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Increasing gas prices, declining house market and rise on the price of basic food items have led consumers to reduce their spending in more discretionary items like apparel, furniture and travel. Many apparel retailers have reported huge declines in same stores sales – Limited -5%, Gap -6% and Chico’s -15%.

In the face of such challenges, many retailers are adopting cost reduction strategies as the last resort to preserve their business profitability since the current environment does not allow them to focus on sales growth.

Apparel retailers have reported an improvement in gross margins as a result of better management of inventory at the stores. They are buying less goods and then reducing the amount of merchandise sold at discount. Others are going beyond inventory and actually reducing staff at headquarters. Talbots recently announced a reduction of approximately 10% at headquarters. Another lever to reduce cost is closing underperforming stores. For example, Gap has communicated its plans to combine Gap Body, Gap Kids and Baby Gap stores under its namesake stores in an attempt to better utilize real state and reduce leasing costs.

The positive side of this story is that apparel retailers are actually now looking at their operations and trying to reduce inefficiencies, most created in times of growth when increasing sales hide their operational inefficiencies. This is a great chance for these retailers, once the economy rebounds, to emerge with a much  leaner operation.

Finding ways to better integrate brands and multi channels is an opportunity for retailers to create efficiencies for the business and, consequently, improve profitability. 

As described in the previous post (Gap integrating all its brands under a single web site), the successful integration of brands and channels can not only improve efficiencies but also increase revenues – e.g. through cross selling opportunities or leverage of physical stores as a support to web sales.

According to a recent study developed by RSR research, retailers face many challenges to go forward and integrate their businesses and channels:

1 – Real time inventory and customer updates

2 – Consistent cross brand content and product information management

3 – Central order management systems & processes

Many retailers in the research pointed out that technology constraints and inflexible legacy systems are major barriers to capture those opportunities. 

Those that overcome such challenges not only capture the benefits mentioned above but also jump ahead of the competition in developing the appropriate capabilities to keep evolving and succeeding.

 

Gap Inc. has recently announced the integration of its four web sites: Gap, Banana Republic, Old Navy and Piperlime. So now customers will be able to navigate across all brands and place one single order, saving on shipping costs and having a more convenient and fast shopping experience.

This will allow Gap to improve efficiencies by reducing the number of orders to process. Gap’s executives also expect to increase revenues as customers will trade up when picking products across the brands.

Initially, Piperlime products will be shipped separately, but in 2009 the integration of the brand’s inventory under the same roof of all the others will make it one single shipment.

 

A lot of speculation has already started regarding the performance of Fresh & Easy Neighborhood Market, the food chain recently launched by Tesco, the largest British retail, to enter the US market. Questions came up after the announcement that Tesco will put a halt on the opening of additional stores in the next three months.

It is too early to say whether the business model chosen will be successful or not. Any new business needs time to assess initial performance and implement corrective action to unforeseeable challenges, and then proceed with a more prudent and robust roll out.

Tesco executives agree that Fresh & Easy will report loses in the first year given the initial launching costs, but many stores have already reported beyond expectation sales compared to industry averages – $20 in sales per square foot per week versus an industry average of $9-10.

Entering the highly competitive US market is not an easy task, even for the giant retailer. The challenge becomes bigger given the differentiated business model adopted – limited branded products with more fresh, ready-to-go offerings – and the decision to grow organically with a new brand, which will require time for American consumers to learn and adopt.

Given the culture of constant learning embedded in its business and the deep pockets to finance the project – Tesco reported a $5.5 billion profit in the last fiscal year – the game has just started and is far from being over.

A better assessment will be possible in September when the company promises to report first financial results for the new chain.  

In the past decade, Toys “R” Us experienced a substantial decline in market share with the increasing competition of retail giants such as Wal-Mart and Target. Today Wal-Mart has 25% of the toy market.

The major challenge facing Toys “R” Us was the low frequency of customer visits to its stores. While Wal-Mart and Target see customers coming back every week, Toys “R” Us has a much longer return cycle of over 6 months.

Toys “R” Us has successfully implemented a strategy to increase store traffic by placing its toy stores side-by-side to stores of its growing chain – Babies “R” Us – which receives more frequent customer visits, on average once a month. The plan going forward is to convert all its 600 US stores into this new format.

Toys “R” Us reported positive same store sales in 2007 after years of decline. Closing under performing stores and investing in the new format are the bets to reshape the future of the toy chain. 

 Tesco, the British retail giant, has successfully leveraged its frequent shopping program, the ClubCard – which rewards customers with points every time they shop at Tesco stores and allow them to redeem points for products and airline mileage – as a tool to better understand customer behaviors and preferences.

The ClubCard captures customer buying information and helps Tesco to better tailor its store assortments and promotion efforts. For instance, while only 1-2% of coupons are redeemed on average in the industry, Tesco reports a rate of 15-20% as a result of better targeting its promotion efforts. This process has also helped to uncover interesting findings and develop actions accordingly: shoppers who buy diapers for the first time will receive coupons for other baby-related products but also for beer, as consumption increases as fathers can not go to pubs to drink. 

Dunnhumby Ltd. – a company owned by Tesco – is responsible for analyzing the data from the loyalty cards and creating statistical models to understand customer behaviors and offer recommendations for Tesco. They link buying information with individual customer data such as address, size of household and age of children provided in the application form.

In the US, Kroger has worked with Dunnhumby and implemented several retail actions as a result of the data mining exercise. However, most US grocery stores do not leverage all the potentiality of their loyalty cards and use it only as a way to provide discounts to customers. This is a result of the costs involved to implement the process and a disbelief from some of those retailers that the investment can actually pay off, and / or lack of internal analytical capabilities to capture and process customer buying information.

With increasingly competitive challenges, retailers have to find ways to stay relevant to their customers. A first step is to understand their shopping behaviors and preferences – then tailor their offerings accordingly to differentiate themselves from competitors.

 

Tesco, the largest retailer in the United Kingdom and third worldwide after Wal-Mart and the French retailer Carrefour SA with sales over $80 Billion, started its American operations last November by opening the first 20 stores in the West Coast.  The grocery store chain is called Fresh & Easy Neighborhood Market.   

 

 The chain’s strategy is to offer high quality, fresh and nutritious food on 10,000 sq-ft stores – between the size of a convenience store and a supermarket – located on local neighborhoods. Many people questioned the format picked by Tesco given the one-stop shop culture in the US translated into the success of the big boxes and mass merchandisers. Tesco spent over 3 years studying the American retail market and found that actually Americans visit multiple stores to get what they want. Tesco’s executives believe people will continue shopping on mass merchandisers and clubs to find lower prices but the neighborhood stores will bring a differentiated assortment, with more focus on fresher and ready-to-eat products versus packaged goods, and offer more shopping convenience to customers.

Tesco’s debut into the US market has been long expected. Tesco brings its expertise on operating multiple retail formats – convenience stores (Tesco Express), supermarkets (Tesco Metro), super-centers and a large format (Tesco Extra). It has successfully penetrated in 12 markets, always tailoring the retail format to the local market dynamics and customer needs. For instance, in Japan, where Wal-Mart has struggled to create a solid, growing operation and Carrefour already withdrawn, Tesco has successfully opened small convenience stores, adapting itself to the habits of the Japanese customers. 

Another 120 stores are planned to open by the end of 2008 across California, Arizona and Nevada.