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An IBM Institute for Business Value executive brief

The retail divide: Leadership in a world of extremes

The IBM Institute for Business Value develops fact-based strategic insights for senior

business executives around critical industry-specific and cross-industry issues. This executive

brief is based on an in-depth study created by the IBM Institute for Business Value. This

research is a part of an ongoing commitment by IBM Business Consulting Services to provide

analysis and viewpoints that help companies realize business value. You may contact the

authors or send an e-mail to [email protected] for more information.

The retail divide IBM Business Consulting Services1

IntroductionToday’s market forces are shaping a global consumer marketplace that will look radically different in 2010, affecting retailers as never before. Traditional strategies will be eclipsed by unprecedented customer diversity, market polarization and dominant megaretailers. This is not just business as usual, but competitive Darwinism played out in fast motion. These trends will push the retail industry to a “world of extremes” with big winners and losers.

What will the future of retail look like? What capabilities will retailers need to remain relevant to demanding customers? How should retail executives begin preparing? The answer lies in a retailer’s ability to embrace fundamental change and become truly customer-centric to maintain market leadership in 2010’s world of extremes.

Executive summaryIn the recent IBM® global CEO survey, over 80 percent of chief executives from a wide range of industries identified revenue growth as their key focus area for the next three years. A similar number cited speed of response to changing customer needs as a high-priority means of driving that growth.1 For retailers, this should be a familiar refrain, as growth has long been the primary driver of shareholder value for their companies. Yet, as we look toward the future, the challenge to retailers to achieve sustainable growth has never been greater.

The consumer marketplace around the world is evolving rapidly, with unprec-edented social diversity and competitive intensity pushing the industry to a world of extremes characterized by market polarization. The “bell curve”-oriented thinking of the twentieth century – focused on serving homogeneous mass markets – will need to shift to a mindset informed instead by “well curves”2 as growth and perceived customer value migrate to opposite ends of the competitive spectrum (see Figure 1 on page 6). Retailers will succeed in 2010 to the extent that they abandon the undifferentiated middle and focus their organizations on serving the extremes of the demand curve, even if they play both sides.

Contents

1 Introduction

1 Executive summary

4 The future of shopping – two customers’ views

6 A world of extremes

8 Customer value drivers fragment

12 Gatekeepers become more guarded

13 Information exposes all

15 Megaretailers break the boundaries

17 Partnering becomes pervasive

19 Competitive Darwinism accelerates

20 Strategic imperatives for the new world

21 Craft a distinctive brand proposition

24 Drive innovation through deeper insight

27 Optimize core activities through systematic intelligence

30 Operationalize customer centricity

34 Conclusion

35 Related publications

36 About the authors

36 About IBM Business Consulting Services

37 References


In this in-depth study, IBM Business Consulting Services examined a broad range of social, political and economic forces to forecast the nature of the consumer market-place in 2010 and the implications for retailers. We identified five deep-seated trends that are redrawing the rules of competition in the industry:

• Customer value drivers fragment. Customers are fragmenting into micro-segments as a result of pronounced shifts in demographics, attitudes and patterns of behavior. Furthermore, they are “trading down” to low-cost commodities on one end and “trading up” to high-value, premium brands and companies on the other. Retailers will operate in a world where established norms no longer apply, and serving the needs of the “average” customer only hastens retailers’ demise.

• Gatekeepers become more guarded. Overwhelmed and time-strapped customers are seeking greater control over their interactions with businesses. Empowered by new technology and regulation, they will actively protect themselves from “me-too” marketing tactics. Only retailers offering differentiated, relevant value will gain access to customers’ mindshare and personal information.

• Information exposes all. Customers are being increasingly empowered by unpar-alleled access to information – virtually wherever, whenever and however they want it. Retailers must provide value propositions and shopping experiences that keep customers coming back even in a world of total information transparency.

• Megaretailers break the boundaries. The world’s top retailers are rapidly expanding across geographies, channel formats and product/service categories, blurring market segments and devouring market share. Aspiring megaretailers will need to figure out how to maintain growth at ever-increasing levels of scale and complexity. Meanwhile, their competitors must successfully differentiate themselves in order to survive.

• Partnering becomes pervasive. Competition is no longer a solo game. Leading retailers are morphing their enterprises into flexible “value networks” based on strong integration and collaboration with alliance partners. Industry competitors will face increased pressure to match the responsiveness and agility of these connected and mutually dependent business models.

The combination of these five “megatrends” will bring about dramatic change in retail markets in the developed world (the primary focus of this study). In the future, “super shoppers” will optimize their individual value equations and give their money – but not necessarily their loyalty – to whomever best satisfies their personal needs.


Growth will continue to flow to the extremes as mass retailers provide “good enough” value at very low prices, and focused specialists offer unique value and experi-ences worthy of a price premium. Competing retailers will court failure if they cannot maintain relevance in this increasingly complex and polarized world.

To position themselves to succeed in this environment, retailers need to reexamine how well they differentiate from competitors, respond to customer needs and manage operations internally and externally. But too many retail organizations remain saddled by a business design that constrains their ability to respond to new challenges with sufficient speed and agility. In the emerging world of extremes, we believe retail executives must focus on the following strategic imperatives, which serve as the means to address these challenges and provide a context for action:

• Craft an exceedingly focused, distinctive brand proposition. As the marketplace becomes more complex and competitive, undifferentiated retailers risk being squeezed out. For each part of their business (such as brands, formats or depart-ments), the most successful retailers will build a clear position in the minds of customers along two critical dimensions: selling proposition and customer needs alignment. These dimensions describe four distinct retail operating models – Mass value, Solver, Lifestyle and Opportunist – each of which has a unique set of strate-gic and operational requirements.

• Drive customer-valued innovation through deeper insight. To sustain growth, retail-ers must continuously bring customer-valued innovations to market before the competition. New tools, techniques and sources of information will help retailers understand the true drivers of customer behavior and develop successful new product, concept and marketing strategies.

• Optimize core activities through systematic intelligence. Megaretailers are forcing competitors to close the gap on efficiency and price to “stay in the game.” But simply focusing on cost reduction can lead to a downward spiral that undermines the business. Instead, retailers must optimize core activities such as merchandis-ing, pricing and store operations via systematic intelligence to drive growth, boost productivity and create margin to invest in greater customer value.


• Realign the organization to operationalize customer centricity. To satisfy, let alone delight, the complex, fickle customer of 2010, retailers need to address the internal constraints that hold them back today. Greater customer focus must go beyond the superficial by addressing all the basic building blocks of the organization. Operations must shift from disconnected, multiple channels and touchpoints to a unified orchestration of the customer experience.

Overall, the fundamental challenge for retailers is to become truly customer-centric in strategy and execution. This will take more than sound planning and strategic intent. To build and maintain market leadership in 2010’s world of extremes, retailers must take execution to the extreme – by focusing on their true differentiators, verifying all change initiatives and investments are appropriately aligned, and embedding a strong customer-focused dimension in their existing operating model.

The future of shopping – two customers’ viewsAs the consumer marketplace evolves toward 2010, retailers will increasingly face the need – and have the capability – to serve different customers with tailored shopping experiences that satisfy their unique requirements. Even two customers who have similar characteristics on the surface may have very different preferences and value drivers, as illustrated by our hypothetical shoppers, Saffron and Eileen.

It’s a Sunday afternoon in July, and Saffron and Eileen are chatting as they watch their six-year-old

sons, Kyle and Billy, play games at a mutual friend’s birthday party. The two women are both thirty-

something managers at ODB Research, Inc. and long-time friends. Eileen asks Saffron, a self-confessed

“shopaholic,” how her home remodeling project is coming...

“It’s going great,” says Saffron. “We’ve got an excellent décor consultant working with us at Domicile

Depot; his name is Martin. Using the Virtual Decorator tool on their Web site, he and I have been testing

and sharing ideas about designs and colors. Yesterday, I sent a message from the car that I wanted

to come in that afternoon to finalize the bathroom plans, and they got back to me right away with an

appointment. Martin even came in early for it – I think he gets extra vacation time for being ‘on call’ like

that. The employees at Domicile Depot really make a complex project seem easy.”

“So I’ve heard,” replies Eileen. “I haven’t worked with any of their consultants yet, but I like how you can

find almost anything you want and get it for a really good price. In fact, I was there last weekend, looking

for replacement parts for our outdoor grill. They had all the pieces I needed except for one, but the clerk

was able to find it right away at another store through their computer system. They had it shipped to

our house the next day! They also have these self-checkout machines that allow you to simply sign your


name and go – no cards or cash. In and out fast, that’s what I like about that place.” Eileen smiles and,

noticing what Saffron is wearing, says, “By the way, that’s a great outfit you have on. Where did you get it?”

“Oh, at Doubloon’s – I get most of my clothes there,” Saffron replies, smiling conspiratorially. “I’ve had

my eye on this dress for a while, and yesterday they called to say that if I bought it that day, they would

give me a special deal of 27 percent off this pair of matching shoes. That’s just enough for me – how

could I refuse! You know, Doubloon’s keeps good track of the things I like to buy, and I feel like they’ve

really gotten to know me. The store associates are great at recommending things that I’ll like and making

me feel pampered.”

“Hmm, I don’t especially like that store,” opines Eileen. “Their people are too attentive for my tastes – I

prefer to shop in peace. But I do like Jasmine, the store across the road. They have a great selection

of natural clothing and accessories made from 100 percent cotton, and they give you direct access to

information about where and how their products were made. Like the other day, when I saw this beautiful,

hand-carved wooden bowl. I was able to bring it over to one of their digital screens and check the source

of the wood against those approved by the environmental groups I’ve joined. You never know exactly

what you’ll find at Jasmine, but it always reflects the things I care about.”

It’s time to open the birthday presents. As the group of six-year-olds gathers around Tommy, the birthday

boy, Saffron says to Eileen, “Isn’t it funny how they’re so excited about this Sassy Brats stuff?”

“I know what you mean,” replies Eileen. “Billy and I went to Big Mart yesterday to buy Tommy something

for his bike, but Billy wanted to head straight for the Sassy Brats toys. Personally, I am not really fond of

those characters and the constant marketing. The good thing about Big Mart is that they let me filter out

things I don’t like from the advertising in the store, and I don’t have to see it on the video screens and

signs or have to deal with Billy constantly asking me about it.”

“Actually,” says Saffron, “Kyle is a big fan of Sassy Brats, too, and he insisted that we buy something

for Tommy that had one of those characters on it. We went to Big Mart as well, since they have a huge

selection of Sassy Brats merchandise, and they’re never out of stock. I can even use my mobile phone to

get a listing of what items they have in the store and where to find them. Even though it’s a huge store,

they’re good at helping you find things easily. I hope Tommy likes the handheld video game we picked

out.”

Eileen smiles. “I’m sure he will. You know, I hate carrying my phone or any other gadgets around when

I’m shopping, but I find that Big Mart and my other favorite stores are making it easy to shop the way I

like to shop. It’s a big change from they way it used to be. Some retailers really understand how to put

customers first.”

Saffron nods in agreement. “Absolutely. Why would anyone put up with anything less?”


A world of extremesIn 2010, retailers will face a consumer marketplace defined by divergence and complexity. We call our view of the future the “world of extremes.” In this environment, customer diversity and individualism are pervasive, rendering traditional segmen-tation inadequate. Customers demand low prices for goods they view as commodities, yet are willing to pay sizable premiums for products that matter more to them personally. In response, the retail market effectively splits into two extremes, with huge megaretail formats dominating one end of the spectrum and focused specialists dominating the other. Lost in the middle, undifferentiated retail concepts stagnate and fade into irrelevance.

As the marketplace polarizes across a variety of dimensions, corporate thinking needs to shift from “bell curves” – where firms try to serve a generic mass market but do not meet anyone’s needs particularly well – to “well curves” – where companies drive growth by applying distinct business models in each part of their business to deliver the greatest value to explicitly defined groups of customers (see Figure 1).3

Figure 1. The consumer marketplace is polarizing.

Customers seek low cost for basic goods with low emotional investment

Megaplayers capture market share by delivering “good enough” value at very low prices

Customers seek greater “personal value” when purchasing goods with high emotional importance

Differentiated specialists build profi table niches by delivering relevant value to targeted groups of customers

“Bell curves”

“Well curves”

Undifferentiated competitors fade into

irrelevance

Grow

th a

nd p

erce

ived

cus

tom

er v

alue

Mass Competitive spectrum Specialized

Source: IBM Institute for Business Value analysis, 2004.


Envisioning the future

In building this vision of the consumer marketplace (focusing on mature economies, particularly North

America and Western Europe), we considered two critical dimensions – customer preferences and the

nature of the consumer products/retail industry ecosystem. We asked:

• Will customer behavior trend toward an individualistic, highly proactive extreme or be more

homogenous, passive and accepting? To what degree will customers embrace new ways of shopping

and expend effort to optimize their personal value?

• Will the industry be fragmented and locally focused or become increasingly consolidated, integrated

and global? How large will the “megaplayers” actually get, and will they be capable of organizing

themselves and exerting their strength on a consistent basis globally?

While we believe our world of extremes vision to be the most likely scenario, there are other, very

plausible possibilities (see Figure 2). What if societies reject “consumerism” and accept a simpler

lifestyle where materialistic consumption is unimportant? What if geopolitical shocks turn countries into

walled fortresses, both in economic and social terms? With uncertainty and sudden change becoming a

fact of life in the 21st century, retail executives must evaluate their preparedness for a variety of future

states and build sufficient flexibility to adapt as the future unfolds.

Figure 2. Alternative future scenarios.


Nature and scope of industry

Cust

omer

pref

eren

ces

Individualistic, highly proactive

Local fl avors• Proactive customers driven by highly

personalized value systems and strong desire for “authenticity”

• Thriving regional and local players• High level of innovation in products,

channels, services• Resurgence of intermediaries

Behind the walls• Customer focus on personal relationships

and privacy• Highly fragmented competition with no

truly dominant players• Extremely localized and “gated”

shopping behaviors• Customers unaware of and

uninterested in choice

World of extremes• Individualistic “super shoppers” armed

with ubiquitous information access• Integrated, global supply chains• Dominant megaretailers coexisting with

focused specialists• Widespread failure of mid-tier retailers

and brands that fail to differentiate

Sameness sells• 70% global market share held by 3-5

megascale competitors• Price-conscious customers satisfi ed by

generic mass market offerings• Traditional shopping channels dominate• Niche players remain small and scarce

Fragmented, local,

disconnected

Homogeneous, passive,

accepting

Consolidated, global, highly

integrated


The world of extremes is being shaped by long-running social and industry trends which, when added together, will bring about fundamental changes in the retail market. Based on research at the IBM Institute for Business Value and our work with clients worldwide, we have identified five key “megatrends” that will redraw the rules of competition for retailers in 2010.

Customer value drivers fragmentAcross the board, profound shifts in age, wealth, ethnicity/culture, life stage patterns and value systems are making customers harder to define, categorize and reach. To begin with, aging baby boomers and their children are driving population growth to the tail ends of traditional age groups. By 2010, for example, nearly 40 percent of the European population will be over the age of 50.4 In addition, 22 percent of Japanese consumers will be age 65 and older.5 As baby boomers age, they will drive disruptive change in unexpected ways, just as they have in earlier phases of their lives. Traditional assumptions around store design (aisle width and signage, for example) or product design and packaging may no longer meet the requirements of an aging customer base. Meanwhile, the traditionally “core” 25- to 55-year-old segment will significantly decline both in absolute numbers and as a share of the total population, creating a U-shaped population distribution curve. Retailers will have to compete fiercely for the increasingly important youth segment (those under age 25), as these customers will be much more aware of marketplace options and quick to embrace new trends or switch brands and companies.

Across all age groups, long-standing life stage patterns are becoming less predictable. People are marrying later, divorcing more, having second families, starting second or third careers and even raising their grandchildren. These changes are causing unprecedented diversity in household composition. For example, between 1991 and 2002, single-person households in the United Kingdom grew twice as fast as the overall average and currently outnumber married couples with dependent children6 (see Figure 3). Depending on their magnitude in a given market, these shifts in household composition can have substantial effects on shopping behavior and spending patterns, including shopping frequency, average ticket/basket size and preferences around product packaging.


Figure 3. Changes in U.K. household composition between 1991 and 2002.

Ethnic diversity is permeating more nations at a more rapid pace. Between 1990 and 2010, the U.S. Hispanic population is projected to grow by over 80 percent and reach nearly 14 percent of the overall population.7 In Germany, Sweden and many other European countries, nonindigenous populations continue to grow, and their presence is especially being felt in major urban markets.8 For example, in Rotterdam, the Netherlands, ethnic minorities already account for more than 45 percent of the population.9 And as each new state is added to the European Union, cultural diversity will only increase. Customer tastes become a constantly moving target as the process of acculturation mixes “native” culture with that of new immigrant groups across successive generations.

These demographic changes are contributing to shifts in the decision patterns of individual shoppers, which are also growing more complex. Value-oriented buying, based on traditional cost-benefit trade-offs, is increasingly sharing the stage with a values orientation, where purchasing decisions are based on personal beliefs or self-expression. For example, over 45 percent of Swedes today are characterized as “ethically-minded,” and the figure is expected to continue rising; although not quite as strong, the trend can also be observed in other countries.10 Thus, the tradi-

All households

Two-parent households

Married couples with dependent children

Married couples with no children at home

One person households

Other non-family households

0 5 10 15 20

Source: “Social Trends, 33.” U.K. Office of National Statistics, 2003.

Total households 2002(in millions)

24.4

14.2

5.6

8.5

7.1

3.2

8.9

3.6

0.2

5.9

17.0

1.2

Percent increase between 1991 and 2002

“There was a movement

toward sameness and

economization, and everybody

looked the same with all the

same looks, prices and colors.

Now, it’s not about the uniform

look. Today, being a part of

the society shows how you can

maintain your individuality.”

– Marshal Cohen, senior

industry analyst, NPD Group11


tional value equation comprised of price, quality, product features and convenience will become exponentially more complex by 2010, as customers factor in personal opinions about corporate and social ethics, health, privacy, politics, world trade, the environment and much, much more.

Amid all this change, an important underlying trend is emerging. As they seek to express their identities, different customers are trading up and trading down within the same product category. In areas where shoppers perceive no unique value, they are trading down to mass-value products and retailers that offer “good enough” quality at rock-bottom prices. In categories that matter more to them personally, customers are trading up to “new luxury” products and specialized retailers, paying significant premiums for offerings that satisfy their personal wants and needs.12 Meanwhile, companies caught in the middle with insufficient differentiation for either audience are experiencing major growth challenges (see Figure 4). This phenomenon is not confined to particular products or geographies – it is occurring worldwide in virtually every category. For example, in Japan, it is common to see a teenager wearing a pair of inexpensive jeans accessorized with a high-end, designer handbag – or vice versa.

The trading up/trading down dynamic also plays out within individual firms. Take Gap, Inc., for example. Its premium Banana Republic and budget-minded Old Navy stores are thriving (9 and 14 percent compound annual revenue growth from 1999 to 2003, respectively), while its mid-tier Gap stores have been challenged to grow (2 percent CAGR in the same time frame).13 In the U.K., leading retail chain Tesco is experi-encing this phenomenon in its private-label product lines. Its high-end “Finest” brand is seeing the fastest growth, 25 percent annually. Its cut-rate “Value” brand is next, growing at 20 percent per year, while its mid-tier “Tesco” brand trails behind with a (still respectable) 12 percent annual growth rate.14


Figure 4. Within many product and retail categories, growth is greater at both ends of the pricing spectrum.

With “mainstream” social norms and consumption patterns becoming increasingly rare, retailers must delve deeper to understand the wants, needs and purchasing drivers associated with ever-increasing numbers of customer segments. Even when their demographic profiles are similar, customers can be driven by very different motivations. By 2010, retailers will need to achieve a deeper level of customer insight if they are to maintain relevance to complex customers, drive meaningful innovation and sustain growth.

Tackling the trend

• How can you develop better insights about customers’ true value drivers in an environment where

customer segments are fragmenting?

• In what ways will your customers allow you to expand or realign your positioning in the context of the

existing brand?

• How do you build an operating model that functions effectively in a world of increasingly fragmented,

complex customers?

?

Retailers (1999 - 2003)

Grocery (U.S.) Costco: 11.6% Albertson’s: -1.4% Whole Foods: 19.1%

Grocery (U.K.) Tesco: 13.2% Sainsbury: 1.3% Waitrose:11.9%

Dept. Stores (U.S.) Kohl’s: 22.5% Federated: -3.7% Nordstrom: 6.2%

Apparel (WW) H&M: 10.9% Benetton: -0.2% French Connection: 24.4%

Brands (1999 - 2002)

Cosmetics (U.S.) Cover Girl: 4.3% Revlon: -5.2% Clinique: 7.6%

Laundry Detergent (U.S.) Purex: 8.1% Era: 0.0% Tide: 8.4%

Vodka (U.S.)* McCormick: 7.2% Smirnoff: 1.6% Ketel One: 20.6%

Autos (Germany)** Hyundai: 20.6% Volkswagen: -0.7% Porsche: 16.7%

Notes: *CAGR for Vodka brands based on 1999-2001; **Figures represent unit sales growth in Germany for 2003 over 2002.Source: IBM Institute for Business Value analysis.

Company sales CAGR

Mass/value Postioning Targeted/premium

Gatekeepers become more guardedWhether they’re conscious of them or not, individual customers are bombarded with thousands of different marketing messages every day, and the volume is only increasing with time.15 Not surprisingly, this trend has left them overwhelmed – and increasingly annoyed. Enabled by technology and regulation, time-strapped consumers are blocking out communications that are not demonstrably relevant to their particular needs and interests. New technological tools for phones, Web browsers and televisions are already cutting the volume of marketing messages that make it through. For example, among users of TiVo (a rapidly growing digital video recording service), as many as 77 percent of people watching recorded prime-time TV programs are skipping past the advertisements.16 Around the world, public dissent is leading to legislation that prohibits or heavily regulates unsolicited contact whether by phone, mail or the Internet. The speed with which large numbers of people have signed up for “Do Not Call” lists and the like reveals the depth of their dissatisfaction.

With unfocused marketing techniques decreasing in effectiveness, companies will need to concentrate more on connecting with customers in ways and situa-tions where their messages are most relevant. Retailers will need to identify the “moments of truth” when the customer is most open to being influenced, whether that’s at home, leaving work, on the way to the mall or walking through the store. For example, studies show that 40 to 50 percent of grocery shoppers “almost always” or “frequently” deviate from their shopping lists and make unplanned purchases.17 How can supermarkets take advantage of this behavior to increase up-sell and cross-sell? Retailers will need to develop more creative approaches to generating and capturing demand at the point of purchase, in part by working more effectively with key suppliers.

At the same time, retailers must tread carefully in order to maintain the trust of customers increasingly wary of opening themselves to unwanted attention and fraud. Retailers must view trust in their brands as a precious, irreplaceable asset – vital to cutting through the noise and confusion faced by their customers. Customers will seek greater control over how their personal information is used by companies, and more innovative and relevant exchanges of value will be essential. Mere discounts may prove insufficient motivation for customers to provide personal data to yet another company. As customers become more guarded, retailers will face a new urgency to understand the effectiveness of their marketing tactics and to evaluate them in terms of their contribution to lifetime customer value.


Tackling the trend

• What new marketing techniques can you implement at the point of purchase to drive greater needs

awareness, cross-sell and up-sell?

• What new forms of value can you exchange with customers to help you gain access to their hearts,

minds and wallets?

• How do you optimize the impact of your marketing investments on customer purchasing decisions

and customer profitability?

Information exposes allCustomers are becoming “super shoppers,” empowered by the ability to access information where, when and how they want it. The Internet – broadly defined – is fast becoming a standard part of the global shopping experience. As shoppers go online, they are using the Net as an important source of information about products and retailers for a growing breadth of buying decisions (see Figure 5). By 2010, over a billion people may be online globally. The challenge for retailers is to harness inter-active electronic media to engage the customer in a productive dialog.

Figure 5. Online shopping behavior in Europe and the United States.


?

Cars

Music

Movies

Brokers

Games

Airlines

Health

Insurance

Banks

CPG products

0 10 20 30 40 50

*Figures shown are percent of the online population.Source: “Online Retail Europe January 2004 Data Overview.” Forrester Research; American Interactive Consumer Survey, 2002, Dieringer Research Group.

42

41

Percent of respondents

10

17

19

26

30

33

37

37

U.S. consumers changing opinion due to online information, 2002

Sweden 73% 93% 48%

The Netherlands 71% 94% 40%

Germany 55% 90% 55%

U.K. 57% 89% 62%

Italy 45% 76% 17%

France 40% 82% 33%

Spain 28% 89% 16%

Europe 49% 86% 42%

Online penetration and behavior in Europe, Q2 2003

CountryPopulation

onlineResearch online*

Shop online*


The stakes will get even higher over the next decade, as widespread adoption of advanced wireless technologies gives shoppers access to ubiquitous information on the go. Even now, the number of Wi-Fi “hotspots” in the United States is expected to double to 20,000 by the end of 2004.18 With access to Internet-based “infome-diary” services via next-generation handheld devices, customers standing in the aisle of one store will be able to easily comparison shop at another store across the mall, down the street or online. As the technologies behind these services evolve, infomediaries may offer increasingly sophisticated tools that learn customer prefer-ences over time and glean information from the user’s physical proximity. Imagine customers pulling up personalized reports that show which local supermarket has the best overall price on their entire shopping list, based on the particular promo-tions offered by different competing stores that week. How do merchandising and marketing strategies need to adjust in such a scenario?

Along with their increasingly complex value drivers, many customers will demand even more information from retailers. The provenance of a product, its ingredients or components, and the history and practices of the companies that make them may all factor more heavily in purchasing decisions, requiring businesses to respond. Concerns over food safety and security, for example, could create greater need for retailers to integrate information flows with partners along the supply chain. (Using in-store kiosks, Japanese supermarkets today provide customers with detailed information about the farms where the vegetables or meat they sell is produced.) In all segments, smart retailers will exploit the growing demand for information as an opportunity to differentiate. In an increasingly complex world with increasingly complicated products, retailers that help customers gain the knowledge they need to make informed buying decisions will enjoy greater sales and customer loyalty.

Note that information will not just flow from businesses to customers. The Internet is fast becoming a useful platform for large-scale collection and dissemination of customer opinion. Retailers have the opportunity to harness the habits of super shoppers to gather valuable information from them – overtly or implicitly, but always being sensitive to privacy concerns – either through customers’ own devices or via in-store technologies.

In the end, this trend is a double-edged sword. On the one hand, retailers’ compet-itive weaknesses will be laid bare, and they must proactively manage the heightened risk from negative perceptions about their company. On the other hand, they have the opportunity to serve information-hungry customers in innovative ways to reap the benefits of high customer satisfaction and positive word-of-mouth.


Tackling the trend

• In a world of information transparency, how do you provide a shopping experience that shifts

customer focus away from price comparisons?

• How can you flip this trend to your advantage? How can you take advantage of greater customer

demand for information?

• How can you better enable store employees to address the needs of both well-informed and less-

knowledgeable customers?

Megaretailers break the boundariesA select group of major competitors are causing profound changes in the retail competitive landscape by exploiting a virtuous cycle that fuels continued growth in market share and profitability (see Figure 6). These “megaretailers” are aggressively expanding across stores, formats and categories, blurring the boundaries between traditional industry segments. Consider the following:

• Wal-Mart is making strategic acquisitions in Latin America and Asia, aims to roll out 1,000 gasoline pumping stations in the United States in 2004 and is rapidly entering categories such as home sales, auto sales, financial services, online music and DVD rental.19, 20

• Carrefour, which operates a variety of formats from giant hypermarkets to conve-nience stores, is planning to have 500 stores open in China by 2007.21, 22

• Metro, operator of cash and carry, hypermarket, department and specialty stores, opened nearly 100 new stores in 2003 and continues to expand into new markets; it is now present in 28 different countries across Europe, Asia and North Africa.23, 24

• Tesco now measures its market share in terms of the total U.K. retail industry (not just grocery), a figure which has surpassed 12 percent. Its breadth of offerings continues to expand in nonfood categories and services such as telecommunica-tions, energy, legal and financial.25, 26

Mass merchants like Wal-Mart and Carrefour – as well as “category killer” specialists like Staples and Home Depot – are posting double-digit revenue and profit gains year after year.27 As they continue this torrid rate of growth, these giants are driving rapid consolidation of the retail industry. In some countries and segments, retail consolidation has already reached extreme levels: In Germany, for example, the top five food retailers control 70 percent of the market, and in the United Kingdom and France, their market share tops 60 percent.28 In the not-too-distant future, some of

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these megaretailers may even merge with each other (antitrust legislation notwith-standing). By 2010, it’s quite possible that just a handful of global retailers could have aggregate sales over US$1 trillion.

Figure 6. Megaretailers employ a virtuous value cycle to continuously increase productivity and market share.

In addition, megaretailers may emerge from other areas besides the “big box” stores. Hard discounters in Europe – Aldi and Lidl among them – are capturing significant market share from incumbent grocers. And a few online retailers are expanding to match the scale and reach of their bricks-and-mortar rivals. eBay’s US$24 billion in 2003 gross merchandise sales would rank it among the top thirty retailers in the world.29, 30 The online auctioneer has expanded its presence to 28 countries and boasts 95 million registered users.31 Amazon.com appears to have reached a point of steady profitability and has expanded its assortment to areas as diverse as home and garden products, apparel, professional supplies, and health and beauty care. Its partners include the likes of Target, Office Depot and Waterstones. Consider the potential implications if one of these “e-tailing” giants were to join forces in a much more substantial way with a brick-and-mortar megaretailer!

Megaretailer: A retail enterprise

that achieves dominant market

share far above that of rivals

and is able to dictate industry

terms of competition.

Source: IBM Business Consulting Services analysis, 2004.

Drive greater productivity

Invest in differentiators (e.g., price,

service, quality)

Deliver greater value to

customers

Increase sales and

market share

Earn more margin dollars

Reinvest in processes and

technology


Megaretailers of all types will continue to drive the bar higher for the rest of the industry. As they provide customers with ever more value at lower cost, compet-itors will be forced to respond. By 2010, we can expect to see the downfall of retailers that merely provide “reasonable value at reasonable prices” and little else. Such companies must find effective ways of differentiating themselves, prepare themselves for acquisition, or otherwise exit the business.

At the same time, aspiring megaretailers will face their own challenges: finding ways to keep growing in scale and across product categories and geographies – all without succumbing to excessive operating complexity. Simply being big is not enough; megaretailers must continue to stay true to their brand values and seek ways of providing increased value to customers. They will need to differentiate effectively from one another and avoid backlash from customers and governments (as illustrated by Wal-Mart’s difficulties in obtaining approval to open new stores in California and Illinois).

Tackling the trend

• How can you improve operating efficiency enough to “stay in the game” with powerful megaretailers?

• On what customer-relevant dimensions can you clearly differentiate from megaretailers?

• As a megaretailer, how do you maintain growth and manage risk at ever-increasing levels of scale

and complexity?

Partnering becomes pervasiveDriven by escalating expectations from customers and stakeholders, leading retailers are rethinking their business models and searching for ways to become more agile, responsive and efficient. They are morphing their traditional, vertically-integrated value chains into more flexible “value networks” that allow them to deliver greater value to customers, with each company in the network contributing its own unique capabilities. Behind this restructuring are several critical enablers that are simultaneously reaching functional maturity and adoption “tipping points”:

• Universal connectivity – Increased bandwidth, Internet access, wireless net-working and RFID adoption create an environment where almost everyone and everything are connected.

• Data and systems integration – Middleware, Web services, application integration software, workflow management software, portals and user “workbenches” facili-tate continuous, often realtime, information sharing and interaction.

?


• Open industry standards – Global data standards such as global trade item number (GTIN), global location number (GLN) and electronic product code (EPC), along with software platforms such as extensible markup language (XML) and Linux®, create a common parlance and basis for integration across the industry ecosystem. In the future, new standards are likely to be developed in areas such as price and promotions synchronization, security and privacy, and product safety and health content.

• Process outsourcing to business specialists – Process specialists are proliferating in both horizontal (HR, indirect procurement) and vertical (product manufacturing, customer data analytics) competency areas. As these providers mature, retailers can obtain more efficient and effective external capabilities in a growing range of business areas.

Today, a wide range of partnering examples can already be found in the retail industry. Some companies are using partnerships to add to the customer value proposition, in some cases as a response to the megaretailer threat. Many super-markets have expanded the array of products and services offered on site by colocating with banks, pharmacies and restaurants. U.S.-based Radio Shack has successfully expanded its assortment to technology-based services, providing branded in-store space to communication service partners such as Sprint and DISH Network.

Behind the scenes, retailers will continue to increase competitiveness and lower operating costs by outsourcing non-core activities such as IT and facilities management. But increasingly, they may also seek partners in areas traditionally considered core, such as customer data analysis, merchandise management and credit services. Tesco and Kroger both work with dunnhumby, a firm specializing in the analysis of shopper transaction data and management of loyalty programs. AutoZone’s supply chain prowess has reached such a level that other companies, such as Midas and Firestone, have outsourced product distribution and inventory management to the auto-parts retailer.32

Retail market leadership in 2010 will be determined in part by how quickly and efficiently a company’s value network can respond to shifting customer demand. Industry relationships will only grow more diverse and complex, making effective alliance management a strategically important competency.


Tackling the trend

• What new business partners can you leverage to enhance your value proposition to target customers?

• What new organizational capabilities are required to effectively manage a more complex business

model based on intensive partnering?

• How must your operating infrastructure (processes, technology) evolve to enable more flexible and

rapid partnering?

Competitive Darwinism acceleratesTogether, these megatrends are driving us toward the world of extremes – a market-place of tremendous complexity, with big winners and losers. Here, super shoppers, armed with ubiquitous information access and equipped to fend off unsolicited contact, choose to do business with those companies that provide them with the most overall value – both financial and personal. Incumbent retailers risk being displaced by more focused, innovative and agile competitors better able to meet the demands of these customers.

Dominant megaretailers will coexist with focused specialists – while both witness the absorption or failure of undifferentiated competitors (as reflected in the dramatic shifts in market share projected for the U.S. “mass retail” market – see Figure 7). Companies caught in the proverbial middle will need to migrate to more distinct strategic positions. And all retailers will have to cope with intensified market forces that will erode the sources of competitive advantage faster than ever. In this world, ultra-efficient, globally integrated value networks dominate, and insular enterprises disappear. To keep up, let alone take market leadership, retailers will need to break through today’s organizational constraints to respond to customer needs with speed and agility.

?


Figure 7. Analysts expect major shifts in market share from traditional retailers to megaretailers and specialists.

Strategic imperatives for the new worldGiven these daunting challenges, we believe that retailers must become truly customer-centric in both strategy and execution – reassessing their business operating models from top to bottom and embedding a strong customer dimension within current practices. Specifically, retailers must begin to address four strategic imperatives today to be competitive in the future market environment:

• Craft an exceedingly focused, distinctive brand proposition. Build a clear position in the minds of customers along two critical dimensions – selling proposition and customer needs alignment.

• Drive customer-valued innovation through deeper insight. Bring successful innova-tions to market before the competition by using new tools, techniques and information sources to understand the true drivers of customer needs and preferences.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%1996 2001 2006E

Note: “Mass Retail” defined as general merchandise, grocery, consumables, and pharmacy; does not include gasoline nor tobacco2001 Total Sales = $1,050 billion. *Figures may not sum due to rounding.Source: “Convergence of Mass Retail Channels,” William Blair & Co., January 6, 2003.

46

7 56

40

7

65

15

69

13

88

2633

2011E

Convenience stores (2%)

Drugstores 11%

Grocery stores (20%)

Warehouse clubs 4%

Supercenters 20%

Discount stores (9%)

Department stores (7%)

Small-format 3%

Percent change in share*

1 432

11 221814

4

241710

11579


• Optimize core activities through systematic intelligence. Improve performance in core functions – such as merchandising, pricing and store operations – by augmenting traditional approaches with advanced analytics.

• Realign the organization to operationalize customer centricity. Drive change into all the basic building blocks of the organization to achieve true customer focus. Shift from disconnected multichannel operations to a unified orchestration of the customer experience.

Craft a distinctive brand propositionTo avoid being squeezed out by megaretailers on one side and focused specialists on the other, retailers must clearly differentiate themselves through an exceedingly focused brand proposition. In practice, of course, the potential dimensions of retail strategic positioning are numerous: product assortment, depth of selection, pricing, quality, store design and size, location, service and the like. The key for retailers is to build clear and distinctive brand positioning for each part of the business (such as brands, formats or even departments) in the areas most important to their target customers and to regularly monitor how they and their competitors compare to one another.

IBM has developed a “strategic positioning matrix” to help retailers think about their place in the market. This matrix focuses on two key dimensions (see Figure 8):

• The core selling proposition – whether it emphasizes “products” or “solutions.” Do customers shop with you primarily because of the appeal of the products them-selves, or is it because you provide a range of added value around those products – such as services or a unique shopping environment?

• Alignment against the customer’s hierarchy of needs. Are you focused on basic needs or do you help customers express themselves, either as individuals or as part of a larger social group? The former category typically includes products with comparatively low emotional importance, such as groceries, office supplies or basic clothes. In contrast, the latter often includes items that provide signifi-cant personal and emotional value to the customer, such as jewelry, fashion and furniture. Note, however, that any given product category can exist at either end of the spectrum.


Figure 8. Retail strategic positioning framework.

The two dimensions described above create four distinct “brand propositions”, each of which has a distinct operating model and unique competitive differentiators. For example, “mass value” retailers emphasize convenient, one-stop shopping and value for money. In contrast, “lifestyle” retailers focus on building brand prestige, offering superior customer service and helping customers “actualize” their individual identities. When a retailer achieves superior competitive differentiation, its brand values and positioning are abundantly clear to customers, employees and other stakeholders, and superior performance usually follows. Consider the following notable examples:

• Mass value – Tesco (supermarkets and hypermarkets), Aldi (hard discounter), Costco (warehouse club), Wal-Mart

• Solver – Lowe’s (home improvement), CVS (drugstore), Vodafone (communica-tions solutions)

• Lifestyle – Tiffany & Co. (fine jewelry and gifts), Selfridges (department store), Williams-Sonoma (cooking products and housewares), REI (sporting goods)

• Opportunist – Zara (apparel), Apple Computer’s retail outlets, Virgin Megastores (books, music and video).

Products

Self-expression

Basic needs

Basis of competition• Product appeal, in-store

experience, organizational agilityThe shopper says:• “It’s exciting to shop here”• “Great product”• “It’s cool; it’s me”

Solutions

Opportunist Lifestyle

Mass value Solver

Selling proposition

Needs alignment

Basis of competition• Prestige, superior service,

customer intimacy, enthusiasmThe shopper says:• “They know what I want”• “They help me to be me”

Basis of competition• Price, selection, convenience,

scale, operating efficiencyThe shopper says:• “I’m getting a good deal”• “I can get everything I need”• “It’s quick and convenient”

Basis of competition• Relevant solutions, partner

network, reliable deliveryThe shopper says:• “I trust them”• “They solve my problems”• “I can’t do it anywhere else”

Source: IBM Business Consulting Services analysis.


The chosen brand proposition determines the strategic priorities and operational capabilities that the retailer must focus on. Each has a distinct “DNA” in terms of how it manages core functions like merchandising, supply chain, store operations and customer management, as well as corporate functions like IT and human resources.

For example, a “solver,” such as the home improvement chain Home Depot, drives growth in part by extending its offering into a broader range of relevant solutions. This model requires store associates with deep domain expertise, a network of partners (for example, craftsmen and designers) who can reliably deliver high levels of service and quality, and a tight rein on operating and product costs to maintain margins. Solvers must have a deep-rooted, service-oriented culture and the metrics and processes to support it.

In contrast, an “opportunist” like Hot Topic – which sells music-themed clothing and merchandise to teenagers – must stay on top of fast-changing customer trends, with staff that maintain close contact with the market (sharing knowledge both at corporate and in the stores), flexible and responsive relationships with innovative suppliers, and the ability to rapidly roll out new products (only six to eight weeks in Hot Topic’s case).33 Opportunists play a game of high risk/high reward – sales growth and gross margins can be very high, but “trend misses” can lead to dramatic declines in performance – and thus organizational agility is key to their long-term success.

Of course, even within a given quadrant, competitors must differentiate themselves from one another, and they often do so by drawing on elements from the other models. For example, even though Target is fundamentally a mass value retailer, it has crafted a brand proposition distinct from rival Wal-Mart in part by partnering with celebrity designers and infusing a greater fashion element in its product assortment (an “opportunist”-oriented approach).

And some retail enterprises may consist of a portfolio of different brands or formats that extend across different positions within the matrix. Take, for example, Limited Brands’ stable of concepts such as Express, Limited, Henri Bendel and Bath & Body Works. Note, however, that a collection of business units defined solely by the products sold is not the same thing – the test is whether these business units are focused on the distinct needs of different customer segments and whether their business processes and operating model are shaped accordingly.

“[Our] longer-term vision

is to become a lifestyle/

fitness company to sustain

growth…Total customer

experience will be key.”

– Retail Respondent, IBM

2004 CEO Survey


Regardless of the current composition of your business, the critical first step is to determine explicitly where you want it to go and how it will be clearly differentiated from competitors. With this level of clarity, you can then properly focus resources on executing other strategic imperatives in ways that are directly aligned with the chosen strategic positioning.

Drive innovation through deeper insightThe sources of competitive advantage in retail are eroding faster than ever. Information and ideas travel instantly around the marketplace, empowering customers and enabling competitors to rapidly mimic successful strategies. Business process specialists are making best-in-class capabilities available to all. Retailers will face ever increasing pressure to provide greater value to customers and do it at lower cost.

Thus, continuous innovation in products, services and business concepts is crucial for retailers to generate and sustain growth over the long term. For example, many retailers today – whether they are big or small – are building portfolios of related, but distinct, businesses. Although this increases operating complexity and risk, it is vital to fuel growth. In a world of fragmented customer demand, retailers must constantly bring new ideas to market – and do it faster than competitors. To improve the chances of success, retailers need to build (or partner to obtain) greater ability to develop useful customer insights that lead to more innovative product, concept and marketing strategies.

The first step is to embrace and understand the customer of 2010. Recalling our first megatrend, customer behaviors are inherently multidimensional and getting more complex all the time (see Figure 9). Traditional superficial classifications (based on demographic characteristics) are increasingly inadequate to accurately predict behavior. For example, two 40-year-old working women who both have two children and similar household income may shop very differently, depending on their personal value systems. One customer chooses brands that donate a part of profits to good causes; prefers recycled goods, even if they cost more; and empha-sizes convenience and simplicity in the shopping experience. The second customer only buys products from domestic companies and brands; clips coupons and carefully compares prices before choosing what to buy; and emphasizes product quality and value. How must retailers vary the services delivered to these two very different customers? How will retailers recognize which is which? And how will these customers’ wants and needs vary, depending on the specific product category and shopping occasion?

“Our customer centricity

initiative enables us to engage

more deeply with customers

by empowering our employees

to deliver tailored products,

solutions and services

to customers.”

– Brad Anderson, Vice

Chairman and CEO, Best Buy 34


Figure 9. Understand customer value drivers across multiple dimensions.

Start with store employees. There is perhaps no more important means of building customer insight than through the day-to-day interactions store associates have with customers. Companies like Zara excel at gathering insights about customer preferences and fashion trends through their store employees. Retailers that enable and encourage their staff to spend more time interacting with customers, instead of handling activities that add less value, will better leverage these “feet on the street” to improve understanding of and responsiveness to customers.

With regard to more formal customer research, going forward these efforts need to delve deeper to understand why customers make particular shopping decisions, not just what they bought and where they bought it. New techniques enable companies to deconstruct customer behavior into the specific elements that govern decision-making, helping companies identify which factors are most important. With that level of insight, retailers can execute business actions with greater impact. (For more details, see the IBM executive brief “Confounded by consumer purchase decisions? Consumer decision process modeling takes the guesswork out of revenue growth”.)

Price Quality Product benefi ts Convenience

Service Entertainment Ethics

Security Politics ???

+ + +

+ +

+ +

+

+

Value =Value system

Shop

ping

occ

asio

n

Produc

t/nee

d cate

gory

Survival

Social

Esteem

Self-actualization

Conve

nienc

e

Discov

ery

Replen

ishmen

t

Self-ex

press

ion

Solutio

ns

Source: IBM Institute for Business Value analysis; partially adapted from Retail Forward and “Retailing”, Dale M. Lewison.


To help generate more valuable customer insights, retailers will also need to become proficient at integrating and leveraging information from across their value networks. The potential sources of knowledge are not just plentiful, but exploding:

• Internal – Point-of-sale systems, loyalty programs, RFID-enabled inventory man-agement and in-store monitoring systems

• Vendors – Category analytics and customer market research

• Third parties – Traditional syndicated sources like ACNielsen, NPD, and GfK; cus-tomer research specialists; and advertising agencies

• Customers themselves – Information gathered via store employees, through online interactions or mined on the Web (via Web logs, chat rooms and the like).

How well retailers turn this bounty of information into useful insights and initiatives will be a key differentiating capability in 2010. Today’s use of loyalty program and transactional data to design targeted promotions is only the beginning. In the future, innovative retailers will devise many new ways of turning customer insights into value for both the customer and the retailer, such as:

• Targeting not just today’s most valuable customers, but also those with the great-est growth potential

• Allowing customers to self-select among diverse ways of being served

• Tailoring the in-store experience (including layout, displays and messaging) to specific customer groups

• Adapting product assortments more quickly to changing customer tastes

• Providing more relevant services to attract customers and build loyalty.


Making strategic use of customer data: Tesco 35, 36, 37

Tesco PLC, the leading retailer in the United Kingdom, actively uses its successful Club Card loyalty

program as a source of customer insights and innovative ideas. The company launched the program in

1995 to improve customer loyalty and enhance the shopping experience through a more personalized

“corner grocer” approach. Using sophisticated analytical algorithms and segmentation techniques, Tesco

and its majority-owned marketing services partner, dunnhumby, analyze point-of-sale data from more

than 10 million card holders to create profiles of Tesco’s customers and their shopping behavior. The

retailer then uses this information to:

• Predict future shopping behavior

• Identify gaps in its product offerings

• Develop highly customized offers based on customer lifestyles and life stages (Tesco sends out over

4 million variants of its promotional mailings to its 10 million card holders.)

• Increase share of wallet by identifying what customers are not buying at Tesco and offering

promotions to “fill in their baskets”

• Provide insights to suppliers that help improve category performance and promotion effectiveness.

The Club Card program enables Tesco to intimately understand its customer base by being able to track

four out of every five pounds spent in the store. This customer-centric approach is paying dividends

in a variety of areas. The company’s coupon redemption rate reaches 20 percent or more. Its share of

the grocery market in the United Kingdom increased from 16 percent in 1995 to 27 percent in 2003.

Customer insights generated from the Club Card data helped the company launch new product offerings,

including Tesco Personal Finance, which now serves 3.5 million people, and the Tesco Talk Phone

service, which has signed up 500,000 subscribers since its mid-2003 launch.

Optimize core activities through systematic intelligenceOften, companies’ initial response to the megaretailer threat is to focus on cost reduction to bring prices down to competitive levels. To be sure, achieving adequate levels of operating efficiency will be essential for many retailers to stay in business. But it is equally clear that simply lowering costs is unlikely to be a sustainable strategy. Worse, it may lead to a damaging downward spiral in quality and customer service and hence, decreased store traffic and revenues (pre-bankruptcy Kmart is a notable case in point).


Instead, retailers need to “play smarter,” not just “harder” (that is, avoiding a sole focus on costs). Traditional qualitative and intuitive approaches to making decisions and managing core retail functions have served many companies well for decades. To achieve the next level of performance improvement, however, retailers need to adopt the principles of “systematic intelligence” (see Figure 10). In areas such as merchandising, store operations and supply chain management (in addition to customer management and marketing, as discussed in the previous section), retailers now have the ability to apply advanced analytics to achieve substantial gains in productivity and revenue growth.

Figure 10. Applying systematic intelligence to retail operations.

Retailers can start by harnessing the wealth of market, competitive and opera-tional information at their disposal – whether it’s captured in internal enterprise and supply chain systems, gathered in the store, or obtained externally from suppliers or customers. (Data management capabilities will thus be another key enabler of competitive advantage in 2010.) Then retailers can apply a growing range of tools

“Significant progress can

still be made in execution

of end-to-end business

processes, from ordering

through to inventory

management, distribution of

product, pricing, close out

and returns…Continuous

improvement and optimization

of operations is key.”

– Retail Respondent,

IBM 2004 CEO Survey

Refi ned business actions

Business insight

Customer, operational and competitive data

Advanced analytics

Optimized operations

1100 1001 10010

100 10

01 1011010

1001001100 1001101


Merchandising• Assortment

planning• Pricing and

promotions

Stores• Store design and

presentation• Employee

management

Supply Chain• Demand forecasting• Inventory management• Warehouse

management


designed to help them manage specific activities through automated realtime analytics, data-driven decision support and predictive modeling. These tools will help managers identify new opportunities for improving sales, productivity or efficiency that were not readily apparent in the past.

The final step is to translate newly generated insights into refined business actions that optimize performance. For example, how can you boost profitability by optimizing prices or markdowns at the store level on a weekly or even daily basis? Are you giving up too much margin, or not maximizing demand? Once armed with the answers to these questions, how can you act upon it quickly? How can you improve capacity allocation, demand forecasting or employee assessment activities through similar techniques?

The successful retailers of the future will have highly flexible operations driven by a new generation of store managers and associates who understand and seek to apply systematic intelligence in their work. The only real inhibitor is the capability of the retailer to change its processes and how its employees operate. Addressing these important change management issues is crucial to getting the most return from the systematic use of information and analytics in a retailer’s operations. Leading companies are building these capabilities and learning important lessons today (see examples below).

“Playing smarter” – improving retail performance through systematic intelligence

Retailers in a variety of markets are applying systematic intelligence to improve the execution of a wide

range of functions across the enterprise.

Bloomingdale’s – The upscale department store division of Federated Department Stores selected

ProfitLogic’s merchandising optimization solution in 2003 to better meet customer needs and fuel

increased sales and earnings. The tool provides purchasing managers with an automated decision

support system that can assist them in buying, allocation, replenishment and pricing. Bruce Berman, CFO

of Bloomingdale’s, stated, “ProfitLogic’s solution provides us with a new way to look at our business.

We have greater visibility into merchandise performance and have the information we need to react to

changes in customer demand.”39, 40

B&Q – This leading U.K.-based home improvement and garden retailer engaged with IBM and DemandTec

to adopt a data-driven pricing solution. B&Q sought to better understand how its customers react to

price changes and the impact those changes have on sales and profitability. Howard Langer, B&Q project

leader, said, “The service we will receive from IBM and DemandTec will allow us to more effectively

“If you add science to the

art of merchandising, you

can do two things: minimize

risk in the event of a bad buy

or economic downturn, and

maximize profits if you’re

hitting everything head on.”

– Michael Stanek, CFO,

Northern Group Retail 38


carry out our pricing strategy of delivering lower prices to our customers.” The initiative will make use

of an innovative delivery model, where IBM hosts the Web-based solution and charges B&Q on a usage

basis.41

REI – The U.S.-based, multichannel retailer of quality outdoor products pursued a “Right Team, Right

Time” initiative through the implementation of Workbrain, Inc.’s employee optimization solution. REI

wanted to standardize its labor scheduling process and better meet customer demands for superior

service. By better matching store staffing levels and employee skills with customer traffic, they could

reduce overstaffing (and thus labor costs) and understaffing (improving conversion rates and customer

satisfaction). Through process automation, payroll management costs were reduced by up to 60 percent

and paper processing costs by up to 70 percent.42

Caprabo – This Spanish grocer engaged with IBM and i2 Technologies to deploy several i2 Merchandise

Planning solutions in an effort to improve efficiency and customer service. The suite includes tools

to analyze business performance against plans, to tailor demand forecasts to specific product

characteristics and to calculate optimal stock requirements for the retailer’s distribution centers. As a

result, the retailer has achieved significant increases in planner productivity and reductions in inventory

(8 to 20 percent in pilot implementations). Xavier Argente, CEO of Caprabo, stated that, through

this initiative, “we expect to be able to give our customers better service and improve our business

performance as we execute our plans to aggressively grow the business.”43

Operationalize customer centricity“Focus on the customer” works fine as a corporate slogan, but achieving true customer centricity requires alignment of all the basic building blocks of the business with clearly defined, customer-focused objectives. Unfortunately, many organizations are limited today by internal constraints that prevent them from achieving these goals and responding to rapidly changing, increasingly complex customer needs.

These constraints can include organizational silos, process disconnects and inflexible infrastructure. For example, marketing and merchandising departments are often separate and do not share calendars or plans throughout the season. As a result, merchants may develop or plan for products that do not fit the needs of the specific customer segments targeted by the marketing department. On the flip side, marketing may have a promotional/event calendar that is not shared early enough, or not at all, with merchandising. The merchants then do not buy deep enough (for example, within a specific vendor or style) to meet the requirements of the promotion or event.

“Think of your company not as

a group of products or services

or functions or territories, but

as a portfolio of customers.”

– Larry Selden and Geoffrey

Colvin, “Angel Customers and

Demon Customers” 44


To operationalize customer centricity beyond strategic intent, senior managers need to align the entire organization with the chosen areas of focus. This is where many change initiatives falter, with “reorganization” happening only in a very superficial way. To achieve deeper transformation, retailers must address the six major aspects of their business operating model (see Figure 11) – all of which are important, and many of which, unfortunately, are too often neglected:

• Culture, climate and capabilities – What new capabilities will be critical to enabling customer centricity (for example, a more collaborative, service-oriented culture, or statistical analysis skills)? What values, beliefs and behaviors are consistent with a customer-centric orientation and how will we systematically embed those in the organizational culture, including our incentive system?

• How the company structures itself – What is the optimal relationship among different functions and divisions within the company? Should we create or elevate an explicitly customer-focused dimension in the organization?

• Assets deployed – What are the physical and intellectual assets (including a common base of essential knowledge) that need to be deployed in the execution of our strategies? How and where should they be managed to optimize our ability to respond to varying customer requirements?

• Communities the company interacts with (its value network) – What key alliance partners do we need, whether to deliver greater value to customers, increase operating efficiency or enable us to focus more on key differentiating capabilities? How should each of those relationships be managed and by whom? What changes in partner and supplier management practices would help us tailor products and shopping experiences to different groups of customers?

• How decisions are made and information is used – Where should profit-and-loss responsibility be held? Do managers and store employees have access to the information they need to serve customers in the way we want?

• Processes and technologies – Are both customer-facing and back-office processes designed appropriately to achieve desired changes in the customer shopping experience? Have we eliminated the process disconnects that cause customer dissatisfaction today? What changes in technology infrastructure will help us develop and exploit deeper customer insights, better manage specific customer segments and deliver tailored services and offerings?


Figure 11. Operationalize customer centricity across the entire business operating model.

The area of multichannel integration provides a good illustration of what’s required to realize customer centricity. By 2010, retailers will need to be capable of deliv-ering a unified, seamless customer experience that treats customers as the unique individuals they are. This requires the ability to maintain a continuous “state” of inter-action across all touchpoints and consistent delivery of information internally and externally. To deliver on this promise, retailers must tackle a variety of issues that relate directly to the areas outlined above:

• Build a common view of the customer and the ability to see and respond to cus-tomer behavior across channels

• Overcome organizational silos that hinder execution of cross-channel programs

• Verify that goals and metrics among divisions/channels are aligned

• Integrate customer information, merchandising, inventory and reporting systems

• Avoid making technology investments for the short term or for technology’s sake.

Ultimately, retailers in the future may elevate customer segment management to a position equal to or above that of traditional dimensions in the organizational matrix (such as product categories, channels and brands). Empowered with greater authority, resources and even P&L accountability, executives focused on specific needs-based customer segments can help drive greater organizational alignment to those customers’ evolving requirements. Lessons learned by innovators in the travel, hospitality and financial services industries may offer useful guidance for retailers moving down this path.

Culture, climate and capabilities

Value network and alliances

Processes and

technologyOrga

niza

tion

and

legal

stru

ctur

ePhysical and

intellectual assets Decis

ion

mak

ing

and

info

rmat

ion

Customer centricity

Source: IBM Business Consulting Services analysis, 2004.


But regardless of how customer centricity is defined, substantive change at this depth is difficult, and executives across many industries readily admit that their organizations are often ill-equipped to accomplish it. In fact, half of the CEOs surveyed by IBM cited “limited internal capabilities and leadership resources” as the most significant barrier to change in their organization.44 In 2010’s fast-paced and volatile world of extremes, effective management and execution of change will stand out as a clear differentiator.

Making it easy to shop: Staples 46, 47

Staples, the U.S.-based office products specialist, has made great strides toward the delivery of a unified

customer experience. It operates nearly 1,600 stores worldwide, a catalog operation and Staples.com

(which generated over US$2 billion in revenues in fiscal 2003). According to Michael Ragunas, Vice

President of Technology Strategy and Architecture, Staples “works hard to make it easy” for customers

to shop across its three channels. The company emphasizes this concept in its marketing campaigns

(which use the tag line “Staples. That was easy”) to showcase to customers the ease with which they can

buy from its catalog, stores or Web site and how each channel supports the other.

To support this strategy Staples has pursued a number of channel integration initiatives addressing the

customer experience and the underlying delivery infrastructure:

• Customers are directed to in-store kiosks by shelf tags or sales associates if they can’t find what

they are looking for in the store. The kiosks allow customers to log onto Staples.com and order

from an inventory of over 45,000 items, compared to 7,000-8,000 in the store.

• Customers can order online from the kiosk, print out a bar-code receipt with their order and pay at

the cash register.

• A copy of the catalog is available in all stores for at-home browsing.

• Products purchased online can be returned to a store, and pricing is generally consistent across

all channels.

• The online operation is tied into the retailer’s existing call centers and delivery systems, and the

underlying IT systems are integrated using IBM MQ messaging middleware.

The benefits of Staples’ commitment to an integrated and easy experience for the customer are reflected

in its 2003 fiscal year results: Total sales rose 14 percent to $13 billion, and online sales rose 30 percent

to $2.1 billion.


Conclusion2010 will present extreme challenges for retailers, as the marketplace will look quite different than it does today. Traditional customer norms will disappear. Products at both ends of the pricing spectrum will be popular – but to which shoppers? Technology and regulatory fences will help customers assume greater control over their interactions with businesses. What kinds of messages will make it through? Ubiquitous information access will empower customers and expose companies’ shortcomings. Will retailers be capable of redefining the value exchange between themselves and customers to earn their lasting loyalty?

How and where companies compete will change, too. As megaretailers transcend previous notions of what “big” means and break through the boundaries between industry segments, how will competitors establish sustainable market positions? In 2010, threats will come not just from individual companies, but from networks of competitors. Whose value network will be flexible, integrated and responsive enough to meet unpredictable customer demands?

In this world of extremes, retailers need to redefine themselves in a much more customer-centric fashion and turn this notion into operational reality. Deeper customer insights will be crucial to drive successful new concepts and higher sales growth. Core operations must be optimized to maintain competitiveness and create margin to invest in greater customer value. True customer focus must be infused into all key elements of the business operating model – including culture, metrics, channel management and the company’s alliance network.

The first step is to explicitly define the desired strategic positioning for each part of the business and then to verify that all change initiatives – from brand strategy through core business processes to the operational infrastructure – are clearly aligned to support the company’s highly focused strategies. In the past, retailers could pursue growth strategies founded on a single concept, serving a large and relatively homogeneous mass market. Such an approach will no longer work in an increasingly complex and competitive global marketplace. To build and sustain market leadership in the future, retailers need to make speed, flexibility and customer centricity a day-to-day reality throughout their organizations.


To learn more, please contact us at [email protected]. To access publications on related topics or to browse through other materials for business executives, please visit our Web site:

ibm.com/bcs

Related publications• “Confounded by consumer purchase decisions? Consumer decision process

modeling takes the guesswork out of revenue growth.” IBM Institute for Business Value. April 2004. http://www.ibm.com/services/us/index.wss/xs/imc/a1002477?cntxtId=a1000404

• “Doing CRM right: What it takes to be successful with CRM.” IBM Business Consulting Services. April 2004. http://www.ibm.com/services/us/bcs/html/2004_global_crm_study_gen.html#2

• “Driving an operational model that integrates customer segmentation with customer management.” IBM Institute for Business Value. July 2003. http://www.ibm.com/services/us/index.wss/xs/imc/a1000617?cntxtId=a1000063

• “In pursuit of comparative advantage: Retail goes on demand.” IBM Institute for Business Value. June 2003. http://www.ibm.com/services/us/index.wss/xs/imc/a1000747?cntxtId=a1000063

• “What top-performing retailers know about satisfying customers: Experience is key.” IBM Institute for Business Value. November 2002. http://www.ibm.com/services/us/index.wss/pv/imc/a1001315?cntxtId=a1000063

• “Your Turn: The Global CEO Study 2004.” IBM Business Consulting Services, February 2004. http://www.ibm.com/services/us/bcs/html/2004_global_ceo_study_gen.html


About the authors

Joseph L. Gagnon is the Global and Americas Retail Industry Practice Leader for IBM Business Consulting Services. He can be contacted at [email protected].

David Thomas is the EMEA Retail Industry Practice Leader for IBM Business Consulting Services. He can be contacted at [email protected].

Julian Chu leads the Global Distribution Sector team at the IBM Institute for Business Value. He can be contacted at [email protected].

Key contributorsStuart Harker, Partner, IBM Business Consulting Services, Asia Pacific

Frank Ihnen, Senior Consultant, IBM Business Consulting Services, EMEA

Sean O’Neill, Managing Consultant, IBM Institute for Business Value

Gina Paglucia Morrison, Senior Consultant, IBM Institute for Business Value

We would also like to convey our appreciation to the many other IBM colleagues and industry executives who contributed to the information and perspectives provided in this paper.

About IBM Business Consulting ServicesWith consultants and professional staff in more than 160 countries globally, IBM Business Consulting Services is the world’s largest consulting services organi-zation. IBM Business Consulting Services provides clients with business process and industry expertise, a deep understanding of technology solutions that address specific industry issues and the ability to design, build and run those solutions in a way that delivers bottom-line business value.


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References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates.

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