|Chapter Four - IT Applications: Drivers of Change|
In the longer term, retailers will have to come to grips with vast social, economic and technological changes. Today, staid commentators increasingly discuss what might have seemed science fiction fantasies barely a decade ago. They observe that IT already helps retailers to decrease stock, satisfy consumer demand, manage the supply chain and build close relationships with suppliers to attack production and distribution costs, and enhance the productivity of staff. They predict that it will eventually lead to unmanned checkouts when existing EPoS, EFTPoS and smart-card technology come together, and virtual stores realised through interactive multimedia and high definition TV.
The important truths behind such apparently wild-eyed predictions are that running a store is an expensive business, the number of stores is declining and consumer demand is becoming ever more sophisticated or more fickle (depending on your point-of-view). The success of teleshopping TV channels like QVC has rung warning bells. New or modified forms of retailing taking advantage of changed circumstances begin to proliferate. Teleshopping, door-to-door catalogue selling, warehouse clubs, kiosks, alliances and partnerships, and in-store branches all address the issues of the retail environment, its costs and effectiveness in reaching markets. Retailers are increasingly aware of the need to be more efficient, more customer-facing, and more competitive.
Global contraction pushes retailers like Ahold, Aldi, Toy R Us, Ikea and Tesco to seek to expand beyond their home bases. But it pushes them equally to rationalise their investments in expensive real estate. The larger but fewer approach leads to the spread of warehouse clubs like CostCo, vast category killer stores like Toys R Us, and out-of-town shopping centres. Large stores can maximise income generation and customer numbers by offering a range of extra facilities and attractions: Ikea s restaurants and children s play areas, for example. The smaller but more profitable approach leads to niche marketing, small discount stores and targeted outlets.
Political considerations are increasingly important. New markets are opening up because of political change, while in mature markets the continued development of out-of-town hypermarkets and shopping centres depends on the willingness of the authorities to provide correspondingly large-scale infrastructural services: roads, parking space, water and electricity supplies, and communications facilities. The expenditure on developing the services necessary to support large-scale retail projects can only really be justified if those projects meet the needs of the community. In a contracting economic environment th vast shopping centre may simply hasten the decline of independent retailers who service a minority of members of the community (for example, those without access to transport) and provide the natural focus of urban life. Retailers themselves may wish to consider these questions if they contemplate (as many businesses are beginning to) the sustainability of their operations. Out-of-town sites may be cheaper per unit area, but the real cost of establishing them and their longer term impact on the vitality and well-being of the local economy is rarely considered.
The Transformation of Consumer Demand
The economic and cultural changes that have underpinned the success of multiples also affect consumer demand more generaly. In most of the developed world, the economic expansion that drove the early growth of the retail sector has slowed and even reversed. The industrial economies are - on the whole - stagnating: population numbers remain stable overall but there is a drift away from the urban environment. Structural unemployment, low birth rates, increased longevity and changes in the burden of taxation have altered the character of consumer demand. Effectively universal road transport has expanded the catchment area of the fixed shop, and an efficient postal service combined with consumer preference and the proliferation of advertising media has stimulated the growth of specialist as well as general mail order.
Consumer awareness has grown in the last twenty years, thanks to the success of campaigning groups, the growth of consumer journalism, foreign holidays, and fiercely competitive marketing by manufacturers and retailers themselves. The pattern is, of course, uneven, but the indications suggest that consumers in the developed countries are spending less on most goods than they were six or seven years ago and that a longer-term trend is away from spending on goods in general towards services like restaurant meals, air travel and telecommunications. Among the items that do relatively well within a generally stagnant or slow-moving trend are clothing, pre-processed foods, and electrical goods. These phenomena are not just aspects of an increasing standard of living, but of the dis-integration of daily life. They may not even have anything to do with living standards. While consumer spending as a whole may stagnate, consumption is increasingly the means by which we manage day-to-day existence and, as such, it has had to become better educated.
John Beaumont, the chief executive of the UK s Institute of Grocery Distribution told the Financial Times last year that, The [retail] business is no longer about selling what you buy, but about buying what you sell. This aphoristic observation identifies a fundamental shift in retailing - it is no-longer primarily producer-facing and has turned to the consumer. The emphasis has moved from stock-holding to replenishment, and retailers have discovered a need to follow consumer demand rather than to set it. In fact, they must do both; reality is invariably messier than aphorisms. Today, consumers are more price sensitive and sophisticated than ever before, stores offer a greater range of goods, and retailing itself is increasingly customer-led, but astute marketing can still help direct customers, while margins become increasingly important.
The Supply Chain
Having changed from producer to consumer orientation, retailers need - perhaps more than ever - to exercise control over the supply chain. The changed character of retailing is nowhere more obvious to the retailers themselves than in the nature of their relationship with manufacturers and distributors. The need to carry a wider range of stock has made vertical integration an increasingly obsolete notion. Retailers need flexibility in sourcing their product range.
That said, some retailers have discovered that a partnership arrangement with manufacturers can work very well. Wal-Mart and B&Q are two retailers who make sales information available to their suppliers in order to help them plan producton effectively. The end result should not be increased profits for the manufacturer, but reduced costs for the retailer. This sort of relationship has been made possible by the introduction of IT in the form of EPoS terminals which can collect the required data, and electronic trading which ensures that retailer and supplier can communicate with each other speedily and accurately.
Vertical integration may bring unnecessary headaches for an organization which has the capacity to communicate efficiently with suppliers, yet price competitiveness can only be achieved by efficient management of the supply chain. This has led many retailers to develop distribution networks based around regional warehouses, enabling them to rationalise the delivery of stock and to operate Just-In-Time delivery to the individual stores. But here, too, the question of integration is being raised.
The demands on retailers have changed as outlets grow and stock-holding needs to be more efficient and more customer-oriented. They need to focus on the downstream aspects of the business more and more - store management, marketing, the collection of data, increasing customer throughput or value per transaction. It might once have been part of a retailer s core business to ensure the delivery of goods to a store. Today, this is no longer core business - instead, it supports the retailer s primary activities. Yet, there must still be precise and responsive control over the supply chain. Companies which once might have run their own warehousing and distribution systems are increasingly entering into agreements with specialist warehouse operators or delivery fleet operators. For example, the Lo-Cost stores belonging to the UK Argyll Group have such an agreement with Wincanton Distribution, a specialist in the storage and transport of chilled foods. This agreement covers the warehousing and distribution of more than 300 different food items to 300 Lo-Cost stores around the country. Wincanton acquired a purpose designed warehouse specifically to service this contract, and communication between the stores, their suppliers and Wincanton is now almost entirely electronic.
For many smaller retailers, the management of resources - staff, buildings, delivery trucks, and so on - can now be handled very efficiently using computer systems. Where particular specialisms are required or where the tasks are inordinately complex, many retailers have turned to outsourcing, or the use of contractors to provide specialist services. This is particularly useful for national chains and is probably essential for international enterprises.
Merger, Acquisition and Alliance
Current economic conditions underpin both the opportunity for investment in new technologies and the need for it. Merger, acquisition, alliance and centralization have created the organizational base which supports new technologies, while substantial investment can produce economies of scale only where such economies are available through processing, packaging, storage and distribution.
The most successful retail multiples have grown by adopting a mass production approach to retailing. But consumer preference now turns on choice as much as price or convenience, and the ability to offer a wide range of products from a variety of sources, and to change stock rapidly, demands sophisticated information processing technologies rather than more conventional technologies. The future of large-scale retailers will undoubtedly depend on their ability to maximise the choice they offer customers. Now more than ever, the retailer s job means, in the words of an often-quoted formula, Getting the right merchandise to the right place at the right time . With the stock volumes and range characteristic of modern multiples and stores dispersed as widely as they are, this cannot be done without powerful and flexible information systems.
Merger or joint activity has also been employed as a defensive tactic by groups of smaller retailers. The 1960s and 1970s also saw the growth of voluntary groupings of independent retailers and the rise of independent wholesalers, particularly in the grocery sector, to allow small shops to benefit from shared packaging and distribution costs. This phenomenon took on a new form towards te end of the 1980s, when the UK retailers Argyll, the Dutch Ahold company and the French Casino chain set-up the European Retail Alliance, which now controls over 13,000 outlets across Europe and accounts for 11% of the European food market.
During the 1980s, merger and acquisition have proved to be more cost-effective than simple expansion for all sizes of retailer - particularly where a declining market or a collapse in market share stimulated rationalisation. In countries with stringent regulation of mergers and monopolies - France, for example - the process may have been slower than in countries with weak regulation, like the UK, but it has been no less apparent.
Merger and acquisition can also provide a strategic mechanism for retailers. Diversification - whether it is into different market segments or different markets altogether - has always been an important instrument for risk management. Retailers have extended their product range (grocery supermarkets selling petrol, for example), moved into completely new market categories (DIY has been popular), or sought to parcel up the market according to preferences or habit. In recent years, these goals have increasingly been pursued by acquisition, merger or alliance.
Alliances in general have provided a less risky route to growth than straightforward acquisition or merger, particularly where foreign expansion is concerned. In fact, cross-border alliances have become an important mechanism for expansion in retailing everywhere. The failure of many past ventures has led retailers to take a generally more cautious approach to foreign expansion. The UK s Institute of Grocery Distribution identifies four types of cross-border alliance:
purchasing alliances, designed to exploit scale economies in sourcing product (for example, Eurogroup which brings together GIB from Belgium, Coop Schweiz from Switzerland, Rewe from Germany, the Dutch company Vendex, and Paridoc from France);
development alliances involving collaboration on a single project (for example, a joint venture between Barneys of New York and the Japanese department store, Isetan, to open an up-market clothing store in Tokyo);
skills alliances, where retailers with particular expertise collaborate (for example, Sainsbury s UK Homebase DIY stores in which DIY experience from GIB of Belgium has been grafted onto Sainsbury s understanding of the UK market);
multifunctional alliances, in which retailers come together for a variety of reasons (the best-known example of which is the European Retail Alliance and Associated Marketing Services).
These alliances can provide a managed approach to expansion into new markets, bringing with them a requirement for strategic communications and information systems to support joint operations.
Delivery scheduling and managing the supply chain
The Argyll Group owns the Safeway, Presto and Lo-Cost supermarket multiples in the UK. The company has its origins in the early 1970s when the RCA Corporation acquired a small food retail and wholesale operation, Oriel Foods, and put in a management team to run it. The team subsequently left Oriel/RCA and formed their own company which specialised in buying unsuccessful or troubled companies in the food sector and restructuring them. Companies acquired included retail outlets, wholesalers and manufacturers. The Argyll Group was formally constituted in 1980 and the next year acquired Oriel, including the Lo-Cost discount chain, from RCA.
It s origins give Argyll a different flavour from that of its main competitors, Sainsbury s, Tesco and Asda. Argyll has never been a family firm, and has only been involved in food production as a marginal activity. The company is distinctly management-oriented, rather than activity-oriented.
In 1981, Argyll s total sales amounted to just over œ100 million. In the same year, the company bought a significant stake in Linfood Holdings - nw known as Gateway - and launched an unsuccessful bid. In 1982, the company acquired 67 Pricerite stores and raised funds on the stock market to buy Allied Suppliers - one of the UK s largest retail grocery operations - from Cavenham Foods. Allied ran 923 stores under the brands Galbraith, Templeton, Presto and Lipton.
With sufficient mass to be a major player in the food retailing business, Argyll now set about developing a strategy which would allow it to compete with the big two - Sainsbury s and Tesco. In 1987, the company divested itself of its food and drinks manufacturing businesses to concentrate on retailing. It bought the UK subsidiary of the American Safeway company in a move that illuminated the differences between large-scale national and international operations in grocery retailing, and proceeded to rationalise its operations into two major strands, chiefly by a managed process of store conversions. Safeway was positioned at the upper end of the market against Sainsbury s, Tesco and Asda, while Lo-Cost stores were positioned against discount stores like Kwik Save, Gateway and the Co-op.
Dual branding has been characteristic of Argyll to a greater extent than any other UK food multiple, and has often been used strategically to defend geographical markets against the onslaught of competitive discount retailers. By 1992, Argyll had achieved total sales of just under œ5 billion, about 80% of which came from the group s 300-plus Safeway stores (about a third of its total), which increasingly offered value-added services - petrol stations, delicatessen counters, in-store bakeries, pharmacies, coffee shops, post offices, dry-cleaners, customer small ads and so on. The company uses a customers panel as an effective market research tool.
Argyll s concentration on the UK market has paid off, despite periodic price wars with its competitors. Internationally, it formed an alliance with the Dutch Ahold and the French Casino stores. These are larger chains (Ahold has about 900 stores and Casino around 3,000 stores), but individual shops are smaller. The three partners established the European Retail Alliance (ERA) in 1989 as a voluntary arrangement, reinforced by a certain amount of cross-shareholding. There are several more such pan-European buying groups in existence, and their objective is to exploit economies of scale in sourcing products while avoiding the administrative, cultural and regulatory problems of straightforward expansion into foreign markets. ERA became involved with another pan-European group, Associated Marketing Services, in an attempt to exploit economies of scale in other areas - notably, promotions and other marketing, own-brand development, distribution and stock-holding, and standardisation and market-testing.
Argyll invested heavily in information technology towards the end of the 1980s. By 1985, the group had already introduced a computer system for delivery planning known as Paragon as part of a thoroughgoing modernisation of its distribution arrangements. Distribution and delivery planning was clearly becoming more of a problem as the group acquired or opened stores, and spread throughout mainland Britain.
Paragon and related systems brought immediate benefits in terms of more efficient fleet management, which is a major cost in any widely dispersed retail operation. Deliveries are recurrent but may be unpredictable. On the one hand, there is the risk that trucks will be inefficiently loaded and inefficiently routed in order to keep them on the road and, on the other, that they and their drivers may be idle in depots awaiting the opportunity to take a full-load to a single destination. The fleet itself must be managed and maintained and legal obligations must be met.
Many problems can be avoided by use of delivery planning software. In a well-known analysis of the Paragon system written in 1985, Introduction of a Computer System for Delivery Planning: Argyll Stores - Case Study , Focus on Physical Distribution Management, Vol.4 No.6, pp. 21-27, the authors, L.R.Christensen and M.P.Eastburn, observed that benefits of the systems included:
Improved utilisation of vehicles
Improved service toindividual stores
Decreased capital and revenue costs associated with transport, and
The possibility of using the system to simulate different scheduling and routing arranagements.
In 1985, computer systems tended to be isolated as this list suggests, but the issue of delivery planning in a sprawling organisation like Argyll really demands an integrated approach. Deliveries should not be considered in isolation from sales and order processing. Argyll accordingly planned an integrated supply chain management system, linking sales data analysis, store management, order processing, and delivery planning. In the early 1990s, Argyll became the UK s first national retail operation to achieve 100% scanned sales using laser bar-code readers at checkout EPoS terminals, enabling sales data to be analysed and stock reordered precisely when it was needed. The immmediate effects were to tighten inventory and allow Argyll stores to fully exploit the then increasingly fashionable philosophy of Just-In-Time stockholding.
The question of distribution and fleet management is critical to Just-In-Time operation, whose central tenet is that stock should not gather unnecessarily in stores or at depots, but should be delivered just in time for replenishment. The ideal form of Just-In-Time would see a stock item come in the back door just as a customer removes a similar item from its shelf. Obviously, this is not practical in a store operation with more than 15,000 lines, averaging one million customers a day at around 800 stores. All the same, inventory control places severe demands on delivery planning, which must now reckon with far shorter time scales and extremely tight delivery schedules. The immediate objective is to minimise fleet overheads, ensuring that trucks are idle for only the smallest possible time. Stores will need frequent replenishment and must accept deliveries only at precise times. Route planning and load management will be critical in order to maximise the return on truck usage.
But an integrated system creates its own momentum. The early delivery planning software used data about stores and their delivery constraints, and the road network as input to an automatic routeing module which generated routes and loads. An integrated system produces far more frequent and precise updates of store data and needs fast communications with suppliers and distribution centres to ensure that produce is available when it needs to be loaded. The system is inevitably far more sensitive to local conditions and to slight changes in its operational environment.
In the increasingly competitive and recessionary market of recent years, margins have been squeezed and customer loyalty tested. Small delays in replenishment or inadequate stock-holding may lead to lost sales and declining profits. The growth of discount retailing (particularly the arrival in the UK of the German and Danish multiples, Aldi and Netto) has created further turmoil. To date, the leading food retailers have been reactive rather than proactive. Argyll has exploited its double-branding and established reputation for customer-focus to counter the threat of a drift towards discount outlets and to retain customer loyalty.
Tesco and Sainsbury s have adopted aggressive price-cutting strategies and introduced budget own-brand lines. Both have also announced moves into France in the last 18 months, where the market may be less saturated. But history amply demonstrates the risks of such expansion, and meeting competition with cost-cutting can only ever be a short-term strategy. In the longer term, competitive pressures and uncertain conditions must be met with effective supply and demand chain management. This means accurate prediction of future customer demand, supplier output, and delivery times. The miracle can be achieved by a mix of instruments - better information systems, targeted marketing, and improved communications notable among them.
In 1992, Argyll created a special division to examine the strategic use of scanned data, while its existing systems can - as noted above - be used to develop new and more effective operational strategies based on simulations. Along with electronic data interchange(EDI) - since 1993 utilising satellite communications - and integrated database management, the development of tools for the extraction of relevant data (so-called data-mining ) and the modelling of operational and administrative processes (typically using personal computers) will enhance the group s capacity for proactivity. This is the route that Argyll started down in 1985 with Paragon.
The processes of merger and acquisition which produce companies like today s Argyll, Carrefour, Ikea and Kingfisher raise the question of integration: to what extent are merged or acquired companies integrated into a unified corporate structure? And, whatever the degree of operational or management integration, how best can information systems be coordinated or rationalised?
There is a natural tendency to opt for integration when enterprises merge. On one level, there are cost-savings to be made by pruning duplicated or excess resources. There are also real benefits to be gained from taking the stronger of two brands and adding to it. And no-one should underestimate the attraction of the high profile that an obviously expanding company will generate for its senior executives. Arguably, retailing has more star chief executives than any other area of business, from Sam Walton to Anita Roddick, and the limelight can be addictive. Yet a strong local or regional identity is often a major asset for a retailer, and it can clearly help market positioning. The balance between the commercial value of a single national brand identity and the consumer loyalties that can be generated by strong local identities is a difficult to strike, but fashion to a large extent dictates trends.
During the 1970s and 1980s, retail expansion meant creating national identities, although within that tendency some companies exploited market positioning by preserving different identities aimed at segments of their market. A past master of this strategy was the UK jewellery chain, Ratner s, which preserved through its acquisitions a clearly defined market segmentation based partly on geography and partly on social class. Ratner s grew to national pre-eminence (and a significant presence in the US) thanks to its resolutely downmarket approach to selling jewellery, but it also fostered the appearance of choice by operating chain stores aimed squarely at different categories of jewellery buyer. In this way, it seemed to solve, if only temporarily, the modern retailer s dilemma: how to benefit from economies of scale while simultaneously targeting consumers.
The increasing importance of customer loyalty and the recognition that customers want choice and value-for-money have fostered a less monolithic approach to retail expansion. Today, acquisitions may be kept more-or-less independent, even when they are integrated into a high-level centralised management structure, and many retailers are even resorting to branding strategies like those which have characterised the growth of the Argyll Group. As far as information systems are concerned, however, retailers continue to follow the characteristic corporate pattern in which IT has been seen as a head-office administrative function.
Two things may change this. First, once a large retailer has achieved a national presence, sentiment plus the law of diminishing returns make foreign expansion or domestic diversification increasingly attractive. This attraction is, of course, underscored by the fact that sooner or later the single category domestic retailer will be at the receiving end of a competitor s expansion. However, launching or acquiring operations in other countries or in other categories presents major problems of integration which have brought many retailers to the brink of catastrophe.
Secondly, retailing has to cope with contracting markets as well as expanding ones. Under these circumstances, centralisation is almost always an inadequate form of organization. Retailers seek or are forced to diversify. They may have to confront very different traditions and consumer expectations. They must be more flexible, better informed, and capable of rapid change. While they must continue to have high-level overviews of business operations, they must also allow store managers greate autonomy to respond to street-level demand. Integration increasingly has to account for local market conditions as well as national and global trends, and only decentralised information systems can support the required flexibility.
As recently as 1990, Michael Porter - writing in The Competitive Advantage of Nations - observed that the traditional form of many types of retailing was multidomestic . While some industries are characterised by companies with no particular national allegiance or image competing against each other in a world market, retailing (among others) has a different character:
Competition in each nation (or small group of nations) is essentially independent. The industry is present in many nations..., but competition takes place on a country-by-country basis.... Some competitors may be multinational firms, but their competitive advantages are largely confined to each country in which they compete. The international industry is a collection of essentially domestic industries, hence the term multidomestic. (The Competitive Advantage of Nations, Macmillian, London, p.53).
In fact, retailing is probably more multidomestic than most. Until very recently, even successful multinational retail operations with independent outlets in different countries were few and far between. Aspirations towards globalisation in Porter s sense were almost non-existent.
Part of the reason for this is that retailing has always been an industry primarily serving local communities. Even in vertically integrated enterprises, the link between a community and its store has been paramount. Retailing is a service industry and the skills required to manage such a service do not necessarily translate well to other areas. The service businesses which succeeded in globalising early tend to be narrowly focused with well-defined offerings. If they are retailers, then they are probably outlets for a vertically integrated global business or they offer a very limited range of products. One thinks of accountancy firms with a small number of universally similar services, hotels catering for an international trade, fast food outlets or gas (petrol) stations.
But the local character of most retailers and their dependence on a variety of suppliers makes globalisation difficult - especially so, when (as in Japan) the link between manufacturers and stores is mediated by territorially rooted wholesalers. The greater mobility of people at work or at their leisure has undermined the sense of community which once underpinned many retail operations, and international tourism has stimulated an international consumer culture, but the logistics of global distribution remain problematic. Distance, custom and local economic traditions present barriers to horizontal integration.
One answer, of course, has been - as Porter points out - to avoid horizontal integration altogether: multinational companies may own operations in many countries, without seeking to integrate or coordinate their activities. This has proved an attractive proposition for many retailers seeking to expand abroad but aware of the problems of globalisation. However, the autonomy of national subsidiaries can itself be problematic. Competitive advantage may depend on a subsidiary s strengths in the national market, but this is precisely the thing that is hardest to manage from another country. And to allow complete autonomy to a subsidiary is, at best, pointless and, at worst, potentially disastrous. Many retailers have learnt to regret the acquisition of loss-making or effectively unmanageable foreign companies. Most recently, Carrefour - successful in every other territory it has entered - has had to retreat in disarray from a potentially disastrous purchase of two US hypermarkets, and while Kingfisher may have shown buoyant performance in 1993 thanks largely to the performance of its French acquisition, Darty, the good news still indicates an unhealthy reliance on local market conditions. The point about globalisation is that local market conditions become irrelevant.
There are, of course, growing markets in areas of the world which are already helping fuel te continued expansion of major retailers. In East Asia, China and some parts of Central Europe, local retailers are undergoing the same sort of changes that have already transformed retailing in the US and Europe. Asia, in particular, has become the focus of major international activity. Department store chains like Parkson of Malaysia and C.K.Tang of Singapore have recently moved into China, Australia s Davids Holdings has formed a joint venture with NTUC/Fairprice, the biggest supermarket chain in Singapore. The region s dominant economy, Japan, has developed its own breed of discount operators taking business away from traditional family-run corner shops and department stores. The country s largest chain, Daiei, has used its economic clout to cut prices and introduce discount brands. If it succeeds in dominating the competition, we can expect to see Daiei branches opening in other countries. Already, the Japanese retailers Mitsukoshi, Takashimaya, Sogo and Yaohan are expanding into Asia. Yaohan, which is now headquartered in Hong Kong, aims to open 1,000 stores in China by the year 2010. And since the retailing law was reformed in 1990, Japan itself is attracting increasing interest from US and European retailers such as Toys R Us, The Gap and Marks & Spencer who are able to undercut local market prices because they now can and certainly will deal direct with manufacturers.
The whole of Asia and Eastern Europe is seen as new territory for many retailers, despite the fact that the countries concerned often present numerous problems. Among the most evident are:
low standard of living;
formal or informal restraints on the ownership and control of businesses;
the lack of adequate infrastructures;
Retailers who are expanding into these areas point out that market growth can be phenomenal and that despite the great disparities in wealth within individual countries, there are often enough people with a high standard of living within a small geographical area to justify the establishment of enterprises. It is said, for example, that there are more individuals with high levels of disposable income in Jakarta, Indonesia s capital city, than there are in the whole of Portugal, despite the fact that average income in Indonesia is only $800 a year.
It is certainly true that retailing is not in itself egalitarian: to paraphrase F.E.Smith, the doors of Fortnum & Mason or Saks Fifth Avenue are open to all, like the Ritz. Many of the ventures engaging European or US retailers in East Asia are indeed aimed up-market, but the logic of expansion in retailing is, broadly speaking, democratic; to maximise their returns, retailers will seek to develop a business catering to a broad range of social classes and income groups. At present, retailers seeking to expand into East Asia or any other of the areas mentioned will probably have to cope with interventionist governments and partnership arrangements. This will be all to the good, if it avoids the huge problems associated with cultural differences.
Of course, within the limitations on retailing, it is possible to identify strong national and local demand. One important implication of multidomestic competition is that it encourages niche markets. Typical of these in recent years have been small, specialist stores catering for the increasing numbers of commuters: the German shoe repair and accessories chain, Mr.Minit, or the UK s Sock Shop and Tie Rack. Many of these shops have catered for basic needs - groceries, stationery, ready-to-eat food, small items of clothing - but others have taken advantage of the high levels of passing trade at travel interchanges or within urban commercial centres. They often benefit from extremely low overheads and low stock-holding.
Other new selling environments pursue the same benefits. Door-to-door catalogue companies may not hold stock at all, while the overhead involved in printing a catalogue is minimal. Discount stores trend to carry a restricted range of items and cut costs on store design and often packaging. Warehouse clubs are really giant discount stores, benefiting from the combination of warehousing and selling in one location. Factory outlets obey a similar logic.
A conventional large store must increase customer throughput, transaction value, and absolute customer numbers. This involves a complex equation, which is not always solvable. For example, a store will attract more customers if it offers quick-selling popular items rather than slow-moving and unpopular ones. But this does not apply at the margins. In order to win new customers, the store may have to stock currently unpopular lines, possibly at the cost of losing sales to existing customers. Niche retailers flourish in this sort of situation. They supply a wide range of goods within a narrow category, probably holding stock in less depth than a large store would but making sure to catch marginal sales. Writ large, this becomes the principle of the category killer.
IT can help make niche operations more profitable by analysing stock movements, identifying optimum stock-holdings, and managing replenishment. For example, a small chain of wine merchants in the North West of England (Willoughby s), owned by an independent brewery, J.W.Lees, invested in a mainframe computer a few years ago. The finance director at the time observed that with fine wines a great deal of money is tied up in stock which moves very slowly. The computer system would save, on average, œ1 million a year just in rationalising stock. It paid for itself in two years.
Management Techniques and Management Information
There is a rough logic to the adoption of fashionable management techniques which is essentially to do with controlling the processes at the heart of a business. For some retailers, that may mean moving from in-house and informal operational arrangements to formalised, contractual relationships. Other organizations have adopted quality management in an attempt to formulate controllable procedures for management and operations. All organizations, no matter what their activity or focus, insist that reliable information is a necessity. The only question is the nature of the information.
As companies get larger and less tolerant of entrepreneurial idiosyncracies, management processes demand more accurate and useful information on which to base decisions. The assumption in retail management is that more accurate information is also more tightly focused: store managers who can tell how many people bought which brand of breakfast cereal on a Tuesday should have a better chance of making appropriate decisions than store managers who can only tell you how many people passed the checkout in a week. More importantly, perhaps, is the fact that fine-grain information should allow useful correlations to be drawn. Without knowing which items sold well and when, for example, the manager would be hard put to draw conclusions about the success of advertising campaigns.
Clearly, this requires the sort of market intelligence and sales data which IT can provide. And the increased use of IT in retail itself creates a stimulus for the further use of IT. Direct product profitability (DPP) analysis, for example, has been adopted by many retailers as a management tool based on the data collected by in-store and corporate information systems. DPP (pioneered by the UK drug-store chain, Boots) is intended to optimise the return on each stock line by determining its space allocation within the store based on its profitability. Profitability is calculated by looking at an item s contribution to overall profits and then taking transport, storage and other overhads into account. These factors can all be derived from data collected by corporate information systems, and given the right tools and technology it is possible to fine-tune the analysis to derive not just a DPP figure for a product line, but a measure relating to product lines at store level.
It is almost a clich‚ of IT that if it becomes possible to do something using computer systems, someone will do it And given the focus on control and on customer-orientation, the detailed analysis of sales trends and customer preferences can actually be used to achieve competitive edge: micro-managing or managing at store level , is how retailers like Wal-Mart and Safeways have described it.
For large retailers, size itself has become a problem. Centralised management makes it difficult to handle the specific requirements of an individual store. Category killers like Toys R Us or focused outlets like McDonald s tend to ignore this problem: assume that the market for your goods is already global and open stores which are as similar as they can be wherever they are. Here, the scale economy is king, and the tactic is to use size and marketing strength to generate business. Variety stores or grocery supermarkets with thousands of lines and different local traditions and customs to cope with need more sophisticated management tools, particularly when seeking to expand into new and unfamiliar markets, or when attempting to maximise profitability. The management tools provide competitive edge for retailers for whom size is not always an advantage.
People say you reach a point when everyone can do what you do, and the playing field becomes levelled, Wal-Mart s Executive Vice-President of Information Systems, Bob Martin, told CIO Magazine in 1992. We say, `nonsense . There s tons more we can do. We still have a lot more inventory than we need to run the business. We re not sure we can get to the point where one item comes in the back door every time one goes out the front, but we can get closer. The trick is to do it without losing the economies of scale you get from having trucks pull up every day at the same time with the same kinds of loads for every store.
The trick , as Martin calls it, can only be worked with an accurate predictive analysis, rapid communications, and close relationships with suppliers. The predictive analysis takes the DPP model and refines it so that it focuses on the store level. So-called category management divides a store s products into categories (around 400 in a large grocery supermarket) and manages each one as a business in its own right. At one end, the system supports micro-management focusing on a single category within a single store, but it must connect with centrally managed production and distribution systems at the other end.
But category management may not be enough. To maximise their profits, most retailers would target their analysis and marketing even more precisely - ultimately (and perhaps only theoretically) to the individual customer. The gulf between this pinpoint focus and organizational vastness is characteristic of contemporary retailing, and it is a gulf which only IT can bridge.
Consumer awareness has grown in the last twenty years, and is changing its character - becoming better educated.
Consumer demand in developed countries is stagnating as a whole but is shifting its emphasis away from basic goods towards value-added commodities and services.
Retailers need more and better information about consumer preferences, in their home markets and in areas of expansion.
Retailers have always needed to control the supply chain; customer-led retailers need to control it with greater sensitivity and responsiveness. This encourages the development of partnerships and alliances rather than vertical or horizontal integration, both of which present extremely complex management problems.
Recession has driven the retail sector towards rationalisation and ever-fiercer competition.
Diversification has proved to be, at best, a mixed blessing and many companies are now trying to divest themselves of their once promising adventures.
New markets present particular problems which may best be resolved by alliances and partnerships, although loose structures may demand powerful information and communications systems to make them work.
Niche or low-margin retailing can also benefit from the superior control of inventory afforded by IT, and has the added advantage of smaller overheads and focused marketing.
Management techniques in retail increasingly emphasise profitability measures and the ability to fine-tune inventor - direct product profitability and category management are two of the most popular approaches.
The need to exploit economies of scale, customer-focus and so-called micro-management create conflicting demands which can only be managed with the help of information systems.
-end chapter four-