propositions



The supply picture

Key skills Persuading the customer to buy

Retailers are having to change their approach to ‘selling’ in order to stimulate increasingly cynical consumers

•  In order to persuade consumers to buy more of what they already own, the challenge for retailers is to inspire people to ‘want’ things and provide them with more reasons to purchase; in other words, to really sell to them.

•  For example, the model needs to have segmented ranges to move away from the ‘all things to all men’ approach of the mass market general merchandisers. Retailers need to know who their customers are and what they want and cater to their needs, either under one roof or through developing different retail brands all under one ownership.

•  A further issue for retailers is that of editing ranges. Over the past five years consumers have become increasingly demanding of ranges which are suited to their needs; rather than being presented with a massive choice of products they want a good selection of products which are specifically relevant to them.

•  A final rule will be to engage with consumers far more. The days when retailers could simply put products on shelves and expect them to sell have gone. Instead, products must be displayed to their maximum potential, in the correct environment. Retailers that create interesting environments, that stimulate consumers and give them a reason to visit their stores, will be the ones that secure the most footfall.

NEW SELLING SKILLS OLD SELLING SKILLS

product price

differentiation choice

niche range

fashionability convenience

retailer as brand product as brand

personal service self service

brand marketing product marketing

experience signage

Section 4




The supply picture

Product Make it compelling

Meeting consumer needs with a clearly segmented, visually inspiring offer, where ranges are given their own values and identity

•  As retailers have differentiated their offers and as consumers have become increasingly fragmented, it has become less viable to go after the whole market. Consumers today want an edited and coherent choice.

•  A slowdown also makes it imperative for retailers to have different parts of their ranges targeted at different audiences. In essence this means that a retailer can simultaneously offer a value -oriented range to a hard pressed consumer at the same time as offering a value-added range to a more affluent consumer. Good, better, best range segmentation is critical here ,where good product provides the value element of the mix, better product is the mainstay of the retail offer, and best product provides the value-added trading up element.

GOOD BETTER BEST

• Low volume • Highest price points • Higher margins • Premium offer

• High volume • Low price • Low margin

• Competitive entry prices

• Core product • Core offer

• Basis of positioning • Standard margin

•  Sub-branding is critical in allowing consumers to understand what part of the product offer does what and how different parts of the range are differentiated from each other. Different groups of product should have their own identity to prevent confusion among consumers and to make the offer easy and logical to shop.

•  Visual merchandising has also become increasingly important and is a critical part of stimulating wants. Consumers need to be presented with themes and stories to help them make their choices. This process of ‘editing’ is part of ranging and segmentation and is still something that many retailers do not get consistently right.

Section 4




The supply picture

Building a brand How to be effective

A strong brand helps retailers bond with increasingly disloyal consumers

•  One of the most important factors for success is branding. In the past, retail merely served as the final link in the distribution chain, with little need for retailers to differentiate - as needs were relatively similar and competition was weak. However, in today’s mature environment the situation could not be more different. Consumers are spoiled for choice, are shopping around more than ever before and have different needs and different requirements. Branding is the medium through which retailers must build more engaging relationships with them.

•  In essence, a retailer’s brand is what represents the value it adds to its products, or put another way, its margin. Retailers add value in a variety of ways from customer service and convenience to low prices and superior choice. Whatever the mix of ingredients, the shopping experience offered by a given retailer is embodied in its brand.

•  Retailers are having to make their pitches more aggressive, more clever and more compelling. Branding is crucial, not merely for identification but as a banner representing their entire proposition. Good brands have a relatively narrow focus, and this focus helps increase brand equity and consumer understanding. They are also consistent across all aspects of the retail proposition, from product to marketing to store environment.

•  However, branding is not static. It needs constant evaluation, with reference to changes in customers and the competitive arena. Nor is branding, in and of itself, the answer. The brand is, in many ways, the end point: it has to be driven by an understanding of which consumer is being served, what they want and what the respond to. A good brand evolves over time and in response to changing conditions; however, the core essence of the brand should not change often, if at all.

CUSTOMERS

• Focused customer Relationships • Strong customer loyalty • High visiting rates • High conversion rates • Strong market penetration

MARKETING •  Identity • Packaging • Pricing • In-store support • Advertising

RANGING • Focused • Empathetic • Added value • Premium price

BUYING • Sourcing • Short production runs • Frequent range rotation • Frequent visits • Higher sales/visitor conversion

FINANCIAL

• Range fragmentation = lower volumes per unit • Higher promotional support • Higher margins

BRANDING

Section 4




The supply picture

New streams of growth Use of services

Capitalising on growth in non-retail spend provides opportunities to diversify

•  Traditional retail spend is set to lose out as consumers are faced with more demands for their disposable income. However, while this is potentially a threat to retailers, it is also an opportunity to diversify, in order to supplement growth and bolster sales. Retailers already have relationships with consumers and these relationships can be leveraged to sell non-retail products. Moreover, there is an opportunity for retailers to consider partnerships with other companies already offering services, which they can then brand as their own.

Competing spend Consumer lifestyle changes Retail opportunity

Holidays & travel Total growth 2013-18: 16.2%

More people are travelling, and travelling more often, mixing short breaks with long breaks farther afield; retail expenditure is not only being diverted to the cost of holidays but also to retailing abroad

Shopping facilities in travel locations – airports, train stations and on board ships. supplying clothes, equipment and literature for travel. Developing ranges to reflect holiday experiences (e.g. Taste of Italy food)

Cars Total growth 2013-18: 14.9%

Car ownership is on the increase, with many families owning two or more cars

Car accessories and equipment; car insurance; on-site petrol stations; placing convenience stores in petrol stations, at motorway stops and out-of-town retail developments – convenient for car users

Sport & leisure activities Total growth 2013-18: 17.1%

Rise in gym membership, health clubs, participation in sport and sporting events, visits to theme parks; increase in eating out and use of hotels

Sports clothing, health & beauty products linked to pampering and health; outlets in gyms, clubs and hotels; sponsorship of events and the promotion of sporting activities linked to retail brands (e.g. Nike Run London)

Recreation & culture Total growth 2013-18: 19.7%

Popularity of cinema admissions, outdoor musical events, art exhibitions, educational activities

Supplying food to accompany events (e.g. Waitrose picnic hampers), merchandising links to films and exhibitions. in-store product demonstrations, cookery courses, activity holidays

Health, insurance, savings & investment Total growth 2013-18: 21.9%

Shift from dependence on state to self-dependence and making own provisions for health and pension cover; greater command of personal financial matters

Provision of financial products – trust of retail brand extended into another area

Domestic services Total growth 2013-18: 12.6%

Employing domestic support services – such as cleaners, window cleaners, gardeners and childcare

Crèches in-store, home delivery services; food, laundry, dry cleaning; extended services from retailers e.g. gardening from garden centres.

•  In order to be successful, retailers must offer services that are of interest to their core customer base and which fit with their brand. A high end retailer should focus on selling high-value added services, a discount retailer should focus on selling value or price focused services. They must also be careful to ensure that they do not crowd out their retail offer. These services are incremental revenue drivers; they must not crowd out the main product offer or overshadow the main retail brand.

Section 4




The supply picture

Store portfolio Adapting and shaping

Store portfolios need to evolve to meet changing shopper habits

•  Individual shoppers are increasingly diverse, behaving in a variety of ways according to the type of shopping mission they are undertaking.

•  Broadly there are four main types of shopping mission: the destination shop, the comparison shop, the bargain hunting shop, and the top-up shop. This is a generalisation and it is possible that a shopper may engage in more than one form of behaviour during a single trip. Nevertheless, it provides a useful shorthand for understanding consumer behaviour and destinations are becoming more segmented along these lines.

•  Retailers need to have a strategy for segmenting their supply according to consumer demand and the local competitive environment in which they trade. The best example of this can be seen with John Lewis, which has opened larger flagship stores in major catchment areas, while in-filling gaps with smaller, flexible format outlets.

•  Store portfolios should contain a range of store types to tackle each of the broad markets the company trades in. Although it will be part of the wider brand, each format should have a distinct identity. This is important for managing customer expectations: if there are different store types in the chain, consumers need to know what to expect before they go into each store.

•  Each location should be assessed to establish which store format is best suited to meet the needs of the local shopper population. Ranges can also be flexed to local demand, to ensure that the price and product mix is appropriate for consumers and competition in the area.

Competition is local

A ‘one size fits all’ store portfolio is no longer appropriate

Retailers must have formats to address the different needs of different markets

A multi-format model ensures messages can be clearly communicated

Multi-format must be designed by demand rather than done by default

Segmented store formats

Section 4




The supply picture

Multichannel A critical part of the offer

Achieving online growth is requiring more forethought

•  Despite the ongoing growth and outperformance of online, internet retailing is not easy and we are now entering a new era of more competitive online retailing. Retailers can no longer expect to reap strong growth by casually listing their wares on a site and to maximise potential, retailers’ sites must not only offer products in a coherent way, be easy to use, have great functionality and offer good customer service in respect of delivery and returns, but must go even further.

•  Websites must be more sensitive to the requirements of individual users and, where possible, should be personalised in terms of the products they present to shoppers. Websites must also be ‘stickier’ and incorporate aspects like peer-reviews, expert advice and video content in order to attract and maintain customers.

•  For the online shopper, price is critical, especially during a slowdown. While this is positive in driving cost conscious consumers online to save money, it does mean that price is central to the buying decision. Retailers must ensure they compete effectively and consistently with their rivals on price otherwise they will lose out as fickle web shoppers transfer their custom elsewhere.

•  Advantages can also be gained from blending the internet with other sales channels to create a holistic multichannel offer, using the internet to drive footfall to stores and vice versa. This is especially crucial for filling gaps and reaching additional shoppers, as retailers re-shape their store portfolios.

5.8

8.8

9.7

11.8

16.2

20.4

31.3

37.6

37.7

49.5

Sold out in store

Don't like physical shops

More enjoyable

Products not available elsewhere

Couldn't find what I wanted in store

Can shop at a retailer not near me

More choice

Can shop at any time

Saves time

Cheaper prices

Reasons consumers prefer to buy clothing & footwear online

Section 4




The supply picture

Managing costs Intelligent management

Cost cutting is necessary but it is crucial that it does not damage the competitiveness of the business

•  Over the past ten or so years, the retail sector has become incredibly lean and efficient across most of its operations. That does not mean, however, that there is no further room for improvement; indeed, in constrained economic times when both margins and cash become squeezed, it is imperative that retailers look to tighten up on cost management.

•  Blind cost cutting does not work and retailers need to think carefully about the implication of cutting a particular budget. For example, trimming a marketing budget may seem an attractive way of making savings, but in a competitive retail environment the long term implication could be a decline in sales. Cost cutting must be a creative and intelligent exercise which is intrinsically linked to, and not at odds with, wider business objectives.

•  Cutting staff – one of the largest areas of retail cost – may have an adverse impact on customer service and consequently on sales. However, while cutting wholesale is often a mistake, retailers can think creatively about deployment. In a downturn, patterns of demand change and retailers should ensure that there is some flexibility to move staff to where they can be most profitably be employed within the business.

•  Managing inventories is particularly critical in a downturn. Retailers anticipate demand and ensure they do not over order product, leaving them with overstocks which then have to be marked down to clear, negatively impacting on a retail margins.

Don’t do! Long term investments that will reap rewards at the start of an upswing Staffing that has a direct impact on customer service levels Marketing budgets that are needed to stimulate consumer interest

Cut with care Unprofitable stores and sites – so long as their unprofitability is longer term and cannot be easily resolved Store investment programmes that can be postponed Supplier costs – squeezing suppliers can yield results, but suppliers should not be alienated

Easy wins Non-critical and risky investments with longer term returns Expensive stores/locations which can easily be replaced by alternative channels – i.e. the internet Cutting back on inventory costs where demand is slower

Section 4
