Industry Benchmark - IBM · PDF fileIndustry Benchmark . By Brian Kilcourseand Paula...

Retail Growth Strategies in 2015

Industry Benchmark

By Brian Kilcourse and Paula Rosenblum, Managing Partners

October 2014

In Cooperation with:

Executive Summary Key Findings

When IBM and Oracle asked us to conduct this study, we were fairly certain that we’d find retailers looking at emerging markets for growth. After all, a majority of respondents were drawn from well-served retail markets like the United States and the United Kingdom. It turns out this was not the case. For the most part, retailers still seem eager to grow in existing markets – whether by adding stores or by increasing their digital presence. These same retailers report adding brands and new partnerships are key growth initiatives.

Some highlights of the report include the following:

• The fast pace of change in consumer technology is still disrupting the retail enterprise. While there are significant differences depending on what they sell and how well they perform, retailers are in agreement that omni-channel processes are here to stay. To learn more, check out the Business Challenges on page 7.

• Oddly, those same retailers, when asked to identify the most effective way to overcome the business challenges they identified were most apt to cite expansion into new markets. What other opportunities did they identify and what were their most favored geographies? Find out in the Opportunities section of this report, beginning on page 11.

• Depending on retailer sales trajectories, we found significant differences in internal roadblocks or Organizational Inhibitors (page 15), with IT bearing the brunt of retailer frustration. Operational issues were pragmatic, and practical, including cross- cultural Human Capital Management and finding a way to manage price and inventory across disparate geographies.

• Big Data and technologies associated with it like predictive analytics and analysis of non-transactional customer data are highly prized by retailers hoping to grow. Find out which technologies are currently in use and the ones that are on retailer radar screens in the Technology Enablers section of this report, beginning on page 19.

Based on our data, we’ll also offer several in-depth and pragmatic suggestions on how retailers should proceed. We encourage retailers to think outside their existing box and find a way to make best use of the information asset. These recommendations can be found in the Bootstrap Recommendations portion of the report, which begins on page 25.

We certainly hope you enjoy reading the work. We definitely enjoyed writing it,

Brian Kilcourse and Paula Rosenblum

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Table of Contents Research Overview ......................................................................................................................... 1

A Surprising Preference to Grow in Existing Markets .................................................................. 1 Collaboration & Efficiency Also Drive Growth .............................................................................. 2 Methodology................................................................................................................................. 3 Winners Adding Stores And Going Global ................................................................................... 3 Winners Value Trading Partners .................................................................................................. 4 Survey Participants ...................................................................................................................... 5

Business Challenges ....................................................................................................................... 7 No Clear Aggregate Consensus On External Challenges ........................................................... 7 But Challenges Vary Wildly Depending on Products Being Sold ................................................ 8 The Challenge of Omni-channel Retailing ................................................................................... 9

Opportunities ................................................................................................................................. 11 In Aggregate, Opportunities Are Also Diverse, and Confusing .................................................. 11

The Myth of Broader Assortments and Endless Aisles .......................................................... 12 Is There Value in Dark Stores? .............................................................................................. 13

Which Geographies? ................................................................................................................. 13 Working With Trading Partners: Who Is Actually Doing It? ....................................................... 14 The Net: Amid Some Confusion, Clarity Can Be Seen ............................................................. 14

Organizational Inhibitors ................................................................................................................ 15 Getting Practical ......................................................................................................................... 15 IT: An Enabler Or An Inhibitor? ................................................................................................. 16 Local Vs. Central Control ........................................................................................................... 17 It All Gets Back To People, Process, Technology ..................................................................... 18

Technology Enablers ..................................................................................................................... 19 Enabling People And Process With Technology ....................................................................... 19 Putting Analytics To Work In The Store ..................................................................................... 20 Growth In The Digital Space ...................................................................................................... 22 Digital Growth Fuels Total Growth ............................................................................................. 24

BOOTstrap Recommendations ..................................................................................................... 25 Consider Growth in Economically Strong Markets .................................................................... 25 Consider Growth in Emerging Markets ...................................................................................... 25 Establish a Digital Beachhead ................................................................................................... 25 Establish A “Global Governance” Framework ........................................................................... 26 Move To A Sense-and-Respond Model ..................................................................................... 26 Take Consumer Privacy & Data Security Seriously................................................................... 26 Think About IT as An Enabler, Rather Than an Inhibitor ........................................................... 26

Appendix A: RSR’s BOOT Methodology© ....................................................................................... a Appendix B: About Our Sponsors.................................................................................................... b Appendix C: About RSR Research ................................................................................................... c

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Figures

Figure 1: There’s No Place Like Home............................................................................................ 1

Figure 2: Sharing Data, Designs and Product Information Is Important .......................................... 2

Figure 3: Winners More Bullish On Growth Across All Areas ......................................................... 4

Figure 4: Winners More Likely To Value With Trading Partners ..................................................... 5

Figure 5: Diverse Aggregate Business Challenges ......................................................................... 7

Figure 6: Wildly Different Perceptions of Challenges ...................................................................... 8

Figure 7: Omni-channel – Potential Opportunity Remains A Real Challenge ................................. 9

Figure 8: Basics and Perishables Retailers in an Omni-channel Quagmire ................................. 10

Figure 9: Wait…That’s Not What You Said Before… .................................................................... 11

Figure 10: Where Winners See Things Differently ........................................................................ 12

Figure 11: Desirable Geographies are Familiar Geographies ....................................................... 13

Figure 12: Winners More Likely to Walk the Partnership Walk ..................................................... 14

Figure 13: What Hinders Executing A Growth Strategy? .............................................................. 15

Figure 14: Focus On IT .................................................................................................................. 16

Figure 15: Retail-Winners-In-A-Box............................................................................................... 17

Figure 16: Big Data Represents A Big Advantage ........................................................................ 19

Figure 17: Work-in-Progress ......................................................................................................... 20

Figure 18: The Information-Enabled Store .................................................................................... 21

Figure 19: More Work-in-Progress ................................................................................................ 22

Figure 20: The Digital Touch ......................................................................................................... 23

Figure 21: Fashion/Seasonal Leads The Way .............................................................................. 24

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Research Overview

Retailers are compelled to grow their businesses. Shareholders, shoppers, and their own perception of their value propositions make growth an imperative. Shareholders always expect growth and retailers generally must respond. Shoppers expect closer and more convenient access to brands they like. Retailers themselves may see opportunities for sales and profit growth in new or existing markets. Whatever the reason and regardless of the source, revenue growth is a key retailer imperative.

Retailers have three distinct growth strategies to work with. First, they can achieve sales growth by physically moving into new geographies and expanding in geographies where they already operate. Secondly, they can build market share through winning more “share of category” of the products they sell or adding more product categories. Finally, they can grow by finding new customers and by achieving greater customer “share of wallet”. All three strategies have operational implications for marketing, merchandising, supply chain, and store operations. Today’s technology is a key enabler to any growth strategy.

For this study, we set out to find out what retailers see as their best opportunities for growth, the challenges they believe hold them back, and the technology enablers they value and use to support growth. The resulting data is compiled on the following pages.

A Surprising Preference to Grow in Existing Markets With retail’s growth imperative as a given, it’s logical that our first key question would be: Where might that growth come from? We embarked on this study with the hypothesis that retailers would favor a strategy of achieving growth by expanding into new markets. As it turns out, that is not the case. Against all expectations, and in the face of a generally over-retailed environment in the US and UK (which constitute the bulk of our survey base), our respondents still believe their best opportunities for growth lie at home by augmenting their offering via a digital presence and by adding more physical selling locations (Figure 1).

Figure 1: There’s No P lace Like Home

Source: RSR Research, October 2014

44%

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9%

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1%

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Emphasize digital, de-emphasize stores

More physical stores in new geographies

Digital presence where we don’t have physical stores

Create greater efficiencies in our existing operations

New Brands and/or Partnerships

Generate more sales in our existing markets

More physical stores in existing geographies

Digital presence to augment our stores

Perceived Value of Growth Opportunities

High Value Some Value Low or No Value

1

As we’ll see shortly, some are more bullish on new markets than others, but overall, the least expensive and most effective route to growth is perceived to be in existing markets, typically at the presumed expense of competitors.

Collaboration & Efficiency Also Drive Growth As we can see in Figure 1 above, the single most important opportunity retailers see to facilitate new growth lies in creating new brands or creating new partnerships. Only 1% of respondents see no value in those partnerships.

Clearly retailers believe adding brands or creating new partnerships is one way to improve market share against competitors, and help find new ways to drive shoppers into their stores and onto the digital channels customers and retailers prize so highly.

In addition, almost all respondents believe there is at least some growth value in becoming more efficient in their existing operations. We believe these efficiencies focus on inventory management: keeping inventory levels on target, avoiding out-of-stocks, and minimizing the number of draconian markdowns taken because of overstock problems. Achieving these objectives is driven in part by better collaboration with trading partners.

We asked these same retailers what role trading partners can play in facilitating their growth. Figure 2 tells that tale.

Figure 2: Sharing Data, Designs and Product Informat ion Is Important


Data sharing is the most frequently cited high value process, as it enables the efficiencies retailers aspire to. Sharing sales data with trading partners helps improve sales forecasts and produce the right amount of product as close as possible to the point of demand. Sharing product information through PIM or MDM platforms also helps makes new product introduction more efficient for both partners. That’s all logical and good.

45% 53% 59% 63%

49% 41% 37% 32%

6% 6% 4% 5%

Product InformationManagement (PIM) &

Master DataManagement (MDM)

Outsourced design Collaborative design Data sharing withtrading partners

The Value Of Trading Partner Collaboration

High Value Some Value Little or No Value

2

We confess to a certain amount of surprise, however, at the relatively high percentage of retailers willing to collaborate with vendors on product design or simply outsource the whole process to them. It’s hard to understand how retailers will differentiate on designs done by others in an already commoditized world. Still, the consensus is clear and as we’ll see shortly, it’s not just poor performing retailers who think this way. We can only assume the primary focus here is on private label product, rather than new merchandise categories or styles.

Methodology For the core of this benchmark report, we’ll use RSR’s model, called the BOOT Methodology© to frame the forces shaping industry trends. The BOOT helps us better understand the behavioral and technological differences that drive sustainable sales improvements and successful execution of brand vision. A detailed explanation of this methodology can be found in Appendix A.

In this study, we’ll look at Business Challenges: External forces exerting pressure on the industry; Opportunities: Ways our respondents believe they can overcome those pressures; Organizational Inhibitors: Internal forces and challenges that might prevent the ecosystem from taking advantage of the opportunities they have identified; and Technology Enablers: In the 21st century, technology is often integral to taking advantage of opportunities. In this section, we’ll look at budgets and planned investments. All RSR’s reports also include Recommendations designed to help retailers move forward. We focus on business process recommendations and appropriate technologies to support those processes.

In our surveys, we continue to find differences in the thought processes, actions, and decisions made by retailers who outperform their competitors and the industry at large: Retail Winners. Our definition of these Retail Winners is straightforward: We look at year over year comparable store and channel sales growth. Those who perform above the rate of inflation (pegged at 3.5% for this report) are defined “Retail Winners.” In this report, those whose comparable channel sales in 2013 were at or below the rate of inflation are called “Others.”

To help illustrate these differences, we’ll take another look at perceived growth opportunities and trading partner processes through the lens of performance.

Winners Adding Stores And Going Global It’s not surprising that Winners overall are more bullish on growth opportunities of all sorts, but it’s interesting to look at the entire list of questions to get differences in perceptions (Figure 3).

3

Figure 3: Winners More Bul l i sh On Growth Across Al l Areas


Far more Retail Winners want to expose new customers to their brands than their poorer performing counterparts. They want to open more stores, improve their digital presence, create new brands and partnerships and, most importantly, want to move into new geographies.

The near parity between Winners and others when thinking about improving efficiencies was most interesting. The notion that “you can’t expense control your way to growth” is an axiom, yet many still focus on it. Winners know that profitability and efficiency are important, but they clearly recognize that their brand is worth additional exposure as well. For Winners, efficient operations facilitate growth; for average and under-performers, achieving greater efficiencies is more of an end unto itself.

Winners Value Trading Partners We find attitudinal differences in the ways Retail Winners look at their trading partners as well (Figure 4).

30%

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Emphasize digital, de-emphasize stores

Create greater efficiencies in our existing operations

Digital presence where we don’t have physical stores

New Brands and/or Partnerships

Generate more sales in our existing markets

More physical stores in new geographies

Digital presence to augment our stores

More physical stores in existing geographies

Growth Opportunities Rated "High Value"

Winners Others

4

Figure 4: Winners More Likely To Value With Trading Partners


Across every queried area, Retail Winners are more likely to depend on or rely on trading partners to facilitate their growth. Most interesting was the dramatic difference in the perceived value of data sharing. Retail Winners recognize that sharing data speeds responsiveness, which is critical to growth.

Survey Participants RSR launched this survey in September 2014. We received responses from 126 qualified retailers. Responses were limited to companies with annual revenue greater than $500 million.

Annual Revenue (in US$)

$500 million - $1 billion 44% $1 billion - $5 billion 42% Greater than $5 billion 14%

Job Functions Executive Management 42% Home Office VP/Director 44% Store Operations Executive (Regional, District, Country) 14%

Current Retail Footprint

Stores only 14% Store and Digital 77% Digital only 9%

Comparable Sales Performance (assuming industry average 3.5%

Better than Average 58% All Others 42%

30%

40%

53%

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56%

63%

63%

77%

Product Information Management (PIM) &Master Data Management (MDM)

Outsourced design

Collaborative design

Data sharing with trading partners

Value of Trading Partner Processes To Support Retailer Growth Strategies (Winners vs. Others)

Winners Others

5

Geographic Profile

Headquarters Retail Presence USA 45% 71% Canada N/A 33% Brazil 2% 15% Other South America N/A 10% Mexico 1% 20% Other Central America N/A 11% United Kingdom 48% 60% Europe 3% 42% Middle East N/A 15% Africa N/A 9% Asia/Pacific 1% 19%

Category of Products Sold or Handled (all numbers expressed as percent)

Fashion/Short Lifecycle 21% Seasonal 22% Durable Goods 25% Consumer Electronics 15% Basics / Replenished Items 12% Perishables 6%

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Business Challenges

No Clear Aggregate Consensus On External Challenges Overall, our respondents exhibit no clear consensus on the problems they face in growing their businesses (Figure 5).

Figure 5: Diverse Aggregate Business Chal lenges


This makes sense, given the varied approaches to growth we highlighted in the report overview. Their roadblocks are as disparate as the growth strategies themselves.

We see few differences when looking at Winners vs. other respondents as well, except in four key areas:

• Retail Winners are far more likely than others to feel pressured by the fast rate of change in consumer technologies (40% vs. 32% respectively)

• Retail Winners are also significantly more concerned about creating a seamless experience across all customer touch points (34% vs. 21%). This surprises us. This has long since been settled: it’s a clear imperative.

• Poorer performers are far more likely to cite consumer privacy concerns as a top-three threat (36% vs. 26% of Retail Winners)

• Similarly, poorer performers are more likely to cite hyper-educated and digitized consumers as a threat to their business (34% vs. 26% respectively). Given that these retailers were less threatened by the rate of change in consumer technology, we can only assume that while Winners are focusing on consumer technologies proactively, others are reacting indirectly, based on what consumers adopt and use to shop.

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Threat of New Entrants

New Geographies Require us to Adapt to DifferentLaws

Customers Expect a Seamless Experience Across AllTouchpoints

Hyper-educated & Digitized Consumers

Long Supply Chains & New Product IntroductionCycles Slow Responsiveness

Saturated Existing Markets

Consumer Privacy Concerns

Need to Adapt Business & Products to DifferentCultures

Global Economic Uncertainty

Fast Pace of Change in Consumer Technology

Top Three (3) Business Challenges Affecting Your Ability to Profitably Grow Your Business

7

But Challenges Vary Wildly Depending on Products Being Sold The blurry aggregate responses change pretty dramatically when we look at challenges articulated based on primary product sold (Figure 6).

Figure 6: Wildly Dif ferent Perceptions of Chal lenges


Although ultimately their concerns tend to most mirror the aggregate respondent pool, retailers selling fashion and seasonal merchandise are most concerned about consumer privacy concerns. This makes quite a bit of sense given their propensity to use new technologies like smart fitting rooms as a differentiator.

Similar to the overall respondent pool, retailers selling durable goods and Consumer Electronics have broad and varied concerns. The only challenge they cite with greater frequency than their peers is slow responsiveness driven by long supply chains and new product introduction cycles. Yesterday’s hot electronics product is today’s “old news,” and six week delivery times with whole day delivery windows for furniture remains an anachronism from a bygone era. It’s an anachronism retailers know they have to change, but most have yet to crack the code.

Retailers selling basic and perishable merchandise have far less ambivalence in their perceived challenges, which are clustered in four specific areas:

• Threat of new entrants –in the US, retailers of all shapes and sizes seem to decide selling food is a great idea. The grocery business has seen its market disbursed across the world of Mass Merchants, Convenience Stores, and most recently, Dollar stores.

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Threat of New Entrants

Long Supply Chains & New Product IntroductionCycles Slow Responsiveness

Customers Expect a Seamless Experience Across AllTouchpoints

New Geographies Require us to Adapt to DifferentLaws

Saturated Existing Markets

Hyper-educated & Digitized Consumers

Global Economic Uncertainty

Fast Pace of Change in Consumer Technology

Need to Adapt Business & Products to DifferentCultures

Consumer Privacy Concerns

Top Three (3) Business Challenges Affecting Your Ability to Profitably Grow the Business

Fashion/Seasonal Basics & Perishables Durable/CE

8

While no one would ever mistake this product as a new source of profits, most acknowledge food is a great traffic driver. Barriers to entry are low, as product is typically sourced domestically and can readily be replenished from alternate sources.

• Saturated Existing Markets – when you have few barriers to entry, markets can become saturated quickly. The number of places a shopper can buy laundry detergent or a loaf of bread seems to grow by the day. We wonder why those same retailers believe they have more headroom for growth in existing markets (45% rate this as a high value growth opportunity). The old axiom seems to hold true: when you don’t know what else to do, you do what you have always done.

• Need to Adapt Business and Products to Different Cultures – Even the world’s largest retailer, Walmart has had some tough experiences attempting to move its business into new countries. It has famously exited Germany and still struggles in Mexico. Target famously started horribly in Canada for a variety of reasons, both in assortment and in-stock availability, Generally, basics and perishables have very little brand caché (there are notable and odd differences like Coca Cola and Kellogg’s Corn Flakes, but the general case holds true).

• Fast Pace of Change In Consumer Technologies – The implication here is that consumers can find less expensive alternatives to commodity merchandise via their own devices. The ever-looming threat of Amazon in the West and Alibaba in the East create stress for the retailers already selling those commodities. They are vulnerable and generally have not created differentiated customer experiences to fall back on.

The Challenge of Omni-channel Retailing Depending on one’s point of view, Omni-channel retailing is either a business challenge or an opportunity. We can see below that the processes themselves are perceived as an opportunity, but the status of implementation is problematic (Figure 7).

Figure 7: Omni-channel – Potent ial Opportunity Remains A Real Chal lenge


Lack of omni-channel integration is a significant challenge for retailers. While it may not hold a company back from improving its revenue, but it most certainly will constrain profitability.

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42%

46%

59%

Mobile integration to both e-Comm and thestores

A single integrated selling platform across allchannels & geographies

360° view of product, customers, channelactivities

Omni-channel Processes: Perceived High Value vs. Implemented

High Value Implemented

9

It’s not surprising to find retailers selling basics and perishables furthest behind in implementing these processes…but it is surprising to see just how large the gap is between their perceived value of these processes vs. their stunning lack of progress on moving forward (Figure 8).

Figure 8: Basics and Perishables Retai lers in an Omni-channel Quagmire


These are the challenges our retail respondents see in moving forward with growth strategies and plans. But there’s a reason they keep persevering. Quite simply, they see a lot of opportunities in doing so.

In the following section, we’ll dig deeper into those opportunities and the significant differences between Retail Winners and their peers.

27%

9%

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36%

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45%

Mobile integration to both e-Comm and thestores

A single integrated selling platform across allchannels & geographies

360° view of product, customers, channelactivities

Omni-channel Processes for Basics / Perishables: High Value vs. Implemented

High Value Implemented

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Opportunities

In Aggregate, Opportunities Are Also Diverse, and Confusing Just as in aggregate, we saw very little consensus on the Business Challenges retailers face in executing on their growth strategies, the opportunities they perceive they can take to address them are equally diverse. They are also somewhat confusing (Figure 9).

Figure 9: Wait…That ’s Not What You Said Before…


Even though when asked to rate the value of various kinds of growth strategies, retailers place the highest value on growth in existing markets (Figure 1), when asked how to overcome the business challenges they face, they are most apt to cite expansion into new markets. This strikes us as a knee-jerk reaction that may or may not hold water.

Respondents are more consistent in their next two most frequently cited top-three opportunities: growing through mergers and acquisitions is not so different from extending the brand through partnerships and subsidiaries.

The data does get a bit more interesting and straightforward when looking at responses through the lens of retailer performance. When push comes to shove, Retail Winners are best positioned and willing to move into new markets, while others remain far more focused on efficiencies and broader assortments (Figure 10).

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“Dark stores” for direct fulfillment

Broaden our assortment (endless aisle, etc.)

Work with groups and regulatory agencies topromote global security and privacy standards

Narrow our assortment (curation)

Enhance the in-store experience with digital touchpoints

Source / replenish closer to the point of demand

Expand our digital direct-to-consumer capabilities

Extend our Brand into new markets throughpartnerships and subsidiaries

Grow through mergers and acquisitions

Expansion into new geographies

Top Three (3) Opportunities to Address Business Challenges

11

Figure 10: Where Winners See Things Di fferently


It’s worthwhile to take a deeper dive into the notion of both broader assortments and “dark stores.”

The Myth of Broader Assortments and Endless Aisles Broader assortments are, theoretically, a way to drive more traffic to stores and web sites. After all, the theory goes, the more ‘stuff’ we have available, the more likely consumers are to find us. The “Superstore” model was in great favor in the early 2000’s as well – with Hypermarts and super-centers sweeping across the landscape.

But times have changed. Most consumer studies show they value convenience and a product assortment designed “especially for them” more than long walks through big-box retail stores. Consumers are fundamentally time-starved, and shoppers value assortment depth over breadth.

Endless aisle is a useful theoretical construct, but tends to have value more as a way to solve in-store out-of-stocks than it does extending the merchandise mix.

There are those who would cite Amazon.com is an exemplar of an almost an infinite assortment, but there are sharper lenses to look through:

• Amazon may have an almost infinite assortment, but the company is a master of curated presentations that display cross-sells, up-sells and product affinities, followed by emails that echo the same message. Once the consumer lands on a page, what she sees is very planned and programmed.

• Amazon’s infinite assortment wreaks havoc with its operational efficiencies. After all, the company’s profits are meager to nil. Most retailers could not survive in that mode for long.

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“Dark stores” for direct fulfillment

Broaden our assortment (endless aisle, etc.)

Expand our digital direct-to-consumer capabilities

Enhance the in-store experience with digital touchpoints

Extend our Brand into new markets throughpartnerships and subsidiaries

Expansion into new geographies

Selected Top Three (3) Opportunities: Performance Differences

Winners Others

12

Is There Value in Dark Stores? In the real world, warehouse space is cheaper than retail space. So “dark stores” should be, and generally are, more expensive to rent and hold than a dedicated distribution facility in an industrial area. But many retailers have a specific and unique problem: underperforming stores with long lease terms. Absent a bankruptcy filing, it’s virtually impossible to break a retail lease.

It’s natural for retailers who have an over-large terrestrial footprint to contemplate “dark stores” as a way to utilize underperforming square footage. It’s also the best of a set of bad options. That’s why Retail Winners are far less interested in the concept. They have less under-performing real estate, and a more efficient distribution network. In other words, our best advice is: a dark store may be a good alternative to spending a fortune to get out of a lease, but we would never contemplate leasing a facility for that purpose. There are too many less expensive alternatives.

Which Geographies? We asked our respondents to identify the top TWO geographies they see as most desirable for expansion. The answers take us back to the original question expressed back in Figure 1: when asked to rate the value of various methods of retail growth, our respondents selected their existing markets as far more valuable than new ones. It’s therefore not all that surprising to see in a study made up of predominantly United States and United Kingdom retailers respond as we see in Figure 11…once again, there’s no place like home.

Figure 11: Desi rable Geographies are Famil iar Geographies


There’s certainly a lot of noise in the media about expansion into Asia/Pacific and South America, yet there’s very little interest we can find among our respondents. Hot fashion brands often make headlines for moving into these geographies, but ironically it is more frequently retailers selling basics and perishables that look to expand into Asia/Pacific (27%), while only 13% of fashion retailers express this interest.

60%

18% 13%

7% 10% 2%

34% 30%

9% 5%

14%

The Two (2) Most Desirable Geographies for Expansion

13

We do worry a bit – of the whole world, the US and UK markets are probably the most over-stored of all. Underperformers must recognize that competitors are coming. And the whole industry must recognize that markets are never infinite.

Working With Trading Partners: Who Is Actually Doing It? In Figure 4, we highlighted the higher value Retail Winners place on collaborative Trading Partner processes in supporting their retail growth. As it turns out, for the most part, they are not only talking the talk, they’re walking the walk (Figure 12).

Figure 12: Winners More Like ly to Walk the Partnership Walk


Notwithstanding the somewhat abysmal state of Master Data Management / Product Information Management adoption, we can see Retail Winners taking a stronger position in all other collaborative trading partner processes.

There is lots of headroom left for growth, and more than 90% of respondents have “plans” across all these collaborative processes, but winners are typically twice as likely to have made those plans a reality. We certainly hope to see more collaboration with suppliers going forward. It’s hard for us to recommend fully outsourcing design, but we are very bullish on collaborating on design to improve speed to market, and certainly data sharing to improve forecasts and the flow of inventory across the supply chain.

The Net: Amid Some Confusion, Clarity Can Be Seen Even though we’ve seen that on the surface opportunities are somewhat diffuse, they come into sharper focus when we look at retailer performance. Retail Winners always seek to stretch their advantage, while others seek to tighten efficiencies and cast a wider net. Winners are more apt to lean on their trading partners for assistance. Others neither talk the talk, nor walk the walk.

38% 47%

55% 63%

19% 26% 30% 34%

Product InformationManagement (PIM) &

Master DataManagement (MDM)

Collaborative design Outsourced design Data sharing with tradingpartners

Percentage Who Have Implemented Trading Partner Processes

Retail Winners Others

14

Organizational Inhibitors

Getting Practical Given retailers’ sense of the growth opportunities open to them (Figure 1), compared to their sense of the business challenges they are faced with (Figure 5) and the diverse responses to those challenges (Figure 9), one might expect they would throw up their hands in despair at the sheer number of the growth related issues they face. But retailers are above all things practical problem solvers, and when we look at the top operational challenges that concern them, we begin to get a clearer picture of their to-do lists. The most frequently cited top-three operational challenges retailers are working to overcome are real-world problems like cross-cultural differences, executing consistently across geographies, and managing inventory across a potentially far flung enterprise (Figure 13).

Figure 13: What Hinders Executing A Growth Strategy?


Looking inside the responses, we see surprisingly little difference between Winners and others.

Instead, we find a few standout concerns when these operational challenges are analyzed by retail vertical:

• Durable Goods & Consumer Electronics retailers are more concerned about effective inventory management across the enterprise (64%) than are Basics & Perishables retailers (55%) or Fashion/Seasonal retailers (41%);

• On the other hand, Durable Goods & Consumer Electronics retailers are less concerned about price consistency (44%) than either Basics & Perishables retailers (64%) or Fashion/Seasonal retailers (61%);

• And Fashion/Seasonal retailers are much more concerned about the “long tail” of the product lifecycle (56%) than Basics & Perishables retailers (32%) or Durable Goods & Consumer Electronics retailers (44%).

42%

47%

48%

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56%

Lack of global operational standards

The “long tail” of the product lifecycle is hard to manage

Ship-from-store creates additional pressures onstore employees

Effective Inventory management across theEnterprise

Pricing consistency across channels andgeographies is hard to manage

Cross-cultural Human Capital Managementconsiderations (language, training, support)

What Are Your Company's TOP 3 Operational Challenges?

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The problems associated with “Cross cultural Human Resource Management Considerations” are perceived as a top operational challenge to growth by all types and performance levels of retailers. This is not so remarkable. After all, retail is a people-intensive business, and retailers don’t want to get spread so thin that they can’t ensure that the Brand Promise is consistently delivered to customers in every market they serve. As much as for any other reason, this concern explains retailers’ strong preference to find growth in existing markets.

IT: An Enabler Or An Inhibitor? When asked about what stands in the way of making progress on a growth strategy, the value of technology comes into focus for the first time, and not in a good way (Figure 14). Retail Winners are most concerned that IT isn’t prepared to support the business’s emerging analytical needs, nor to support technology across cultures and languages.

Figure 14: Focus On IT


Winners’ IT-related concerns are consistent with their sense of growth opportunities in new geographies and markets. As we’ve seen in other RSR studies, they are cognizant of the relationship between business processes and the technologies that are needed to support them. While almost 40% of all the respondents in this study worry that IT can’t respond quickly enough to changing needs, Retail Winners translate that into specific concerns that the IT function will be

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Top Three (3) Internal Roadblocks Faced In Executing a "Growth" Strategy Based On Expanding Digital And Physical

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challenged to support advanced analytical needs and global technology capabilities needed to support a widely distributed operational environment.

As with the operational challenges discussed above, there are some notable differences in ranking the internal roadblocks when we look at the responses by retail vertical:

• Basics & Perishables retailers are far more concerned about operating budget restrictions than other retailers (50%). Likewise, these same retailers worry more about CAPEX considerations (46%). Given the extremely tight margins and skimpy earnings that these retailers usually have to work with, neither of these findings is surprising;

• On the other hand, Basics & Perishables retailers are far less concerned about the growing influence of the CMO than other retailers (18%). These retailers, whose value proposition is everyday item & price oriented, tend to put less emphasis on customer facing and next-generation marketing technology solutions (as we’ll see in the next section of this report). The implication is that the role of the CMO hasn’t changed much for them; it is still overtly product (rather than customer) oriented, all about co-op advertising, vendor allowances, and new product introductions.

Local Vs. Central Control Back in the mid 2000’s UK mega-retailer Tesco developed a global strategy built around a delineation of technologies and processes as either “local” or “global”. “Tesco In A Box” defined a set of standards that established how IT would support rapid expansion into new markets across the globe. In this study, we can see Winners approaching process and IT support of global growth in a somewhat similar way, specifically by looking to “localized IT outsourcing” and “localized business process outsourcing” to address the roadblocks to global growth (Figure 15).

Figure 15: Retai l -Winners-In-A-Box


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Essentially, Tesco defined a core set of processes and supporting technologies that would be operated centrally (for example, Human Resource Management), while identifying what tasks were best managed locally (e.g. hiring). Such a strategy requires two key components to work: first, a strong global steering function, and secondly, well defined global standards. In this study, more Winners emphasize the steering function than do their lesser performing counterparts, but incongruously put less emphasis on global standards and processes. In our opinion this is a mistake Winners may live to rue if they don’t correct it. But over 40% of non-Winners make an even bigger error by favoring completely separate IT departments, almost guaranteeing conflict.

It All Gets Back To People, Process, Technology Broadly speaking, retailers worry about their ability to execute consistently across bigger and potentially multi-national geographies. In general, this is a whole new frontier for almost all retailers except for luxury fashion retailers who went global over a decade ago. Whether the concern is “people” issues (language and culture), “process” issues (consistent execution), or “technology” related challenges (inventory visibility across the enterprise, IT’s ability to support a far flung enterprise), the common thread is effective use of information to both create value for consumers and to manage the business.

But retailers’ top concern was identified at the beginning of this report: the fast pace of change in consumer technology is a top business challenge, and retailers’ relative inability to absorb those changes quickly can be a huge inhibitor to growth either in-market or in new markets. We’ll see in the Technology Enablers section of this report how retailers are trying to position their information assets so that they can better respond to consumers’ digitally empowered expectations.

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Technology Enablers

Enabling People And Process With Technology In our analysis of the Organizational Inhibitors, the issue of “advanced analytics” came into focus. Since 2007, RSR has studied the steady progression of BI & Analytics from traditional product-oriented transactional data analysis, to the inclusion of customer-oriented data and “operationalizing” the results of data analysis with KPIs, dashboards, and alerts, and finally to “big data” – advanced analysis of non-transactional “signals” derived from customers’ digitally enabled paths to purchase. In 2014, there is no longer any real resistance to Enterprise-level technologies for “Big Data” type analysis of non-transactional data or predictive analytics. Retailers see these capabilities as key enablers to their growth strategies. But while these concepts have been generally accepted, there’s a clear distinction between how Winners perceive the value when compared to others (Figure 16).

Figure 16: Big Data Represents A Big Advantage


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Some differences based on retail vertical:

• Fashion/Seasonal retailers put far more emphasis on “big data” than do others, especially basics/perishables retailers (72% vs. 45%). In RSR’s August 2014 benchmark study, Omni-Channel 2014: Double Trouble, we observed that “fast moving consumer goods (FMCG) companies such as grocers tend to view mobile/digital as an in-store shopping assistant both for consumers themselves or for employees working on the sales floor, while high-end fashion retailers view digital in all its forms as an opportunity to build the Brand and extend it far beyond the retailer’s physical boundaries”. This study further underlines the difference; fashion/seasonal retailers are far more interested in using the digital channels to engage the consumer than basics/perishables retailers are.

• Perhaps as a result, fashion/seasonal retailers find far more value in an “enterprise privacy policy and technical framework” than do other retailers, especially basics/perishables retailers (54% vs. 24%).

As much as Retail Winners put value on “Big Data”, predictive analytics, and the analysis of non-transactional data, those capabilities remain a work-in-progress for many of them (Figure 17). Average and under-performers have much farther to go. Not only do more of them need to be convinced of the value of such capabilities, even more of them have yet to implement them. Figure 17: Work- in-Progress


Putting Analytics To Work In The Store Core to ensuring operational effectiveness across a wide enterprise footprint is the use of information to manage in-store processes and people. And as we saw earlier in this report, retailers acknowledge that omni-channel processes (and supporting technologies) also require better information, particularly a “360° view of product, customer, channel activities”. When we asked our survey takers to rate enablers for the store, they put value on operationalized analytics,

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What is Your Company's Actual Experience with Enterprise Technologies To enable Your Growth Strategy?

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an improved customer experience, and the generation of new data to help bridge the gap between the consumers’ digital and physical shopping behaviors (Figure 18).

Figure 18: The Information-Enabled Store


The difference between Winners and others regarding “task management” is surprising; in the Organizational Inhibitors section of this report, we saw that there is little difference between how retailers assessed the business challenges associated with consistent execution in the store. But only Winners want to resolve those challenges with “task management” automation. What’s especially incongruous is that almost twice as many non-winning retailers value “mobile analytics for managers” as “task management”. One has to ask – what besides flash sales are managers expected to look at, if not operational KPI’s generated by task management systems?

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Winners are not only focused on operational excellence. They also see a role for technology in the store to enhance the customer experience. And as one might expect, “fun stuff” like smart fitting rooms, etc. is perceived as valuable by fashion/seasonal retailers across performance levels, especially in contrast to basic/perishable retailers (61% vs. 32%).

In-store tracking technologies present both an opportunity and a threat for retailers. The opportunity created by tracking technologies is that they enable retailers to connect the consumer’s digital path to purchase with the physical one (especially via smart-phone geo-location tracking). The threat is that consumers may perceive the technology as an unwelcome breach of their privacy. For example, an August 2014 consumer survey by cash management solution provider Balance Innovations found that 68% of those surveyed disagreed with the statement, “I don’t mind retailers tracking my in-store location using my smartphone to provide relevant deals and savings as I shop.” Recent payment data theft incidents at JP Morgan Chase and Home Depot, and 2013’s data breach at Target (at the worst possible time of year) have only heightened consumers’ concerns about data privacy. Given these facts, it is troubling that over one-half of retailers in our study don’t rate an “Enterprise privacy policy and technical framework” as ”highly valuable”. But as we’ll see below, retailers are forging ahead to enable in-store tracking of some kind.

Just as we saw with Enterprise technologies, it’s still early days for implementing “next generation” store-level information technologies, and it's a behavior of Retail Winners (Figure 19).

Figure 19: More Work-in-Progress


Growth In The Digital Space We saw in the Research Overview section of this report that developing a “digital presence to augment our stores” is perceived as a valuable growth opportunity. And we’ve also seen that

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Retail Winners in particular favor the implementation of Enterprise and Store level technologies that enable integration to the direct (usually “digital”) channel. RSR also observed in our August 2014 benchmark study, Omni-Channel 2014: Double Trouble that Winners favor a digital strategy “to drive consumers to the store”. It follows then that Winners would put more value in enabling customer-facing capabilities, and be further along in implementing them. It turns out that is exactly the case (Figure 20).

Figure 20: The Dig ital Touch


It’s also consistent with what we’ve seen regarding Enterprise and Store level enabling technologies that Fashion/Seasonal retailers generally are far more progressive than other retailers when it comes to using non-transactional information generated in the digital space to offer more personalized value to consumers in both the digital and physical selling environments.

Comparing the data in Figure 20 with Figure 21, we can see that Fashion/Seasonal retailers are making better use of capabilities that enable them to interact with consumers in the digital environment, than either Durables/Consumer Electronics or Basics and Perishable retailers. But Retail Winners (aggregated across all verticals) are finding the greatest value from those capabilities. Simply put, over-performers, no matter what kind of merchandize they sell, are ahead of the game when it comes to interacting with consumers in the digital environment as a way of influencing their shopping behaviors to create a bias for the Brand.

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Figure 21: Fashion/Seasonal Leads The Way

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Digital Growth Fuels Total Growth The trend is unmistakable – digital growth fuels total growth, and using data as a competitive weapon is a key success factor. Retailers have moved beyond their early skepticism of “big data” as just the latest Silicon Valley buzzword, and Winners in particular are now implementing the technical foundations to use that data to personalize the customer shopping experience in both the digital and physical selling environments – everywhere that they operate.

There’s also an underlying recognition that consumers are driving the evolution of the shopping experience. Retail has been redefined from “what you want to sell” to “what, where, when, and how consumers want to buy”. That shift requires retailers to use pre-transactional data to glean customer preferences about “what, where, when, and how” to make the right offer at the right time. None of that can occur at scale without a strong information-based go-to-market strategy.

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BOOTstrap Recommendations

Retailers have been accused of being risk averse before now. They rely on what has worked in the past to frame their future growth strategies, and have shied away from putting too much dependence on anything new – whether it’s new technologies, new products or services, or new markets. But consumers are far ahead of retailers when it comes to developing a global view; for many shoppers (and particularly the next generation of shoppers), “the world” is the store, and technology is the window. They expect retailers to “be there” with them.

But retailers are not “there” yet, as this study reveals. They doggedly cling to tried-and-true growth strategies, focusing on existing markets and moving too slowly to adopt technologies that consumers assume are already in place. Given the size of retailers who responded to this survey (equivalent of $500 million or more in annual revenue) and their geographies (primarily UK and US), there’s plenty of room for concern. Those markets are not infinite, and rarely are there products and categories so unique that they can sustain growth forever.

With that as a core notion, we make the following recommendations:

Consider Growth in Economically Strong Markets We were surprised to find a lack of interest in markets that have a growing middle class, like the Middle East and Asia. These economies are strong and growing. The recent IPO of Alibaba should highlight the opportunity in China, and wealthy countries in the Middle East have a clear hunger for the fashions of High Street and Seventh Avenue.

This report has highlighted the ways Retail Winners manage the challenges of moving into these markets, managing from afar, and implementing technologies to support centralized management and control.

Consider Growth in Emerging Markets Certainly, South and Central America and Eastern Europe have risks. While we would never advise moving whole-hog into politically unstable environments, many of these countries have stable political and social systems, and are still under-served for even basic merchandise and products. Retailers worry about their ability to execute consistently across bigger and potentially multi-national geographies, but those concerns can be overcome with consistently applied global standards, local execution, and a strong technology base underpinning it all. We see further consolidations and shake-outs in fragmented markets – we are in the early stages of a seismic shift to global retail brands that will dominate the landscape.

Establish a Digital Beachhead The “digital domain” doesn’t respect national borders, and today’s digitally enabled consumers already view “the world” as “the store”. Retailers are focused on using the digital domain to augment their existing stores, but they also have an opportunity to test new markets, before committing to physical growth. A digital presence that is supported by regional distribution centers and local marketing is one way to test those markets. Particularly for fashion brands, a digital presence can help build a strong local customer base among the middle class, which might well be followed by stores.

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Establish A “Global Governance” Framework Retailers don’t have to re-invent global growth. Companies in other industries that have grown globally follow a particular pattern, establishing a set of standards that must be applied globally, and establishing local operations while maintaining central governance. A key to being successful is by implementing business performance metrics, implementing KPI’s and the technologies that support them, in order to govern far-flung operations. For example, one key difference between Retailer Winners and others noted in this study is that they use task management solutions to deliver operational KPI’s to manage store operations.

Move To A Sense-and-Respond Model Retailers must implement BI and Analytical technologies to populate operational KPIs and management dashboards with useable and timely insights. But modern technologies also enable retailers to move beyond a transactional mindset, and move toward being a “sense-and-respond” business. This is where “big data”, analysis of non-transactional data from consumers’ digital paths-to-purchase, and predictive analytics come in; Retail Winners are much more aggressive than their lesser performing competition in seeing and responding to events in both their digital and physical operations as they are happening. This is more important than reverting back to tried, tired and true strategies like opening up new stores in the same geographies.

Take Consumer Privacy & Data Security Seriously Modern technology can glean consumer behaviors and lifestyle preferences from non-transactional data generated during digitally enabled paths-to-purchase. This information is useful for retailers who want to anticipate customer needs and deliver value messages that create a bias for the Brand at the right moment in time. But having the ability to know customers that intimately creates ethical and legal responsibilities, and retailers must be proactive in considering them. We were dismayed to find in this study that less than half of Winners have implemented an Enterprise privacy policy, and even fewer non-Winners. This is a true inhibitor to growth strategies that have a “digital” component to them – in other words, virtually any 21st Century growth strategy.

Think About IT as An Enabler, Rather Than an Inhibitor With full acknowledgement that IT backlogs continue to grow we continue to encourage the shift away from home-grown customized solutions to standard, off the shelf solutions. Under a central governance model, technologies that support languages and alphabets of all flavors must become core to a growth strategy. It may require a greater up-front investment, but should drive results over the longer term.

Perhaps even more important, rather than just focusing on applications, it makes a lot of sense for retailers to focus on the source: their information assets. With a sound base of data, applications are easier to implement and their results more believable. In the 21st Century, information assets are as important as physical ones, and should be nurtured and preserved.

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Appendix A: RSR’s BOOT Methodology©

The BOOT” methodology© is designed to reveal and prioritize the following:

• Business Challenges – Retailers of all shapes and sizes face significant external challenges. These issues provide a business context for the subject being discussed and drive decision-making across the enterprise.

• Opportunities – Every challenge brings with it a set of opportunities, or ways to change and overcome that challenge. The ways retailers turn business challenges into opportunities often define the difference between Winners and “also-rans.” Within the BOOT, we can also identify opportunities missed – and describe leading edge models we believe drive success.

• Organizational Inhibitors – Even as enterprises find opportunities to overcome their external challenges, they may find internal organizational inhibitors that keep them from executing on their vision. Opportunities can be found to overcome these inhibitors as well. Winning Retailers understand their organizational inhibitors and find creative, effective ways to overcome them.

• Technology Enablers – If a company can overcome its organizational inhibitors it can use technology as an enabler to take advantage of the opportunities it identifies. Retail Winners are most adept at judiciously and effectively using these enablers, often far earlier than their peers.

A graphical depiction of the BOOT Methodology© follows:

a

Appendix B: About Our Sponsors

In a 24/7 world where the Internet has removed physical boundaries and created global reach for even the smallest brands, there is more choice and flexibility around how, when and where consumers shop. To meet the expectations and preferences of an increasingly fragmented consumer base, retailers need a new way to plan and manage financial goals, develop localized assortments, and make buying, allocation and replenishment decisions that will maximize profitability and minimize costs. The IBM and Oracle Retail approach relies on a single version of the truth—one trusted, centralized source of information that synthesizes market, trend and customer demographic data on which to base merchandising decisions. Together we are focused on helping retailers deliver a superior shopping experience, and create customer-driven merchandising and supply-chain capabilities to drive operational excellence.

http://www.ibm.com/solutions/oracle/us/en/index/retail.html

https://www.oracle.com/industries/retail

b

http://www.ibm.com/solutions/oracle/us/en/index/retail.html

https://www.oracle.com/industries/retail

Appendix C: About RSR Research

Retail Systems Research (“RSR”) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the extended retail industry, providing thought leadership and advice on navigating these challenges for specific companies and the industry at large. We do this by:

• Identifying information that helps retailers and their trading partners to build more efficient and profitable businesses;

• Identifying industry issues that solutions providers must address to be relevant in the extended retail industry;

• Providing insight and analysis about a broad spectrum of issues and trends in the Extended Retail Industry.

Copyright© 2014 by Retail Systems Research LLC • All rights reserved.

No part of the contents of this document may be reproduced or transmitted in any form or by any means without the permission of the publisher. Contact [email protected] for more information.

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