3 Foreword Fred Weenig, Head of Wholesale Clients Netherlands Dear participant, The Anton Dreesmann Leerstoel voor Retailmarketing Foundation - supported by a group of leading retailers in the Netherlands - has chosen Rabobank as its partner to host and co-organise its annual congress. The initial partnership was for a period of three years ( ), but based on the success of our cooperation we have agreed to extend it for at least three more years ( ). We appreciate this opportunity to share views on the retail sector with you and to strengthen our good relationships. The subject of today s congress, Retailing Beyond Borders, is Disruption? Re-charge!, a key theme for the retail sector that includes two different messages. Firstly, the retail sector is in a phase of fundamental change: Disruption. Secondly, various strategic measures are available in order to address the market challenges: Re-charge. Our Industry Knowledge Team has prepared a report on the congress theme. The report is based on desk research, an online survey among Dutch retail executives and discussions with the management of leading Dutch retailers. The key points of the report can be summarised as follows: (i) the retail environment is highly disrupted, driven by three main drivers: People, Economy and Technology (PET), (ii) some current strategies of retailers cost cutting, increasing floor space, price focus are a dead-end street, (iii) other strategies are necessary for retailers in order to Re-charge and to retake the lead: build excellent retail formulas, omnichannel, flexibility/agility, cooperation and evaluation of real estate portfolio. Rabobank strives for a leading position in the Dutch market, as do many retailers in their respective markets. We are a knowledge-driven bank, serving a wide range of corporate customers active in all sectors in the Netherlands, including retail. Our market analysts continuously cover all relevant sectors in the Netherlands and support our clients and banking teams. With its wide portfolio of banking products and experience in the retail sector, Rabobank is well prepared to support the strategy of retailers. Finally, I would like to thank you for your presence at the congress today. I trust that the presentations and discussions have fully energised you to go out and grab the opportunities and deal with the challenges of the retail sector. I also look forward to welcoming you again at next year s event here at Rabobank. Kind regards, Fred Weenig Head of Wholesale Clients Netherlands 17 January 2014 Foreword 3
4 Table of contents Foreword Management Summary 5 1. INTRODUCTION 7 2 THE RETAIL ENVIRONMENT IS HIGHLY DISRUPTED Fundamental change with three main drivers: People, Economy, Technology People: change of demographics and consumer behaviour Economy: no growth driver anymore Technology: ongoing technological development has impact on the sector 14 3 SOME CURRENT STRATEGIES ARE A DEAD-END STREET Cost cutting can harm the formula proposition Floor space keeps increasing while technology is marching in Focus on price has some important disadvantages 18 4 OTHER STRATEGIES NECESSARY FOR RE-CHARGE Build excellent retail formulas, both online and offline From omnichannel to post channel retail Flexibility and agility Cooperation Pro-active management of real estate portfolio The way forward 30 LIST OF CONTRIBUTORS 32 Colophon 33 Disclaimer 34 4 Retailing Beyond Borders Disruption? Re-charge!
5 Management Summary The retail environment is highly disrupted The retail sector is in a phase of fundamental change. We see three main drivers for this change: People, Economy, and Technology (PET). People reflects a structural change in demographics and consumer behaviour. Population growth is very low and the composition of the population changes: ageing, more one person households. There is a clear trend towards urbanisation: the share of people in large municipalities increases. Mobility has increased on the one hand, but on the other, people will become more critical on the private use of their cars, leading to a decreased willingness to travel to stores. The paradox of more choice and less time provides chances for retailers who can help consumers save time. For the Economy driver of change, the long term economic prospects are more important than the short term indicators. We do not believe that the low levels of private consumption are temporary. In our view the retail sector is entering a long period of limited growth at best. Besides various risks and uncertainties (unemployment, procurement power, housing market, pensions) the high (financial) leverage of households plays an important role. Furthermore, other categories of consumer spending will take up a larger part of private consumption, including healthcare and fuel/energy. In particular, non-food retail will be hurt as spending is highly discretionary and the consumer has lots of choices and alternatives. The Technology driver has already had a huge impact on consumer behaviour and therefore on the retail sector. This trend will go on at an even higher pace than before, driven by increasing adaptation of technology by consumers, ongoing technological development and retailers making more use of technology. We foresee more market transparency and more competition because of the ongoing technological development. Some current strategies are a dead-end street The cost cutting strategy of retailers is understandable from a short term economic perspective. However, it can hurt the long term sustainability of the retailer via too little investment in new technologies and in the necessary new competencies of sales staff. Despite the entrance of new technologies, the retail sector has continued to increase floor space. Current plans even point at an ongoing increase of floor space. The consequences for the floor productivity are dramatic, especially for store-based non-food retail. The strong focus on price has some important disadvantages, including an indifferent retail landscape, consumers who are addicted to lower prices and the increasingly difficult battle on price since the market becomes more transparent and competitors enlarge their scale. Other strategies are necessary to Re-charge and to retake the lead Retailers must focus on building excellent retail concepts that excel in one of three areas: (i) Product: delivering unique products, via a high level of vertical integration, eventually combined with experience, (ii) Customer: building strong customer relations via interaction with the customer and the leveraging of consumer data, (iii) System: building a cost efficient retail system, encompassing the total supply chain. Omnichannel models must be lifted to the next level: post channel retail. This model is fully consumer Management Summary 5
6 focussed and delivers an integrated shopping experience (products, information, prices/conditions), without boundaries of channels. Flexibility and agility are key in order to react quickly to changing circumstances. Important elements for retailers include: a multi format proposition, flexible concepts, more flexible rental contracts, modular store fittings and flexible project organisation. Online and real estate cooperation platforms can be supportive for the retail proposition and for the quality of the shopping area. A pro-active management of the real estate portfolio is necessary. Retailers need to assess their real estate portfolio on a continuous basis, using multiple criteria. Following this assessment they must take measures like e.g. re-allocation of stores, rationalisation of store portfolio, renegotiation of rents and conditions or improvement of the consumer relevance of the shopping area. 6 Retailing Beyond Borders Disruption? Re-charge!
7 1. INTRODUCTION The news flow on the retail sector is enormous. It is often focussed on short term indicators like consumer confidence, private consumption and (monthly) retail sales or on events like bankruptcy of retail chains. We think that beneath this surface of economic indicators and events a fundamental change of the retail landscape is going on. This fundamental change is driven by more factors than the economy. The retail sector has to find answers to this fundamental change and we think that many of the current strategies of retailers have a short term focus and lack fundamental response to the mentioned changes. This line of thinking inspired us to make a report with a twofold message. The first message is retail is in disruption and the second one is taking the lead again is possible. The combination of the two messages has led to the title of this report: Disruption? Re-charge!. This report is based on a combination of desk research, an online survey among Dutch retail executives and discussions with the management of leading Dutch retailers. We have summarised our findings in three blocks. We start by explaining the three key drivers of fundamental change, via the PET model (F. Quix, 2013): People, Economy, and Technology. The second block reviews some current strategies of retailers and concludes that they are a dead-end street. In the third and final block, we give our view on the way forward: new and sharpened strategies in order to address the fundamental change. Drivers of fundamental change (chapter 2) Overview PET model (2.1) People (2.2) Economy (2.3) Technology (2.4) Current strategies (chapter 3) Cost cutting (3.1) More floor space (3.2) Focus on price (3.3) The way forward: other strategies (chapter 4) Excellent formulas (4.1) New level of omnichannel (4.2) Flexibility and agility (4.3) Cooperation (4.4) Real estate portfolio (4.5) The way forward (4.6) Introduction 7
8 2 THE RETAIL ENVIRONMENT IS HIGHLY DISRUPTED 2.1 Fundamental change with three main drivers: People, Economy, Technology There is much news flow on the weak economy, the low levels of consumer confidence and the impact on the retail sector. Although we fully recognise that the short term economic drivers are important for the sector, we think that there are more fundamental and long term drivers of change on the table. We will use the PET (People, Economy, Technology) model to describe the three fundamental drivers of change. We will examine these drivers in more detail in this chapter. People: change of demographics and consumer behaviour Economy: not only the short term prospects, but also long term trends Technology: ongoing technological development has impact on consumer behaviour and therefore on the retail sector 2.2 People: change of demographics and consumer behaviour Low population growth and changing composition of population The population growth will be very limited and clearly below historical levels. According to CBS estimates the Dutch population will grow to 17.7 million in 2060, corresponding with a CAGR of just 0.1%. As of 2045, there will even be a decrease of the population. For the retail sector, population growth is therefore no longer a growth driver. Furthermore, the population will become older. The share of people of 65 year and older will increase firmly in the coming years: from ~17% now to a peak level of ~26% in After 2040, the share is expected to stabilize at ~25%. The consequences for retail are threefold: (i) the working population will decrease and the costs of the non-working population will have to be paid by fewer people which will put pressure on purchasing power, (ii) older people tend to spend less on goods - they already have most of the goods they need and are less willing to invest in new durable goods - and more on services, which will decrease the share of (especially) non-food retail in the total private consumption, (iii) pensions are at risk (as discussed later), affecting the purchasing power of retired people. 8 Retailing Beyond Borders Disruption? Re-charge!
9 Figure 1: Growth of population CAGR 1.4% CAGR 0.9% CAGR 0.4% CAGR 0.1% # People in NL (x million) Changing composition of households The composition of households will also change rapidly. The share of one person households and therefore the number of Decision Making Units will increase further from ~37% in 2012 to ~44% in 2050 (source: CBS). This will have impact on consumer needs and consumer spending. The costs per person in a one person household are higher compared to households with more persons due to e.g. relatively fixed costs of housing. Some retail sectors can profit from this trend including living (e.g. more houses to be furnished) and food (e.g. providing ready-to-cook or ready-to-eat meals for one person), assuming that they manage to tailor their product offerings towards the one person households. However, since one person households spend a relatively larger share of their income on housing and food (compared to households with more persons) they will spend less on other categories. This will affect other retail sectors like fashion and shoes, either on volume (people will buy less) or on price (people will buy cheaper). Value-for-money formulas can profit from this development. In addition to the overall development on one person households, we would like to point at strong regional differences. In larger cities like e.g. Amsterdam the share of one person households is today already above the 55% mark and is likely to increase a little in the future. Source: CBS The retail environment is highly disrupted 9
10 Figure 2: Increasing share of people living in larger municipalities, Urbanisation and mobility There is a clear trend towards urbanisation. The share of people living in municipalities with more than 50,000 people has increased from 27% in 1900 to 53% in This trend will continue as illustrated by research of the Planning Bureau for Living environment (PBL), showing that the growth of people in the four largest municipalities (Amsterdam, Rotterdam, The Hague, Utrecht) is much higher compared to the total for the Netherlands for the period Above average growth of larger municipalities implies of course that the rural areas become smaller. For retail, large municipalities become more important as they become larger and rural areas become less important. In addition, the average age of people in large municipalities is lower, giving higher market potential for these municipalities as older people tend to spend less on goods (as previously explained). 100% 80% 60% 27% 32% 41% 42% 46% 53% 40% 20% 0% Living in municipalities > 50,000 people Living in municipalities < 50,000 people Source: CBS The number of passenger cars in the Netherlands has, according to CBS, increased from ~5.1 million in 1990 to ~7.9 million in 2013 (CAGR ~2%): mobility has also increased. However, we believe that people will become more critical on the private use of their cars, driven by the high price of fuel, increasing costs of parking and more environmental awareness. Research by Q&A Research and Consultancy indicates that: (i) the number of private kilometres has decreased 5% over the period , despite the mentioned increase in the number of cars, (ii) 25% of consumers expect that their number of private kilometres will decrease further, (iii) people are prepared to travel a bit more than 15 minutes on average (one way) for their shopping trip. This more critical stance towards mobility has an impact on retail as consumers are less willing to travel for their shopping and demand shops nearby. 10 Retailing Beyond Borders Disruption? Re-charge!
11 2.2.4 The paradox of choice and time: more choice, less time People have, an on the one hand, an increasing choice in retail goods and services in terms of formulas, brands and channels and, on the other, less time to choose as other commitments take up a larger part of their time. The increased labour participation supports this statement. They therefore tend to choose retail formulas and brands that they can trust and which have the most relevance for them. This accounts for both online and offline shopping. Furthermore, the 2013 report Look Listen Learn indicates (based on consumer surveys) that less people have a positive stance towards shopping (56% like shopping in 2013 versus 71% in 1989) and that more people have a neutral stance (34% in 2013 versus 20% in 1989). The impact for retail is threefold in our view: (i) formulas and brands have to be top of mind for consumers, (ii) retailers can add value for their consumers if they manage to save them time via e.g. additional services: delivery, pick-up, installation, (iii) it becomes increasingly important for brands and formulas to be relevant for consumers in order to motivate them positively to go to their (online or offline) stores. Figure 3: Labour participation has increased 70% 65% 60% 55% 50% 45% 40% Men and women Women Source: CBS The retail environment is highly disrupted 11
12 2.3 Economy: no growth driver anymore Figure 4: Unfavourable prospects for private consumption in the Netherlands Unfavourable short term prospects For the retail sector, private consumption is the most important part of GDP on which to focus. Private consumption has four drivers: (un)employment, wages/purchasing power of consumers, house and stock market and consumer confidence. None of the four engines is running very well: unemployment is expected to rise, purchasing power of consumers will be no important growth driver, house market is bottoming out but is no driver for private consumption, stock market is strong but too volatile to be a driver for consumption and consumer confidence is still very low. All in all, Rabobank expects a 1.5% decrease of the volume of private consumption for % 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Volume private consumption NL (YoY) Forecasts Average Source: CBS, estimates Rabobank Long term prospects do not look good also For we expect an ongoing decline of the volume of private consumption (average -1% for this period). Figure 4 contains our estimates on private consumption. The most important conclusion of figure 4 is that historical growth levels (~1.4% for ) are way out of sight. This is more important than the absolute level of the estimates for The risks and uncertainties for the consumer (economy, risk of unemployment, pressure on procurement power, weak housing market) will not disappear soon and will continue to affect spending behaviour. Furthermore, the Dutch consumer has issues with his/her balance sheet. The assets of households in the Netherlands (mainly value of houses and value of pensions) have increased considerably in the past decades. However, the debt of households has also increased and the leverage ratio (debt versus disposable income) of Dutch households is very high compared to other countries. The risks of the assets have increased as the housing market is still 12 Retailing Beyond Borders Disruption? Re-charge!
13 weak and the coverage ratio of pension funds has decreased from 141% in 1Q07 to 108% in 3Q13. We think that the high level of debt and the increased risks on assets will force the Dutch consumer to deleverage which will affect private consumption. 300% Figure 5: High leverage of Dutch households 250% 200% 150% 100% 50% 0% France Germany Belgium Euro area 17 countries United Kingdom The Netherlands Gross debt-to-income 2001 Gross debt-to-income 2012 In addition to the mentioned pressure on the volume of private consumption, we see another risk for retail and especially for non-food retail. Other categories of consumer spending will take a larger piece of the pie, pressuring retail spending and especially non-food retail as this is more discretionary than food retail. We see three main issues in this respect: healthcare, fuel/energy and food prices. Source: Eurostat The ageing of the population, in combination with ongoing technological developments and innovations in healthcare will lead to a sharp increase in healthcare costs. These costs have to be paid by the consumers, either directly via healthcare insurance premiums or indirectly via taxes. To illustrate: a CPB study on the future of healthcare (March 2013) indicates that 75% of the income growth between 2010 and 2040 (for lower incomes) will be absorbed by higher healthcare insurance premiums. Fuel prices and prices of energy (electricity and gas) are quite volatile and dependent on (i.a.) the oil price. Over a longer period ( ), the average increase of the Consumer Price Index (CPI) for fuel (~4.5%) and for energy (~5.6%) was clearly above the general CPI level (average ~2.1% per year). The CPI for food over this same period (average ~1.7% per year) has been lower than the general CPI, but there is always the risk of higher food inflation given the dependency on uncertain conditions of nature and the worldwide food scarcity issue. Fuel, energy and food are more need to have for consumers than non-food, also price increases in these categories will affect non-food retail spending negatively. The retail environment is highly disrupted 13
14 We see downward pressure on the total non-food sales due to the before mentioned decline of the volume of private consumption and the higher share of some other categories of consumer spending. Price increases can lead to sales growth, but it is questionable if they contribute to profit growth for retailers (depends on pricing power in the value chain). All in all, we expect the non-food retail sales for to be flat (bottoming out) or even declining. Historical growth levels (~1.9% for ) are far out of sight and the market is no growth driver for the retailers. Growth has to come from gaining market share at the expense of competitors. 2.4 Technology: ongoing technological development has impact on the sector Technology has changed the way people shop In the pre-internet era, consumers could only shop at physical shops and via catalogues. In the early days of internet, online shopping was desktop based and the content of web shops was relatively poor because internet connections were too slow to handle e.g. larger pictures. Multiple technological developments have led to a far better online shopping experience: (i) internet speed has increased considerably, leading to more and richer content, including photos, 3D view and films, (ii) possibilities and use of mobile devices (smart phones, tablets) have exploded; with 7 million tablets (source: GfK 2013) in the Netherlands almost each household has one; the consumer is now always (any time, any place) online, (iii) the rise of social media has enabled a permanent connection and communication with communities that are relevant for the consumer. Various technologies have enabled retailers to integrate the internet in their shops (e.g. touch screens, internet stands, mobile devices in combination with WiFi) and to enrich the consumer experience in other ways (e.g. virtual fitting, dynamic shop-windows, product information via screens and bar codes, augmented reality). Now, shopping has become independent from time and place. The challenge for retailers is to provide consumers with this time and place independent shopping experience Importance of technology will increase further We believe that the technological development will continue at an ever-increasing pace and that technology will become even more important for the retail sector. We see three main drivers for this development. These drivers can reinforce each other: Consumers. Adaptation of current and new technologies will increase. Technologies have proven their value to consumers and the news spreads around via various media (including social media) that are fast and have a wide and global reach. New and younger generations of consumers are more acquainted with technology than current generations. To illustrate: according to a study by Cisco we are on the way to a new era The internet of everything, characterised by a dramatic internet growth through new devices. The number of internet devices will grow from 10 billion in 2011 to 50 billion in 2020, according to Cisco. The use of internet will grow accordingly, via all these devices. Technology and ICT companies. Various technology and ICT companies (e.g. Apple, Samsung, Microsoft, Google) will continue to develop new devices and applications and improve quality and speed of existing devices and applications. This not only relates to devices and applications directly 14 Retailing Beyond Borders Disruption? Re-charge!
15 used by consumers (e.g. smart phones and tablets), but there will also be an ongoing development of technologies that can be used by retailers to improve the online and offline shopping experience. Examples include: virtual fitting, augmented reality, virtual shop-windows, in-store internet stands. Retailers. In order to remain competitive or to get an edge over competitors, retailers will continue to use new technologies in their online and offline stores and in their interaction with consumers. They will drive consumers to adapt these technologies and they will stimulate technology and ICT companies to continue innovation at an ever increasing speed Technological development leads to more transparency and more competition One of the consequences of the before mentioned technological development is a nearly perfect transparency of the market for consumers. Via their smart phone, they have always and everywhere all the comparable products and retailers and all of the relevant product and shopping information (literally) at hand. If they are in the shop, they can compare the offering of the retailer with competitors, read the reviews of other consumers and refer to product information of e.g. the producer. Another consequence is increased competition. In the old days retailers needed physical shops to reach consumers, implying relatively high entrance barriers as it took time to build a network of stores and to gain the confidence of the consumer for these stores. In the more technology driven retail environment, the entrance barriers have become much lower. Online retailers can start quickly, provided that they have sufficient consumer relevance. Other players that also have a consumer base and sufficient consumer relevance can enter the retail arena. Publishers can leverage their subscribers base, (online) content and online traffic to a retail proposition, eventually in cooperation with retailers. We have already seen some examples: De Telegraaf has a web shop, Sanoma has taken a stake in an e-commerce company and in a consumer review site (Wugly.nl) and Buienradar (owned by RTL) started a web shop in cooperation with Kijkshop. In our opinion, this development will continue going forward. Internet/ICT companies like Google can penetrate further into the retail sector. They can bring some valuable assets to the table: high consumer relevance, huge customer base and deep consumer insights. Google already has an online store, a comparison site that helps consumers find the right products and the company opened a shop-in-shop in a German Saturn store (Hamburg) and showrooms in the US for its computers and tablets. We think Google can roll out these initiatives further. The retail environment is highly disrupted 15
16 3 SOME CURRENT STRATEGIES ARE A DEAD-END STREET 3.1 Cost cutting can harm the formula proposition As a reaction to the unfavourable market developments, many retailers have started cost cutting operations. Since costs of personnel are usually an important part of the operational costs of retailers, these cost cutting operations have also affected number and quality of the staff. Although cost cutting is understandable, it can hurt the retail formula proposition in various ways. If the retailer cuts costs and investments in technology and ICT, this will bring some short term relief but it will also hurt the omnichannel retail proposition that is important for future success. The retailer needs to invest in non-store channels (web shop, mobile, social media) and in technology that integrates online and offline channels (e.g. virtual fitting, in-store internet stands, mobile devices for sales staff). Furthermore, the new technology driven retail environment calls for new sales staff. Box moving is far from sufficient as the consumer can get the products everywhere, including online. Since the consumer is well informed and has all the information on products, prices and consumer reviews at hand (via his/her smart phone), sales staff have to add value in another way. Sales people have to guide the customer through their customer journey, by investigating and challenging the customer needs ( are you sure you want this big TV, tell me more about your living room and we can see which TV fits best ) and looking for the best solution, using their own knowledge, insights in consumer preferences (e.g. based on their buying history) and all of the information available in the store and online. This requires other competencies for the sales staff and the retailer will have to invest in their sales staff instead of reducing spending on staff. It also requires that sales staff have direct access to all relevant information, including: (i) the product offering of the retailer, including the long tail (available online), the stock positions and the delivery times if the product is not in store, (ii) information from the CRM system on buying preferences and buying behaviour of the consumer, (iii) product information, information on comparable products and product offerings of competitors, product reviews of other consumers. In order to enable such an information-rich sales environment the before mentioned investments in technology and ICT are necessary. 3.2 Floor space keeps increasing while technology is marching in The ongoing growth of internet sales and the further integration of online and offline channels will lead to fewer stores (as online grabs a bigger piece of the pie) and smaller stores (as the retailer does not have to stock all his product offering in his store). Remarkably, floor space has increased between 2004 and 2012 in almost all categories. Consumer electronics is the only exception, but the decrease in this sector is not the result of a well-balanced policy but of some insolvencies (including It s, PrijsTopper and Megapool). Even more remarkable is the fact that, based on current plans in the pipeline, floor space is expected to increase further, in particular in the non-food retail sector (+25% in 2020 compared to 2010), the sector that will be hurt most severely by the technological developments. The combination of a flat or decreasing non-food market, a higher share of online and increasing floor space leads to a dramatic decline of floor productivity. 16 Retailing Beyond Borders Disruption? Re-charge!
17 Figure 6a: Floor space has increased between 2004 and % Fashion 15% 13% 12% 11% Shoes DIY Non-food total Food 8% Living -5% Consumer electronics -10% -5% 0% 5% 10% 15% 20% 25% Increase floor space Source: Q&A Research & Consultancy, based on data CBS and Locatus Figure 6b:...and floor productivity will decrease dramatically Total retail (index, 2000=100) Food retail (index, 2000=100) Non-food retail (index, 2000=100) Non-food retail, corrected for online share (index, 2000=100) Source: Q&A Research & Consultancy, based on data CBS, HBD, thuiswinkel.org and Datamonitor Some current strategies are a dead-end street 17
18 3.3 Focus on price has some important disadvantages Another reaction of retailers to the unfavourable economic environment has been strong focus on price, including discounts and promotional actions. This has some important disadvantages. First of all, in a competitive retail environment all retailers have to go along with the lowering of prices. The price level in the market gets pressured and it becomes increasingly difficult to lift the price level. As all retailers play the price weapon, the formula landscape becomes flat with all players moving to the middle of the market. Secondly, just like a drug, lower prices will become addictive, both for consumers and for retailers. Consumers get used to lower prices and become less sensitive to product quality, service and experience. Retailers become extremely focussed on the price weapon and fail to compete on other aspects of the value proposition. Thirdly, it becomes increasingly difficult for retailers to compete on price as the market is highly transparent. Only the retail giants (with massive volumes) and the Low End Retailers (LER), with special skills on price and an intrinsic strong price perception (e.g. Action or Primark) are able to remain successful in this respect. For store based retailers we see an extra risk in the focus on price. If price is the only thing that makes the difference, why should the consumer go to the store? He/she can make the best deal via internet and saves the hassle of going to the store. Therefore, in our opinion full focus on price will drive consumers ultimately to online. 18 Retailing Beyond Borders Disruption? Re-charge!
19 4 OTHER STRATEGIES NECESSARY FOR RE-CHARGE In chapter 2 we have explained the disrupted retail environment from multiple perspectives. Chapter 3 has examined some current strategies of retailers and we came to the conclusion that these strategies lead to a dead-end. So new and sharpened strategies are required to address the market challenges and to be in the lead again (Re-charge). In this chapter, we will review these strategies. 4.1 Build excellent retail formulas, both online and offline Focus on Product, Customer or System In an increasingly competitive environment with consumers having overwhelming choice and lack of time, consumer relevance is of eminent importance. Consumers will make a selection out of the broad choices they have and will choose the supplier with the most relevance to them. This supplier can be anyone: a retailer (online or offline), a brand owner, a publisher or an internet company like Google. The issue of consumer relevance is not only important for store based retailers, but also for online players. According to thuiswinkel.org, there are ~45,000 web shops in the Netherlands, selling goods Figure 7: Focus on Product, Customer or System Product Minimum required level Performance market leaders Customer System Source: Rabobank, based on Three paths to leadership by Treacy & Wiersema Other strategies necessary for Re-charge 19
20 and services to consumers (B2C). We expect that this number will decrease over time as consumers choose for a limited number of broad line web shops and some super specialists in certain categories. Therefore, both online and offline retailers have to excel in order to obtain sufficient consumer relevance. There are various models that provide attributes for a distinctive retail proposition. One of them is based on the Three paths to leadership model of Treacy & Wiersema. If we translate this generic model to the retail sector, we arrive at three possible positionings: Product, Customer, and System (see figure 7). Every retailer has to find the right mix between these positionings. He has to excel in one of the three and meet market expectations (with a minimum required level as a sort of floor ) in the other two. The model is dynamic due to actions of competitors and changing consumer demands. Furthermore, thresholds will become higher in every aspect as competition increases, new players are entering the arena and consumers become more demanding. Therefore retailers must constantly evaluate their positions on all three dimensions of the model and must be able to handle continuously changing and increasing expectations on all three elements. Product: delivering Unique Products The key of the Product focus is delivering Unique Products via a high level of vertical integration. This strategy can eventually be combined with experience in the store as part of the product offering. Many retailers trade in the products of others, e.g. brand owners. This position as collector and distributor of products is vulnerable. Firstly, these products are widely available via multiple suppliers (specialist stores, department stores, brand owners) and multiple channels (online, offline). Secondly, unless the brand owner has a very strict price and brand control, the retailer faces the risk of a price war. The product is fully comparable, widely available and price transparent and the customer will go for the lowest price, supported by information available via internet. The Unique Product positioning is far less vulnerable as the retailer sources (and eventually designs) own products that are not available elsewhere. There are various possibilities to get such a positioning: products carrying the retail brand or a private label, sourcing products that are specially designed for the retailer (e.g. via cooperation with designers/celebrities or special collections of suppliers), finding niches in the market that are not or hardly covered by other players. Examples of this positioning are Hunkemöller, HEMA, H&M and Rituals. The positioning requires a high level of vertical integration as the retailer has to control the supply chain. The physical product can be complemented with other elements in order to make the product even more unique for the customer. Examples are: experience in the store (e.g. Scotch & Soda, using music, light and smell to enhance the store experience) or extra services. Customer: strong Customer Relation In the Customer focus, the retailer builds a strong Customer Relation via interaction with the customer. To do so he must be able to collect data on his customers and translate these data into individualised consumer offerings. In this way he gets more consumer relevance. This strategy is typical for online retailers like Amazon, ebay and Wehkamp since they collect much consumer data via their sites and use these data to interact with their customers, e.g. via personalised s, containing customised offerings or via offerings at special dates like birthdays. What if store-based retailers were able to capture all these data on their customers and leverage the data not only to the internet, but also to their stores? Besides using and 20 Retailing Beyond Borders Disruption? Re-charge!
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