Archive for May, 2008


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.



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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.  

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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. 

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 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.

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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. 

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Same store sales – a key indicator of retailer performance measuring sales of stores opened more than one year – were up 2.5% in April compared to the same month last year.  The positive performance in April did not boost market analysts’ optimism since Easter fell in March this year which affects comparison. The retail market is still under pressure given the high gasoline prices and the struggling housing market.

The consistent winners continue to be discounter stores – Costco with gains of 5% and Wal-Mart 3.2% after excluding fuel sales. Among department stores, the surprise was Saks which reported a 24% increase in same store sales (totaling a 8.4% growth in same store sales in the first quarter).

In the specialty apparel segment, Gap Inc reported a decline of 6% driven by low performance in its international business and Old Navy brand; and Chico’s a drop of 15%. Aeropostale Inc continues to outperform with same store sales growth of 25%. Abercrombie & Fitch also reported sales gains of 6%.  



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Blockbuster has recently announced its intent to acquire Circuit City. Many questions came up regarding the true value and potential synergies that both struggling companies could achieve operating together. Blockbuster’s executives believe synergies will come from the optimization of the store footprint and a broader offering of products under one roof – from DVD players and TVs to movie and game rentals.

As a matter of fact, Blockbuster is looking for alternatives to survive given the enormous transformation in the movie rental industry. All started in the early 2000s, when Blockbuster started to see its empire threatened, initially, by the growing consumer preference to buy vs. rent with the reduction in DVD prices. The attempt to jump into that market was unsuccessful as Blockbuster faced fierce competition from other retail giants such as Wal-Mart, Target and Best Buy. Later came the rental subscription, driven by Netflix, that offered more convenience, lower prices and a broader selection of movies. In parallel, cable video on-demand also started to grow on consumer preference and steel share from in-store rentals.

The market share of in-store rental, which represents 60-70% of Blockbuster’s sales, in the total rental industry has declined from 75% to 60% in less than 2 years. The attempts to move to the subscription business, which has experienced a double digit annual growth, has been unsuccessful as Netflix has captured over 70% of market share. Additionally, the overall movie rental business – including in-store, subscription, vending and on-demand – is a mature market in the US ($9.4Bn in 2006 and $9.5Bn in 2008E) which brings additional pressure and challenges to Blockbuster.

Given this environment, Blockbuster’s future does not look that promising. A merge with Circuit City will potentially deliver synergies in closing overlapping stores but will not solve the structural problems that Blockbuster is actually facing.

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