Retail Strategy

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Retail Strategy
The view from the bridge

Edited by
Jonathan Reynolds and Christine Cuthbertson

With contributions from

Richard Bell
Richard Cuthbertson
Ross Davies
Dmitry Dragun
Elizabeth Howard

AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD

PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO
Elsevier Butterworth-Heinemann
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First published 2004

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British Library Cataloguing in Publication Data

Retail strategy: the view from the bridge
1. Retail trade – Management
I. Reynolds, Jonathan II. Cuthbertson, Christine III. Bell, Richard
658.8’7

Library of Congress Cataloguing in Publication Data

A catalogue record for this book is available from the Library of Congress

ISBN 0 7506 5696 4

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Printed and bound in Great Britain
Contents

List of contributors ix
List of figures and tables xiii

Part I Introduction
1 Introduction to retail strategy 3
Jonathan Reynolds

Part II Strategic issues in retailing

2 Attracting and keeping customers 25
Richard Cuthbertson and Richard Bell

3 Collaboration in the retail supply chain 52

Richard Bell and Richard Cuthbertson

4 Planning policy for retailing 78

Ross Davies

5 Retail internationalization: how to grow 96

Elizabeth Howard

6 Prospects for e-commerce 119

Jonathan Reynolds

7 The financial implications of retail strategy 137

Dmitry Dragun

Part III The view from the bridge

8 Supply chain: a core competency for retailers 173
Interview with Armin Meier, IT and logistics director of Migros
Richard Cuthbertson
vi Contents

9 Bridging the gap between IT and the business 181

Interview with Dick Dijkstra, chief information officer and
Eric Polman, director, IT strategy and architecture, Ahold
Christine Cuthbertson

10 Leisure and retailing: legoland parks 190

Interview with Mads Ryder, head of legoland parks and
director of legoland, Billund, Denmark
Jonathan Reynolds

11 Everything for the trade – next day: Screwfix Direct 196

Interview with John Allan, managing director of Screwfix Direct
Jonathan Reynolds

12 Uniquely Auchan: retailing as invention 202

Interview with André Tordjman, marketing director of Auchan
Richard Bell

13 Straightforward British approach works in China 209

Interview with Steve Gilman, international director of B&Q
Elizabeth Howard

14 Metro in China or a Chinese Metro? 218

Interview with Dr Hans-Joachim Körber, chairman and CEO of Metro AG
Richard Bell

15 Music, movies, more: the specialist retailer 225

Interview with Alan Giles, chief executive of HMV Media
Christine Cuthbertson

16 Consumer wellbeing: wellbeing.com 236

Interview with John Hornby, managing director of Digital Wellbeing
Richard Cuthbertson

17 Freshen up: differentiation through fresh foods 247

Interview with Antoni Gari, deputy general manager of Supermercats
Pujol SA
Christine Cuthbertson

18 Integration, challenge and change 253

Interview with Roland Vaxelaire, president and CEO of Carrefour Belgium
Richard Bell

19 A passionate journey: creating the right culture in a food retail

organization 260
Fiona Bailey, director for culture, Safeway Stores, Hayes, UK
Contents vii

20 Wal-Mart’s entry into the German market: an intercultural

perspective 265
Reinhart Berggoetz, HR, recruiting and developing, and Martin Laue,
senior HR manager for operations personnel, Wal-Mart, Germany

21 Ready to scale up: India’s Shoppers’ Stop 270

Interview with B.S. Nagesh, customer care associate,
managing director and CEO, Shoppers’ Stop
Elizabeth Howard

22 Creating a global retail brand 275

Interview with Sir Geoffrey Mulcahy, former group chief executive,
Kingfisher plc
Richard Bell

23 Consolidation in the European mail order market 284

Interview with Kurt Ebert, former marketing director,
Quelle Schickedanz AG & Co
Richard Bell

24 Modernization in Greek food retailing 291

Interview with Konstantinos Macheras, general manager,
Alfa-Beta Vassilopoulos, SA
Richard Bell

25 Financial management at Sainsbury’s 298

Dmitry Dragun

Part IV Putting it all together

26 An exercise in successful retailing: the case of Tesco 311
Jonathan Reynolds

27 Portents: strategic retail futures 331

Elizabeth Howard

Index 349
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Contributors
Richard Bell joined the Boots Company after graduating from University College,
London with a degree in economics. Richard later joined Pedigree Petfoods, the
UK pet food division of Mars Incorporated, working initially in forecasting and
planning, then purchasing, and latterly in marketing. He went on to run the inter-
national division of Mars Inc., later becoming MD in Belgium and finally assuming
responsibility for Mars Inc.’s European sales strategy and their global consumer
research. During this period he was a member of the CIES Marketing committee. He
left Mars in 1996 and joined Templeton College as an associate fellow specializing
in retailer–supplier relations.
Christine Cuthbertson began her career in marketing at Hymac Engineering
and moved into publishing with Parrish-Rogers. Christine has also developed an
information systems specialism, and has lectured at the universities of East London,
Bournemouth, Cranfield and Southampton. Christine is completing a research
methods MPhil at the University of Southampton. She is author of book chapters,
journal and conference papers and is presently editor of the European Retail Digest
and senior research associate at Templeton College, University of Oxford.
Richard Cuthbertson has a wide variety of professional experiences working
both in industry and academia, in managerial, consulting, research and teach-
ing positions. Richard has held managerial posts for the Unipart Group of
Companies and British Gas in both marketing and supply chain management.
Management consultancy work has typically involved the strategic modelling
and analysis of retailer–supplier and retailer–consumer systems, operations and
relationships. Before joining Templeton College as a senior research associate,
Richard was a senior lecturer at Bournemouth University. His current research
projects include: the strategic evaluation of consumer loyalty to European retail-
ers, sponsored by KPMG; benchmarking international FMCG supply chains with
the Boston Consulting Group for CIES (the World Food Business Forum); a
European Union funded study on the effects of transport trends in retail logist-
ics and supply chain management; and the development of a new approach
to inventory replenishment systems. Richard has a degree in management
science from Lancaster University, and is currently completing a PhD at
x Contributors

Southampton University. He is also a member of the Operational Research

Society.
Ross Davies was a founder director of the Oxford Institute of Retail Management
in 1985. Ross’s research interests centre on the retail and shopping centre devel-
opment process, location strategy, the internationalization of retailing and public
policies towards the industry. He has held academic appointments at the universit-
ies of Massachusetts, Newcastle-upon-Tyne, Windsor (Canada) and New England
(Australia). He has also been technical director of the Coca-Cola European Retail
Research Group, a Specialist Adviser to the House of Commons Environment Com-
mittee’s Enquiry into Shopping Centres and their Future, and remains chairman of
the Oxford Retail Group, a consortium of companies concerned to improve retail
planning policies within the UK. He is the author of numerous books and articles
and has been a consultant to several UK and international retail and develop-
ment companies, through his company Retailing and Planning Associates. He is
presently Emeritus fellow at Templeton College and a visiting professor in retail
management at the University of Surrey.
Dmitry Dragun. Prior to arriving in Oxford to study for an MBA, Dmitry worked
at the National Bank of Belarus as director for foreign exchange operations and
controls. In this capacity, he implemented the EBRD/WB credit line for small and
medium companies ($30 million + facility, 1994/5); structured and executed the
financing scheme for the viable export-oriented projects in the private sector of
Belarus ($12 million + facility, 1996); and contributed to the development of the
external debt management system for Belarus as a sovereign borrower. Dmitry’s
PhD thesis – and a corresponding degree conferred by the Belarusian Academy of
Sciences – was a result of the five years of research into international finance and
external debt management. As the senior research associate in finance at Templeton,
Dmitry is responsible – at the request of the Templeton corporate clients – for equity
analysis and risk assessment of the leading European companies such as Vodafone,
AXA, RWE and Unilever. He has progressed the value creation line of executive
research, related in particular to the patterns of risk and value recognition among
the global regions and countries. Professional assignments include development of
the risk management framework for Shell T&T, an analytical review of Tesco’s risk
and value comparative performance, and a number of the innovative data-mining
finance products.
Current research interests include: development of the UK Retail Confidence
Index (‘Templeton RCI’), strategic and financial performance review of the top UK
companies, value creation and convergence in global retailing.
Elizabeth Howard specializes in international retail development and environ-
mental issues in business. After professional posts in town planning, Elizabeth
began research work on retailing at the University of Newcastle and came to
Templeton in 1986. Her work on public policies and the impact of out of town retail
development, as part of the Oxford Institute of Retail Management at Templeton,
is well known. Current research focuses on international retail development. She
Contributors xi

designs, directs and teaches executive programmes for a variety of international

companies and is a tutor for the Oxford Strategic Leadership Programme. She
has taught university degree courses in environment and business, established the
business project scheme for the Oxford University MBA and is keenly interested
in management learning through project work. Publications include many articles
and monographs on retail development, an examination of concepts of partner-
ship in shopping centre businesses, research for the CEC (DGXVII) on the retail
response to energy labelling, Business and the Natural Environment (editor, with
P. Bansal), and most recently European Retailers’ Approaches to Asian Markets.
Jonathan Reynolds first joined Templeton to work with UK food retailer Tesco on
the application of new information technology, following time spent at the Univer-
sity of Edinburgh, with Coca-Cola, and at the University of Newcastle-upon-Tyne.
A geographer, urban planner and retailer by turn, Jonathan now teaches and
researches in the areas of retailing and technology, retail and services marketing
and retail planning and development. He has published and spoken widely on
e-commerce, structural changes in retailing and in the fields of database, direct
and local marketing. As director of the Oxford Institute of Retail Management,
he is actively involved with Templeton’s commercial clients in the retail, financial
and leisure services sectors and, as a faculty member of Oxford University’s Said
Business School, teaches marketing and e-commerce on Oxford’s undergraduate
and MBA programmes.
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Figures and tables

Figures
Figure 1.1 – Ansoff’s product-mission matrix 8
Figure 1.2 – Opportunity diamond 9
Figure 1.3 – Determinants of store choice, UK grocery shoppers 13
Figure 1.4 – Retailers of speciality women’s outerware –
UK competitive map 14
Figure 2.1 – Loyalty segmentation 26
Figure 2.2 – Private-label strategic alignment model 30
Figure 2.3 – Consistent private-label strategy 31
Figure 2.4 – Inconsistent private-label strategy 32
Figure 2.5 – Importance of loyalty marketing over time 34
Figure 2.6 – The purchaser–purveyor loyalty matrix 36
Figure 2.7 – Store switchability 38
Figure 2.8 – The effect of multi-facings in store 39
Figure 2.9 – Customer response to out-of-stocks 42
Figure 2.10 – Major factors affecting switchability and substitutability 43
Figure 2.11 – Target customers 44
Figure 2.12 – Retailer loyalty strategy 46
Figure 2.13 – Retailer loyalty: budget customers 46
Figure 2.14 – Retailer loyalty: quality customers 47
Figure 2.15 – Retailer loyalty: luxury customers 47
Figure 2.16 – Retailer loyalty: value customers 48
Figure 2.17 – Retailer loyalty: summary 48
Figure 3.1 – A push supply chain 53
Figure 3.2 – A pull supply chain 55
Figure 3.3 – Production frequency and stock 56
Figure 3.4 – Percentage of grocery turnover scanned 58
Figure 3.5 – Integration upstream 60
Figure 3.6 – Footprint Global ECR Scorecard 64
Figure 3.7 – Grocery shares in Europe: top five retailers 66
xiv Figures and tables

Figure 3.8 – Formula for expansion 69

Figure 5.1 – Channel evolution 105
Figure 6.1 – Growth in selected European country e-commerce market
volumes, summer 2002 122
Figure 6.2 – Estimated UK online sales, April 2000–April 2003 123
Figure 6.3 – Estimated quarterly e-commerce sales, USA 123
Figure 6.4 – The extent of mobile phone transactions, 2002 125
Figure 6.5 – Business involvement in e-commerce: UK retail versus UK
business as a whole 125
Figure 6.6 – The ‘showroom effect’: percentage of US customers browsing in
store before making a purchase online 129
Figure 6.7 – The informed consumer: percentage of US customers
consulting websites before making a purchase in store 129
Figure 7.1 – Financial model of the retail business 139
Figure 7.2 – Cash conversion cycles for two retailers 140
Figure 7.3 – Components of the extended DuPont model for Carrefour,
1992–2001 155
Figure 7.4 – Stock market valuation in continuous loop 157
Figure 7.5 – pe ratios of the leading European retailers 159
Figure 11.1 – Screwfix Direct market segmentation analysis 198
Figure 25.1 – Gross capital expenditure, 1993–02 300
Figure 25.2 – Performance evaluation matrix 302
Figure 25.3 – New debt and equity issues, 1993–2000 303
Figure 25.4 – (a) Operating profit margin and ROE, 1993–2000. (b) Total
asset turnover and gross leverage, 1993–2000 306

Tables
Table 1.1 – Grocery market concentration levels of the five largest retailers
1999–2000: selected European countries 7
Table 1.2 – Penetration strategies 10
Table 1.3 – Development strategies 10
Table 1.4 – Growth opportunities for Tesco 11
Table 1.5 – The evolution of own brands 19
Table 1.6 – Making sense of the cases 20
Table 2.1 – Trusting companies to be honest and fair in the UK 32
Table 2.2 – Trusted to be honest and fair 33
Table 2.3 – Key requirements for customer loyalty by customer group 45
Table 3.1 – Example of an inventory replenishment in a push system 54
Table 3.2 – Example of an inventory replenishment in a pull system 55
Table 3.3 – Supply chain contrasts between food, fashion and electrical
retailers 75
Table 4.1 – Recent retail planning policies in western European countries 82
Table 4.2 – Foreign retail investment in China, 1992–2000 88
Figures and tables xv

Table 4.3 – Change in Atlanta city centre retail sales, 1954–77 90

Table 4.4 – Western retail company investment in the Czech Republic,
Hungary and Poland, 1990–98 92
Table 5.1 – Top five destinations in Europe for cross-border moves 98
Table 5.2 – International sales of the largest retail companies 99
Table 5.3 – Push and pull motives for international development 102
Table 5.4 – The largest retailers in central Europe 104
Table 5.5 – Five parameters of international retailing and four kinds of
international retailer 109
Table 5.6 – Tesco: transfers of management know-how 115
Table 6.1 – The strategic business concerns of food retail chief executives
across Europe 120
Table 6.2 – Numbers of users of UK retail sites, December 2002 126
Table 6.3 – Driving forces affecting the development of B2C e-commerce 127
Table 6.4 – Prospective dimensions of internet market efficiency 130
Table 6.5 – Factors that affect home delivery options 132
Table 7.1 – Wal-Mart, consolidated balance sheet 142
Table 7.2 – Wal-Mart, consolidated statement of income 144
Table 7.3 – Wal-Mart, statement of cash flow 146
Table 7.4 – Tesco, excerpts from financial statements 148
Table 7.5 – Financial leverage ratios 152
Table 7.6 – Earnings coverage ratios 153
Table 7.7 – DuPont model 154
Table 7.8 – Components of the extended DuPont Model for Carrefour,
1992–2001 154
Table 7.9 – DuPont model actions 156
Table 7.10 – Retail dividend yields 161
Table 7.11 – Calculation of EVA for Home Depot 163
Table 22.1 – Kingfisher plc five year history 276
Table 23.1 – Internationalization of Quelle 286
Table 23.2 – Quelle specialogues: international coverage 287
Table 25.1 – Components of the extended DuPont model, 1993–02 305
Table 26.1 – Hypermarket growth 325
Table 26.2 – Financial performance data (typical store) 325
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Part I

Introduction
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Chapter 1

Introduction to
retail strategy
Jonathan Reynolds

Introduction
Retail practitioners, historically, have been suspicious of strategy. Sir Ken Morrison,
chairman of family-run Morrisons supermarkets in the UK, is on record as saying
that running supermarkets is simple. Sir Ken reportedly has little time for fancy
theories or clever marketing: ‘It’s just taking money off people, isn’t it? And giving
them something in return’ (Mail on Sunday, 2002). Marketers and economists used
to share this somewhat folksy view, in effect regarding retailers as mere ciphers
in the distribution channel, working as intermediaries just to smooth the flow of
goods and services between suppliers and consumers. Then it became clear that
in practice, retailers were able to become much more active agents in their own
right within the value chain than was sometimes suggested. Indeed, the flows of
people, goods and money through the retail supply chain make the sector’s busi-
nesses some of the most influential corporate players in the economies of developed
countries. In 1999, for example, European retail trade generated sales of d1518
billion; created d292.5 billion in added value and employed 12.4 million people
(European Commission, 2003).
From the point of view of the marketer, retailers are, by definition, closer to
the consumer than supplier companies. This has two implications. First, retail-
ers are in principle better placed to gather information on the behaviour of
consumers and customers than organizations further back in the supply chain.
Second, and as a consequence of this data-gathering activity, such companies are
also therefore becoming better placed to communicate more effectively with con-
sumers and to develop strategies that are more effectively market-oriented. And
strategies are required, as Sam Walton once remarked: ‘retailing is simple but it
ain’t easy’ and such businesses – like Wal-Mart – are becoming increasingly com-
plex animals: very large, widely spread organizations, managing multiple product
supply lines, managing very large amounts of data, and above all, far from being
4 Retail Strategy

ciphers, are competing more and more with other large organizations rather than
small ones.
But strategy has come late to retailing. Business strategy text books have con-
tained few references to the sector until relatively recently. Now retailing is the
domain of corporate strategy, format strategy, marketing strategy, international
strategy and so on. Strategy has arrived because of the most important of the struc-
tural trends we can identify: this is that large organizations now run most of the
retailing in western economies and are now coming to do so in transitional eco-
nomies. In a strategic sense, retailers are concerned with growing larger and faster
than their competitors, being different from the competitors, attracting and keep-
ing customers, and gaining efficiencies in systems and procedures. Bell describes
the way this has happened for food retailing as an ‘inexorable logic’ (Bell, 2000).
There are, he suggests, four stages:

The development of retail chains as retailers sought to increase their buying power. The
early exponents of this process were the consumer co-operatives and during this stage
most chains, including the co-ops were organized on a regional basis within a coun-
try. This was followed by the emergence of national retail chains with large market
shares.
The development of large retail formats. The emergence of these formats across Europe
coincided with increasingly lax planning regimes, initially in Belgium followed by France,
Spain, Portugal, and then the UK. The large surface outlets resulted in a reduction in
the number of small corner stores and the decline of town centre supermarkets. This
process in itself contributed to the retail concentration of ownership characterized by
stage 1.
The development of dedicated distribution systems by the large integrated retailers. The devel-
opment and application of scanning systems provided the necessary information for the
supply chain to be reversed from ‘producer push’ to ‘consumer pull’. A consequence of
this process is the decline of traditional wholesalers and cash and carries that has the
effect of further disadvantaging small retailers.
The emergence of retail chains as national brands in their own right. The effect is to move
away from head-to-head price competition to a differentiation strategy based on range,
service, store format and location.

This book is about achieving a better understanding of the characteristics and

consequences of this process. In doing so, it seeks to bridge the gap between
retailing and strategy and between retailers and academics. It takes several of the
corporate themes of strategic interest to contemporary retailing and explores them
through the presentation of practitioner insight underpinned by rigorous academic
analysis. In particular, a series of case studies are developed based on interviews
with senior executives in some of the world’s leading retailers. The book is an
attempt to communicate contemporary retail thought from the perspectives not
only of senior international retailers but also retail commentators and analysts.
Introduction to retail strategy 5

Size and its consequences

Even as recently as 1990, there were no retailers in the Fortune 500 list of the largest
global companies. Now there are over 50, and in 2002 Wal-Mart became the largest
of all companies, judged by size of sales. (Wal-Mart alone employs over 1.3 million
associates worldwide; 100 million customers a week visit the company’s 4,300
stores.) In just two years – between 1996 and 1998 – retailers’ share of the revenues
of the Fortune top 500 grew by over 25 per cent, and their share of total assets
doubled (Gestrin, 2000). Small shops, independent retailers and small firms have
closed in their hundreds of thousands. Some large and medium sized companies
have grown dramatically: Dutch retailer Ahold tripled in size between 1990 and
1998 and then added over 50 per cent in the following year. French retailer Carrefour
is five times its size at the beginning of the last decade. Wal-Mart’s compound
annual growth rate throughout the 1990s was 19.5 per cent. Despite significant
consolidation activity in the US, it is European countries that show the highest levels
of concentration. For example, in France, the five largest retailers have increased
their share of grocery retailing from 61 to 83 per cent in just six years (Bell, 2001).
Maturing markets are also catching up: in Greece the top ten food retailers’ market
share grew from 18.5 per cent in 1990 to 72 per cent in 1999 (Bourlakis, 2001). Nor
should we forget that large companies dominate many of the specialist non-food
retail trades too – although by their nature levels of turnover are generally smaller.
In the UK, three companies accounted for 26.4 per cent of clothing sales in 2001
and fully 82 per cent in DIY. Italy, so long a preserve of small firms and small
retailers within the EU is changing too: the presence of Carrefour and Auchan in
the country has helped increase the number of hypermarkets to over 400 in 2000 –
a fourfold increase in ten years (Mintel Retail Intelligence, 2002). From negligible
levels in 1989, large multiple firms have grown to take substantial proportions of a
growing retail trade in the countries of central Europe. The trends are the same in
Latin America and Asia Pacific countries. The degree to which large corporations
dominate in the latter seems mainly related to the degree to which the countries are
open to foreign direct investment. In China, for example, the reforms and changes
of the last few years mean that, apart from the foreign entrants who see huge
prospects for growth, indigenous multiple retailers are growing. Although they
are responsible for only a small fraction of retailing at the moment, official policy
is to encourage their growth, as a means to increasing the efficiency of distribution
and encouraging growth in the consumer economy (Central Committee of the
People’s Republic of China, 2002).
The implications of size become significant when retailers affect consumer choice,
obtain a relative competitive advantage and/or influence supplier profitability.
This has brought retailing to the attention of the regulatory authorities. Market
share reflects retailers’ influence over consumers, competitors and suppliers. Abso-
lute size is also important vis-à-vis suppliers. The potential impact of retailer size
can be measured by their ability to extract non-cost-related discounts from sup-
pliers. Size becomes important here when the potential lost volume to a supplier
6 Retail Strategy

has a significant effect on profit. Businesses whose profit is highly sensitive to

changes in sales volume are more likely to offer non-cost-related discounts and are
more vulnerable to smaller sized accounts, e.g. with market shares of under, say,
10 per cent. Thus the exact level of size at which a retailer exercises power varies
with financial structure of each supplier. Chapter 3 discusses the consequences that
have emerged in terms of supply chain collaboration of such a situation.
The relevant measure of size with respect to influence over consumers, and rela-
tive competitive advantage is the level of concentration shown by the Herfindahl-
Herschman Index. The HHI is determined by adding the squares of the market
shares of each competitor within the relevant product and geographic market. For
example, if there are four firms, with shares of 30 per cent, 30 per cent, 20 per cent,
and 20 per cent, respectively, then the HHI equals 2,600 (900 + 900 + 400 + 400). If
two or three retailers have a very large market share, this is reflected in a higher HHI
than if five retailers have similar market shares, even though the aggregate share
for the top five retailers is similar. The US regulatory authorities have used the HHI
as a means of understanding and potentially challenging prospective post-merger
outcomes in retailing (Miller, 1997):
The guidelines under which the FTC and the Department of
Justice operate are as follows: If the pre-merger HHI is between
1,000 and 1,800, the industry is moderately concentrated, and the
merger will be challenged only if it increases the HHI by 100
points or more. If the HHI is greater than 1,800, the market is
highly concentrated. In a highly concentrated market, a merger
that produces an increase in the HHI between 50 and 100 points
raises significant competitive concerns. Finally, mergers that
produce an increase in the HHI of more than 100 points in a
highly concentrated market are deemed likely to enhance market
power.
Usually, levels of concentration are calculated nationally (see examples in
Table 1.1) but there is a growing weight of evidence to suggest that influence
over consumers is better measured by regional or local market share of each
store type. Absolute turnover is also increasingly relevant as suppliers organize
themselves at a European level and food retailers organize their procurement
at a European (or global) level even though their operations may be national.
Turnover enables a comparison to be made between retailers from different coun-
tries. The competition directorate within the European Commission has ruled on
several cases during the 1990s of pan-European businesses making strategic acquis-
itions in different countries that have consequences in terms of buyer power and
influence over consumer choice. For example, in the case of the French Promodès-
Carrefour merger, the Commission referral followed concern that in three Spanish
administrative regions, post-merger market shares were particularly high. In one
region, six out of seven hypermarkets would have been run by the combined
group.
Introduction to retail strategy 7

Table 1.1 Grocery market concentration levels

of the five largest retailers 1999–2000: selected
European countries

Country HHI

Denmark 2,502
Finland 2,529
France 1,619
Germany 1,216
Italy∗ 285
Norway 2,500
Spain 462
Sweden 1,811
Switzerland 2,535
UK∗∗ 1,506
∗ organized distribution.
∗∗ base is grocery stores referenced in Competition
Commission Inquiry, 2000.
Source: OXIRM, ACNielsen, DCF, ICA

The terms of regulatory clearance in this case meant that in January 2003, a group
of French financial institutions paid d242m (US$258.9m) to buy 59 Spanish super-
markets from Carrefour. The company will continue to operate the supermarkets
under long-term leases. In the UK, the debate over the acquisition of supermar-
ket chain Safeway during 2003 revolved around, amongst other things, the extent
to which the competing would-be acquirers would be forced by the regulators to
dispose of stores in local areas where their potential market share was regarded as
excessive.
Increasing retailer size and power, especially buyer power, is now beginning
to concern competition authorities worldwide. In a recent and little-publicized
conference in New York, representatives from European, American and ASEAN
competition agencies met specifically to exchange views on the topic (Fordham Cor-
porate Law Institute, 2000). Anumber of governments, not least southern European
ones, have expressed particular concern that failure to regulate the growth of large
retail businesses will destroy the still large numbers of established small- and
medium-sized businesses within those countries. At a European level, the Com-
mission’s Directorate-General XXIII, whilst unable to intervene in the planning
policies of member states, funds training and technological assistance programmes
for small businesses within those states considered most vulnerable to increased
levels of retail concentration. This approach has been criticized as being unduly con-
cerned with conserving historic patterns of change, rather than allowing retailers
to operate more freely in an increasingly turbulent business environment (Dawson,
1996).
8 Retail Strategy

Strategic routes to growth

Growth of this kind by a small number of retail businesses has not been accidental.
The success of a retailer can be seen as a consequence of the effectiveness of its
strategy: its ability to create long-term superior financial performance through
the cultivation of valuable internal resources and their matching to the set of most
advantageous external opportunities as it grows. As Dawson and others have sug-
gested (Dawson, 1996), the environment for strategic decisions in retailing has
become considerably more complex. The ultimate drivers of retail change and
the permissible range of external opportunities are generated by the demographic,
political and economic forces in society, alterations in social values and behaviours,
and in the communications and technological revolutions we are experiencing.
Retailers respond to, and in some ways help create or facilitate these changes.
There are a number of conventional conceptual frameworks in strategic manage-
ment that seek to organize the kinds of external opportunities available to businesses
and it is not the intention of this chapter to provide an exhaustive review of alter-
natives. Ansoff’s (1988) well-established matrix suggests four particular options
for growth based upon any business’s market and product with risk increasing
as the business moves away its existing products and markets towards new ones
(Figure 1.1). This is a very appealing distinction to draw. However, it is clear that
in any business, let alone retailing, the options available to business are more than
can be portrayed in a simple two-by-two matrix. Retailing additionally deals with

Existing market/ New market/

mission mission

Existing Market Market

product penetration development

New Product
Diversification
product development

Figure 1.1 Ansoff’s product-mission matrix

Source: After Ansoff (1988)
Introduction to retail strategy 9

Product/service mix

Geographical market Channel mix

Consumer segment

Figure 1.2 Opportunity diamond

Source: OXIRM

assortments of goods and services, rather than with individual products per se. Fur-
ther, in retailing the channel formats through which the product selection is offered
(whether they be stores, branches and web sites) may be significant and integral
characteristics of the business and not simply downstream consequences of the
strategic marketing process. We also need to consider that retailers operate both in
geographical markets of different scales as well as in markets determined by their
size and nature of their consumer base.
We argue that a more relevant way of representing the strategic options available
to retailers is to talk of a ‘diamond’ of opportunities (Figure 1.2).
Put simply, the questions we need to have answered are: what are we selling, to
whom, how and where? At the four apices therefore are:

Product/service mix The key choice of an appropriate assortment of products or

services that defines what a retailer is in the eyes of its customer base.
Consumer segment To whom is the product/service mix targeted and what are
their perceived needs?
Channel mix How is the product/service mix to be delivered in terms of formats
or channels?
Geographical market Where is the product/service mix to be delivered in terms of
site, location and geographical market?

These apices provide directions for growth. Following Ansoff’s lead, retailers can
choose to intensify their existing activity to optimize their penetration of one of
these elements. They can seek to achieve dominance against one or more of the
four opportunity criteria given in Table 1.2.
10 Retail Strategy

Alternatively (Table 1.3), they can choose to develop new opportunities along one
of the axes.
For example, many larger retailers are seeking to diversify into services. Eagle
et al. argue that this is not just for reasons of growth per se, but because retailers have

Table 1.2 Penetration strategies

Strategy Description Examples

Product/service mix Seek to dominate a IKEA

product/service Home Depot
category through B&Q
specialization Toys ‘R’ Us
Consumer segment Increase market share Frequency marketing
within primary target programmes
segment
Channel mix Proliferate stores to Boots the Chemist
optimize store McDonald’s
densities
Geographical market Deliberate Carrefour
concentration of Wal-Mart
geographical
penetration at local or
national levels

Table 1.3 Development strategies

Strategy Description Examples

Product/service mix Diversification into Wal-Mart (financial

related or totally new services)
product/service
mixes
Consumer segment Appealing to related or Lowes Hardware
totally new groups of (women)
consumers
Channel mix Diversification into Borders (online)
new store formats or Staples (Dover)
alternative distribution Wal-Mart
channels through the (Neighbourhood
development of Markets)
associated transactional
web sites
Geographical market Growth into new Carrefour
geographical Ahold
markets Zara
Introduction to retail strategy 11

actively identified a need amongst consumers for improvements in the efficiency

and speed of handling of certain types of complex transaction. The best service
diversification is characterized, they argue, in terms of packages of inter-related
products, services and information (Eagle et al., 2000, p. 108).

Home Depot now offers design and installation services, home

improvement financing, and tool rentals. Carrefour, the world’s
second-largest retailer, provides insurance, telecom, and travel
services. Meanwhile, the US office supply retailer Staples,
extending its products and services for small businesses and home
offices, provides insurance, telecom services, copying, shipping,
and payroll servicing.

Sometimes, the largest businesses are able to take advantage of all these routes
to growth. Tesco, the UK’s largest grocery retailer is an excellent case in point. With
a packaged grocery market share of some 25 per cent within the UK, the major-
ity delivered through large outlying superstores, sustaining profitability growth
through pure penetration strategies in a slow-growing UK grocery market and
within the regulatory constraints of the UK competition and planning authorities
has been challenging. Whilst penetration strategies have been pursued, the com-
pany’s long term route to growth in profitability is developmental. Its strategy is
summed up below. We can recast these elements into the opportunities framework
developed in Table 1.4.

Table 1.4 Growth opportunities for Tesco

Strategy Description

Product/service mix Diversification into clothing, health & beauty,

electrical, entertainment and other non-food
categories; joint ventures in financial services
Consumer segment Appealing to broader groups of consumers
Channel mix Diversification into Tesco Express, Metro and Extra
formats and the development of Tesco.com, now
accounting for some 5 per cent of the company’s
turnover; acquisition of 862 T&S convenience stores,
of which 450 will be converted to the Tesco Express
format
Geographical market Growth in Eire, central Europe and south-east Asia,
accounting in 2002 for 45 per cent of group
floorspace and some 18 per cent of turnover
12 Retail Strategy

Our successful long-term growth strategy has four elements:

strong UK core business – continues to grow and to build market share
non-food – making excellent progress towards our goal of being as strong in
non-food as food
retailing services – following the customer into new areas such as personal
finance and on-line retailing
international – our long-term organic growth programme is progressing well and
we are on track for 45% of Group space by 2002.
Tesco plc Annual Report and Accounts, 2001

We can note that in Tesco’s case, this mix of strategies has been achieved through
a mixture of organizational methods: independently, through organic growth; via
merger or acquisition; or through a variety of joint ventures. Chapter 7 reviews
the financial efficacy of such activity; Chapter 5 puts this into the context of
international development.

Creative positioning: art or science?

The interaction between product/service mix and target consumer segment is an
iterative one. Crafting an offer that meets shoppers’ perceived needs, can be as
much an art as a science. The offer conventionally requires positioning in relation
to the offers of other retailers to establish a differential advantage. Retailers con-
ventionally must choose from the list of store choice criteria seen by consumers as
important to determine how they wish to compete. Hill (2000) suggests that we
can distinguish between order-winning criteria and order-qualifying criteria. Qual-
ifiers are those criteria that a company must meet for a consumer to even consider
it as a possible choice. However providing or attaining these criteria does not
win orders. Winners comprise the criterion, or criteria, against which consumers
will make the final choice. Strength in both winning and qualifying criteria build
switching barriers and generate loyal customers.
Chapter 2 discusses the relationship between business effectiveness and cus-
tomer loyalty. An example is shown in Figure 1.3, which provides insights into
grocery shopping behaviour and distinguishes between the most important factor
in store selection and those factors which are important but not critical. In this
context, more shoppers find the ‘one-stop shop’ criterion a winning one than price
alone, although price is a significant qualifier and, for a smaller group of con-
sumers, a key winning criterion in its own right. Convenience is the only other
criterion to attract a greater than 10 per cent appeal as a main factor in store choice.
This example suggests that there may be three key positioning dimensions in the
Introduction to retail strategy 13

market available to grocery retailers: a ‘full service’ range one-stop shop; a low price
offer and a convenience offer, each relevant to certain customer segments at certain
times; and of course, this maps very closely on to what we know about how this
sector is presently structured in many developed economies. Further, the dominant
‘one-stop’ positioning criterion has the effect of raising barriers to store switching:
the move to larger surface grocery stores, the shift in location to out-of-town for
such stores, and the absence of competing stores at the same location will work
to raise consumers’ search costs and reduce consumer awareness of product price
and availability elsewhere.
It is also necessary that such positioning solutions be sustainable over a reas-
onable period, since re-positioning can be expensive as well as being confusing to
the customer. Such sustainability can be challenging to generate: the CEO of UK
supermarket retailer Tesco, Sir Terry Leahy, once remarked that the lead time for
the innovative grocery retailer was in the order of six weeks.
As Figure 1.3 suggests, one of the key trade-offs in developing compelling stra-
tegic positioning is that between price and a bundle of non-price factors. Identifying
how competitors are positioned in relation to these two sets of factors can be a start-
ing point in determining gaps in the existing market. For example, in the case of
selection of a clothing retailer, consumer surveys have shown that non-price con-
sumer choice differentiators include: a wide range of sizes, good stock availability,
clothes that are ‘a bit different’, a wide range of colours and sizes, good changing
areas and more helpful staff. Figure 1.4 shows a sample competitive map of retail-
ers’ positioning in relation to their aggregate score against a bundle of non-price
factors, and a score on a price index as perceived by shoppers themselves. The size
of the circles indicate market share.
Recently, and in line with increasingly professional and strategic thinking by
the leading organizations in the sector worldwide, we have witnessed a move to

Weekly shopping done under the one roof

Prices charged

Easy and convenient reach

Large range

Sufficient car parking

Always in stock
Important factor
Flexible opening hours Main factor

0 10 20 30 40 50 60 70 80

Figure 1.3 Determinants of store choice, UK grocery shoppers

Source: Competition Commission, 2000
14 Retail Strategy

150

140
Monsoon
130 Gap

120
Miss Selfridge Next
110
Price index

River Island
100
0 1 2 3 4 5 6 7 8 9 10
90
Top Shop
80

70
Matalan
60

50
Non-price factors

Figure 1.4 Retailers of speciality women’s outerware – UK competitive map

Source: OXIRM

develop an ‘image’ of good price. So-called every day low pricing (EDLP), first
developed by leading US retailers such as Wal-Mart and perpetuated, for example,
in Europe not just through Wal-Mart subsidiaries such as Asda and Wertkauf, but
also in Castorama (France), and the ‘never knowingly undersold’ claim of the John
Lewis Partnership of the UK: all examples of attempts to develop a longer term
belief in the price positioning of leading retailers. German retailer Aldi’s brand is
even more about lowest price at acceptable quality. The differences between the two
main types of strategy in respect of supermarket price positioning are explained
by Tang, Bell and Ho (2000):

A wide range of possibilities is available in terms of pricing

strategy, with the ‘Every Day Low Price’ (EDLP) store on one end
and the store which offers promotional pricing, known as the
HILO store, on the other. Retailers like Wal-Mart employ the
EDLP strategy and typically offer low prices all the time. As a
result, there is minimum variability between the regular price and
discount price. In contrast, a HILO store has a greater disparity
between the highest and lowest price, relying on sales and
promotional strategies to entice the buyer.
The ‘Every Day Low Price’ format generally appeals to the
cost-conscious buyer. EDLP shoppers normally buy many things in
one trip, they benefit from the small average cost savings on
Introduction to retail strategy 15

individual items. In contrast to the EDLP stores, the HILO store

competes on service and assortment, not price. The consumers
who like to make small and frequent shopping trips are more
likely to go to the HILO store.

Tang, Bell and Ho make clear that supermarket companies cannot ‘have their cake
and eat it’: that is, it is not considered generally viable for them to offer both
extensive assortments and very low prices across their full assortments. Grocery
multiple retailers therefore have choices available to them in terms of their posi-
tioning in terms of price and retail service. EDLP stores in general compensate for
their small range of price fluctuations by offering limited product ranges in certain
categories.

Branding and the development of retail brands

The use of branding has been a major historical source of supplier power. Whilst
branding has come late to retailing, it is one of the most important elements of retail
strategy today. The expression of the retailer as a brand serves as a means of articu-
lating its strategic positioning choices. The traditional dominance of simplistic
‘product-price’ announcements once reinforced commentators’ views that the sec-
tor was a relatively unprofessional proponent of marketing principles: ‘Each store
sings the same song . . . “here tomatoes are cheaper”. The result is a poor attribution
of advertising claims and some lack of credibility’ (Kapferer, 1986).
Whilst there are still examples of isolated product-price claims, as retailers have
come to control more of the supply chain, to be larger and more corporate enter-
prises, and to face more competition in maturing markets, they have come to
develop increasingly coherent and professional marketing functions and expertise,
made manifest in the brand. As we have already suggested, some retailers have
even been able to project an image of ‘good price’ through ‘every day low price’
positioning, as well as to professionally package other, often intangible, ‘non-price’
factors. Branding serves to protect or increase product and price differentiation and
thereby customer loyalty. As Whittington (2000) comments: ‘good strategy rarely
means doing exactly the same as everybody else’.
Whilst the most successful retailers are clearly focused on branding their offer
and themselves, they have yet truly to make their impression on the global brand-
ing stage. By 2000 Interbrand’s survey found only three conventional retail brands
in the top 100 worldwide by value: Gap, Benetton and IKEA. A number of ver-
tically integrated luxury goods manufacturers (Gucci, Louis Vuitton and Armani)
were also represented. By 2002, there were still only three retailers in the top 100,
but Benetton had been replaced by Amazon.com (Business Week, 2002). Yet brand-
ing is an important trend among grocers and general merchandisers as well as
specialists like these. Our interview in Chapter 12 with the marketing director of
Auchan (a grocery and hypermarket operator based in France, where price has
16 Retail Strategy

traditionally dominated retail competition), suggests that the business is moving

from a distribution focus to a brand focus.
What can retail brands be? Brands are much more than products: they are (using
de Chernatony and McDonald’s definition) identifiable clusters of functional and
emotional values (de Chernatony and McDonald, 1998). Price can still be a part of
the brand offer and positioning, as we have suggested above. Price is not everything
however: Aldi is offering the customer the chance to be a ‘clever’ consumer, with
a selected and low priced range. Strong brands create strong differentiation in
consumers’ minds and can only be created over time. The strength of the Marks &
Spencer brand for instance, despite its recent difficulties, lies in a long history of
familiarity for the British shopper.
Whale (2001) suggests that retail brands, as distinct from product brands, can
offer to simplify our lives (Argos); help edit or filter the choices we make in our
lives (Zara, Selfridges); or provide increased personalization (Amazon, Tesco.com).
Retail brands can truly be said to be post-modern brands in the sense that they
can seek to assist individual consumers manage their life goals. Our interview
with Auchan suggests that the company wants to be ‘the creator of solutions that
improve the standard of living for the majority of people’. We can see elements
of all three of Whale’s possibilities in this, together with the engaging, emo-
tional proposition that most people’s lives can be improved by Auchan. Emotional
branding is not just for Benetton!
Some of the strongest brands in retailing are built on product, format and staff.
For example, Pilgaard (2001) cites the Danish BoConcept store: ‘It’s all about stores
providing a total experience – from the moment a customer sees the store, to when
he or she goes through the door, sees the product, experiences the service, perhaps
gets a whiff of freshly made coffee in the café area, right through to the products
being delivered problem free to the purchaser.’
Retail own-brand products can of course be an element of retail branding and are
a most significant element of a branding strategy. Beginning generally with limited
aims of increasing margins, own brand approaches are now far more complex and
connected with overall strategic intent.
Own-label product can be the key to differentiation, as in the case of say Hennes
and Mauritz (H&M), Marks & Spencer or Aldi, where own-label product accounts
for all or virtually all products. Or they can be contributors to it, with interesting
subsidiary benefits in terms of cost and control, for firms selling a mix of own and
suppliers’ labels. Doubts as to whether grocery own label products can work in
emerging as well as mature markets are disappearing, as companies like Tesco and
Delhaize use them as part of their growth strategies in international operations, as
Howard suggests in Part II, Chapter 5.
But retail branding can also work without own-brand products. The success of
grocers in developing their brands, with part own-label product, shows this. It is
even clearer with branded retailers who sell only manufacturer branded product.
Sephora, for example, bases much of its appeal on its offer of the widest range of
proprietary products. Its own overall brand image has been strongly developed
Introduction to retail strategy 17

over the last few years however (though the company has existed for many
years): ‘The aim is to act as an umbrella for merchandising quality beauty product
brands . . . however at the same time the Sephora brand must not overwhelm the
products’ (Alpi, 1999).
There is however undoubtedly a trend in every sector – electricals, do-it-yourself,
department stores, grocery, drugstores, all of them – for retailers to use more own-
label products, and to develop more differentiated ranges, to be used for strategic
ends. The tendency for some firms to differentiate themselves, as Sephora does, by
emphasizing range of proprietary products is becoming rarer.
All retailers adapt their offer to some degree in new markets. Even McDonald’s
offers different menus in different countries. Tesco’s products in Thailand are quite
different from its stock in Poland. But can retailers be global brands? Can they
expand by exploiting similar brand values (if different products) in similar market
positions? Chapter 5 discusses these issues and concludes that there are a sufficient
number of successful stories to suggest that the answer is yes, but both international
expansion and sophisticated brand strategies are new enough in retailing for there
to be no clear-cut prescriptions. Indeed, there are doubts as to whether the successes
can really be extended globally in the ways that some consumer goods brands
have been.
IKEA and H&M may be cited as successes. Yet they remain predominantly
European firms – not truly global. Still, the strength of both is their brand, sup-
ported by efficient and effective supply chains which enable them to achieve the
price and rapid stock turnover which support their brand propositions. H&M
uses a single global brand, and own-label products within this. It offers fashion-
able but not trend setting clothing at affordable prices. Stores are recognizably
the same everywhere: brand consistency is regarded as a key strategic task.
‘Although the company emphasises the importance of maintaining a uniform
concept throughout its market, it adapts a flexible attitude to local conditions. . ..
There is room for some adjustments and decentralised stock control provided
the character of the retail format remains intact and costs are controlled’ (Helf-
ferich and Hinfelaar, 1999). For retailers like H&M and BoConcept (above),
the key is control with sufficient attention to the advice of local management.
Human and organizational factors of decision making are important factors in
success.
For others, particularly the general merchandisers and grocers, the problem is a
different one. It is whether similar brand concepts and positions can be achieved
with very different product ranges and possibly even different formats in different
places. For a brand to be global, it must have a single identity, unified position-
ing and communications programmes, centralized development and there must
be wide internal dissemination of best practice. Tesco is achieving a great deal, as
Chapter 5 and our discussion above suggests. Their positioning is based on cus-
tomer research, which has apparently demonstrated to them that consumers in
many places want essentially the same things from: lower prices, wider selections
of goods, more service and more non-food goods. Perhaps the convergence
18 Retail Strategy

of consumer interests and globalization of taste which has been remarked upon
in the context of Coca-Cola or McDonald’s is indeed sufficient to allow successful
global branding strategies for all kinds of retailers. Certainly the most interest-
ing retailers are building strategies around customer values rather than baskets of
goods.
The arrival of the Internet and of new, international formats in retailing chal-
lenges not so much the old rules of the game, or the essential role of the retailer
(although other, newer, intermediaries may be able to perform the role more effect-
ively than older incumbents) but has worked to increase the speed, efficiency and
need for flexibility and responsiveness within many retail markets. The growth
of ‘fast fashion’ operators such as Zara and H&M in relation to more traditional
operators such as C&A and Marks & Spencer is a case in point. Emerging evidence
online, discussed in Chapter 7, suggests that whilst the notion of the Internet as a
frictionless, efficient marketplace has proved to be something of a myth – at least as
far as the majority of consumers are concerned – its role in creating potentially new,
if not profitable, models of intermediation and new channels to consumers with
very different attributes from conventional ones, provides significant challenges to
the hegemony of bricks and mortar retailers.

Internal capabilities
The final, balancing, component in an effective strategy revolves around internal
capability. What are the retailer’s key capabilities? We can identify desirable
industry specific as well as more generic skills. The role of the retailer, as an inter-
mediary, has always been to source an authoritative range of goods designed to
appeal to consumers and which achieve an appropriate, but profitable, trade-off
between price and quality. To do this, the retailer has conventionally required
stores in convenient, accessible and sometimes attractive locations, buying power
through expertise or scale, and an intimate knowledge of consumers’ needs. These
capabilities underlie the major thematic chapters in Part II. The execution of the
role requires considerable skills in operations management and attention to detail.
Increasingly, the most powerful and professional retailers have created, and culti-
vated specific brand positioning – over and above the branding of the products
sold in store – that adds to their distinctive appeal to consumers. Increasingly pro-
fessional retail businesses also need to demonstrate excellence in generic skills such
as leadership, negotiation and team management.
In more and more countries, consumption may be regarded as a most important
part of the every day life of most people, and retailers as key actors in both economic
and cultural life. Retail companies have become big business. Their activities are
very visible, to consumers, citizens and politicians and are subjected to increasing
scrutiny. This book provides a further contribution to a better understanding of the
retailing sector and its challenges and concerns.
Introduction to retail strategy 19

Table 1.5 The evolution of own brands

1st generation 2nd generation 3rd generation 4th generation

Type of brand • generic • ‘quasi-brand’ own brand extended own

• no name • own label brand, i.e.
• brand free segmented own
• unbranded brands

Strategy • generics • cheapest price • me-too • value-added

Objective • increase margins • increase margins • enhance category • increase and retain
• provide choice in • reduce margins the client base
pricing manufacturers’ • expand product • enhance category
power by setting assortment, margins
the entry price i.e. customer • improve image
• provide better-value choice further
product • build retailer’s • differentiation
(quality/price) image among
consumers
Product • basic and functional • one-off staple lines • big category • image-forming
products with a large products product groups
volume • large number of
products with small
volume (niche)

Technology • simple production • technology still • close to the brand • innovative

process and basic lagging behind leader technology
technology lagging market leaders
behind market
leader
Quality / image • lower quality and • medium quality but • comparable to the • same or better than
inferior image still perceived as brand leaders brand leader
compared to the lower than leading • innovative and
manufacturers’ manufacturers’ different products
brands brands from brand
• secondary brand leaders
alongside the
leading
manufacturer’s
brand

Approximate • 20% or more below • 10–20% below • 5–10% below • equal or higher than
pricing the brand known brand
leader
Consumers’ • price is the main • price is still • both quality and • better and unique
motivation to buy criterion for important price, i.e. value products
buying for money

Supplier • national, not • national, partly • national, mostly • international,

specialized specializing to own specializing for manufacturing
label own brand mostly own
manufacturing manufacturing brands

Source: Laaksonen and Reynolds, 1994

Table 1.6 Making sense of the cases

Case Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7

(Chapters) Attracting Collaboration Planning Retail Prospects The financial
and keeping in the retail policy for internation- for e-commerce implications
customers supply chain retailing alization of retail
strategy

8. Migros 
9. Ahold  
10. Legoland  
11. Screwfix Direct   
12. Auchan 
13. B&Q 
14. Metro 
15. HMV   
16. Wellbeing  
17. Supermercats 
Pujol
18. Carrefour  
Belgium
19. Safeway 
20. Wal-Mart  
21. Shoppers’ Stop 
22. Kingfisher    
23. KarstadtQuelle   
24. Alfa-Beta   
25. Sainsbury’s 
Introduction to retail strategy 21

Structure of the book

The book is not structured as so many other case study books are structured, with
the introduction of a subject followed by a series of vignettes or real world examples
focused firmly on the topic. Retail Strategy: The view from the bridge features some
key, strategic themes in retailing in Part II and then in Part III presents the case
studies. The case studies are not focused on a particular theme. However, this
does not mean that the book is unstructured. Each key theme has two or three
case studies that draw out the issues from a real world perspective, drawn from
interviews with leading retailers from a wide range of retail companies. Table 1.6
summarizes this coverage. Part IV provides an integrative exercise that takes a
more holistic view of the cases. In addition, Chapter 27 on ‘portents’ provides
contrasting perspectives on the alternative strategic futures facing retailing. In this
way, both the key themes and the present and likely future complexity of the
retailing environment are explored in theory, in practice and then in student-based
activity.

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Part II

Strategic issues in
retailing
This Page Intentionally Left Blank
Chapter 2

Attracting and
keeping customers
Richard Cuthbertson and Richard Bell

The attraction and retention of customers consistently tops the list of concerns
on the retail CEO’s agenda. This considers the management of retailer–customer
relationships, which encompasses the often-quoted retailer objective of customer
loyalty. The chapter discusses the role of loyalty in retailing and explores some key
ways in which retailers seek to create customer loyalty, including the role of private
label products, loyalty schemes and multiple channels. The varied factors affecting
the outcome of a retailer–customer relationship are discussed, and the implications
for retailer strategy and implementation are thus derived.

Customer loyalty
Loyalty is the state of ‘being faithful’ or ‘steadfast in allegiance’ to another party,
according to the Oxford English Dictionary (1996). Therefore, customer loyalty to
a retailer can be defined as existing when a customer chooses to shop in only
one store or retail chain for a specific product or group of products. Sheth and
Parvatiyar (1995) define relationship marketing as ‘the ongoing process of enga-
ging in co-operative and collaborative activities and programmes with immediate
and end-user customers to create or enhance mutual economic value at a reduced
cost’. The emphasis on a two-way economic relationship is supported by Woolf
(1996) who states ‘great success comes from a marketing strategy based primar-
ily on understanding customer economics – and only secondarily on customer
loyalty’. To the retailer, ‘profitable’ customers appear more important than ‘loyal’
customers. Hence, this chapter concentrates on the business effectiveness of loyalty
26 Retail Strategy

marketing rather than the customer loyalty created. Moreover, the focus is on the
retailer view rather than the customer view.

Customer priorities
Customers may be classified in many ways. One way is to consider them as
attribute- or attitude-based shoppers (Mantel and Kardes, 1999). An attribute-based
shopper makes a judgement based on knowledge of key product attributes. As long
as products are available in a store that meets the customer’s key criteria, the cus-
tomer is likely to be store loyal. Attitude-based purchasing is more intuitive and
based on lifestyle and marketing choices. If the chosen product brand is unavail-
able at a store, an attitude-based customer is prepared to search for it. A customer
may be an attribute-based shopper in some circumstances, for example, the usual
grocery shop or in a hurried lunch period, and an attitude-based shopper in other
circumstances, for example, buying sports clothes or on a restful Sunday morning.
Furthermore, this may change as circumstances change over time, for example,
due to salary increases or new family members. With increased access and infor-
mation, customers are more able to become attribute-based shoppers rather than
attitude-based shoppers, reducing loyalty based on restricted choice.
Customer loyalty is not only difficult to gain; it is difficult to define. A customer
may be loyal to choices other than those defined by retailer or manufacturer brands
or product. For example, loyalty may be price-driven (high or low) or be based on
location rather than a specific brand. Dick and Basu (1994) divide consumers into
four loyalty segments, as shown in Figure 2.1 and further described below.
The difference between brand concept (relative attitude in Figure 2.1) and cus-
tomer behaviour (repeat purchase in Figure 2.1) also emphasizes the importance

Repeat purchase
High Low
High

Latent
Loyalty
Relative attitude

loyalty

Spurious
Low

No loyalty
loyalty

Figure 2.1 Loyalty segmentation

Source: Dick and Basu (1994)
Attracting and keeping customers 27

of accessibility in determining loyal behaviour. Consumers who are latently loyal

(in the top right quadrant of Figure 2.1) may value a particular brand (product or
retailer) but may not purchase that brand because it is not easily accessible. Simi-
larly, customers who are spuriously loyal (bottom left) may be so because they only
have access to a particular brand. They may not value that particular brand highly
at all.
Current and past research (Vanhoof et al., 1997) shows that a customer disap-
pointed by the retail experience may still continue to be loyal to the retailer if
product attributes (price, quality, etc.) are most important. This may be true even
if a particular product experience is also unsatisfactory, as long as there is a choice
of products.

The loyalty marketing mix

Loyalty in retailing is difficult to achieve when customers have choice, and are
empowered by information, such as price comparisons. Customers increasingly
know more about services and products, and expect a great deal from their suppli-
ers and retailers. The average customer today is more mobile and willing to travel
long distances to shop, contributing to the success of large out-of-town centres,
such as Bluewater in the UK, CentrO in Germany or Bay 2 in France. Compet-
ition for customer loyalty works on a number of levels. Retailers’ private label
products compete with manufacturers’ branded products, while new e-tail offer-
ings compete with established retailers’ distribution channels. First-movers may
be quickly imitated and the pace of change seems unrelenting. Customer loyalty
may become even more difficult to gain in the future, when artificial loyalty (based
on a lack of consumer choice and information) disappears in the face of better
products and services. Shrinking brand loyalty is a constant threat to any busi-
ness. In the highly developed automotive industry, for instance, where the retail
brand and product brand are virtually indistinguishable, brand loyalty in Europe’s
five main car markets (Italy, France, Spain, Germany and the UK) has consistently
reduced in recent years (Business Times Singapore, 1999). On the other hand, the
time-constrained customer may be less willing to visit alternative stores and may
be more willing to accept alternative brands, and so may be more loyal to a single
retailer.
There is wide variation within customer loyalty trends. There is a need to differ-
entiate between loyalty of necessity (low mobility or time-constrained customers)
and loyalty through choice (highly mobile customers with time to spend shop-
ping). Loyalty to a retailer is multi-dimensional and varies between sectors and
the nature of the purchase, for example, grocery or clothing, frequent or infrequent
purchases. The most important factor in keeping customers loyal according to a
survey by Verdict (1999) is the introduction of the ‘one-stop shop’. Retailers have
provided more out-of-town, one-stop shopping, where petrol can be bought along
with prescribed drugs and photographic services, with the result that customer
28 Retail Strategy

loyalty may be heavily influenced by the structure of retailing. At the same time,
loyalty through lack of product knowledge or choice is changing. A major area
of competition policy concerns the potential existence of local monopolies where
one or two retailers exist with little competition. This may be due to the ‘natural’
forces of economics, such as the limitations of a small marketplace, or ‘artificial’
barriers to entry, such as planning restrictions. As the retail sector becomes more
concentrated, competition authorities are increasingly investigating the practical
choices available to consumers. For example, the European Commission required
both French-owned Carrefour and German retailer Rewe to divest stores in order to
avoid excessive local market shares following acquisitions. The Competition Com-
mission in the UK also raised important issues regarding potential local monopolies
within the grocery sector (Morris, 2000).
Increasingly, competition authorities are considering the impact of retailers and
manufacturers on consumers at an increasingly detailed level, moving the focus of
inquiries from national to local markets, from basket to product pricing and from
supplier dependency to supply terms and conditions (Office of Fair Trading, 1999).
This focus on detail aims to reduce barriers to competition at a consumer level
rather than a (national) market level and so increases the possibility of consumer
fickleness. While this may be good news for the consumer, it has been argued
that mini monopolies, and therefore imperfect competition, are sometimes neces-
sary for efficient capitalism (Schumpeter, 1987). Mini monopolies, in any case,
may find it difficult to exist in the new global, electronic markets. They require
limited choices and imperfect consumer information, whereas e-commerce poten-
tially widens choice and allows access to more information, though this depends
upon the consumer taking advantage of such facilities. The information available
to consumers via consumer organizations and the media also reduces the barriers
to loyalty based on ignorance. It has been argued by Kuttner (1998):

The Internet is a nearly perfect market because information is

instantaneous and buyers can compare the offerings of sellers
worldwide. The result is fierce price competition, dwindling
product differentiation, and vanishing loyalty.

This harsh price competition is well illustrated where a third party, such as
BestBookBuys.com and dooyoo.co.uk, provides competitive information at one
access point.
Under this constant price pressure, many retailers have attempted to build a retail
brand that the consumer perceives as uniquely satisfying, and even exceeding, their
own requirements. This is a major reason for retailers to focus on the other aspects
of the marketing mix (McCarthy, 1964). In particular, in the case of product, a
retailer may develop a portfolio of private label products. In the case of place, a
retailer may offer new distribution channels and in the case of promotion, a retailer
may monitor and reward loyal customer behaviour. (For a broader text on retail
marketing, see McGoldrick, 2002.)
Attracting and keeping customers 29

Private label: strategic alignment

In building loyalty to the retailer brand, many retailers choose to use the store
brand as an umbrella brand for their private label products. This creates marketing
synergy between the store name and the product name. The retailer’s name on
the label can increase the trust towards the products and encourage the customer
to buy. For example, Wal-Mart Asda in the UK include the Asda brand name on
the ‘smart price’ range of products, to increase trust to the range and strengthen
the Wal-Mart Asda price positioning. Retailers usually put heavy emphasis on the
quality of their private label products, within the limits of their general strategy
and price positioning. The aim is not to take the cheapest alternative available,
but rather to choose products with the best combination of price and quality that
fits the retailer’s overall marketing strategy. Hence, even German hard discount
grocery retailer Aldi, who have a very high proportion of private label products,
stock selected lines of manufacturer branded product, such as Mars chocolate bars.
To maximize brand loyalty, it is important for a retailer to manage the quality
of private label products throughout the range. This is especially true in the case
of store brands, where there is a strong association between private label products
and the retailer. If the retailer has different names for each product, as do Aldi,
the ability to convey values of originality and consistency may be reduced but
the consequences of poor product development, low sales and subsequent risk to
brand loyalty are also reduced.
As retailers become more highly differentiated and focused, brand loyalty tends
to increase, though the relevant potential market may decrease. What is important
is to maximize brand loyalty within the overall marketing strategy adopted by
the retailer. This can be illustrated in the private-label strategic alignment model
(Cuthbertson et al., 2000) as in Figure 2.2.
Using this analytical framework, it is possible to evaluate the consistency of a
retailer’s private-label strategy. A consistent strategy appears as a small area on
the framework, while an inconsistent strategy covers a large area. For example, a
retailer with an overall marketing strategy based on a highly differentiated product
range (and hence offering limited customer choice) has a consistent private-label
strategy if there is a high proportion of private-label product over which the retailer
exerts a high level of design and manufacture control. This would be represented
as in Figure 2.3.
An example of an inconsistent strategy for this retailer would be if the private
label objectives did not align with the overall marketing strategy (see Figure 2.4).
Inconsistency may occur through incorrect private label development and/or
through a change in the overall marketing strategy.
Private-label strategies are implemented successfully by gaining the customer’s
trust both in the retailer and the private-label products themselves. Thus, private-
label products may be used to create further trust in the retailer’s ability to
reliably meet consumer needs. Consequently, high standards of quality control
(pre-transaction) and customer service (post-transaction) are vital. The leading UK
30 Retail Strategy

Marketing
Competitive positioning strategy

Price Differentiation
Proportion of private-label products

High Narrow

Consumer choice
ty
al
loy
d
Low an Wide
Br

No control Control of product design Total control

Private- Control of the supply chain
label strategy

Figure 2.2 Private-label strategic alignment model

retailers, with high levels of private-label product, appear to enjoy a high level of
consumer trust and this continues to increase, as Table 2.1 shows.
Similarly, retailers appear to be well trusted, even compared to many well-
established manufacturer brands and to other institutions and professionals, as
a comparison of Tables 2.1 and 2.2 shows.
Furthermore, retailers have several ways of reinforcing consumer trust and there-
fore loyalty towards their private-label products. Refund policies aimed at quality
assurance are common. Examples of these are Marks & Spencer’s ‘No Questions
Asked’ refund policy and Aldi’s ‘No Quibble Guarantee’. Decathlon, French sports
clothes and equipment retailer, offers a one-year (or more) warranty on all Decath-
lon private-label products. All UK health and beauty retailer Boots brand products
are covered by a two-year guarantee. Tesco prints on its private label products that
‘We are happy to refund or replace any Tesco product which falls below the high
standard you expect. Just ask any member of staff.’ Private-label product informa-
tion, such as nutritional information, written on packaging or provided elsewhere
in-store often exceeds legal requirements and may be more extensive when com-
pared to manufacturer brands. Many retailers produce information leaflets, such
Attracting and keeping customers 31

Marketing
Competitive positioning strategy

Price Differentiation

Proportion of private-label products

High Narrow

Consumer choice
Low Wide

No control Control of product design Total control

Private- Control of the supply chain

label strategy

Figure 2.3 Consistent private-label strategy

as Tesco’s healthy eating guide, featuring their private-label products, or Boots’

medicine guides. Another potential advantage that private label has in increas-
ing consumer trust is that it is often easier and quicker to alter the production of
lower volume, private-label products, than higher volume, manufacturer branded
products, in response to changing consumer preferences. For example, many food
retailers in the UK were quicker than branded manufacturers to exclude genetically
modified ingredients from their products, following consumer concern.
The unit price and retailer competence influences the amount of trust a cus-
tomer needs when making a purchasing decision. This relates to the retailer’s core
competence. Where the unit price is low, the customer is more inclined to try a
private-label product, since the consequences of the decision proving unsatisfac-
tory are small. New private-label products are also more likely to be successful
if they are considered close to the retailer’s core competence. Therefore retailers
can move transitionally into new product areas. For example, retailers may initially
offer loyalty cards or credit before moving to a more comprehensive range of finan-
cial services, as we have seen with some leading retailers. For some products, it is
not so much a question of trust in technical elements, but rather social credibility
32 Retail Strategy

Marketing
Competitive positioning strategy

Price Differentiation
Proportion of private-label products

High Narrow

Consumer choice
Low Wide

No control Control of product design Total control

Private- Control of the supply chain

label strategy

Figure 2.4 Inconsistent private-label strategy

Table 2.1 Trusting companies to

be honest and fair in the UK

Company 1994 1997

Boots 78 83
Marks & Spencer 73 83
Sainsbury’s 59 74
Tesco 52 71
Asda 46 67
Safeway 45 64

Source: Henley Centre (1998)

in these niche markets. This is particularly true in high fashion markets. In these
and similar upmarket product categories, a generalist retailer’s regular store brand
may be regarded as being too easily available.
Finally, while some customers may only trust ‘branded’ products, this does
not necessarily stop successful private-label development. According to consumer
Attracting and keeping customers 33

Table 2.2 Trusted to be honest and fair

Institution/brand % Trusted

Your GP (doctor) 85
Kellogg 84
Cadbury 83
Heinz 81
Nescafé 77
Rowntree 74
Your bank 72
Coca-Cola 65
Your church 64
The police 62
...
Your member of parliament 28

Source: Croft (1998)

research, many customers of Marks & Spencer believe that they never purchase
private-label products and that only branded ones will do (Mintel, 1998). This is
despite the fact that Marks & Spencer sell almost only private-label products.

Multiple channels: e-loyalty

As consumer access to and usage of the Internet has grown, there has been a move
towards multi-channel retailing by many major retailers. In this dynamic environ-
ment, the relative importance of retaining existing customers (loyalty) compared
to the acquisition of new customers varies over time, though most multi-channel
retailers would consider both acquisition and retention important. However, less
established e-tail operations tend to agree that customer acquisition is the dom-
inant focus at this point in their development. On the other hand, more established
e-tail operations, with a large existing customer base, tend to be more focused
on retention. So, the importance of loyalty marketing appears to be related to the
development life cycle of the e-tail operations. At the start of an e-tail business,
loyalty marketing is an important consideration though it requires less focus than
the initial acquisition of customers. In the first year of operation, the need to grow
the customer base then dominates. However, once established, the focus then tends
to shift more towards retaining this customer base. This could be summarized as
in Figure 2.5.
There are some important differences in loyalty marketing when comparing the
e-tail and store-based shopping environments. These can be summarized according
to the traditional marketing mix (McCarthy, 1964) of product, place, price and
promotion.
34 Retail Strategy

High

loyalty marketing
Importance of

Low

0 1 2 3
Number of years of development

Figure 2.5 Importance of loyalty marketing over time

In product terms, many loyalty marketing techniques in an e-tail environment are

the same as in a store environment. However, in a store environment, the customer
is not required to place so much initial trust in the product characteristics, because
they can test some attributes within the store, for example trying on clothes before
purchase.
The place variable in the marketing mix is fundamentally different in an e-tail
environment compared to a store-based environment. While the virtual market-
place may be easier to manage, in that it may be a single point (website), the
delivery points may be anywhere. Thus, delivery issues must be carefully and
proactively managed by the e-tailer to ensure effective and efficient fulfilment to
achieve customer satisfaction, and therefore retention. Moreover, it is easier to
manage fulfilment if the customer base is more constant, i.e. loyal.
All retailers, online and offline, are reluctant to discuss pricing strategy in
detail. However, there appears to be general agreement that e-tail product pricing
needs to be competitive with store-based pricing, while delivery may represent an
acceptable extra charge, though often not at the full commercial rate.
E-tail promotional strategies are very varied and include advertising, links from
other websites and stores, conventional promotions and loyalty schemes. The vir-
tual environment of e-tailing allows for the potential to personalize a website for
loyal customers; it is impossible to personalize stores to the same extent. Many cus-
tomer relationship management (CRM) techniques may be employed in a digital
environment, where customer data, both transaction and browsing, may be cap-
tured at source. Of particular interest are the multi-channel retailers who treat
their digital channel as an integral part of the retailer’s overall offer. This enables
the e-tail division to gain synergies in advertising and other promotional activ-
ities. Similarly, loyalty schemes for multi-channel retailers may be run across all
channels. Pure-play e-tailers tend not to employ conventional loyalty schemes
because of their ability to capture customer behaviour data without having to offer
a reward. The management of existing customers tends to be an important activity
Attracting and keeping customers 35

for all e-tail businesses in improving repeat purchasing rates and increasing average
expenditures.
Multi-channel retailers are able to compare online and store-based loyalty. Evid-
ence suggests (Cuthbertson, 2002) that there appears to be less loyalty online,
though this may be explained by the current growth in attracting new custom-
ers to digital channels. Future expectations for online retailing are varied. The key
predictions for the future are a maturing marketplace experiencing fewer prob-
lems, with fewer but stronger competitors able to satisfy the increasing customer
requirements, and thus increasing consumer loyalty.
Successful retailing in the future requires integration, communication and meas-
urement as key ingredients. Successful multi-channel retailers, such as Tesco in the
UK and Tchibo in Germany, integrate their digital channel into the overall retail
brand, including loyalty marketing. This provides for a more cost-effective and
complete retail offering. For multi-channel retailers, the digital channel is evolving
as an important marketing channel, as well as a sales channel. Successful e-tailing
consists of leveraging the advantages of the digital channel, such as communic-
ating with the customer, via promotions and feedback, at a frequency appropriate
to customer purchasing frequency. In particular, the frequency of such commun-
ication may be designed to increase an individual customer’s purchasing frequency
from its present level towards the level of the retailer’s most frequent purchasers.
Successful e-tailing also requires measuring and modelling customer sales, sat-
isfaction, value and loyalty both in terms of absolute figures and trends. In an
evolving environment, trends tend to be more important in this respect than cur-
rent absolute figures. However, the time horizon of any forecasts should still be
kept fairly short, as they may not be very reliable.
In conclusion, the successful retention of loyal customers in multi-channel retail-
ing is based on the whole retail offering and experience, but offers huge potential for
leveraging individual customer information. This may also be done in a store-based
environment via a card-based loyalty scheme.

Loyalty schemes: the purchaser–purveyor matrix

Assuming that the product offer is relevant and accessible to the consumer, retailers
may then offer a loyalty scheme to track and reward customer purchases, with the
aim of increasing the retailer understanding of individual consumer demand. The
combination of the purchaser (customer) and purveyor (retailer) viewpoints can
be used to define the loyalty card strategy chosen by a retailer, and is summarized
in Figure 2.6.
The purchaser–purveyor matrix (Cuthbertson and Bell, 2001) shows five major
strategic classifications of loyalty card schemes: pure, push, pull, purchase and
purge.
Pure loyalty schemes are pure in the sense that both card use and customer benefits
apply only to a specific retailer. A typical example might be purchasing product from
36 Retail Strategy

Customer scope
Single retailer Many retailers

Sole Pure Push

retailer
Customer benefits

Third party Pull Purchase

No loyalty
Purge
scheme

Figure 2.6 The purchaser–purveyor loyalty matrix

a specific retailer to gain a discount off future purchases from that same retailer. The
Swedish retailer ICA has a Kundkort that provides an example of such a scheme. Pure
retailers tend to focus on promoting the retail brand, in order to attract and retain a
core group of high-spending and profitable customers.
Push loyalty schemes aim to push the customer towards a particular retailer by
allowing spending at other retailers to accrue benefits provided by the target retailer. A
typical example might be the result of the target retailer working together with a bank
providing access to many retailers through the use of a common payment scheme, such
as Visa or MasterCard. The GM MasterCard or Sainsbury’s Visa card are examples
of such schemes. Push retailers tend to focus on providing well-regarded or desir-
able products and services, in order to attract and retain a wide group of profitable
customers.
Pull loyalty schemes aim to pull the customer towards the retailer by offering
benefits. A typical example might be purchasing petrol in order to claim gifts from
a catalogue provided by a third party. Shell’s plusPoints loyalty scheme is an example of
this. Pull retailers tend to focus on ensuring accessibility, and then increasing customer
transactions by offering incentives provided by a third party.
Purchase loyalty schemes aim to encourage the customer to purchase in general,
with many retailers and third parties involved. A typical example might be the use of
general credit cards in order to claim gifts from a catalogue. American Express provides
an example of such a scheme. Purchase retailers are interested in increasing transactions
through the financial services provider, rather than creating loyalty to a retail store.
Purge loyalty schemes represent the antithesis of the other types of loyalty card
schemes, which is to purge your loyalty card scheme if it exists at all. Wal-Mart Asda and
Aldi are important examples of this approach. Purge retailers tend to focus on offering
the lowest price to all consumers, and view loyalty schemes as an unnecessary cost.
The classification of loyalty schemes helps focus loyalty scheme strategy and
management. This is dependent upon the retailer marketing mix and the customer
Attracting and keeping customers 37

reaction to the retail offer and competing offers. The different types of loyalty
schemes are not exclusive. For example, the Tesco Clubcard Visa offers discount
off future purchases (a pure scheme), may act as a payment card (a push scheme),
offers benefits from third parties, such as Air Miles (a pull scheme), may be used at
other retailers for financial transactions (a purchase scheme), and may not be used
at all by some Tesco customers (a purge scheme).
The day-to-day operations and marketing tactics employed are then informed
by the strategy defined. The results of any CRM activities can then be measured
and evaluated against the strategic objectives.
The future development of loyalty schemes depends on many issues, such as
legislation on the privacy of data, public attitudes towards personal data, com-
petition authorities, the economic environment, and national and cultural issues.
However, loyalty schemes have always occurred in some form throughout the his-
tory of retailing. It may be argued that technology is the driving force behind loyalty
card-based schemes. Furthermore, it can be argued that it will be technology that
will drive developments away from the current format of loyalty schemes. The
magnetic strip and microchip of today will seem as basic as a book of Green Shield
Stamps at some point in the future.

Switchability and substitutability

Switchability
According to recent studies in UK grocery retailing, customers often switch retailers
when they move house or a new store opens (East and Hammond, 2000). This
reflects the importance of location in retail brand loyalty. If a store is out of town,
there may be little alternative without travelling a considerable extra distance. The
propensity to switch stores depends upon the nature of the store and the shopping
objective. Where stores are located close to alternative stores, the cost of switching
is less. The importance of location is confirmed in a study by East and Hogg (1997)
of the increase in market share by Tesco, UK in the 1990s. This study demonstrated
that much of the increase in market share was due to the increase in the number of
Tesco stores over the period, rather than through other factors. However, location
is not likely to be so important to online shoppers, who can buy via their iDTV, PC
or other web-enabled devices.
When a product is unavailable, customers may switch stores, substitute other
products or defer purchases. Switching stores happens most frequently when there
is easy access to competing stores. The nature of the purchase is also important.
Customers may feel unable to defer purchases, especially where high frequency
consumption products are unavailable, and so may feel obliged to substitute other
products. For example, if a customer has Anchor butter on her shopping list but the
store is out of her favourite brand on one occasion, she is unlikely to change stores
but would substitute another brand such as Kerrygold or the retailer’s private label.
38 Retail Strategy

100%

Likelihood of switching stores

50%

Increasing purchase frequency

0%
Increasing brand strength of non-stocked product

High-frequency purchases
Low-frequency purchases

Figure 2.7 Store switchability

However, switchability is also dependent upon the strength of the product brand.
Strong product brands deter customers from substituting another product, and
so may lead to the customer spending more time and effort on switching stores,
rather than substitute another product brand. For example, some customers will
not accept Pepsi-Cola as a substitute for Coca-Cola, or vice versa. This is illustrated
in Figure 2.7.

Substitutability
Branded products appear to be increasingly important to the consumer, but
brand loyalty is reducing (Scase, 1999). This is because more people are con-
tent with a brand rather than a particular brand. If several well regarded branded
products or retailers are available that can satisfy consumer expectations, then
consumers may not care which particular brands they buy. For example, a cus-
tomer may rate equally French Connection and Gap, or Mars and Snickers –
all well-known and highly regarded brands. Some marketers would argue that
these are not true brands, since differentiation is so weak. In any case, the
substitutability of product brands is affected by the availability of competing
products.
Retailers may have a major influence on product loyalty. As retailers increasingly
stock private-label products, there is a potential conflict of interest between the
retailer’s dual roles, as an agent for manufacturers’ brands and at the same time
a provider of competing brands. The substitutability of manufacturer branded
products with retailer private-label products depends upon a number of factors
Attracting and keeping customers 39

including: familiarity with store brands, extrinsic cues in product evaluation, per-
ceived quality, perceived risk (which is heavily dependant upon the frequency of
purchase), perceived value for money, as well as consumer income and family size
(Richardson et al., 1996).
Retail operations may also heavily impact the substitutability of branded and
competing products, including private-label products. For example, the retailer
may analyse the elasticity of implementing multiple facings of products or product
placing according to shelf height. Based on such analyses, shelves may be stocked
accordingly, perhaps in favour of the retailer’s private label products. For example,
multi-facing may produce a significant increase in sales (though with declining
economies of scale), as Figure 2.8 illustrates.
Retailers may choose advantageous multi-facings for their own private-label
product rather than branded manufacturer’s product. The shelf height and position
along fixture and in-store positioning also affect sales, and may be similarly set out
in favour of the retailer’s private-label products.
Product promotions can have a major impact on customer loyalty to branded
products. There is evidence that non-price-focused promotions, such as free
samples, appear to encourage brand loyalty, while price-focused promotions seem
to attract more promiscuous shoppers (Gedenk and Neslin, 1999). This can cause
conflict between a retailer and a manufacturer. Retailers may welcome constantly
changing price promotions, as they may drive category sales. However, from the
manufacturer’s view, product sales may rise while a product is on promotion but
may quickly fall away at the end of the promotion, especially if there is another

100
Product A
90 Product B
Product C
80 Product D
Increase in sales (%)

70

60

50

40

30

20

10

0
1 2 3 4 5 6 7 8
Number of facings

Figure 2.8 The effect of multi-facings in store

40 Retail Strategy

competing product being similarly promoted. Retailers may also stock one branded
manufacturer’s product rather than another, such as Rite Aid (US) did in 1998,
stocking Pepsi-Cola at the expense of Coca-Cola.
So, retailers may have a major input into the level of substitutability likely to
take place. The retailer’s overall marketing strategy may also be very important
here. For example, it can be argued that an every day low price (EDLP) strategy
may encourage loyalty to the retailer through a consistent low price offering, but
individual product loyalty may vary considerably.

Switchability versus substitutability

Research into branded product substitution tends to have been carried out sepa-
rately from research into store switching and vice versa. In any case, there is no
simple cause and effect relationship between product brands and retail brands. Suc-
cessful product brands enhance the retailer brand, while successful retail brands
enhance the product brands stocked. According to conventional marketing wis-
dom, brands build loyalty (Matthews, 1998) regardless of whether they are retail
brands or product brands. This ability to build brand loyalty affects the initial
product or service trial and repeat business. It is generally agreed that strong brand
values are more easily created for a single product than for a retail store with its
varied ranges of product and service.
The real test of whether a customer is more susceptible to switching stores (store
loyal) or substituting competing products (product loyal) occurs when a previously
available product in a retail store becomes unavailable. This may be temporary, due
to problems with supply, or permanent, when an item is delisted by the retailer or
withdrawn by the supplier. A customer may change purchasing habits if a product
line is delisted. The retailer may not worry when a product is delisted if there
is no impact upon the overall demand for the product category. This may imply
that customers have substituted products, but not switched retailers. However, the
delisted supplier may be far from happy.
Where a product is delisted, the customer has four choices: to no longer make
such a purchase, to switch store, to switch brand or to substitute another product.
Analysis (Cuthbertson et al., 2001) of delisted grocery products in Germany and
France, via retail audit and consumer panel data supplied by ACNielsen and
delisting data provided by AIM, show the impact on product sales before and
after delisting to be ambiguous. This may be due to cultural and economic
influences.
For instance, in Germany the research findings indicate that the loss of sales
from delisting a product was more than made up by a general increase in category
sales. (Of the 16 cases analysed there is one exception to this where category sales
plummeted below the loss of sales for the product delisted. This effect is discussed
later when France is considered.) These category increases are much higher than the
general rise in retail spending over the period. This could reflect the retailer’s better
Attracting and keeping customers 41

category management, resulting in the delisting of a non-performing product, and

perhaps related to a price-focused strategy, common in Germany.
In isolation, this suggests that, when a product is delisted, product substitu-
tion takes place rather than switching retail stores. However, in 11 of the 16 cases
(69 per cent) researched in Germany, the manufacturer’s total sales for the delist-
ed product increased over the same period, suggesting store switching. This may
be because the manufacturer switched promotional expenditure for the product
to other retail stores. The effect of these 11 delistings appears to benefit both the
retailer and the manufacturer.
In 5 of the 16 cases (31 per cent), manufacturers’ overall sales plummeted below
the loss expected from one retailer delisting. As the retailer did not suffer a similar
loss of sales, this implies that customers substituted other products rather than
switched stores.
In France, analysis of sales patterns for delisted products is quite different. In
11 of the 22 cases (50 per cent), the loss of sales from the delisted product does not
appear to affect overall category sales, suggesting that customers are substituting
other product brands.
In another three cases (14 per cent), the category loss was less than the delisted
product sales suggesting a mixture of product substitution and store switching. In
the other eight cases, there is evidence of retail store switching, because category
sales plummeted more than the delisted product sales alone. And in six of these
cases (28 per cent) it appears that the delisted product brand’s strength is so influ-
ential that the strength of the whole category is undermined once the product is
delisted.
In 50 per cent of cases, the manufacturer is also affected, losing sales not only to
the delisting retailer but also to other retailers. So in France, both product substitu-
tion and some store switching are evident. This may be related to a combination of
market share and brand value. Where products have high market share and brand
value then the customer may switch stores. In all other cases the customer may be
more likely to substitute other products.
This analysis illustrates the difficulties in clearly distinguishing between switch-
ability and product substitutability. Retailers attracting the highest levels of
customer loyalty tend to carry the products attracting the highest levels of loy-
alty, and so it is very difficult to differentiate between customer loyalty to the retail
experience and customer loyalty to product brands.
Other research into the effects of delisting particular product brands has pro-
duced similarly mixed results. For example, Verbeke et al. (1997) carried out two
such experiments by delisting five leading branded products from five different
categories in two Dutch grocery stores (with and without nearby competition). The
purchasing patterns of 590 customers were analysed. The results varied between
categories as shown in Figure 2.9.
An average of 55 per cent of customers substituted other brands, 25 per cent
switched stores and 20 per cent postponed the purchase. Interestingly the results
42 Retail Strategy

(%)
70
Substituted product
Switched stores
60 Postponed purchase

50

40

30

20

10

0
Croma margarine Coca-Cola Friesche Vlag Lassie rice Omo detergent
soft drink coffee creamer

Figure 2.9 Customer response to out-of-stocks

Source: Vebeke (1997)

were similar, regardless of whether there was a nearby competitive store, suggest-
ing that the competitive environment may not be very important in the two-week
period over which the experiment took place.
An important conclusion of this analysis is that delisting products appears to
have a major effect on the whole category, which may be negative or positive
depending upon the customer’s attitude towards the delisted product brand. The
commercial implications of delisting products may be unclear but they are always
likely to affect the category as a whole. A clear and measurable rationale when
making such decisions therefore needs to be in place.

Options for brand loyalty

Product and retailer brand loyalty results from a complex combination of factors
relating to: pre-transaction consumer requirements; the marketing mix provided
by retailers and suppliers; and post-transaction customer experience of the retail
store and product bought.
The major factors are summarized in Figure 2.10. The relevance of factors affect-
ing customer loyalty differs according to target customer groups. Four broad types
of customer groups may be identified on the basis of price and quality: budget,
value, quality and luxury.
Attracting and keeping customers 43

(a) Consumer
Product category: FMCG, fashion or durable
Purchase frequency: high or low
Product priority: price or quality
Search priority: convenience or choice

Retailer
Supplier
Channel/store: out-of-town, high street or e-tail
Product distribution: exclusive or inclusive
Product choice (range): wide or narrow
Product supply price: premium or discount
Product retail price: premium or discount
Product quality: high or low
Product positioning in store: good or poor
Product brand value: high or low
Customer service: good, effective, poor
Product promotion: high or low
Channel/store brand value: high or low
Channel/store promotion: high or low

Product
experience
Retail
experience

(b) Product experience

Satisfied Dissatisfied

Loyal to product Loyal to retailer

Satisfied
Retail experience

and retailer

Loyal to Not at all

Dissatisfied product loyal

Figure 2.10 Major factors affecting switchability and substitutability

Budget customers are price-focused. Retailers targeting these customers include

German discount retailers such as Aldi, Netto and Lidl. Value customers focus on
value for money, which implies a range of products to choose from at different
price-quality points. Retailers targeting these customers include the big grocers
and general merchandisers such as Tesco, Albert Heijn, Carrefour and Wal-Mart.
Quality customers are focused on high-quality products and service. While price is
not a prime issue to these customers, they will not pay ‘excessive’ prices. Retailers
for these customers include the more niche retailers such as French retailer Sephora
or even UK grocer Waitrose. The final category of luxury customers is focused on
44 Retail Strategy

exceptionally high quality products and services. For these customers, price is
not an issue and may even have a positive rather than negative correlation with
loyalty. Typical retailers targeting these customers might include the more exclu-
sive department stores, such as KaDeWe in Berlin or Harrods in London. These
customers are summarized in Figure 2.11.
Based on the earlier discussion, Table 2.3 illustrates the key requirements for
customer loyalty for each target group.
A dash (–) indicates a variable that may be appreciated by the customer but it
is not generally key to gaining their loyalty. For example, budget customers may
appreciate a good retail experience but it is not necessary to gain loyalty.

Loyalty strategy and implementation

Retailer loyalty strategy and implementation
Within the key requirements of customer loyalty, there are four critical elements:
access, price, brand and assortment. The critical elements of a successful retailer
loyalty strategy can be related to the traditional marketing mix of place, price,
promotion and product, as shown in Figure 2.12.
Retailers directly influence customer loyalty to a store through a combination of
the store location, brand marketing, product range and store environment. They
can also directly influence product-brand loyalty, via variables, such as price, pro-
motion, location on shelf and display. Customers will often choose to go to one
retail location rather than several, allowing the retailers within that location to
control many of the essential elements required to develop customer loyalty, both
to the retailer and to branded products.
In summary, retailer-brand loyalty is the direct result of the retailer fulfilling
customer needs. Indirectly, this may rely on the supplier’s product being stocked.
Retailers must be accessible and have a clear brand strategy that results in consistent

Luxury
Quality
Quality

Value

Budget

Price

Figure 2.11 Target customers

Attracting and keeping customers 45

marketing and operations, especially with respect to private label products and
customer relationship programmes.
Retailers need to take different routes to achieve customer loyalty, depending
upon their target customer group.
Budget retailers focus on price competitiveness and then accessibility, as shown
in Figure 2.13. Quality retailers focus on both accessibility and their retail brand,
illustrated in Figure 2.14. Figure 2.15 illustrates a luxury retailer’s focus on their
retail brand and then their category assortment.
Value retailers try to focus on all the critical issues at the same time, since they are
attempting to offer ‘everything to everyone’. Figure 2.16 shows the value retailer
strategy. Arguably, the value retailers have the most difficult task, but also the
largest potential markets.
All of these different routes to customer loyalty are summarized in Figure 2.17.
In the digital world, access may become less of an issue. As business-to-consumer
e-commerce grows, particularly in mass-appeal broadband applications, such as
digital television, retailers may be accessible from anywhere, and at any time.
When customers choose to purchase through these digital channels, then physical
location becomes less important.

Table 2.3 Key requirements for customer loyalty by customer group

Customer type

Budget Value Quality Luxury

Retail factors
Channel/location – Out-of-town – High street
Range – Wide Wide Wide
Retail pricing Discount Mixed – –
In-store positioning – Good Excellent –
Customer service – Good Effective Excellent
Supply/product issues
Distribution Exclusive Mixed Inclusive Exclusive
Manufacturer’s product price Low Mixed – –
Product quality – Mixed High Excellent
Consumer view
Retailer brand value – High High Superior
Retailer promotion High High – –
Product brand value – Mixed High Superior
Product promotion – Mixed High –
Product experience – – Good Excellent
Retail experience – Good Effective Excellent

Source: Oxford Institute of Retail Management

46 Retail Strategy

Summary
A loyal customer base is an asset for any company. However, marketing strategies
must consider the overall commercial success of the business. Witness the recent

Retail brand value

Low High

High
Wide
Relative accessibility

Category assortment
y
alt
loy
nd
bra
t ail
Re

Low
Narrow

Low High
Price competitiveness

Figure 2.12 Retailer loyalty strategy

High
Relative accessibility

Budget
Low

Low High
Price competitiveness

Figure 2.13 Retailer loyalty: budget customers

Attracting and keeping customers 47

e-commerce retailers proclaiming customer attraction and retention without deliv-

ering profits. This is despite the fact that it has long been understood that, in
commercial terms, quality of market share (loyalty) appears to be more important
than quantity of market share. For example, Reichheld and Sasser (1990) estimated
that a 5 per cent increase in customer loyalty can increase profits by between 25 and
85 per cent. However, it should be recognized that, in some markets, retailers may
retain loyal customers without focusing a great deal of marketing expenditure on

Retail brand value

Low High

High Quality
Relative accessibility

Low

Figure 2.14 Retailer loyalty: quality customers

Retail brand value

Low High

Wide
Category assortment

Luxury
Narrow

Figure 2.15 Retailer loyalty: luxury customers

48 Retail Strategy

Retail brand value

Low High

High
Wide
Relative accessibility

Category assortment
Value

Low
Narrow

Low High
Price competitiveness

Figure 2.16 Retailer loyalty: value customers

Retail brand value

Low High

High Quality
Wide
Relative accessibility

Category assortment

Value

Luxury

Budget
Low
Narrow

Low High
Price competitiveness

Figure 2.17 Retailer loyalty: summary

Attracting and keeping customers 49

them. In this instance, it may be more cost-effective to focus marketing strategy

and expenditure on non-loyal customers. For example, it has been demonstrated
(Bolton, 1998) that when short-term and long-term customers experience poor ser-
vice, the long-term customers are less likely to defect, because they may consider
that this is not typical of the provider. Marketing strategy, in this situation, should
be directed at new customers, who in turn may become loyal customers.
Each retail situation needs to be analysed individually to assess the relevant
loyalty strategy. It is clear that retailers must have a clearly defined loyalty strategy
and that increased customer loyalty should lead to increased profits. If this is not
the case, then serious questions need to be asked. A key aim for retailers is to create
a profitable long-term customer base.

Review questions
1 With reference to a retailer of your choice, identify, explain and evaluate the
major factors affecting switchability and substitutability.
2 With reference to the Tesco case study and the purchaser–purveyor loyalty
matrix, critically evaluate the CRM strategy of Tesco and two of its partner
organizations.
3 Design (and carry out) some field research to identify and evaluate the
private label strategy in relation to customer loyalty, of a retailer that sells
both branded manufacturer’s product and private-label product.

Discussion questions
1 Compare and contrast the marketing effectiveness of two retailers: one that
operates through a range of channels and formats and one that operates
through a single channel and/or format.
2 ‘Better informed customers lead to less loyal customers.’ Discuss.

References
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continuous service provider: the role of satisfaction’. Marketing Science, 17:1, pp. 45–65.
Business Times Singapore (1999) ‘VW acts to combat shrinking brand loyalty’. September 30,
Singapore Press Holdings Ltd.
Competition Commission (2000) Supermarkets: A Report on the Supply of Groceries from
Multiple Stores in the United Kingdom. The Stationery Office.
Croft, M. (1998) ‘Trusted to be Honest and Fair’. Brand Strategy, July 24.
Cuthbertson, R.W. (2002) eLoyalty Retailer Strategies. KPMG, London.
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Cuthbertson, R.W. and Bell, R. (2001) ‘The purchaser–purveyor loyalty scheme matrix’.
Proceedings of EAERCD, Tilburg, The Netherlands, June 2001.
Cuthbertson R.W., Bell, R. and Howard, E. (2001) Customers for Life: The Role of Retail Brands
and Branded Products in Increasing Customer Loyalty. KPMG Global Consumer Markets.
Cuthbertson, R.W., Bell, R. and Koskinen, S. (2000) Customer Loyalty and Private Label
Products. KPMG, London.
Dick, A.S. and Basu, K. (1994) ‘Customer loyalty: towards an integrated framework’. Journal
of the Academy of Marketing Science, 22:2, pp. 99–113.
East, R. and Hammond, K. (2000) ‘First store loyalty and retention’. Journal of Marketing
Management, 16:4, p. 307.
East, R. and Hogg, A. (1997) ‘The anatomy of conquest: Tesco versus Sainsbury’. Journal of
Brand Management, 5:1, pp. 53–60.
Gedenk, K. and Neslin, S.A. (1999) ‘The role of retail promotion in determining future brand
loyalty: its effects on purchase event feedback’. Journal of Retailing, 75:4, pp. 433–59.
Henley Centre (1998) Planning for Social Change. London.
Kuttner, R. (1998) ‘The Net: A Market Too Perfect for Profits’. Business Week,
May 11, p. 20.
Mantel, S.P. and Kardes, F.R. (1999) ‘The role of direction and comparison, attribute-based
processing and attitude-based processing in consumer preference’. Journal of Consumer
Preference, 3, pp. 335–8.
Matthews, R. (1998) ‘Introduction: Brands and beyond’. Progressive Grocer, July, p. 4.
McCarthy, J.E. (1964) Basic Marketing: A Managerial Approach. Homewood, Illinois:
R.D. Irwin.
McGoldrick, P. (2002) Retail Marketing. McGraw-Hill.
Mintel (1998) Own Label Food. November. Mintel International Group Limited, London.
Morris (2000) Annual Review and Accounts. Competition Commission, London. Download
at http://www.competition-commission.org.uk/review/cc2001.pdf
Office of Fair Trading (1999) News release. 11/99, 8th April 1999.
Reichheld, F.F. and Sasser, W.E. (1990) ‘Zero defections: quality comes to services’. Harvard
Business Review, Sep./Oct., pp. 105–11.
Richardson, P.S., Jain, A.K. and Dick, A. (1996) ‘Household store brand proneness: a
framework’. Journal of Retailing, 72, pp. 159–85.
Scase, R. (1999) Trends and Changes in Mobile Working. Oracle.
Schumpeter, J.A. (1987) Capitalism, Socialism and Democracy, 6th edition. Unwin.
Sheth, J.N. and Parvatiyar, A. (1995) ‘Relationship marketing in consumer markets:
antecedents and consequences’. Journal of the Academy of Marketing Sciences, 23:4,
pp. 236–45.
Vanhoof, K., Bloemer, J. and Pauwels, K. (1997) ‘A case study in loyalty and satisfaction
research’. 9th European Conference on Machine Learning, April 23rd–25th, pp. 290–97.
Verbeke, W., Farris, P. and Thurik, R. (1997) ‘The acid test of brand loyalty: Consumer
response to out-of-stocks for their favourite brands’. Journal of Brand Management, 5:1,
pp. 43–52.
Verdict (1999) Consumer Loyalty. Verdict Research, London.
Woolf, B. (1996) Customer Specific Marketing. Teal Books, p. 44.
Attracting and keeping customers 51

Further reading
Corstjens, J. and Corstjens, M. (1995) Store Wars. John Wiley & Sons.
Kotler, P., Armstrong, G., Saunders, J. and Wong, V. (2001) Principles of Marketing: European
Edition, FT Prentice Hall.
McGoldrick, P. (2002) Retail Marketing. McGraw-Hill.

Acknowledgements
This chapter is based on research carried out for KPMG International. Further
details may be found at www.loyalty4profit.com. The primary sources of infor-
mation are company interviews, company documents (statistics, memorandum,
annual reports, etc.), observation and data supplied by ACNielsen and AIM (aver-
age bimonthly sales over a six-month period). Due to the competitive nature of this
research, most of this information remains anonymous. The focus of the study is on
western European retailers and markets. Dr Emyr Williams, KPMG, Richard Bell,
Templeton College and Elizabeth Howard, Templeton College provided valuable
additional input.
Chapter 3

Collaboration in
the retail supply
chain
Richard Bell and Richard Cuthbertson

Vertically integrated retail chains are not new phenomena. UK retailer Boots the
Chemist, for example, has operated as a vertical chain since the nineteenth century.
However, the notion of collaboration within the supply chain has developed as a sub-
ject in its own right with the emergence of powerful retail chains that have changed
the balance of power vis-à-vis producers. The nature of collaboration is influenced by
a variety of factors. The type of retail store, the nature of the products sold and the
ownership of the intellectual property of the products are amongst the more import-
ant determining factors. Information technology has allowed independent commercial
entities to behave as if they are part of a vertically integrated chain. This chapter
examines the contribution of those factors that shape the construction of individual
supply chains. It begins by examining the principles of supply chain efficiency and
identifying the requirements necessary to introduce a consumer-responsive supply
chain. It goes on to address the operational and financial implications of introducing
a ‘consumer pull’ chain, identify the industry-wide programmes of collaboration that
exist and explain the relevance of collaboration in the context of increasing retail
concentration. Finally, it discusses how the structure of the supply chain is shaped
by the pattern of retail shops, the type of products involved and the requirement to
also deliver direct to the consumer. The chapter argues that collaboration between
suppliers and retailers is now essential if aggregate efficiency is to be achieved.
Collaboration in the retail supply chain 53

Principles of supply chain efficiency

Producer push
The traditional supply chain is based on the source of production. Manufactur-
ers procure the raw materials necessary to manufacture a product that had been
designed to meet a perceived consumer need. The driving force of manufacturing
was production efficiency. Such factories are engineered for low-unit-cost produc-
tion and usually embrace the concept of long production runs and minimal product
changes. It is this philosophy that inspired Henry Ford to offer the Model ‘T’ in
‘any colour, so long as it’s black’. His goal was to simplify the product, maximize
production efficiency, minimize the cost and stimulate consumer sales and profits.
Such a philosophy focuses on the efficient use of fixed assets such as plant and
equipment, and undervalues current assets such as inventory and other working
capital. The philosophy also assumes that price rather than variety is the primary
consumer motivation. As disposable incomes rise, consumers place an increas-
ing value on variety and self-personalization, and although Ford’s Model ‘T’ held
a virtual monopoly in private motoring in the US for several years, eventually
customers wanted greater choice.
In a production oriented supply chain, production determines availability and
usually equals sales. Typically, the manufacturer sells to wholesalers, who in turn
supply independent retailers. This is illustrated in Figure 3.1. The manufacturers
base their production schedules on previous sales rates to the wholesaler. Manu-
facturers are unaware of the stock levels in the wholesaler, the sales rates of the
wholesaler, the stock levels in the retailer and generally the level of consumer sales.
In essence each component in the supply chain operates in isolation. Table 3.1
shows an example of the effect on stock and subsequently production volumes of
a manufacturer attempting to increase output without understanding consumer
sales. In this situation, retailers are unable to influence consumers to increase their
purchases.
Table 3.1 examines the situation of just one product moving down the supply
chain. However, retailers do not sell just one product; they sell a wide range of
product lines, and stock availability at wholesalers across the product range will

Product flow
Manufacturer Wholesaler Retailer
Consumer
Information flow

1. Forecast
2. Make
Push 3. Deliver

Figure 3.1 A push supply chain

54 Retail Strategy

Table 3.1 Example of an inventory replenishment in a push system

Manufacturer Wholesaler Retailer

Consumer Overstock
as a
Production Overstock Received Remaining Ordered Unsold Bought percentage
of sales (%)
500 500 500 500
0 0 0 0
550 550 550 500
0 0 50 10
650 650 500 500
0 150 50 40
800 350 450 500
450 50 0 100

influence total retailer sales. Variable product availability at the wholesaler will
constrain retail sales on some lines while excess stock on other lines will not neces-
sarily increase sales unless discounted in price. A retailer therefore seeks balanced
stock availability across each of the product lines they choose to sell.
A push supply chain controlled by the manufacturer is often characterized by
large fluctuations in stock levels, erratic changes to production schedules and the
use of time as a buffer as consumers order product that is not available at the retailer
and return at a later date to collect it. Production-led chains do not necessarily lead
to production efficiency due to unplanned changes to production schedules. The
cost of current assets is high as stock is often used to buffer each stage in the chain.
Retailers often fail to maximize sales because of variable product availability, and
consumer satisfaction may be low.

Consumer pull
The lessons from a producer push supply chain are that:
retail sales can be maximized if there is available stock across the entire product range,
production can be increased if consumer sales are maximized, and inventory can be
reduced if production and deliveries are aligned to the level of retail sales.
The contemporary supply chain is thus focused on consumption, rather than pro-
duction, with the volume of consumer purchases used as a surrogate measure of
consumption. Consumer purchases equate with retail sales and these can be meas-
ured using store census data, which measures sales of each product line from each
store for a given time period. Consumption may differ from consumer purchases
since households carry some stock, particularly of grocery items, and household
stock levels can fluctuate. Consumption can only be measured by sample data,
which is usually insufficiently accurate to drive the supply chain. This is discussed
in more detail later in this chapter. The chosen period of replenishment time will
Collaboration in the retail supply chain 55

Product flow
Manufacturer RDC Retailer
Consumer
Information flow

1. Sell
Pull

2. Make

3. Deliver

Figure 3.2 A pull supply chain

Table 3.2 Example of an inventory replenishment in a pull system

Manufacturer Wholesaler Retailer

Consumer Overstock
as a
Production Overstock Received Remaining Ordered Unsold Bought percentage
of sales
500 500 500 500
0 0 0 0%
550 550 550 500
0 0 50 10%
500 500 500 500
0 0 50 10%
500 500 450 500
0 50 0 10%

vary according to the type of products sold by the retail store and the most eco-
nomic replenishment cycle. Supermarkets selling fast moving consumer goods
(FMCG), such as grocery products, can be efficiently replenished on a daily basis.
The short shelf life of some of the products sold necessitates frequent replenish-
ment. Products where the rate of sale of each item is slower, and where there are no
immediate shelf life concerns – such as electrical products – require a less frequent
replenishment cycle. The measurement period of retail sales thus varies between
types of retail store.
The consumer pull supply chain requires full visibility of consumer sales to all
participants in the chain. In addition visibility is required for product movements
and stock levels along the supply chain. In this way each independent entity can
observe current demand and translate that into potential movements. The identi-
fication of product movements will then determine the production schedule. In the
example shown in Table 3.2, consumer sales drop in Week 2 due to an unforeseen
event such as unseasonable weather. Since both the regional distribution centre
(RDC) and the factory can see the change in retail sales, they are able to adjust
respectively their deliveries and production in the following week. Had the factory
56 Retail Strategy

120 120
Production
100 96 Stock 96 100
84 Despatches
80 72 80
Volume 60
60 60
48

40 36 40
24
20 12 20
12 12 12 12 12 12
0 0
0 6 12 18 24 30 36 42 48
Time (h)

Figure 3.3 Production frequency and stock

waited until after the RDC had reduced deliveries to adjust their schedules, their
build up of stock would have been greater and the eventual cut in production
would also have been greater. An important principle of the consumer pull supply
chain is cooperation between each stage and each commercial entity in the chain.
In this respect it differs from the ‘beggar thy neighbour’ attitude prevalent in pro-
ducer push chains (see Table 3.1). The concept of supply chain collaboration is
therefore most relevant in consumer pull supply chains.
Algorithms based on optimum operating efficiency can be developed for each
stage of the chain. Thus at the factory stage there is an optimum relationship
between efficient production schedules and stock levels. If a factory produces 240
separate products on five production lines and the minimum efficient production
run is one hour then on average each item is produced every 48 hours. If full vehicle
loads can be efficiently despatched at hourly intervals to warehouses then it fol-
lows that 24 (48/2) hours of stock (plus safety stock) will be held at the factory.
This is illustrated in Figure 3.3. Production quantity 96 is manufactured once every
48 hours and despatches are constant at 12 every 6 hours. Stock rises to 96 immedi-
ately following the production run and falls to zero over a 48-hour period. In this
example, the appropriate algorithms for the factory are one hour run lengths and
24 hours of stock. The factory has calculated the optimum rate of exchange between
production efficiency (utilization of fixed assets) and stock (current assets).

Important considerations
Consumer pull supply chains operate on the principle of ‘just-in-time’ (JIT). The
concept is that product flows like water and that production is perfectly aligned
to consumer purchases. In this situation there would never be a change in stock
levels as there would be instant adjustment to a variation in sales. In practice, as the
Collaboration in the retail supply chain 57

example illustrates, there is ‘lumpiness’ around each stage in the chain. Factories
cannot instantly change schedules, because by doing so, they would not only lose
efficiency but also stop manufacturing another product line creating other stock
imbalances. Similarly efficient transportation requires vehicle utilization and it
is usually impractical to ship one item at a time. Stock will always be required
as a buffer but the goal of the consumer pull supply chain is rapid response to
sales variations and the minimization of the ‘lumpiness’ of each stage. Successful
minimization of ‘lumpiness’ leads to lower stock holding. In the longer term this
requires a reassessment of the efficient operating parameters of each stage in the
chain in turn leading to a re-engineering of the fixed assets (plant and capital
equipment).
Sales variations can have important consequences for factory and vehicle uti-
lization. Such variations can either be buffered by stock or lead to fluctuations in
the utilization of fixed assets. Seasonality, weather and fashion, for example, may
lead to variations in sales. To a large extent these may be predictable as winter,
for example, occurs every year. The issue is that the precise timing of the onset of
winter can vary. Stock can be used to act as a buffer, but in extreme situations lost
sales may result. An important principle to support rapid response is to hold stock
in one location and as close as possible to the point of sales. If stock is held only
at the retail store, some stores may become out of stock while other stores have
excess stock. The only way to balance this is to incur the added cost of transport-
ing product between stores. An alternative is to hold stock in depots that service
a number of stores and are capable of responding quickly to variations in retail
stock. In many cases retail sales fluctuations are induced by promotional activity,
including advertising. If this activity is pre-planned and advance notice given to all
stages in the supply chain, then stock outs and sales losses can be minimized. Even
if the activity is pre-planned it will create a surge in demand on production and
transportation facilities, thereby reducing efficiency. Some retailers and their sup-
pliers have adopted policies of constant pricing (‘every day low price’) to achieve
maximum efficiency by excluding promotions. This may then be translated into
lower prices.

Fundamental requirements
There are a number of fundamental requirements to achieve a pull supply chain.
These are based on the provision of effective information systems throughout the
supply chain.

Point-of-sale data
The fuel for consumer pull supply chains is data on retail sales. This data must be
held at the lowest level, where possible. Each product line is referred to as a stock-
keeping unit (SKU). Stock replenishment takes place at the product line level rather
58 Retail Strategy

than the brand, or sub brand level. Coca-Cola as a brand comes in many varieties
(diet, regular and so on), in many package types (glass bottles, plastic bottles, cans)
in many container sizes (1 litre, 2 litre, 500 ml) and in many pack sizes (6, 12, 24, etc.).
Retailers will list many combinations of a brand, and stock is held at the distinct
product or SKU level (e.g. Coca-Cola regular 12 × 330 ml). Similarly, each SKU may
be produced at a different time within the production schedule. The supply chain
thus operates at this level. Large stores such as a grocery supermarket can list as
many as 30,000 SKUs. Data on the sales rate of each SKU must be captured. Each
SKU has a unique bar code and the sales data is captured at the electronic point of
sale (EPOS), i.e. the cash desk. A further benefit of EPOS data is the frequency with
which it can be accessed and the short time intervals, usually daily and in some
cases hourly, in which consumer purchases can be tracked.
It has only been possible to capture this data since the introduction of scanning
equipment, introduced by British retailers during the 1980s but only effective when
all stores in the chain are equipped. It was not until the early 1990s that consumer
pull supply chains were developed in the UK. Retailers’ knowledge of rates of sale
per item prior to the introduction of scanning was obtained from invoice data. This
related to retailer purchases, not consumer sales and the difference between the
two numbers was accounted for by changes in inventory levels. Such data applied
to longer time intervals, usually monthly, and was inadequate to drive a consumer
pull supply chain. Figure 3.4 shows the progress in adopting scanning across the
European grocery industry.

100
1988
90 1991
80 1995

70

60

50

40

30

20

10

0
m

nd

ce

nd

ly

Po y

K
ga

nd
wa
an

nd
ar

ai

de

U
Ita
iu

an
la

la

rtu

Sp

la
m

m
lg

la

e
or
n

Ire
Fr

er
Sw
en
Be

r
Fi

er

N
he

itz
G
D

et

Sw
N
e
Th

Figure 3.4 Percentage of grocery turnover scanned

Collaboration in the retail supply chain 59

The use of scanning and the emergence of large integrated retail chains have led
to a situation where retail sales data are in effect census data. Each chain records
sales per SKU for all of its stores and then calculates the aggregate. Thus actual
aggregate sales data can be used to drive the supply chain. Retail concentration,
whereby four or five retailers account for around 75 per cent of sales in each retail
sector, enables actual data for product retail sales to be obtained for each sector.
Manufacturers can therefore have access to actual retail sales of their products
through all outlets. This contrasts with the accuracy of measures of domestic con-
sumption. Such measures are obtained from a sample of consumer households. A
panel with 20,000 households would be a sample size of one thousandth of the total
households in a country the size of the UK. This relatively small sample will lead to
grossing up errors in projecting national sales. This level of error is too large to drive
a consumer pull supply chain, where the goal is stock minimization. Further, it is
not practical for household panels to report more frequently than monthly, which
is too long a time interval in which to replenish fast moving consumer goods such
as grocery products.

Information technology integration of retail operations

The capture of EPOS data alone is not enough for retailers to develop a con-
sumer pull supply chain. Such a supply chain embraces the retail functions of
inventory control, depot management, marketing, category management, buy-
ing and finance. Planned marketing activities need to be communicated to retail
branches and the required quantity of product ordered. Since invoices will not be
paid without some form of purchase order, this information must be accessible to
both the buying and finance functions. Integration of each of these retail opera-
tions is therefore necessary for a consumer pull supply chain to be introduced and
is illustrated in Figure 3.5. The linking of individual processes of distribution is
often referred to as connectivity and is achieved by the application of information
technology.
The cost of investment in information technology is high. British retailers such
as Sainsbury’s and Marks & Spencer were estimated to have spent between 1.5 and
2 per cent of turnover on information technology in the early 1990s. At that time
Marks & Spencer is estimated to have spent £500m on IT systems for its 285 UK
stores dealing with 700 suppliers and 150,000 product lines. Such investment has to
be justified on increased efficiencies and greater competitiveness. The efficiencies
would be gained in lower operating costs, lower inventories and greater sales
resulting from less out-of-stock situations in its branches. A study by Martec in
2002 showed that UK retail spend on IT had fallen to 1.1 per cent of sales as retailers
adapted the mainframe-based systems installed in the 1990s to meet the needs of
the next decade. This level of expenditure is 60 per cent of that of the US retail
market.
60 Retail Strategy

Information integration

Integrated
Scanning Daily delivery
stock control

HQ

Centralized buying

Supply contracts with

producers

Figure 3.5 Integration upstream

Store control
Retail stores must operate within an agreed corporate framework for the consumer
pull supply chain to operate efficiently. The framework will embrace product range,
store layout and promotional policy. An aspect of integration is the incorporation
of planned marketing activities so that forward surges of demand can be antici-
pated all the way up the supply chain. Precise implementation of marketing plans
is essential at store level for the forward surges to be predicted with accuracy. Low
accuracy leads to an imbalance of stocks (either too many or too few), which induces
an unplanned surge up the supply chain. A necessary condition for accuracy is cen-
tralized control of store operations. Stores that order direct from suppliers, without
communicating with head office, will be unable to supply sales data for re-ordering.
More importantly such ‘pirate’ products will interfere with the planned marketing
activities of products supplied through the centralized replenishment process. In
the UK, most retail chains are centralized public limited companies whereas in
mainland Europe, many stores are independently owned and operate under a
franchise agreement.

Data synchronization
Since ‘just-in-time’ solutions are aimed at increased efficiency, it is important that
different retailers (each of whom have many suppliers) and their suppliers (each
of whom may supply many different retailers) communicate in a compatible man-
ner. The use of separate complex communication systems would generate levels
of administrative complexity that could negate the gains in operational efficien-
cies. The objective of data synchronization is to establish a common framework
Collaboration in the retail supply chain 61

for product and party data, offering businesses a single, streamlined gateway for
standardized and constantly synchronized product data to drive all supply chain
applications. It has been estimated in a Global Commerce Initiative (2002) special
report that 30 per cent of transactions contain inaccurate data and 3.4 per cent
of sales are lost annually because of supply chain inefficiencies. The aim of data
synchronization is to help everyone in the supply chain implement compatible
processes thereby reducing opportunities for error and the costs of duplicate data
entry.

Visibility
The level of retail sales drives the consumer pull supply chain. It follows
that the level of retail sales should be available to all entities within the supply
chain. The time period for retail sales will be influenced by the replenishment
cycle. In the case of fast moving consumer goods, such as groceries, the time
period could be daily. In the case of Japan, where shops are small in size, and
velocity of sales is high, then the replenishment cycle could be as short as every
four hours. This rate of sale needs to be available to both the wholesaler or
regional distribution depot and to the manufacturer. Similarly the product flows
between each link in the chain need to be visible to all parties. The replenish-
ment cycle may vary between different links in the chain. Dutch grocery retailer
Albert Heijn has a policy of guaranteed replenishment of its stores within eight-
een hours and requires a six-hour response time from its suppliers to its depots.
A large volume beverage supplier such as Heineken has full visibility of aggreg-
ate (all store) sales rates and has introduced a dedicated production line to service
Albert Heijn. Such an integrated operation is only possible if Heineken can observe
hourly aggregate sales rates and product movements between depots. The primary
goal of a supplier such as Heineken is to ensure that there is neither out-of-stock
nor excess stock at the Albert Heijn depots. The concept of visibility requires
the retailer to supply sales data for specific products to each commercial entity
up the supply chain. This integration of independent commercial entities (sepa-
rate companies) contrasts with the producer push process where each company
utilizes its own despatch data to determine replenishment of its own stocks in
isolation.

Reconstruction of the supply chain

The physical supply chain has to be re-constructed to facilitate the implementation
of a consumer pull supply chain. In the traditional producer push supply chain, it
is necessary to hold stock in each link of the chain. This is because each stage does
not know sales and stock levels at the next stage of the chain. Despatches fluctuate
widely, and the fluctuations are likely to increase in intensity the further back each
stage is from the consumer. Stock is held to buffer the sales fluctuations. Stock
62 Retail Strategy

holding may be high at each stage of the chain and high in aggregate across the
total supply chain. The producer push supply chain therefore often requires a high
level of current assets (stock). It also often requires a high level of warehouse space
(fixed assets) to hold the stock. In this situation, retail stores require a stock holding
facility, retail and wholesale warehouses are primarily stock holding facilities, and
manufacturers also usually require stock holding facilities.
The concept of ‘just-in-time’ is to align production to consumption, thereby
minimizing the requirement to hold stock. The more perfect the alignment, the
less stock holding is required throughout the supply chain. Further, the damping
down of unplanned sales fluctuations at the consumer level by controlled mar-
keting programmes also reduces the required stock buffer. The concept of smooth
product flows changes the requirement for warehouses. Rapid replenishment at the
store level allows retail stock rooms to be converted into selling space. Warehouses
become ‘flow through distribution depots’. Product is moved in, re-assembled
into loads for stores and moved out. The primary focus shifts from holding stock
to re-assembly. Space changes from volume, where height is needed for stack-
ing, to surface area where floor area is required for product movement, detailed
order picking for each store, and vehicle loading. Vehicles also have to be adapted
to transport a wide range of products in small quantities. For example, grocery
retailers adapt vehicles to transport ambient, frozen and chilled products on the
same lorry. Importantly, each retailer develops their own flow-through distribu-
tion depots, thus reducing the role of the wholesaler. Retailers are faced with an
increased capital expenditure on new regional distribution centres (RDCs), flexible
vehicle specifications and computerized integration systems in order to achieve
lower stocks and higher sales through less out-of-stock situations at the retail
store.
Suppliers are required to schedule their vehicles to arrive at times determined
by the retailer’s distribution depots. Vehicle scheduling thus assumes greater
importance to manufacturers than previously. The manufacturer is involved in
a reassessment of factory efficiencies versus inventory levels. Shorter production
runs and more frequent product changes are necessary to meet the ‘little and
often’ demands of each retailer’s RDC. Some manufacturers, as in the case of
Heineken and Albert Heijn, are able to reorganize their production facilities. For
others the cost of implementing this is greater than the saving in lower stock levels
and they will buffer the more frequent replenishment required by retailers with
high stock levels. Manufacturers are thus faced with an evaluation of increased
capital expenditure in order to lower inventories to meet the demands for rapid
replenishment.

Industry programmes of supply chain collaboration

A consumer pull supply chain aligns each participant within the chain to the com-
mon goal of maximizing product availability to consumers, while minimizing stock
Collaboration in the retail supply chain 63

held within the chain. In the past, each commercial entity may have operated,
largely in a vacuum, to maximize its own profit. Within a consumer pull sup-
ply chain, each entity must operate within a partnership to maximize consumer
purchases. Maximized consumer purchases translate into increased sales for both
retailer and manufacturer. Since profit for both participants is sensitive to changes
in volume, then maximization of volume will result in profit maximization. Shar-
ing of information between retailers, and their suppliers raises important issues
of competition, since this may increase barriers to entry and dampen competi-
tion. If the supply chains are exclusive, so that some manufacturers supply only
one retailer, then competition concerns may be heightened. The common goal of
retailers and manufacturers is the development of an integrated consumer driven
supply network. Such a network is common and accessible to all participants in
the supply chain and avoids the risk of separate and exclusive supply chains.
Industry-wide programmes such as ECR Europe and the Global Commerce Initia-
tive, both discussed below, that foster a common communication language and
operating standards, contribute to reduced complexity costs and so minimize the
entry barriers for both retailers and manufacturers.

ECR Europe
The Efficient Consumer Response (ECR) movement began in the mid-1990s with
the emergence of new principles of collaborative supply chain management. ECR
developed along the principle that consumers could be served better, faster and at
less cost if companies worked together.
ECR is a response to a business environment characterized by rapid advances
in information technology, shifts in consumer demand and the increasing move-
ments of goods across national boundaries made easier by government initiatives,
such as the internal European market. New trading environments require a funda-
mental reconsideration of the most effective way of delivering the right products
to consumers at the right price.
There are four focus areas of ECR. These areas are further broken down into
core and advanced improvement concepts. They form the basis of the ECR Global
Scorecard, which is illustrated in Figure 3.6. ECR Europe essentially addresses
the grocery industry, which is characterized by the high frequency of consumer
purchase and the presence of well-known manufacturer brands such as Coca-Cola,
Nescafé, Whiskas and Pampers.
Demand management, as shown in Figure 3.6, is an important component of
ECR, when manufacturer brands are an important component of total retailer sales
and where the brand owner initiates promotional and marketing activities on their
brands. It is important that these activities are co-ordinated between retailer and
manufacturer if product is to flow smoothly from the production line to the point
of sale.
The enablers of Figure 3.6, the common data and communication standards,
and the measure of cost/profit and value, provide a common language of
64 Retail Strategy

Supply management Integrators

Supply strategy and capabilities Collaborative

planning, forecasting
and replenishment
Responsive Operational Integrated demand
replenishment excellence driven E-business
supply Business to business

Demand management Enablers

Demand strategy and capabilities Common data and

communication
standards
Optimize assortments Optimize promotions

Optimize new Consumer value Cost /profit and value

product introductions creation measurement

Figure 3.6 Footprint Global ECR Scorecard

communication and embrace such notions as data synchronization. Management

of supply in Figure 3.6 embraces the concepts of consumer pull supply chains in
responsive replenishment, operational excellence and integrated demand-driven
supply. The integrators from Figure 3.6, such as collaborative planning, forecasting
and replenishment (CPFR) are common tools that aim to facilitate smooth product
flow by the accurate anticipation of future demand. This is particularly pertinent
where marketing activities create fluctuations in sales volumes. The accurate pre-
diction of future surges in demand enables production capacity to be planned to
meet such surges.
Individually these concepts are well known and fully documented methods to
improve effectiveness and efficiency. However, when applied under ECR they have
two distinct differences: they are intended to be addressed as an integrated set, not
individually, and they are assessed in terms of their impact across the entire supply
chain, not just the business of individual trading partners.

Global Commerce Initiative

The Global Commerce Initiative (GCI) began in 1999 in response to the interna-
tional development of retailers and the reorganization of manufacturing facilities
for global brands. Retailers wished to adapt common methods of operation as
they expanded their operations into other continents. Similarly, manufacturers of
global brands were rearranging their manufacturing facilities to a global supply
Collaboration in the retail supply chain 65

platform. The GCI is a voluntary platform to improve the performance of the

international supply chain for consumer goods through the endorsement of recom-
mended standards and key business processes. It builds on the foundations of the
regional ECR initiatives and was set up to encourage the speedier development
and consistent adoption of global trading standards. It is not in itself a standards
body but endeavours to identify best practice in areas that will streamline global
supply chain management.
The focus areas of GCI include:

Product identification to ensure that there is a consistent global implementation of

product identification numbering and bar codes, to enable a bar coded product from
any company large or small to be scanned anywhere in the world.
Intelligent tagging is a business application for radio frequency identification (RFI). Radio
frequency tags (RFT), incorporated into packaging, could deliver more efficient shelf
stocking in store, faster checkouts and improved security. These benefits result at the
retail level, though the producer incurs the costs. The development of a common
standard employed by retailers will facilitate a lower cost solution.
Global data synchronization.
Product classification aims to develop a system for product classification that can
be adapted for consumer products industries worldwide, supporting global product
search.
Collaborative planning, forecasting and replenishment (CPFR) is a GCI-backed initiative
to ensure compatible approaches between each continent.

Collaboration and concentration

The development of the consumer pull supply chain and the associated increase
in retailer supplier collaboration should be seen in the context of a rise in retail
concentration. Collaboration becomes an imperative when powerful retailers
sell well-known manufacturers’ brands. This situation is particularly preval-
ent in the food industry in both Europe and North America. Manufacturer
concentration has existed since the 1980s at a national level and has developed
during the 1990s with the emergence of global brands and international manu-
facturers. Companies such as Nestlé, Procter & Gamble, Unilever and Coca-Cola
market their brands in many countries. Retailer concentration increased at the
national level during the 1990s so that by 2000, the median market share of
the top five grocery retailers in Europe was 83 per cent (see Figure 3.7). Since
the mid-1990s there has been an acceleration of grocery retailers that have pur-
sued international expansion. Retailers such as Wal-Mart of the US, Carrefour
of France, Metro of Germany, Royal Ahold of The Netherlands and Tesco of
the UK, each dominant in their domestic market, have substantially increased
the number of countries where they have operations. Most of these participate
66 Retail Strategy

Median 83

Italy 31

Spain 51

UK 71

Belgium 72

Germany 76

France 83

Norway 84

Denmark 84

Sweden 95

The Netherlands 95

0 20 40 60 80 100

Figure 3.7 Grocery shares in Europe: top five retailers

in the GCI. At the start of the twenty-first century, the increase in retail con-
centration and power in distribution channels is fundamentally altering retailer–
manufacturing relations. The extent of further concentration will depend on
strategic moves by the world’s leading food firms and by the attitude of competition
authorities.
Many of the recent initiatives in vertical co-operation, including ECR and
GCI, can be interpreted as a response to increasing concentration at all stages of
the supply chain. The channel may now have ‘shared’ monopoly, i.e. an oligo-
poly, at both manufacturing and retail stages. Vertical co-ordination is therefore
required to prevent double marginalization (higher margins at both the produ-
cer and retailer stage). Oligopoly leads to higher margins than would exist in a
situation of perfect competition. Cotterill (1999) demonstrates that co-ordination
reduces double marginalization increasing total channel profits and lowering
prices to consumers. The presence of industry-wide programmes, such as ECR,
provides a framework for co-ordination without the prospect of collusion, enabling
the elimination of double marginalization without breaking competition laws.
Industry-wide programmes are perceived to encourage competition by lower-
ing the entry barriers to an industry where consumer pull supply chains are
prevalent.
In summary the drive to consumer pull supply chains is greatest when three
factors are present: the application of information technology to the retail-
ing process; the presence of large producer brands; and high levels of retail
concentration.
Collaboration in the retail supply chain 67

Supply chains in practice

Supply chains by type of store
Size of store has an important bearing on the structure and operation of a consumer
pull supply chain. Some outlets are so large and have a high rate of sale that they can
receive full vehicle loads direct from the manufacturer without these generating
high stock levels. Outlets with a slow rate of sale and selling a broad product range
require their deliveries to be consolidated at an intermediate trans-shipment depot.
Rate of sale per retail outlet and product range are key determinants of the structure
of the supply chain.

‘Large surface’ outlets

Cash and carry outlets, such as Metro/Makro, are at one end of the spectrum. Their
primary focus is to supply small retail and catering establishments. Unlike a retail
outlet that sells direct to consumers, they sell multiple quantities of an item. For
example, their customers might buy, on average, six cans of a particular SKU of
cat food, such as ‘Whiskas 400 gm Supermeat with Chicken’. The chain of cash
and carry stores will seek the manufacturer’s cooperation to supply packs of six.
Each six-pack will then be packed into outer cases of 24 cans (4 × 6 packs) for
transportation, and these outers stacked onto a pallet for ease of movement and
storage. In this way the cash and carry will stock full pallet loads in its racks, and the
customer will be asked to select their required quantity of six packs from the outer.
The breakdown of cases into individual cans is thus avoided and the handling costs
are minimized at the cash and carry outlet. The manufacturer generates economies
of scale by supplying the optimum pack quantity of the SKU and outer size to all
branches of the cash and carry, and ideally to all cash and carry chains. The supply
chain to cash and carry is thus direct from the manufacturer to the outlet, obviating
the need for an intermediate warehouse and avoiding the cost of double vehicle
movements and handling. Such a supply chain can only be economically viable if
all (or at least most) suppliers agree to supply packs and outers that are specific
to the cash and carry trade. Transport costs can be minimized by the cash and
carry taking full vehicle loads where each pallet contains only one SKU. If there
are 20 pallets to a vehicle, the maximum number of SKUs delivered will be 20. The
efficiency of such a supply chain is thus determined by the rate of sale of each outlet
and the product range. A large range will inevitably include some smaller selling
items that cannot be supplied on full pallets if excess stock is not to be carried.
Hypermarkets, large superstores and supercentres (as operated by Wal-Mart in
the US) are examples of large surface outlets that sell to consumers. The aggre-
gate volume of sales of each outlet may be very similar to a cash and carry outlet
justifying delivery of full pallet loads of an SKU and hence incurring minimum
transport costs when supplied direct from the manufacturer. However, consumers
shopping at such a large surface outlet may require just one or two items of each
SKU. The shipping containers (outers of 24 in the Whiskas example) will have to
68 Retail Strategy

be unpacked by the staff of the hypermarket, and placed on the shelves of the
store. This is an additional handling cost compared with the cash and carry but not
additional to being supplied by an intermediate warehouse, since such warehouses
will have to transport product in shipping containers (outers). It is therefore a cost
effective solution to supply such large surface stores direct from the manufacturer.
Again, the critical factor is rate of sale and product range. The product range of a
hypermarket is so large that inevitably some SKUs are slow selling products and
will be supplied by an intermediate depot to avoid excess stock at the store. A
hypermarket may thus have more than one supply chain, of which one would be
direct from the manufacturer. When Spain embraced the retail revolution in the
mid 1980s and there was a rapid expansion of hypermarkets, the primary method
of supply was direct from the manufacturer. Centralized distribution centres, with
integrated information technology systems, could not be developed at a speed
necessary to keep pace with the growth of hypermarkets. The economics of direct
supply enabled the hypermarkets to be more competitive on both price and range
than traditional retailers.

Supermarkets
The average store size of a supermarket is approximately one third that of a
hypermarket, but their product range is around 80 per cent of the grocery SKUs
carried by a hypermarket. The average rate of sale is correspondingly significantly
lower than that of a hypermarket and only a few of the best selling SKUs can
be delivered on full pallets. It follows that direct deliveries from manufacturers
are not economically viable. They would result in higher stocks, increased out-
of-stock situations and the conversion of selling space into product storage. The
optimum structure of a supply chain for medium-sized stores is based on ‘flow-
through’ distribution centres. Deliveries are received from manufacturers on full
pallets of SKU for the fast moving products, thus minimizing manufacturer dis-
tribution costs. Full outers from different suppliers are combined onto one vehicle
for efficient, frequent and rapid replenishment of each retail branch. Consolidated
deliveries (of many different SKUs) to branches utilize effective material handling
systems such as roll cages that can be unloaded at the retail store without recourse
to cumbersome equipment such as fork lift trucks. The measure of efficiency of
the distribution centre is the speed to receive, consolidate and despatch product
such that stock moves in and out but is not stored. It is the hub or universal cou-
pling between frequent deliveries from suppliers and rapid replenishment of retail
stores.
Retailers of medium sized stores seeking geographical expansion of their chains,
such as Delhaize in the Czech Republic, or Waitrose from the south of England,
need to develop new distribution centres as the precursor to new store openings.
Lengthy driving times from depot to store serve as a strong influence against rapid
and frequent replenishment. However, a new distribution centre needs to service
Collaboration in the retail supply chain 69

a cluster of retail stores to obtain the minimum product flow required for efficiency.
Geographic expansion thus requires the parallel development of new retail stores
and an RDC.

Discounters and smaller stores

Discounters and smaller stores also require the support of a flow-through distribu-
tion centre, to achieve efficient replenishment. They differ from supermarkets in
terms of a lower rate of sale per retail outlet. This requires a greater density of stores
per distribution centre if the centre is to operate efficiently. Discounters are able to
achieve a high rate of sale per SKU by limiting their range to fast selling items only.
This maximizes their replenishment efficiency and minimizes stock levels because
stock sales ratios are invariably higher for low selling items. Leading discount
food chains, such as Aldi and Lidl, differ from supermarkets by selling mainly
own-brand products. Their commercial policy thus makes unnecessary one of the
three essential criteria for supply chain collaboration discussed above.
The importance of store size in determining the optimum supply chain is
illustrated in Figure 3.8.

Supply chains by type of product

Three types of product can be used to illustrate the contrasting influence product
can have on the construction of a supply chain. These are ambient grocery products;
perishable foods; and fashion clothing.

Ambient grocery products

These can be expected to include both manufacturers’ brands and retailers’ own
brands. In the case of retailer brands, production schedules can be directly aligned
to rate of retail sale. In the case of manufacturer brands, production schedules
are determined by aggregate retail sales through all retailers listing the product.

Economically viable retail Economic feeder units

outlets Satellite retail outlets
(one store at a time) (20+ supermarkets, 70+ discount/c-store
geographic density)

Hypermarket Cash and carry Supermarket Discounter/c-store

Carrefour Metro Delhaize Aldi

Ahold
Promodès Makro Promodès Lidl
ITM 7-Eleven
Auchan Davids Wellcome
Park n Shop Family Mart

Figure 3.8 Formula for expansion

70 Retail Strategy

Production is therefore less perfectly aligned to the rate of sale in any one retailer.
Since production schedules are less flexible for manufacturer brands, it follows
that the manufacturer must buffer fluctuations in sales at individual retailers by
holding higher stocks. The supply chain for ambient grocery products may differ
between fast sellers and slow selling lines.
Fast selling lines will conform to the principle of full vehicle loads of pallets
containing one SKU from the supplier, where such products move through an
RDC. For example, in the case of supermarkets, the shipping unit (outer) remains
intact.
In general, the Pareto principle applies, i.e. 80 per cent of the lines account for
20 per cent of the sales volume. Slow selling lines, therefore, generate much com-
plexity and for this reason are often kept separate from the fast selling lines. For
purposes of stock minimization, it is unlikely that full vehicle loads are delivered
to the distribution centre. Secondly the shipping unit (carton) will have to be dis-
aggregated at the RDC to allow small quantities to be sent to each retail branch.
This is a labour intensive exercise and should be kept separate from the redirection
and aggregation of fast sellers. Larger retail chains favour separated distribution
centres for slow moving product lines, to achieve depot efficiency; others prefer a
separate operation within the same depot to utilize the same roll cages and delivery
vehicles as the fast sellers.

Perishable products
The distinguishing characteristic of these products is a very short shelf life. The
products included are dairy products, flowers and chilled foods. Stock minimi-
zation is essential to maximize the time before the expiry date and therefore to
avoid product wastage. Production therefore has to be very closely aligned to
sales rate. Since sales rates will vary between retailers, production must be aligned
to individual retailer sales rather than aggregate retail sales. It is for this reason
that manufacturer brands are unusual in perishable products. Production must be
flexible and will switch frequently between products according to fluctuations in
sales. This classification of products most closely applies the ‘just-in-time’ concept.
The supply chain is driven primarily by retail sales and production efficiency is
subordinate to freshness (maximum time to best before date) at the retail outlet
(Jones and Simons, 2000). Product will still flow through distribution centres as
loads are combined for products from different suppliers to be sent to individual
stores. The requirement for specialist temperature-controlled vehicles and depots
often results in this supply chain being separate from the supply chain for ambient
products.

Fashion clothing
The unique characteristics of this category are: a short life cycle for individual
items; a stream of new products reaching the market; sales fluctuations between
seasons of the year; and unpredictability of the exact start and finish of each season.
Collaboration in the retail supply chain 71

New products have to be available in store at the start of the new season and the
current season’s products have to be available right up until this time. In this way,
sales are maximized. Stock cannot be used to buffer variations in timing and fluctu-
ation of sales, since unsold stock cannot then be sold the following season. Excess
stock has to be discounted in price (hence the concept of ‘end-of-season sales’)
to a level where sales equal stock. Significant volume sales at a discounted price
reduce the profit margins of retailers. The history of fashion retailing is littered with
companies that have gone out of business because they could not match inventory
to sales. More pertinently, they were unable to match production to sales without
surges in inventory levels. Next in the UK is reported in the financial media to
have suffered a downturn in sales in September 2002 because of an ‘Indian sum-
mer’ when summer conditions continued a month longer than had been expected.
Consumers delayed purchasing the autumn range, but Next had run down its
stocks of summer clothing by the end of August.
The fashion clothing industry is a major beneficiary from the introduction of a
consumer pull supply chain and the origins of ECR were born out of the textile
apparel industry. The stars of this industry in recent years have been those retailers
that have succeeded in introducing consumer pull supply chains. The existence of
such a chain is not a guarantee for success, products still have to be deemed fash-
ionable by consumers, but without such a supply chain retailers cannot compete
effectively. Retailers that have succeeded include Zara, Benetton, Gap and Marks &
Spencer. Each of these retailers has succeeded by vertical integration, to varying
degrees, up the supply chain. The supply chain includes not just the assembly and
manufacturing processes, as with the grocery industry but also the manufacture
of the clothing materials. Marks & Spencer have long been involved, with their
suppliers, in the development of materials that resulted in a high quality finished
article, so that products are shrink proof, colourfast, etc. Such materials may be
manufactured in countries geographically remote from the major markets. Zara,
for example, have a buying office in Beijing. In the section on the Principles of sup-
ply chain efficiency (earlier in the present chapter), we identified the importance of
holding stock in one location and as close as possible to the market. This is particu-
larly important for fashion clothing with its large range of items. Marks & Spencer
has over 150,000 SKUs, five times the quantity of a grocery store. Zara handle
25,000 SKUs. The solution adopted by Spanish retailer Zara and the UK’s Marks &
Spencer is to manufacture the garments in countries geographically close to the
consumer markets. Zara has its main production area in Galicia in Spain where
products are cut, sewn, ironed, packed and ticketed. Marks & Spencer sources
three-quarters of its turnover from UK manufacturers. Both retailers are able to
control the production schedules, Zara through direct ownership of the factories,
and Marks & Spencer through selection of suppliers that are dedicated to meeting
its sales and quality requirements. Such integration is only possible across a wide
range of SKUs because the retailer is responsible for the product design. Both Zara
and Marks & Spencer have extensive specialist design teams, product developers
and material technologists. They also exert tight influence on the operations of their
72 Retail Strategy

retail stores. Zara test store designs centrally and recommendations for window
dressing are sent to store managers from a centralized merchandising department.
It is through the control of both the product and the retail store that fashion clothing
retailers are able to develop consumer pull supply chains handling up to 150,000
SKUs, each having a high sales seasonality.
Centralized warehousing controlled by the retailer is the second part of the solu-
tion to holding stock in one location and close to the point of sale. Zara’s central
warehouse is one of the largest (400,000 square metres) and most automated world-
wide. Store managers handle two deliveries per week and in each delivery they
receive 12.5 per cent of the new products for the month. Thus all SKUs in the store
are new every month. The final design to sales cycle time for any one item is 22–30
days (1 day for final design, 3–8 days for manufacturing, 1 day for shipping and 17–
20 days for selling). US clothes retailer Gap operates along similar principles, the
main difference being the greater number of countries in which Gap operates. Gap
has a centralized distribution system based in the US. Information on sales by SKU
is transmitted on a daily basis to the US, analysed and then optimum replenish-
ment rates are transmitted to the European distribution depot in The Netherlands.
This warehouse acts as a central platform for delivery to all Gap stores in Europe.
Replenishment levels are based on daily inventory movements, by style and store
location. Where stores are concentrated in one geographical area such as Paris, all
delivery is direct from The Netherlands warehouse to store. In this way transport
economies are achieved, as one vehicle will travel to Paris daily. Gap will serve to
minimize deliveries from the central warehouse in The Netherlands by seeking to
switch stock between stores in the Paris area. This can be done within hours and
minimizes the duration of stock-outs since delivery from the central warehouse
takes 48 hours. One distinguishing feature from grocery is that each clothing chain
will have fewer retail stores per geographic area, so that inter shop movements
are made less complex. Marks & Spencer in the UK has 300 stores compared with
around three times as many Tesco stores.

Home delivery
Home delivery is, in many ways, just another supply chain. However, the changes
in home delivery, particularly for fast moving consumer products, have been so sig-
nificant within a short period of time that it requires separate consideration. Home
delivery, of course, is not new. Mail order catalogues have been in existence for
many decades. Grocery deliveries are not new. These were a common occurrence
in the UK, particularly in rural areas, until the 1960s. The growth in car ownership,
and the focus on price by the supermarket chains reduced the demand for home
delivery. The late 1990s saw the convergence of two separate trends. First, there
was the social phenomenon of a high level of working women with increasing
disposable income for whom time was precious. The concept of ‘money rich, time
poor’ was identified. Secondly, there was the explosive growth of the Internet and
Collaboration in the retail supply chain 73

access to the Internet by consumers. With the Internet it became possible to explore
the price and availability of items within different retail chains. Online shopping
became not just feasible but easy and attractive, as solutions were introduced to
overcome the risks and difficulty of making a financial transaction over the web.
Here, we address the challenges that home delivery posed to the supply chain,
particularly of grocery retailers, and the solutions that they have adopted.
A key difference between shopping in store and home delivery is that the
responsibility for picking an order is transferred back to the retailer, introducing
an additional labour intensive procedure. This in itself raises further questions; is
it desirable to have a small army of supermarket employees moving around the
store mingling, even competing, with customers undertaking their own shopping;
and, should expensive retail space be used for order picking or could this be better
undertaken in a warehouse? Another difference is the implication for optimum
vehicle movements. Does it make sense to transport volume from warehouse to
store and then transport again to the consumer’s home or should product move dir-
ectly from the warehouse to the home? Thirdly, picking orders from store increases
the probability of an individual SKU being out-of-stock and therefore alienating
customers. This conflicts with the theory that stock should be held in one location
close to market.
The logical response to these issues is that orders for home delivery should
be picked in a warehouse, not the retail store. Whilst this may be the eventual
long-term solution, it is not the solution that is speedily implemented. Consumers
buy in single units of each SKU but the existing RDCs of multiple grocers handle
only full cartons. The cartons are not broken into single items until they reach the
retail shelf. Furthermore, RDCs are designed as trans-shipment (or flow-through)
centres, which are not stock-holding warehouses, so there is no product available
for consumer order picking. Thus the optimum supply chain structure to supply
retail stores is quite different to that required to supply consumers. Specialist con-
sumer order picking warehouses that hold stock would need to be constructed,
which takes time and money. This delays the implementation of home delivery
providing an opportunity for others, perhaps the cash and carry outlets, to enter
the market. Tesco, the current UK market leader in home delivery, concluded that
speed of market entry was essential and could best be achieved by the picking
and delivery of orders from store. Large surface retail outlets are best suited to
in-store order picking and Tesco has a wider and more national portfolio of such
units than its competitors. A national home delivery operation is likely to lead to
better returns on the IT infrastructure necessary to enable customers to shop using
the Internet.
Once a position of market leadership in home delivery has been achieved, Tesco
can re-assess the benefits of building specialist order picking warehouses for con-
sumers. These require a different form of supply chain collaboration. Production
does not need to be perfectly synchronized with sales because the order picking
warehouses hold stock. In any event, manufacturers may find it difficult to align
their production processes to both a rapid response and flow-through principle
74 Retail Strategy

of the existing RDC and to the stock-holding order picking warehouse for home
delivery, where vehicle utilization is paramount. Only time will tell whether the
long-term supply chain solution to home delivery of groceries is based on specialist
order picking warehouses.

Producer brands and vertically integrated supply chains

The introduction of consumer pull supply chains requires collaboration where there
are powerful producers and powerful retailers. Power derives from the influence
that each has with consumers. Influence derives from the existence of brands and
the esteem in which consumers hold the brands. In a situation where the retail brand
is dominant and the products sold carry the retailer’s name, the retailer selects sup-
pliers to participate in their brand. The retailer selects both the suppliers of the basic
material, and manufacturers of the product and the retailer designs the product.
The intellectual property of the product resides with the retailer. Integration is
required rather than collaboration. Collaboration, in terms of supply conditions,
is one part of the supplier selection process. Suppliers are selected on the basis of
their competence to produce and supply to the retailer’s requirements. This tends
to be the situation in fashion clothing.
Where powerful producer brands exist, then collaboration is essential when
powerful, even oligopolistic, retailers introduce consumer pull supply chains. The
grocery industry is characterized by such a relationship. The relationship is made
more complex by the presence of retailer product brands alongside the producer
brands. It is the existence of retailer product brands that is invariably the cata-
lyst for retailers establishing consumer pull supply chains. Since retailers cannot
simultaneously operate both producer push and consumer pull supply chains, it
follows that collaboration is required from the owners of producer brands. The
issue of supply chain collaboration is thus most relevant where producer and retail
product brands co-exist and where short shelf life products exist. These conditions
are most prevalent in grocery distribution. The first condition partially exists in
electrical retailing with powerful retail chains and strong producer brands. How-
ever, retailer product brands are a small proportion of total retailer sales and the
need to handle short shelf life is mostly absent. Of increasing importance is the
frequency of new product introductions and associated product obsolescence, as
with mobile telephones. Collaboration regarding new product introductions is of
increasing importance if the retailer is not to be left with surplus stock, but this
does not necessitate a consumer pull supply chain where production cycles flex-
ibly respond to the level of retail sales. Electrical retailing thus has some of the
challenges of both grocery retailing (supplier brands) and fashion retailing (short
product life expectancy).
The contrasts between food retailing and fashion retailing are stark (see Table 3.3).
There are important structural differences that explain why supply chain collabor-
ation is primarily an issue for food retailing. Both channels of distribution benefit
Collaboration in the retail supply chain 75

Table 3.3 Supply chain contrasts between food, fashion and electrical retailers

Structural composition Grocery Benetton Zara The Body Electrical

retailer Shop retailer

Presence of producer brands Yes No No No Yes

Control of production No Yes Yes Yes No
Product design competence No Yes Yes Yes No
Uniqueness of retail chain No Yes Yes Yes No
Owned branches Yes No Yes Partially Yes
Sale of perishables Yes No No No No
Length of product life >1 year <1 year <1 year <1 year 1 year

from a consumer pull supply chain but collaboration is an issue for the grocery
trade and this explains why programmes of industry wide collaboration have been
largely confined to food retailing. There are seven structural components that are
relevant to assessing the importance of supply chain collaboration:
1 The presence of strong producer brands
2 The control/ownership of production facilities
3 Competence in product design and development
4 The uniqueness of the retail chain
5 Ownership and control of retail outlets
6 The presence of perishable, short shelf life, products
7 Length of product life cycle.

Summary
The emergence of a consumer-oriented society has been the driver of the change
from producer push supply chains to consumer pull supply chains. Advances
in information technology that permits, at a lower cost, the linking of hitherto
individual processes of distribution, have facilitated this change.
Consumer pull supply chains require a transparency of transactions between
each constituent member of the chain. Movement of product between each stage
and location of inventory must be visible to each member. The consumer pull sup-
ply chain is driven by consumer purchases, and the advent of scanning technology
in the early 1990s enabled sales per store of each product line to be recorded on a
daily basis.
The emergence of powerful retail chains provided the vehicle to implement con-
sumer pull supply chains. The size of the retail chains enabled economies of scale
to be achieved for both the application of information technology and the restruc-
turing of warehouses and vehicle fleets. The economies of scale allowed a rate of
return to be earned on the capital investment that was required.
76 Retail Strategy

The effect of a consumer pull supply chain is to respond rapidly to changing

patterns of consumer purchases and demand for individual products. This faster
speed of response is achieved whilst utilizing less inventory. Consumer pull supply
chains are most beneficial for products with a short shelf life (perishable foods) and
with a pronounced seasonality of sales (fashion clothing).
Collaboration is particularly important when there are two, or more, powerful
members of a supply chain. Where the supply chain is dominated by a powerful
retailer the other members of the chain respond to the requirements of the retailer,
and the structure of the chain is determined by the retailer. Collaboration is neces-
sary where there are powerful producer brands (e.g. Coca-Cola) being distributed
by powerful retail chains that may also be selling their own brands. Where such
retailers have developed consumer pull supply chains for the rapid replenishment
of fast moving consumer goods, then collaboration is essential.
Industry wide programmes of co-ordination such as ECR best facilitate collabo-
ration in a situation where powerful retailers have many suppliers of powerful
producer brands. Grocery retailing uniquely combines the stimulus for consumer
pull supply chains and the requirement for collaboration. It is characterized by:
powerful retailers and powerful producer brands; fast moving consumer goods;
and perishable products.
Fashion clothing with strong retail chains, high seasonality, and a long supply
chain also benefits from a consumer pull supply chain, but lacks the need for
collaboration when most products sold are retailer private labels.

Review questions
1 Using examples, compare and contrast a push supply chain and a pull supply
chain.
2 With reference to an organization of your choice, explain and evaluate the
role and value of information in managing the supply chain.
3 How do different product characteristics lead an individual retailer to
construct separate supply chains?
4 How does the nature of retailer supplier collaboration differ between
retailers selling mainly own-label brands and those selling a substantial
proportion of manufacturer brands?

Discussion questions
1 ‘The Global Commerce Initiative increases the dominance of the global
retailers and suppliers at the expense of smaller players.’ Discuss.
Collaboration in the retail supply chain 77

2 Critically evaluate the extent to which different product lines sold by a

hypermarket require different supply chains.
3 Using an appropriate framework, explain how the retail supply chain of the
future may be managed.
4 Examine the paradox that a retailer can determine the structure of a sup-
ply chain and control the logistics but never own a delivery vehicle or a
warehouse.

References
Cotterill, R. (1999) ‘Continuing Concentration in the US’. In Ramsay, W. (ed.), The Future of
the Global Food Industry. Financial Times, London.
Global Commerce Initiative (2002) Special Report: Summer/Autumn 2002.
Jones, D.T. and Simons, D. (2000) ‘Future Directions for the Supply Side of ECR’. InAcademic
Perspectives on the Future of the Consumer Goods Industry. ECR Europe, Brussels.

Further reading
Harvard Business Review (2000) Harvard Business Review on Managing the Value Chain.
Harvard Business School Press.
Hill, C.A. and Scudder, G.D. (2002) ‘The Use of Data Interchange for Supply Chain
Co-ordination in the Food Industry’. Journal of Operations Management, 20:4, pp. 375–88.
Lambert, D., Stock, J.R. and Ellram, L. (1998) Fundamentals of Logistics Management.
McGraw-Hill.
Levy, M. and Grewal, D. (2000) ‘Supply Chain Management in a Networked Economy’.
Journal of Retailing, 76:4, pp. 415–30.
Lysons, K. and Gillingham, M. (2002) Purchasing and Supply Chain Management, 6th edition.
FT Prentice Hall.
Myers, M.B., Daugherty, P.J. and Autry, C.W. (2000) ‘The Effectiveness of Automatic Invent-
ory Replenishment in Supply Chain Operations: Antecedents and Outcomes’. Journal of
Retailing, 76:4, pp. 455–81.
Patel, T. (2003) Retail Logistics 2003. IGD Business Publication.
Chapter 4

Planning policy for

retailing
Ross Davies

Public planning policies are part of the process of promoting retail development in
many countries of the world. However, they can also be part of the process of
resisting retail development in many countries, often with the aim of defending a
country’s traditional small- and medium-sized retail sector against the inroads of
contemporary large-scale retailing or non-domestic competition. A comprehensive
review of public planning policies and retail development around the world within
a single chapter is impractical. Instead, we make selective trawls of the impact or
otherwise of retail planning policies in the major regions of the world, seeking to
draw out a small number of different approaches to the regulation of retail locations
worldwide. In particular, we can differentiate between conditions of restraint, those of
leniency and those countries presently making a transition between the two states.

Definitions
Most commentators interpret retail planning policies to be merely a specialist
by-product of general governmental land use planning regulations or advisory
notes issued to the principal actors in the development process. In the case of
retailing, these include retail companies, shopping centre developers, invest-
ment agencies, consultants and local authorities. Regulations, which are usually
legally enforced documents, can range from zoning maps, which indicate where
and where not certain types of retail development may take place in an area,
to stipulations about how large new store or shopping centre proposals can be
in an area. Advisory notes, in contrast, are not legally binding but often com-
prise central government guidelines dealing with what is expected from the
retail development process and in the case of the European Union, consist of
Planning policy for retailing 79

encouragements to governments about what might or might not be appropriate at

a supra-national level.
Strongly related to these definitions of retail planning policies are two other areas
of public policy making. The first is the legislation in some countries about trading
hours. Historically, the predominantly catholic countries of western Europe and
Latin America – and also as a unique case Germany – have had very strict laws
on when stores can or cannot be open for trading but these are beginning to be
eroded. They have largely focused on constraints on Sunday and evening trading.
Secondly, restrictions in some countries have been placed on the price of goods and
the product in stores. The US has long had retail price maintenance agreements
set by manufacturers and suppliers whilst Japan effectively has the same although
with convoluted wholesale agreements as well. The Scandinavian countries still
have structures over product sales in stores, particularly over liquor (generally sold
in state-controlled outlets) and some food and pharmaceutical products. These
additional policies are, in effect, ‘competition policies’ and competition and plan-
ning have sometimes been seen as two faces of the same state interventionist cause.
We will return to this issue at the end of the chapter.
Two other issues drive retail planning and related policies around the world. One
is the impact of new corporate chains with large stores or powerful brands on the
traditional structure of retailing in many countries, comprising independent busi-
nesses with very small stores. Government intervention has often been intended to
protect the Davids from the Goliaths. The second issue has been the development,
in the most advanced economies, of ‘out-of-town’ retailing (suburban develop-
ments of free-standing large stores and shopping centres) that may have an impact
upon historic town and city centres and also other traditional centres within large
urban areas.

Countries of restraint
The selection here of regions and countries is necessarily partial but includes
countries that have recently tightened their controls over retail development. For
example, western Europe and Japan have been consistently restrictive over many
years.

Western Europe
The countries of western Europe have probably, over several decades, enacted the
most sophisticated and stringent retail planning policies in the world. An historical
interpretation of what has developed between them is instructive. The structure
of retailing in west European countries was not very dissimilar 50 years ago to
what we see in emerging markets today; the difference is that planning control
then was almost autonomous. Throughout western Europe in the 1950s and 1960s,
80 Retail Strategy

retailing was dominated by small shops and spatially configured in a rigid hier-
archy of shopping centres: neighbourhood centres offering convenience goods;
district centres offering a mix of convenience and low-level specialist goods; town
and city centres providing a full range of convenience, specialist and service goods
through both small and large stores including department stores.
This structure and pattern of retailing was purposely upheld by government
policies that required local authorities to draw up maps displaying the hierarchy
of shopping centres and either legislating or encouraging any new store proposals
to fit with the existing scheme. This was effectively zoning planning.
The 1970s was a decade when the retail format of the hypermarket was born,
initially in Belgium but widely adopted in France. At first, it led to a break-
down in planning controls in those two countries and a retail development
‘free-for-all’. Reactive planning constraints were eventually introduced towards
the middle of the decade as a result of concerns about the impact of these huge
food and general merchandise stores on traditional, small independent busi-
nesses but precedents had been set. In France especially, planning control was
often influenced by other political considerations that meant the hypermarket
development programme continued largely unabated. However, elsewhere in
western Europe, strict retail planning controls on new retail innovations were
generally upheld.
The 1980s saw some other significant changes in the political/planning
approaches to retail development across the region. The most spectacular change
was in the UK where, under Prime Minister Margaret Thatcher, planning policies
of all kinds were effectively abandoned in the name of the need for enter-
prise. In consequence, there was a proliferation of out-of-town shopping centres.
This apparently enlightened attitude towards development also affected southern
European countries. Spain, Portugal and Greece all opened up their borders to
hypermarket development, principally from French companies, but the north and
central countries of western Europe maintained a relatively strict retail planning
regime.
The 1990s proved to be another volatile decade. The reunification of Germany
and the opening up of the former Soviet bloc countries to western retail company
investment saw huge expansion programmes, particularly by German retailers,
against the background of minimal, indigenous planning policies. However,
the decade generally was coloured by an almost complete volte face by several
west European governments about how to deal with the pressures of modern
retail development. Britain and southern Europe, experiencing new governments,
decided to reject the previous laissez-faire approach to out-of-town development
and concentrate on a future regeneration of traditional town and city centres (and
protection for small, independent businesses). France and Belgium followed suit
with some new harsh limits about the sizes at which new stores could be built.
Germany, Austria and Switzerland had retained rather hard regulations on out-
of-town development for almost four decades; and the Scandinavian countries
broadly matched the German.
Planning policy for retailing 81

On entering the twenty-first century, the countries of western Europe are almost
at one in seeing curbs taken by their governments to limit the further develop-
ment of out-of-town retailing, in encouraging the renovation and improvement of
traditional town and city centres and in supporting the small, independent retail
sector.
A summary of these country planning policies towards new retail development
is contained in Table 4.1, which also demonstrates the shift in government attitudes
towards modern retail practices.

United Kingdom
The UK is interesting enough to warrant closer consideration not just because of
changing government policies but also because of its experience in retail develop-
ment in all kinds of locations. Also, unlike most other countries in western Europe
that implement their retail planning policies through controls on the sizes of stores
and shopping centres, the UK controls development through a series of guidance
notes.
The most important guidance note is Planning Policy Guidance Note 6 (PPG6),
revised initially in England and Wales in 1993 under the title Major Retail Develop-
ment. (A complementary set of guidelines was published for Scotland and Northern
Ireland.) Issued by central government, it sought to persuade local authorities to
turn back the tide of out-of-town development by recommending the refusal of
planning applications for new stores and shopping centres in suburban areas and
encouraged planning applications for town centre-based schemes. Whilst the new
PPG6 signalled a major shift in government policy, however, it was followed in 1995
by a Parliamentary Inquiry into ‘Shopping Centres and their Future’ that ruled that
the guidance note did not go far enough. It was replaced by a further PPG6 in 1996
called Town Centres and Major Retail Development.
The later PPG6 exhorts local authorities, particularly the County Councils
through their countywide Structure Plans, to identify where new retail develop-
ment may be appropriate in a map form. It therefore requires local authorities
to take a plan-led approach, almost returning to the old system of zoning plans.
Developers seeking new applications for shopping schemes outside the recom-
mended areas must satisfy local authorities on three tests: that the schemes will
not generate adverse traffic conditions; they will have a minimal adverse trading
effect on a town centre or other traditional centres; and sites for the new schemes
should ideally be first identified within a town centre or on the edge of it, and only
in exceptional circumstances will an out-of-town site be countenanced.
This tougher planning stance has, by and large, been working well. There has
been a significant reduction in out-of-town development and much regeneration
of town and city centres. But some developers and other agencies involved in the
development process have complained that the development tests, particularly the
third one called the sequential test, are not clear enough. Central government has
declared that in 2003 it will publish yet another PPG6. This will not mark any major
82 Retail Strategy

Table 4.1 Recent retail planning policies in western European countries

France
1996 Loi Royer: Planning permission required for any development proposal larger than
300 square metres net. Presumption against large development. Trading is not generally
permitted on Sundays except in designated tourist areas.
Spain
1995 General Commerce Law: Special licences to be obtained for any retail development
proposal of 2,500 square metres net or more. Trading hours generally limited to 72 hours
per week and restricted on Sundays.
Portugal
1996 Commerce and Tourism Law: Planning permission required for development over
2,000 square metres in cities with a population over 30,000 and 1,000 square metres in towns
of less than 30,000 population. Trading hours can be from 6 a.m. to midnight including Sundays
because of the importance of tourism.
Belgium
1994 Royal Decree: Planning permission required for development over 1,500 square
metres gross size in Zone 1 (most densely populated areas) or 600 square metres out-
side Zone 1; and 1,000 square metres sales space in Zone 1 or 400 square metres outside
Zone 1. Trading hours are restricted to 8 p.m. except on Fridays and working days preceding
legal holidays, when it is 9 p.m.
UK
1996 Planning Policy Guidance Note 6: Advocated local authorities to channel new retail
development to traditional shopping centres and reduce out-of-town development. Trading
hours are limited to 10 a.m. to 4 p.m. on Sundays but otherwise stores can be open for
24 hours.
The Netherlands
1990: Presumption that out-of-town development proposals should be located at public
transport junctions. But in 1996, 13 of the largest municipalities allowed, as an experiment,
to permit development over 1,500 square metres gross on a selective basis. Trading hours
permitted are from 6 a.m. to 10 p.m. except on Sundays, although trading is allowed on eight
Sundays per year.
Germany
1980: Planning permission generally granted for stores of less than 1,200 square metres sales
in designated industrial areas. In 1995 the size limit was reduced to 800 square metres in
most areas.
Trading hours have historically been very strict with stores closing at 6.30 p.m. on weekdays
and at lunchtime on Saturdays except on the first Saturday of each month. Since 1996, stores
can be open on weekdays until 8 p.m. and until 6 p.m. on Saturdays but closed on Sundays.
Scandinavia
Municipalities have taken over planning decision-making from central government in recent
years but it remains difficult for developers to build out of town. In contrast, Sweden was
the first country to allow virtually unlimited trading hours in 1972. Denmark and Norway
continue to restrict trading on Sundays whilst stores in Finland can open from 9 a.m. to
8 p.m.

continued
Planning policy for retailing 83

Table 4.1 Recent retail planning policies in western European countries (continued)

Austria and Switzerland

Specific retail planning policy does not exist in either Austria or Switzerland but in 1994
a Trading Act in Austria made it difficult for retailers to develop either hypermarkets or retail
warehouses, whilst in Switzerland, local political decision-making has for long been negative
towards out-of-town development. Trading hours are generally restricted to 6 a.m. to 7 or
8 p.m. during weekdays, depending on municipalities or cantons, but stores, with exceptions,
are closed on Sundays.
Ireland
2000: National guidelines for local authorities to impose a size cap of 3,500 square metres
sales on food store proposals in Dublin and 3,000 square metres elsewhere in the country;
and on retail warehouses of 6,000 square metres gross throughout the country. Stores can
legally open for 24 hours on every day of the week but usually trade on limited hours during
the daytime period.
Italy
1999 Bersani Decree: New land use planning regulations replace complicated commercial
licensing procedures, which were dominated by the independent retail sector. Stores with a
sales area up to 1,500/2,500 square metres (depending on a town’s size) requires municipal
authorization. Larger stores are referred to regional government. Retailers can trade for a
maximum of 13 hours with Sunday trading permitted in tourist centres.

Sources: Davies (1995) and Jones Lang Wootton (1996)

shift in policy but apparently will clarify those procedures that seem to be causing
confusion.
The revival of town and city centres in the UK in recent years, particularly the
biggest ones, has also been aided by legislation assisting the general regeneration of
urban areas. New legislation will shortly come into force to allow local authorities
to designate Business Improvement Districts (BIDs), along the lines of those found
in the USA. Within such BIDs, additional taxes will be imposed on businesses to
be re-invested in cleaning up declining areas, improving security and increasing
overall business and consumer confidence. There has also emerged in Great Britain
in recent years a new body of professionals known as town centre managers. Such
managers are mainly funded by local authorities but in some cases, with the help
of retail companies. Town centre managers now exist in some 400 UK towns and
cities. Their responsibilities are to co-ordinate cleaning, security and marketing of
town and city centres.

Japan
For much of the last 30 years, retail development in Japan has been controlled by a
similar mechanism to that used in most west European countries, i.e. a cap on the
sizes at which stores (and shopping centres) can be built. In the case of Japan, until
84 Retail Strategy

recently, there was a specific law called the Large Stores Law. It was introduced
in 1974 as a result of pressure on the government by the large independent retail
sector in Japan, which feared the decline of their businesses against the background
of growing general merchandise and supermarket chains. Companies could no
longer build stores of more than 3,000 square metres in the 11 largest cities in Japan
and 1,500 square metres elsewhere. Initially this appeared relatively generous, but
the policy was subject to political approval and independent retail interests were
influential. The caps were reduced to 500 square metres nationally in 1979, holding
back both indigenous modern retail development and western foreign investment
for the next 15 years.
From 1994 onwards, however, the Large Store Laws were relaxed, primarily
through pressure from the US government concerned at the overall trade imbal-
ance between Japan and the US. A modern retail industry in Japan, with many
more large stores, was seen as an ideal way for more US manufacturers and
suppliers to export their goods. There were still local political barriers to getting
planning permissions but the reaction was sufficient to encourage several Amer-
ican retail companies with very large stores to enter the market, such as Sports
Authority, Office Depot and Costco. The opening of stores of 500–1,000 square
metres was largely free from regulation, and a further benefit to such companies
was the fact that they could trade through to 8 p.m. and the number of weekend
and holiday closures was reduced to 24 per year. Whilst the hugely cumbersome
procedures of the 1970s and 1980s were reduced, however, the decision-making
process in the Large Store Laws of the second half of the 1990s was still relatively
complex.
In June 2000, nevertheless, there was a more profound change in Japan’s
approach to regulating the retail industry. The onset of a major economic recession
persuaded more politicians that the country’s overly bureaucratic industries and
archaic distribution systems needed to be more competitive and this was encour-
aged through further de-regulation. The Large Stores Laws were abolished and a
new Large-Scale Retail Stores Location Act bought into being. Two years earlier,
however, a revised City Planning Act and a Central District Vitalisation Act had
also been passed. All three new measures shifted away from a simple cap method of
controlling store (and related shopping centre) development to a more westernized
land-use approach to planning.
The new City Planning Act replaced a traditional system of controls over spatial
development with a simplified system that allows local authorities to determine
the location of new large stores and shopping centres within preferred commercial
areas. The Central District Vitalization Act was enacted to prevent traditional town
and city centres from declining in overall health against the growing competition
of large stores and new shopping centres in suburban areas. Whilst this is seen as
a forward step in pure planning terms, there are sceptics who still see the inde-
pendent retail sector continuing to be able to exercise influence in defence of its
own interests. The Large-Scale Retail Store Location Act has introduced a national
policy, interpreted by local authorities, whereby large store proposals have to be
Planning policy for retailing 85

examined in the context of their traffic impacts and environmental intrusions. This
applies to all store proposals of more than 1,000 square metres.
The new retail planning reforms of Japan clearly signal some kind of reduction
in hitherto stringent regulations on the industry, and it is interesting to see that
the new three spatial/land use approaches parallel, to a degree, those that operate
within the UK. However, we will need to see some passage of time before being
able to judge whether the new procedures have really been to the benefit of western
investors.

Countries in transition
Whilst Japan has shown some movement towards more relaxed planning policies,
there are other countries that have done more and over a relatively shorter time
span. We review here the cases of Korea, China and Canada.

Korea
Until the late 1990s, the retail industry of Korea was dominated by small independ-
ent shops and almost completely insulated from foreign competition. A Market
Act of 1960 had promised much assistance and protection for the independent sec-
tor but little financial and technological support materialized until the late 1980s
when amendments to the Act supported indigenous retail companies’ attempts to
modernize. Over the same period, foreign acquisition of land for retail and services
provision was prohibited although land acquisition could be obtained occasionally,
with government consent, to buy land for factories, offices and warehouses.
This situation changed dramatically in the last few years of the 1990s. The trig-
ger was the dramatic collapse of the Korean economy, which hitherto had been
growing almost exponentially. Pressures to allow foreign retail investments into
the country had also been rising, although not to the extent of those in Japan. Three
enactments ushered in the change of retail planning policy. First, was the Distri-
bution Industry Development Act of 1997, which stipulated that any proposals
for new large store development, whether from indigenous or overseas compa-
nies, only required registration with the appropriate local authorities. Previously,
in the early 1990s, special permission was required to open stores of more than
1,000 square metres.
Secondly, an amendment to the Foreigners’ Land Acquisition and Management
Act in 1998 made it possible for all types of potential developers to buy land without
restriction but with notification to the appropriate local authority. Thirdly, again in
1998, an amendment to the Zoning Law, which particularly had strongly protected
agricultural land and forest areas surrounding Korea’s principal cities, meant that
these areas were opened up for potential out-of-town store and shopping centre
development.
86 Retail Strategy

The overall effect has been that, in the space of five years, the retail industry in
Korea has gone from being one of the most highly regulated in the world to being
one of the most open. However, this is set against a background of continuing
economic difficulties and a slump in consumer demand, which has deflated much
western retail interest to invest in the country over the same period of time.

China
There may be some readers of this chapter who are surprised to see China included
in a section on retail planning policies in transition. The reason for China’s inclusion
is that, like Korea albeit not to the same extent, the country’s political approach to
retail development and especially its attitude to western investment has changed
dramatically in the last seven years. Before the late 1990s, like Korea again, China
had begun to embark on limited programmes opening up its markets to foreign
companies (following the 1979 Law of the People’s Republic on Joint Ventures
with Chinese and Foreign Investment) but these were aimed almost exclusively at
manufacturing and construction companies.
A change was signalled in 1992 with the publication of the State Council docu-
ment ‘An Official, Written Reply to the Questions on the use of Foreign Capital in
the Retail Sector’. The document announced that one or two joint ventures with
large foreign retailers would be allowed to operate on a trial basis in a number of
selected cities and within the five established special economic zones (Shenzhen,
Zhuahi, Shanton, Xiamen and Hainan). During the subsequent five years, this led
to a fairly significant number of joint venture experiments, primarily by Japanese
retailers with Chinese construction companies.
Afurther move towards greater openness was triggered in 1997 by a state enquiry
into the fact that approximately 300 joint venture retail and related companies had
been established by this time – many apparently outside of the official trial planning
areas. This led to a decree that within any joint venture operation, 51 per cent of the
ownership must be Chinese. A consequence of this was that some foreign retailers
decided to withdraw from the market.
In 1999, following China’s entry into the World Trade Organization, there were
further relaxations of retail planning policies and related trade restrictions. The
state published another document, ‘The Methods on Foreign-Funded Commer-
cial Businesses for Trial Implementation’, that expanded the trial areas for joint
ventures from a limited number of cities and the economic zones to all provincial
and regional capital cities, municipalities directly under the Central Government
and cities enjoying separate budgetary status. The seeds were sown for a national
expansion of new chain stores and also shopping centres.
There remained two strict rules of engagement over the formation of joint venture
companies, however. First, a foreign retailer seeking this arrangement needed to
have a trading record of annual sales of US$2 billion for the three years prior
to submitting an application to form the joint venture; and secondly, a Chinese
partner had to be a distribution enterprise that displayed ‘solid economic strength
Planning policy for retailing 87

and management capacity’, with assets valued at or above RMB50 million in the
year prior to applying for joint venture status. Moreover, in cases where there
are more than three branches of chain stores (except convenience stores, specialty
stores and brand licence stores), over 51 per cent of the total investment must come
from the Chinese joint venture partner.
Despite these constraints, there has been much foreign retail investment in China
over the last few years, as Table 4.2 demonstrates. Indeed, in some municipalities,
there has been concern over ‘overheating’ of both store and shopping centre
development, with size caps being introduced of 5,000 square metres. The Chinese
market is therefore by no means fully or even relatively de-regulated compared
to many other developing countries; but its progress over the last seven years
has been enormously impressive against the background of what could have been
the case.

Canada
Until the beginning of the 1990s, Canada, like Australia and New Zealand (other
former colonial territories) had adopted a UK-based land use planning approach
to regulating retail and other commercial development. This was very much state-
based, however, with variations reflecting those that might be found between
England, Scotland, Wales and Northern Ireland. A further major difference had
also emerged over the last 20 years: plan-making in Canada became very con-
centrated within just the largest metropolitan areas. (Large, metropolitan areas
dominate the overall settlement pattern in Canada.)
Recently, however, the plans for the major metropolitan areas have ignored the
challenges or issues raised by the retail development process. The new official plan
for Toronto, for example, does not make any specific reference to retailing and
the old hierarchy of shopping centres has been discarded. Retailing has become
subsumed into a number of other general land use categories for the purposes
of planning control: neighbourhoods (mainly residential areas); mixed use areas
(small subsidiary downtown areas); employment areas (where some retailing facil-
ities may service office or factory employees); avenues (strip developments); and
centres (including both the main downtown area and other civic centres that might
incorporate shopping malls). Retailing as a specific policy area has effectively been
abandoned.
There are two specific contexts, however, in which retail issues might come to
the fore: one is in secondary plans for specific metropolitan areas, such as Bloor
West Village, Yorkville or The Beaches; and the other is in Business Improvement
Areas which are about the re-vitalization of run-down mixed use areas where retail
renovation can take an active part.
The general consequence of the overall demise of retail planning policies in
metropolitan areas like Toronto, however, is that there has been an explosion of
out-of-town development in the last decade or so, especially in terms of ‘big box’
stores. There is now in the order of 20 million square feet of such development
88 Retail Strategy

Table 4.2 Foreign retail investment in China, 1992–2000

Country of origin Year of entry Number of outlets Store format

France
Carrefour 1995 22 Hypermarket
Galeries-Lafayette 1997 2 Department store
Printemps 1995 1 Department store
Promodès 1999 1 Hypermarket
Auchan 1999 1 Hypermarket
USA
Wal-Mart 1997 6 Super centre
Price Smart 1997 3 Warehouse store
The Netherlands
Macro 1996 4 Warehouse store
Ahold (withdrawn) 1996 45 Supermarket
Germany
Metro 1997 6 Warehouse store
Sweden
IKEA 1998 2 Furniture store
UK
B&Q 1999 1 DIY store
Japan
Yaohan (withdrawn) 1992 7 Department store
Seibu 1993 1 Convenience store
Seiya 1996 5 Supermarket
Jusco 1996 3 General merchandise
Ito Yokado 1996 2 General merchandise
Niko Niko Do 1997 2 Department store
Sogo 1998 1 Department store
Mycal 1998 1 Department store
Heiwa Do 1998 1 General merchandise
Thailand
Lotus 1994 4 Hypermarket
Korea
E-Mart 1996 1 Hypermarket
Malaysia
Parkson 1994 16 Department store
2 Supermarket
Taiwan
Pacific 1994 5 Department store
Trust Mart 1997 11 Warehouse store
Chung-Yo 1998 1 Department store

continued
Planning policy for retailing 89

Table 4.2 Foreign retail investment in China, 1992–2000 (continued)

Country of origin Year of entry Number of outlets Store format

Hong Kong
Wellcome (some closed) 1995 25 Supermarket
Park n Shop (some closed) 1995 18 Supermarket
Watsons 1995 27 Speciality shop
7-Eleven 1995 50 Convenience store

Source: Davies and Yahagi (2000)

in Toronto, led by Wal-Mart and Home Depot (which recently acquired the local
DIY chain of Aikenhead) from the USA. This has had an effect upon all levels of
traditional centres: the major arterial strip malls that radiate out from the city;
older shopping malls the locations of which were formerly controlled by land use
planning measures; and the major downtown area, which has seen retail sales
fall by about 20 per cent in the last decade, albeit maintaining its overall health
through commercial substitutions such as restaurants and other consumer service
businesses. One particular casualty of out-of-town impact has been the famous
Canadian department store chain of Eatons.

Countries of leniency
Having reviewed some countries with rather strict retail planning regimes, and
others moving from this situation towards more openness, or vice versa, we come
now to a selection of countries that have relatively few barriers to entry for foreign
retail investors.

United States of America

The states, countries and municipalities of the United States of America do not
generally identify the retail development process as a special feature of land use
planning, which of itself is not seen as a very important consideration for govern-
ment. In so far as land use planning is recognized as an ingredient of decentralized
government responsibility, retail development is positioned as part of a wider
raft of commercial activities alongside industry, transport and housing. Curiously,
in those municipalities that have a ‘planning’ function, plans are drawn up in the
form of rather restrictive zoning plans. However, these zoning plans have relatively
little legal backing. The consequence is that, when retailers and developers seek to
develop stores or shopping centres in areas not zoned for development, they go to
the courts for remedial redress. The whole question of retail development approval
90 Retail Strategy

in the USA comes down to court battles over when and where zoning boundaries
on maps were approved and appropriated.
There has been one exception to this general state of affairs over the last several
years, and that has been the state of Vermont. Some 20 years ago, the Ver-
mont District Environmental Commission refused permission for an out-of-town
regional shopping centre to be built on the outskirts of Burlington on the grounds
that it would have a negative impact on the trading health of the city centre. A
study in 1978 estimated that US$24.4 million of projected retail sales up to 1983
would be deflected from the downtown and job losses would outstrip those of
new job opportunities. This state of affairs has continued and Burlington’s city
centre remains extremely vibrant and economically healthy. This is not the case
in swathes of America’s mid-west and south. The lax approach to retail plan-
ning policies across most of the USA has resulted in widespread bankruptcy, the
exodus of small independent businesses, and the terminal decline of traditional
town and city centres. Out-of-town regional shopping centres have been a major
factor in the demise of even the biggest town and city centres; but within rural
communities, Wal-Mart, the world’s largest and most successful retailing com-
pany, has been accused of being the main culprit, allegedly destroying hundreds
of thousands of small businesses through its aggressive general merchandising
activities.
In recent years, however, there has been something of a backlash in some
American communities, towards the apparent inexorable advance of out-of-town
development. There is increasing objection to the development of out-of-town gen-
eral merchandise supercentres, or regional shopping centres, especially in wealthy,
white suburban areas, and community representatives have been using the courts
to give their areas protection from these forms of retail development. However,
it is possible that too little is happening too late. Table 4.3 gives some statistics
about what happened to the spatial structure and retail performance of Atlanta
city, three decades and more ago.

Table 4.3 Change in Atlanta city centre retail sales, 1954–77

Year Sales as % of Sales as % of city sales

metropolitan sales

1954 28.9 39.1

1958 26.4 38.0
1963 19.3 31.2
1967 13.9 24.4
1972 7.4 18.6
1977 4.0 15.1
Source: Dent (1985)
Planning policy for retailing 91

Eastern Europe
Poland, Hungary and the Czech Republic have collectively become a major focus
for western retail investment ever since the fall of the Berlin Wall and with most of
the former communist states gaining their independence. With a combined popu-
lation of 59 million and growing levels of disposable income, about one half of that
of the UK at present, this is an attractive market for both food retailing companies
and shopping centre developers. Until about 10 years ago, small, independent busi-
nesses and state outlets dominated the retail industry of these countries. Hence,
with the onset of free market forces, there were huge gains to be made by western
retailers and developers alike.
Nominally, Poland, Hungary and the Czech Republic, all have land use planning
regulations to control new retail development. However, regulations are lax and
open to considerable interpretation. In Poland, there is a two-stage planning pro-
cess with outline consent granted to proposals that are in line with the statutory
general plans of urban areas, which describe permitted uses and specifications.
This is followed by a detailed application containing the architectural, engineer-
ing and infrastructure details of a proposal. Since 1995, local authorities have had
wide discretion in interpreting retail-planning policies and have generally been
generous in their decision-making, except where it affects agricultural land. In
Hungary and the Czech Republic, land use planning controls are mainly admin-
istered in the capital cities of Budapest and Prague. They are little developed
elsewhere. Budapest and Prague now have ‘master plans’ but these do not refer
to retail development, and decision-making about retail development proposals
is inconsistent and not seen as a priority in the wider scale of metropolitan
advancement.
The overall net result is that western foreign retail and shopping centre
development in Eastern Europe in the last 10 years has been explosive. Table 4.4
shows how many companies have made eastern European market entries over this
time period. German retail companies, because of their proximity to the east, have
led the charge, but Tesco from the UK is amongst the most aggressive.

Middle East
Most Middle Eastern countries, like those in eastern Europe, have been relaxing
their general trading regulations over the last several years in order to attract
western investment into all kinds of industries. With respect to retailing, there
have been few planning regulations and some of the traditional retail structures
and retail environments that we take for granted throughout Europe are not found
in the Middle East. For example, the concept of the High Street does not exist;
retailing, historically, has been dominated by markets (souks) and street traders.
Extensive recent developments, however, comprise a mix of large shopping malls
and stand-alone large stores, the former of which have been very successful in
92 Retail Strategy

Table 4.4 Western retail company investment in the Czech

Republic, Hungary and Poland, 1990–98

Czech Republic Hungary Poland

Austria 7 10 3
Belgium 2 2 1
Canada 1 – –
Denmark 4 2 8
France 9 9 28
Germany 27 22 30
Greece 1 – –
Italy 7 3 4
The Netherlands 6 2 2
UK 6 4 5
Norway – 1 2
Spain – 1 –
Sweden – 1 1
Switzerland – 1 1
USA – 2 2
Portugal – – 3
Total 70 60 90

Source: Retail Intelligence (1999)

meeting modern consumer requirements, whether these are driven by nationality,

climate, disposable income or individual taste.
Rather similar to North America and in contrast with most of Europe, the Middle
East has extensive territory with a scattered population. Ruling or distinguished
local families usually own the land. The owner often donates or bequeaths land to
local citizens; hence developable land is usually in the hands of a few people and
has cost little or nothing at all. The development of shopping malls or freestanding
large stores to obtain substantial or rental income is therefore highly attractive to
the new landlords.
There are usually two ‘local’ regulations to satisfy: statutory requirements for a
licence to construct a proposed development; and discussions based on trust and
local influence with the ‘government’, i.e. the representatives of a ruling family that
would agree (or otherwise) to the development. There are no guarantees for the
latter, but the general lack of proper regulatory control has led to an over-supply
of retail floorspace, which has become a serious problem in some countries.
In a similar way, the architectural design of new retail provisions are not subject
to planning regulations as such, but depend on an owner’s preference or local
government permission. Certain local laws may apply in terms of the religious
facilities of a building, e.g. prayer rooms or floors in a shopping mall for women
Planning policy for retailing 93

only. Consequently, the absence of regulations for design provides for a mix of
traditional and modern designs that comfortably co-exist.
In a part of the world that gained its independence only three decades ago,
the hungry consumer demand for up-to-date brands and retail facilities contrasts
markedly with the history and culture of the ownership and development of land
for retailing with the Arab way of doing business – discussion, agreement and
binding trust – and not yet the regulatory format of western Europe or parts of the
Far East.

Brazil
Specific retail planning regulations are also scarce and, where they do exist, are
highly variable in South America, represented here by Brazil. The variability
within Brazil arises because any planning decisions directed at the retail industry
are taken at the municipal level and there are close to 6,000 ‘municipals’ in the
26 states of the country, each with differing interests and policies. However, the
largest municipals often have a zoning plan, much like in the USA, which demarc-
ates urban land allocated for residential, commercial, industrial and mixed-use
development. Any developer seeking to build a new store or shopping centre must
refer to the ‘planning director’; but this is not often enforced and permissions are
easily gained. There are no additional regulations that protect small businesses or
traditional town centres from the impact of large new developments, nor are there
usually regulations on potential visual intrusion, traffic congestion and social dis-
ruption. However, reminiscent of the US again, there have recently been cases of
residential area representatives using the courts to prevent development, as in a
highly publicized case in São Paulo, where a major shopping centre proposal was
rejected.
Differing state and municipal taxes also influences variability in retail planning
effectiveness in Brazil. For example, a municipal tax on services (the Imposto Sobre
Services) can vary from 0.25 per cent of the turnover of a retail company in one
city to 5 per cent in another, within the same state. This has an important bearing
on where retail companies develop their stores and even locate their headquarters.
Another tax on urban property (the Imposto Sobre Propriedade Territorial Urbana)
has similar influence. By contrast, some states and municipalities provide subsidies
in the form of tax mitigation or special prices for public services (such as electricity
and water) to encourage investment.
In the background, nevertheless, is a federal government agency, the Admin-
istrative Council for Economic Defence (CADE) that is seeking to control the
acquisition of smaller companies by larger ones, to preserve competition. So far,
however, CADE has made little impact in controlling retail acquisitions within
the country although the biggest inroads by foreign investors, namely Wal-Mart
and Carrefour, have been by organic growth. These two companies have brought
significant modernization to the retail industry of Brazil but also a considerable
impact on indigenous independent businesses.
94 Retail Strategy

Summary
The level of stringency of policy-making equates to the experience of different
societies with contemporary retailing and their geographical size. Thus, western
Europe, together with Japan, exhibits the most stringent legal regulations or
guidelines. The USA, Eastern Europe, South America and the Middle East are
the most lenient. In between, we see a mixture of countries in terms of both society
and size, which are going through periods of dramatic change.
Most countries around the world face three major conflicts about the
accommodation of modern retail development, whether large stores or shopping
centres. The first conflict is that, however developed their retail planning policies
are in detail, there is concern at governmental level over the impact of large retail
investment companies over small businesses. The second conflict is that, besides
individual retail companies, major shopping centre companies can come in and,
through out-of-town development, cause deterioration in traditional town and city
centres. The third issue is the general question of competition – to what extent do
you allow competition between large and small companies and between out-of-
town and in-town-development – when there are conflicts over business interests
but consumer preferences.

Review questions
1 With reference to the Legoland case study, identify and explain the major
planning constraints that Legoland might face in developing standalone
retail stores in three countries of your choice.
2 As retail planning policies in China continue to develop, compare and
contrast the approaches of the Metro and B&Q case studies in China.

Discussion questions
1 ‘The big retailers will always have more influence than smaller retailers over
retail planning decisions’. Discuss.
2 Critically evaluate the future of out-of-town retail development in a country
of your choice.
3 To what extent should governments consider retail planning to be part of
competition policy?
Planning policy for retailing 95

References
Davies, R.L. (ed.) (1995) Retail Planning Policies in Western Europe. Routledge,
London.
Davies, R.L. and Yahagi, T. (eds) (2000) Retail Investment in Asia Pacific: Local Responses
and Public Policy Issues. Oxford Institute of Retail Management, University of
Oxford.
Dent, B.D. (1985) ‘Atlanta and the Regional Shopping Mall: the Absence of Public Policy’.
In Dawson, J.A. and Dennis Lord, J. (eds) Shopping Centre Development: Policies and
Prospects. Croom Helm.
Findley, A. and Sparks, L. (1999) A Bibliography of Retail Planning. National Retail Planning
Forum, London.
Jones Lang Wootton (1996) ‘Retail Planning Policies: Their impact on European Retail
Property Markets’. London.
Oxford Institute of Retail Management and Jones Long Wootton (1998) Shopping for New
Markets: Retail Opportunities in Central Europe.
Retail Intelligence (1999) Retail Sans Frontiers: The Internationalisation of European Retailing.
London.
Simmons, J. and Yeates, M. (1998) ‘The Need for International Comparisons of Commercial
Structure and Change’. Progress in Planning, 50:4, pp. 291–313.
Yahagi, T. and Tsuruta, T. (2002) ‘The Large Scale Retail Stores Act and its Erosion in
the 1970s–80s’. In Miwa, Y. et al. (eds) Distribution in Japan. Oxford University Press,
Oxford.

Acknowledgements
I am grateful for assistance in preparing this chapter from: Gareth Williams,
formerly CEO of Al Fultaim & Sons, Dubai; Gleb Bylor and Professor Ken Jones of
the Canadian Institute of Retail Studies, Ryerson Polytechnic, Toronto; Professors
Jose Augusto Giebrecht da Silveira and Claudi Felisoni de Angelo of the University
of São Paulo; and Dr Yong Gu Suh of the Women’s University of Seoul.
Chapter 5

Retail
internationalization:
how to grow
Elizabeth Howard

Internationalization has become one of the most troublesome issues in retail strategy.
Compared with other industries, retailing is far less international. There has been a
surge of activity in the last few years and a great deal of attention is being paid to
international operations. However, there have been many failures. Companies are
taking a variety of approaches to extending their operations and this chapter looks
at some of the differences. This chapter begins by discussing the activities that can
be internationalized in retailing, and goes on to look at motives for international
development. It then considers the strategic choices that retailers must make in
setting up foreign operations. These decisions include those about timing, direction
or destination, mode of entry, partner selection and how and how far to adapt to new
markets. The chapter ends by identifying key competences required by international
retailers.

What international activity?

Buying
Even if their stores are entirely domestic, many retailers have been buying goods
from foreign countries for a long period, most often through agents and wholesalers
of various kinds. Recently, more ‘direct sourcing’ operations have been set up.
Companies are trying to apply the lessons they have learned domestically about the
advantages of closer relations with suppliers and of control of their supply chains,
Retail internationalization: how to grow 97

to international buying. Chapter 3 on supplier relations has discussed these issues.

In addition, as some large companies have developed store operations in several
countries, there have recently been some interesting examples of attempts to extend
the advantages of their large buying power, by sourcing some products centrally
to supply several countries. The most notable example is Wal-Mart but there are
others. For example, look in Part III (Chapter 13) at the interesting comments from
Steve Gilman, international director for B&Q, about the way his organization is
beginning to supply European stores from manufacturers in China. Tesco, similarly,
is looking to supply European stores from its new Asian supply network. Roland
Vaxelaire in Part III (Chapter 18) has some interesting comments about the pros
and cons of this activity for the UK.

Ideas
Ideas and know-how have become international in retailing much more easily
than companies themselves. It can be relatively easy to copy the essential ideas
in a retail offer: the format, the merchandise supplied by manufacturers and the
product mix. Formats especially are easily imitated and cannot be patented like
say, the formula for a pharmaceutical product. Hypermarkets may have been
developed first on any significant scale in France, but they appeared in other
countries because domestic retailers imitated retailers such as Carrefour, without
waiting for an international company to ‘export’ them. Ideas from self-service
to the category killer format have regularly come eastwards to Europe from the
USA. Interestingly, the transfer of ideas can sometimes be used strategically to
block international activity. It seems clear for instance that Kingfisher’s initiat-
ive to build very large format B&Q Warehouse stores from 1994, filled a market
gap that the biggest DIY firm, Home Depot, might have considered invading. On
the other hand, Asda’s imitation of aspects of Wal-Mart’s operation and format
meant that it became an attractive acquisition for the latter. Seen to ‘fit’ the cul-
ture and the business model of Wal-Mart, it was bought by the latter in 1999,
giving the American company an immediate, substantial share of the British
market.

Store operations
The internationalization of store operations is the third kind of internationalization,
and the rest of this chapter concentrates on this issue.
Cross-border retailing has accelerated dramatically through the last two decades,
though of course it began much earlier. There were a few international retailers
operating in the nineteenth century. C&A was expanding from The Netherlands
by the 1920s, and there were some notable international retailers by the 1960s such
as F.W. Woolworth, along with many smaller companies.
98 Retail Strategy

Carrefour began its international moves with openings in Spain and the UK, in
1973. Tengelmann from Germany acquired large interests in the USA in 1979, and
made some smaller moves into Austria and The Netherlands. Vendex from The
Netherlands was beginning to acquire the first of many operations in retailing and
catering across Europe and the USA. Benetton, Stefanel and Laura Ashley, along
with numbers of smaller luxury goods retailers, led fashion retailers at this time.
Already, different strategies were apparent: from the ‘conglomerate’ development
of Vendex and GIB, to the franchising processes of the speciality brands. The big
waves of expansion date from the late 1980s however, and they are continuing to
increase. The later 1980s saw the rapid development of the category killer format
as an international operation: Toys ‘R’ Us from the USA and IKEA from Sweden
began to be very active.
By 1992, and the official completion of the European Single Market, cross-border
moves were accelerating rapidly. There were probably more than twice as many
moves in the 1990s as in the 1980s. Table 5.1 shows the most favoured locations
for opening new operations. In the earlier years, the preferred destinations were
Belgium, France and The Netherlands, reflecting a process of short distance border-
hopping by retailers in the more mature markets of north-west Europe. The process
continued through the 1980s, but Spain became a very important destination as
foreign retailers saw opportunities to move into a fragmented but growing and
maturing market. In the 1990s there was far greater activity overall than in earlier
years, reflecting both the development of the ‘Single Market’ in the European Com-
munity, and the opening up of the countries of central and eastern Europe. The
Czech Republic became the fifth most important destination, closely followed by
Poland and Hungary.
By 1999 there were well over 3,000 international operations run by European
retailers. The biggest ‘exporter’ was France (over 600), followed by Germany
(over 400) and the UK (over 300). Two thirds of these operations were within
Europe but the rest were in many parts of the world. Few individual retail
companies, however, are themselves widely spread, even today, as Table 5.2
indicates.

Table 5.1 Top five destinations in Europe for cross-border moves

Pre 1980s % 1980s % 1990s %

Belgium 15 Belgium 13 UK 9
France 12 Spain 10 Spain 8
Austria 11 Germany 9 Germany 8
The Netherlands 11 UK 9 France 7
Switzerland 8 The Netherlands 9 Czech Republic 6

Source: Jones Lang Wootton and OXIRM (1997)

Retail internationalization: how to grow 99

Table 5.2 International sales of the largest retail companies

Size Company Country MCap, International Integrative

rank 01/07/02 (US$ turnover as % measure of
million) of sales globalization

1 Wal-Mart Stores US 241,973 16 1.2

2 Carrefour FR 38,794 51 2.2
3 Tesco UK 26,350 15 0.4
4 Ito Yokado JP 20,614 34 0.7
5 Ahold NL 19,281 92 5.2
6 Costco US 17,177 18 0.2
7 Sears Roebuck US 16,505 10 0.1
8 Hennes & Mauritz SD 14,796 89 1.9
9 Pinault Printemps FR 14,429 55 3.7
10 Safeway US 14,016 8 0.1
11 Marks & Spencer UK 13,727 15 0.7
12 Metro BD 11,151 42 0.4
13 Sainsbury’s UK 10,815 21 0.2
14 TJX Companies US 10,326 11 0.3
15 Castorama Dubois FR 10,067 69 1.7
16 GUS UK 9,380 26 1.3
17 Staples US 8,939 7 0.1
18 Aeon Co. JP 8,938 11 0.2
19 Boots UK 8,838 9 0.2
20 Casino FR 7,952 25 1.9
21 Kingfisher UK 6,559 46 1.1
22 Dixons UK 5,797 14 0.1
23 Office Depot US 5,086 15 0.2
24 Tiffany & Co US 4,961 51 0.0
25 Next UK 4,702 3 0.1
26 Delhaize BG 4,341 85 2.7
27 Karstadt Quelle BD 3,000 10 0.2
28 Signet Group UK 2,584 71 0.7
29 Michaels Stores US 2,551 4 0.0
30 Esprit Holdings HK 2,256 87 3.2

Source: Oxford Institute of Retail Management

There are no industry wide statistics on the international activities of American

retailers, comparable with those given for European retailers. It is clear that fewer
US retailers have international operations: naturally enough, as the domestic mar-
ket is so many times greater than it is for a European firm. Very few large European
retailers lack some international operations now. A recent survey showed how-
ever that there is widespread interest today among American retailers in becoming
international (Vida, 2000).
100 Retail Strategy

Case Study: How to measure retail internationalization

The integrative measure of globalization (IMG)
Even today, the majority of retailers are entirely or largely domestic in their oper-
ations. Of the top 500 quoted retail companies in the world, only 120 have
significant international operations. Table 5.2 shows the 30 biggest companies in
the world. They have very variable amounts of international business. But even
those with significant sales outside their home markets are not very ‘global’. The
challenge of how to become truly global still lies ahead of most retailers. To be
considered truly global, a retailer must: operate mostly outside its home mar-
ket; operate in a large number of countries; spread across several of the major
regions of the world; and have developed the skills to enter a variety of different
markets.
The IMG measures the first two of these. It is essentially a measure of concentration
or dispersal. Even if a company has 51 per cent of its sales outside its home market,
it cannot be regarded as global if its international activities are concentrated in just
a few countries, or just one region or continent. IMG is a combination of three
factors: percentage of international sales; number of regions in which a company
is present (placed in a range 1–4) and the measure of regional concentration of
international sales (ranges from 0.5–1.0). Arithmetically, IMG = international sales ×
geographic spread ÷ concentration of sales. IMG ranges between 0 and 8, the lower
limit corresponding to purely domestic retailers, and the upper limit to entirely
globalized retailers.
For example, Ahold: 91.7 per cent (percentage of international sales) × 4
(number of global regions present) ÷ 0.7 (the measure of regional concentration)
gives an IMG of 5.2.

Strategic reasons for internationalization

What are the strategic reasons for venturing upon international operations, in the
face of the conventional wisdom that retailing is a local business? Broadly, there
are two sorts of motive: push and pull. Retailers need to consider their individual
situations in making the decision as to where to seek growth – internationally or
domestically, with the expansion of existing formats or through diversification into
new products and formats.

Push
Some of the biggest early international players come from relatively small home
markets. Growth has to be international for them. As the country markets have
matured, with large company presence and similar stores throughout, growth
Retail internationalization: how to grow 101

opportunities for more of the same obviously diminish. The push is to find new
markets for similar propositions and skills. It is not only small sized markets that
have suffered from a degree of saturation, of course. France is full of hypermarkets
and supermarkets; Japan has been saturated with department stores, and so on.
Japanese department store retailers and French food retailers have long looked for
opportunities in new countries. Saturation is a relative term: new ideas and new
formats can be used to invade the most apparently saturated market. Regulation
has tended to increase the difficulties however in many European countries – and
Japan. New stores are difficult and costly to build, the process of obtaining permis-
sions is time consuming and therefore costly. Foreign markets, especially in less
developed countries, can seem far more attractive.

Pull
The opportunities in less mature markets or where there are market gaps are highly
attractive. Economic growth, or more precisely growth in consumer spending, is
the most fundamental pull factor retailers should consider. Population growth and
the growth of middle classes with money to spend on consumer goods are clear
attractions in some countries. Economic growth of 5 or 10 per cent per year in places
like China encourages international retailers to enter.
The pull factors include less tangible but nonetheless important considerations
about corporate philosophy and indeed management ambition.

Growth
All of these factors or motives of course should be seen in the context of the need for
growth. For public corporations especially, growth is rewarded and lack of growth
is punished, by market valuation and related financial assessments – leading to
virtuous or vicious cycles in the ability to invest and grow further. It is no coincid-
ence that the big European retailers who do not have international operations are
voluntary groups or co-operatives of one form or another, who are not so much
subject to this demand. But whatever the form of the organization, in broad terms
there is a perception that opportunities for growth are no longer solely or most
obviously in the local market.
Retailers themselves do not much emphasize the ‘push’ motives, as we can see
from the interviews in Part III, but emphasize opportunities in certain countries
and their abilities to exploit the strength of their brands or their expertise. Later
in this chapter we look at the problems firms encounter in actually doing these
things.
The decision to move internationally should not be made simply on the basis
of the factors identified in Table 5.3. Many factors may trigger, facilitate or hinder
international activity. We should not ignore the ‘band wagon’ effect: ‘if they are
doing it, we had better do so’. This effect has been in part increased by the influence
of the stock markets: analysts have valued anticipated international growth quite
102 Retail Strategy

Table 5.3 Push and pull motives for international development

Push Pull

Mature markets, few opportunities Growing population in host

country
Intense competitive pressure; declining Economic growth; growth of
market share consumer spending in key
groups
Saturation or impending saturation in Presence of niche market;
floorspace provision desire to export a formula
that works well in home
market
Slow economic growth Removal of barriers to
entry
Low population growth, changes in Strong product brand
demographics
Regulation restricting store building, Fragmented competition
especially large store formats
Regulation restricting growth via Company skills and strengths
corporate takeover
High operating costs Corporate philosophy to
become international
business
Opportunity to learn
about international
retailing/establish base for
further expansion

Source: Oxford Institute of Retail Management

highly, encouraging companies to seek and to declare such expectations. Chance

plays a part: the financial crisis in south-east Asia 1997, for example, was largely
unforeseen, but it gave a considerable impetus to the activities of international
retailers there. They were able to acquire assets relatively cheaply, or indeed had to
acquire the assets of local partners in difficulties, in order to ensure the continuation
of their businesses.

Strategic choices
Retailers need to consider the push and pull factors that might lead them to interna-
tional development. However, this is only the beginning. There are many strategic
choices to be made in setting up international businesses. This section considers
the main choices.
Retail internationalization: how to grow 103

Types of retail business

First, it is worth noting some differences amongst types of trade. The first inter-
national retailers were very often manufacturers or suppliers of novel products –
like Singer sewing machines, or van den Bergh margarine – looking to develop
their own distribution networks. Some of the most successful international retail-
ers since the 1960s have also been those with strongly branded products, often as
part of a branded format. The most obvious are suppliers of luxury, niche products,
such as Armani, Cartier, Hermes or Louis Vuitton, who have set up some stores,
or concessions within department stores, to promote the brand within the country.
Operating the store or concession offers the advantage of increased control over
factors that affect the brand.
There is a bigger group of retailers who also have a relatively long track record
of internationalization. These are more mass-market product brand formats, often
in the clothing or fashion sector, and sometimes taking the franchise route to
expansion. In Europe, companies in this category, such as Bally, Bata, Benetton,
Stefane, Yves Rocher and Hennes and Mauritz have dominated ‘border-hopping’
international activities.
Retailers such as these have succeeded on the basis of brand management skills
and the ability to exploit similar market niches in many countries. The risks and
difficulties of internationalization have been relatively low: that is not to say that
it has been risk free and easy. Local franchisees have often supplied much of the
capital and the know-how about opening and operation in new locations.

Grocery chains
A recent interesting trend is the emergence of international strategies among the
largest retailers, who are mostly grocery chains. Conventional wisdom was that
food retailing was the most difficult business to transfer from one country to
another. First, tastes are very local. Secondly, a food – or general merchandise –
retailer apparently has no product advantage, as the necessary products are widely
available. Thirdly, the business model of the efficient large grocers of today depends
on close integration with a network of suppliers. Carrefour, with the longest his-
tory of expansion from one country to another, has based most of its strategy for
organic expansion in new countries on the hypermarket format. This very large
format is more ‘stand-alone’ than the smaller grocery store format. Individual stores
tend to manage their own buying and supply to a greater extent. Companies with
smaller grocery stores that depend on efficient networks, have possibly a more
difficult requirement to develop many stores rapidly so that the network reaches
economic size. Aldi entering the UK market for example, faced particular problems
in obtaining enough sites and permits to build its network rapidly.
The most internationalized grocers, Ahold and Delhaize, have small home mar-
kets in The Netherlands and Belgium respectively. Their ‘push’ outside national
boundaries was natural enough. However, over the last few years, the large
European grocers have almost all taken international steps as well. Undoubtedly
104 Retail Strategy

Table 5.4 The largest retailers in central Europe

Rank Company Home country

1 Metro Germany
2 Rewe Germany
3 Tesco UK
4 Tengelmann Germany
5 Ahold The Netherlands
6 Jeronimo Martins Portugal
7 CBA Hungary
8 Co-op H Hungary
9 Carrefour France
10 Casino France

Source: Lupton (2002)

the ‘push’ is greater. Modern stores are almost everywhere; a few large companies
with large market shares dominate most west European countries; there are rel-
atively few places for them to go at home. Competition authorities within the EU
limit the opportunities for many of them to take over rivals within the same coun-
try. That is not to say that innovative retailers cannot increase sales at home but
foreign opportunities have come to be perceived as more inviting. The nearest
opportunities in the 1980s were in southern Europe: Spain especially, but also Italy
and Greece, where retailing was then much less consolidated. Rapid development
through the 1990s means that now the largest retailers in Spain are French and the
largest in Greece are French and Belgian. The opening of central and eastern Europe
has brought further opportunities. German firms dominated the first moves in this
direction, but others such as Tesco have become very significant players. Table 5.4
lists the largest retailers in central Europe in order of size of sales.

Choice of direction
The choice of destination or direction is a critical one. The last section discussed
some European directions. More recently, attention has moved to Asia and South
America. Carrefour found early opportunities in the growing and less consolidated
markets of Latin America, entering Argentina in 1982, and later Chile, in 1998.
Economic difficulties in Argentina in 2002 illustrate the risks of moving into less
stable environments. The decision as to which new market to enter may be seen as
one of weighing risk against opportunity. The most obvious risks are of political or
economic instability. Balanced against these are the opportunities of undeveloped
and/or growing markets. Consumer spending growth of 5 or 10 per cent per annum
in tiger economies or elsewhere is far more attractive than a few per cent at home.
Broadly static consumer spending has characterized Germany for instance, for
some time. Timing – or chance – is often the key. B&Q took an opportunity to move
Retail internationalization: how to grow 105

Spain % Argentina
%
100
100
90

80
80
70

60 60

50

40 40

30
20 20

10
0 0
1975 1980 1985 1990 1993 1994 1995 1996 1997 1998 1975 1980 1985 1990 1993 1994 1995 1996 1997 1998

Comershop Discount Supermarkets Hypermarkets

Figure 5.1 Channel evolution

into Turkey in 2000 when a suitable partner appeared. Turkey, with a fast growing,
young, population, on the edge of the EU and seeking to join, is an attractive market.
Hyper inflation has however made the business difficult: with greater stability
in the future, there may be very large opportunities for international retailers in
Turkey.

Riding the wave of modernization

When spending growth is combined with the opportunity to restructure the market,
by developing a new format or taking substantial market share from fragmented
domestic competitors, we have seen the most substantial moves by the grocers
and general merchandisers. The strategy of ‘riding the wave’ has been particu-
larly successful for hypermarket companies. The growth of the hypermarket and
supermarket sectors in Spain, Argentina or Thailand has largely been because of
the success of international retailers in those countries. Their success has been to
offer a wide range of low priced merchandise, in a modern format with the vir-
tues of consistent availability, range and quality, based on the systems and skills
developed elsewhere, against relatively weak competitors. In each country, new
retail channels have evolved as part of a process of modernization in retailing,
and in each case the process has been led by international retailers (particularly
Carrefour).

Market gaps
Market gaps, whether in mature or less developed countries, are attractive for
retailers with a strong format proposition. Lidl’s 2002 entry into Finland with its
small scale, hard discount format is the most recent case of a company spotting
and occupying such a gap. Just a few domestic retail groups dominate the Finnish
106 Retail Strategy

market but none has done more than experiment with ‘hard’ rather than ‘soft’ dis-
count formats. In the mature markets of Europe, especially northwest Europe, and
North America, such gaps are now relatively rare. Ideas have spread, formats have
proliferated, and the opportunities for retailers to develop international operations
are relatively limited. This is a major reason for European and American retailers
to consider the emerging markets.

USA and Europe

Success in the USA for European retailers, and for Americans in Europe, has been
somewhat more elusive. Although Carrefour and others attempted to open hyper-
markets in the USA, those experiments failed. The competitive landscape was
difficult: well-entrenched companies had good consumer relations, and American
consumers found the mix of food and non-food products unattractive in the light
of existing competition. There were no doubt other factors involved, especially the
difficulty of building supplier networks in a culturally different business envir-
onment. However, successful ventures include Tengelmann with Great Atlantic
& Pacific, Ahold and Delhaize, and more recently Sainsbury’s with Shaw’s. These
successful examples use various supermarket, food and drug focused formats, and
it is clear that good local competitors existed. At least some of the success of these
operations may be attributed to a careful process of acquiring and then extending
chains that were already well established, with good store portfolios and a strong
consumer bond.
American retailers venturing to Europe have very often taken their first steps
in the UK, seeing the most culturally similar country as the most obvious starting
point. Gap, Blockbuster, T K Maxx and Disney are good examples. Many, however,
have progressed no further than the UK as dissimilarities have taken their toll.
Higher land and property prices mean that different business models are required.
Difficulties in building large-scale stores or out-of-centre stores have impeded the
strategies of companies from Costco (warehouse club stores) to Toys ‘R’ Us.
Similarly, there have been several notable European failures in the USA. Dixons,
the UK electrical retailer, made its first significant international move in the late
1980s. Deciding that its brands and formats were irrelevant to US consumers,
it acquired the discount chain Silo. The acquisition proved ill judged, as oper-
ational weaknesses were exposed by recession. Large losses and perhaps most
important, the consumption of disproportionate management time, led to the
sale of the chain. Laura Ashley in contrast attempted organic expansion but was
undermined by the costs of physical expansion, weak distribution and invent-
ory control systems, and problems with extending the brand from fashion into
furnishings.
It is important to recognize the problems that can be caused by unfamiliarity
with the market. The unfamiliarity is natural but has been compounded in many
cases by lack of research and planning. Choosing the wrong locations is a particular
mistake. Probably more important is overestimating the strength of a brand or a
Retail internationalization: how to grow 107

concept and its potential in the new market. A different competitive landscape may
mean in addition that a retail brand will be perceived differently from the way
consumers see it in the domestic market, and indeed may mean that its owners
must position it differently. At the least, it may mean that a different, more rapid
campaign of brand development is needed in the new market, in contrast to the long
process of growth in the domestic market. And retailers tend to be less experienced
in the skills of brand development and brand management than other industries.

Asia
Asian markets have become very much more attractive for European and North
American retailers, for various reasons. First is the diminution of opportunities else-
where. It is instructive to compare French grocery retailer Casino, which came late
to international activity, with its peers. It has ‘leapfrogged’ the border-hopping pro-
gression and learning process of European expansion of other companies. Casino
was largely domestic until 1996, with a substantial market share in France. Nar-
rowly escaping a takeover by Promodès, Casino was shaken into international
investment. Casino’s first opening was in Poland but then very soon it has moved
into much more distant markets.
The second reason for growing interest in Asia is the process of learning. Unlike
Casino, many firms tend to go through a process of experimenting with interna-
tional operations, gradually gaining experience of the necessary skills, in markets
regarded as close or relatively less risky than distant ones. Border-hopping comes
first, followed by more distant expansion. As international strategies develop, they
become more courageous, or well founded, and interest expands. This is not to say
that there is a neat set of stages that retailers must or do go through: strategy often
evolves in a messy way. Nor is it to say that we can see a neat process of outward
expansion, as retailers have become larger and more international. Indeed leapfrog
is a better metaphor for what many are doing, than a steady march forward.

Case Study: Casino: a later starter reaching the front ranks

Casino is a most interesting case. It remained largely domestic until recently, though
it acquired 53 per cent of the Smart & Final cash and carry chain in 1984. In France, it
runs 115 Geant hypermarkets, over 1,200 supermarkets and discount stores, and over
4,000 convenience and franchise stores. In the mid 1990s it had a large market share
but rather poor performance and was showing little real growth. The punishment for
lack of growth and lack of ambition was the threat of take-over. It narrowly escaped
being consolidated into Promodès (itself now part of Carrefour) in 1996. Much later
than most of its peers, the firm then embarked on serious international expansion.
It also invested heavily in logistics and category management, and restructured its
buying department. The bulk of Casino’s sales growth recently has come from new
international operations however.
108 Retail Strategy

Casino’s first new opening was in Poland but then it moved into five countries
of South America and into Taiwan. In 1999 Casino acquired 66 per cent of Big C
in Thailand. Most recently, Casino moved into the Indian Ocean region. Casino’s
strategy has been to acquire good businesses on which to build, though in several
cases it holds only minority shares. Casino has not spent time in trying to enter
European markets long dealt with by its rivals but is trying to ‘leap-frog’ into places
where it sees greater opportunities, principally for hypermarkets but also for its
discount leader price format.

France International

Stores 6,385 1,155∗

Sales growth 6.3% 18.1%∗∗
∗ as at end September 2002
∗∗ 9 months to end September 2002, constant exchange rates

Opportunity is clearly a key driver as Part III illustrates. The opportunity pre-
sented by the opening of China to foreign investment, encouraged by the accession
to the World Trade Organization, is one of the most important current challenges
to international retailers.

Market selection and timing

The questions of destination and timing are closely connected. Timing is crucial –
taking opportunities as they arise, particularly as markets open to foreign invest-
ment, and as consumer spending reaches absolute levels and levels of growth that
are sufficient to support a new entrant. The UK was and remains an attractive
destination for international retailers: consumer spending is high. Japan has pos-
sibly an even more attractive consumer spending profile: it has been difficult to
enter because of regulation and also hidden or informal restrictions. The ques-
tion for many is whether the time is now right to enter: recent times have seen
considerably increased interest, including interest from Carrefour and Wal-Mart.
Restrictions on imports have been eased; the Large Store Law which restricts much
development has been reformed. Still few international retailers have gained sig-
nificant market share there. HMV Media is an exception – in Part III (Chapter 15),
the chief executive, Alan Giles, discusses their approach. Timing for the big
grocery or general merchandise retailers is particularly significant. First-mover
advantage operates in a particular way for them in relation to site acquisition.
Those who identify and occupy key sites for hypermarkets or modern grocery
Retail internationalization: how to grow 109

stores can gain strong positions in new markets. Tesco’s particular strength in site
and location analysis is undoubtedly one of the foundations of its international
success.
Waves of interest in different markets at different times have been seen and the
earlier part of this chapter identified some of these. Keen interest must focus on
where the next waves will be.

What growth strategies can international retailers employ?

Helfferich et al. (1997) brought together a wide variety of analyses of international
retailing and suggested some terminology (Table 5.5) that can be used to distinguish
types of international retailer. Different authors have used terms in various ways.
Of course, firms do not always fit neatly into the classification but the broad dis-
tinctions in Table 5.5 help to identify the strategic decisions that need to be made.
Global strategies, focusing on exploiting similar market niches across the world
and developing and benefiting from economies of scale, can be described as dia-
metrically opposite to the multinational strategies of operating diverse, relatively
independent units. Transnational strategies seek the advantages of both. Appro-
priate strategy for any particular retailer must involve processes of fitting both to
markets and to organizational capabilities, and may well involve a mixture of the
elements described in this table.

Table 5.5 Five parameters of international retailing and four kinds of international retailer

International Global Transnational Multinational

Geographic 1 continent 2 or more 1 or more 1 or more

scope continents continents continents
Cultural 1 cultural 2 or more cultural 2 or more 2 or more
spread zone zones cultural cultural
zones zones
Cultural Ethnocentric Mixed Geocentric Polycentric
orientation
Marketing Expansion of Minimal adaptation, Medium Major
home homogeneous adaptation, adaptation or
format or markets heterogeneous diverse formats,
international markets heterogeneous
alliances markets
Management Domestic Centralized Integrated Independent
HQ control network units

Source: Helfferich et al. (1997)

110 Retail Strategy

Mode of entry
Retailers can choose various strategies for entering new countries. Broadly they
can be seen as less to more risky:

supply of goods
concession in others’ retail outlets
franchising (from strong to weak control agreements)
minor share acquisition of existing operation (and probably exchange of know-how)
majority or full share acquisition of existing operation
establishment of new venture/organic expansion (with a significant partner)
establishment of new venture/organic expansion (without a significant partner).

Marks & Spencer, who became one of the most widely spread and widely
known major retailers before retreating from many of its international operations
in 2001/2 because of troubles in the domestic market, began international opera-
tions almost inadvertently, through supplying goods to retailers in other markets.
Loose franchise agreements were followed by more formal ones, for instance in
Korea. Existing well established retailers – Brooks Bros and a supermarket chain –
were acquired in the USA. A joint venture with Cortefiel to establish new stores
in Spain was followed by the company taking full control from its partner, and
eventually full control or organic ventures were made to develop stores in France
and Germany. Marks & Spencer’s international operations are now re-focused on
franchising.
The advantages and disadvantages of each form of expansion are partly depend-
ent on the environment: markets that are more distant culturally and geograph-
ically are often seen as best served by local retail partners for example. However,
difficulties with partners, and difficulties in adapting to new environments are
general issues, and we will return to these below.
It is notable that franchising accounts for a high proportion of international stores
generally, and particularly in the fashion and clothing trades where product and
format are more likely to be branded (whether strongly or weakly) so that franchises
can be built on supply of goods and use of brand logos, etc.
Boots from the UK has recently taken the reverse of Marks & Spencer’s route,
with high risk ventures gradually replaced by a lower risk form of expansion.
Early acquisitions in Canada and France were eventually sold. A more recent
phase of internationalization began in 1997 with operations in the neighbouring
Netherlands. ‘Leapfrog’ took the company to Thailand in the same year, where they
could see both a good market opportunity in a rapidly growing class of consumers
with money and interest in strong brands, combined with few restrictions on for-
eign investment and store opening. In a fully Boots owned enterprise, they rapidly
opened stores, at first very similar indeed to British stores, even to using store
fittings shipped from the UK. Products of course had to be adapted and labelled
to comply with local taste and local regulation. Many were Boots branded. The
company opened stores very rapidly to reach a network of almost 100. The process
Retail internationalization: how to grow 111

of gaining approval for new products or imported products was not easy. Recogni-
tion of the Boots brand, though it grew rapidly, was of course nothing like as high
as the almost universal recognition and trust in the home market. In the UK the
Boots brand is mass market, not a luxury one. In Thailand, it was perceived as a
luxury, expensive brand (even though strenuous efforts were made to reduce costs
and prices). The interview in Part III (Chapter 16) comes from this phase of rapid
expansion in 2000.
Boots has now retreated from this high cost, high risk strategy of trying to
establish its brand in a new market and develop its own stores. It has sold its
interests in The Netherlands, and is reducing the number of stores in Thailand and
instead establishing concessions within grocery stores opened by Tops (Ahold).
Boots entered Japan in a partnership with Mitsubishi, but managed to open only
two stores. It is now entering other Asian markets through concessions in dis-
count drug stores owned by Watsons (Hutchison). The investment of time, people
and resources for sales achieved will be much less; the potential return in terms
of size of the business in each market is also likely to be less than that of the
earlier vision.

Partners
The textbooks tell us that partners are more or less necessary in entering more or
less unfamiliar markets. Partners provide know-how about consumers or ways of
doing business, and key assets, whether stores, people, brands or other things.
In some cases, partners may be essential because of regulation of foreign owner-
ship. In others – and some particularly uncomfortable situations – partnerships
have resulted from the negotiation of a partial takeover. Retailers should take great
care in selecting partners and obtaining agreements with them. There have been
some very difficult experiences in the past. Negotiating and maintaining the rela-
tionships can be time consuming for senior managers. There are issues of control
and of communication. Problems also relate to the key question of adaptation
(see below).
Retailers tend to move to acquire control of joint ventures when they can, or
as they grow in experience. Early international efforts with shared control are
followed by those with greater or full control sought from the beginning. Gen-
erally speaking, these moves may be accounted for first by growing experience
and confidence and secondly by the intrinsic difficulties of partnerships. Conflicts
are generated by the partners having incompatible goals, different views of the
decision-making process, and different perceptions of the local market. Problems
may simply arise because of a slow or complex decision-making process, involving
local and central organizations. Some of the difficulties experienced by US video
rental chain Blockbuster in Japan for example, are attributable to its failure to obtain
good sites, because site acquisition decisions were made, slowly, in Australia, not
Japan. In addition, local management’s perceptions of best product mix and of
112 Retail Strategy

most appropriate locations were different from the headquarters’ view. Eventually
the US company withdrew from the venture.
Local partners can have very different views of what is appropriate in the market.
Such views may be precisely what the market entrant wanted to acquire, but if they
lead to modifications of key brand attributes, or to the firm’s normal or expected
ways of working, problems ensue. There are no prescriptions: successful firms are
those who have the skills to adapt sufficiently, to learn constantly, and to balance the
exploitation of what has made the firm successful at home, with what is required
for success in a new environment. The balancing is particularly difficult for general
merchandise retailers, without strong product brands of their own.

Acquisition
The acquisition route to expansion is becoming more common in grocery and gen-
eral merchandise retailing especially. In mature, highly regulated markets, the new
store building route to expansion is difficult. It also requires patience and deep
pockets, as it may take a long time to build sufficient scale for economic operation.
In northern and western Europe for example, acquisition is seen as virtually the
only route for Wal-Mart to expand significantly, as indeed it is for electrical retailers
such as Dixons or Mediamarkt, or a do-it-yourself retailer such as Home Depot.
Acquisition of existing retailers provides a base for further expansion quickly in
eastern Europe, as Tesco for example has shown in Poland. Acquisitions may be
seen in strategic terms as providing a base of know-how and a foothold, or in terms
of providing major assets in the form of stores, brands or networks.
For some retailers, acquisition is the preferred mode of expansion and is sympto-
matic of the ‘multi-national’ form of organization and approach to markets. Ahold
notably has sought to acquire well-established and successful retailers, such as
ICA in Sweden, Giant Food and Stop & Shop in America, and to operate them
as largely separate enterprises. Networking behind the scenes means they seek to
share best practice from one organization to another. Contrast this approach with
that of say, Wal-Mart, re-branding stores and integrating the new organizations
into centralized systems.
In Part III (Chapter 18), Roland Vaxelaire provides a view from a company
acquired by Carrefour. Chapter 6 discusses the financial aspects with some salutary
warnings about the difficulties of achieving real value from corporate acquisitions.
Finding suitable, available targets is often difficult. The most obvious examples
are recent takeovers in Germany. ITM, with a very large market share in its home
France, and determined to enter Germany has bought Spar but faces considerable
difficulties in raising performance levels in a very mixed portfolio of stores. Simil-
arly Wal-Mart could find few opportunities to acquire large, well-positioned stores.
Kingfisher, seeking to enter, has acquired part only of Hornbach. Consolidation in
the USA has provided some better opportunities. Sainsbury’s and Ahold, like the
domestic grocers, have expanded by acquiring regional chains.
Retail internationalization: how to grow 113

Despite the difficulties, companies continue to seek acquisitions. If this is the

route to international growth that is available, they must take it, if growth is what
they seek. There is an analysis that suggests that the end game of current develop-
ments among the big retailers is a situation with a handful of dominant players, and
the rest swallowed, or disappeared or pushed into niche strategies in smaller mar-
kets. This analysis sees scale as the key to dominance. Strong domestic performance
gives the ability to buy at low prices, attract the best staff and acquire the best sites.
Increased cash flow enables acquisitions. The transfer of best practice across the
extended organization strengthens it. Increased scale again gives greater bargain-
ing strength, especially in product supply. Lower prices and improved performance
in turn give greater cash flow and further increases in acquisition ability and so
on. One particular feature of this strategy is the ability that increased international
scale brings to reduce domestic prices, and further dominate local competitors.
There is evidence that this cycle is working, but we must also bear in mind that no
retailer is yet anything approaching ‘global’. Countervailing problems of adapta-
tion, control and communication also mean that it is not clear that such strategies
will bring success in the short or even medium term.

Adaptation
Some of the debate about whether global strategies with minimal adaptation of
formula are more successful than multinational ones with format and product
adapted to new markets, is rather pointless. In fact every international retailer
adapts to some degree – even McDonald’s adapts its menus without adapting the
essence of its brand (consistency, speed of service, appeal to young people, etc). In
considering adaptation we must focus on what needs adapting, and what essential
basis of success, including product, supply chain skill and store management skill,
must be transferred or replicated. A store may have totally different products from
those sold in the home market, yet the overall offer, the format including mix,
price, store environment, may have similar brand qualities and similar appeal to
the consumer, as in the home market. B&Q’s international director, Steve Gilman,
makes some interesting comments, as does Metro CEO, Dr Hans-Joachim Körber
regarding this factor in Part III (Chapters 13 and 14).
Some adaptations are forced on international retailers. Building and plan-
ning regulations may mean particular restrictions on the locations where firms
may operate and the size and style of store. Belgium’s ‘Padlock Law’ is just an
extreme example of restriction, meaning that stores over certain sizes cannot be
built. Some retail trades, especially pharmacies and alcohol are licensed and re-
stricted in some countries. In France for example, chain pharmacies are forbidden:
it is therefore highly unattractive for Boots, with its format including pharmacies.
Food and health regulations, tariffs and other import restraints affect the products
retailers may stock. Restrictions on pricing and promotions may require adaptation
of selling practices, rather than product itself.
114 Retail Strategy

Case Study: So you think selling is the same the world over?
Many retailers who were operating at national level are discovering the complexities
of rolling out successful national strategies onto the European stage.
An example helps demonstrate the extent of the problem. In the field of commer-
cial communications (advertising, sponsorship, direct marketing, sales promotions
and PR services) whether it be in traditional retailing or in e-commerce, the import-
ance of promotional offers, from discounts through to loyalty premiums is well
recognized by commerce. Yet how many major UK or French retailers are aware
that their loyalty card schemes would be considered illegal in Germany or that a
50 per cent offer would not be allowed in a number of European countries or that
joint offers (i.e. premium offers) are also banned in a number of key European mar-
kets? . . . You may be interested to know that the right to make a discount (for certain
products and services they are strictly regulated and sometimes banned), the manner
a discount is displayed, the type of discount offered (e.g. 10 per cent off, or three
for the price of two), the period of the year when it can be made and announced (in
some countries you cannot announce discounts immediately prior to the seasonal
sale periods) are all already regulated by national statute . . .
To keep within the law in each and every member state you decide to develop your
business into will require a new marketing strategy. The associated adjustment costs
can be enormous and moreover it is worth remembering that you will be testing
out new strategies whereas the incumbents will have worked with their regulatory
environment for many years making your successful entry into their market all the
more difficult.
Extracted from an article by Bergevin (2000)

Store size, and consequently product offer, often requires adaptation. American
category killer firms entering European or Japanese markets have certainly found
this. Office Depot in Japan for instance, whose stores in the USA are typically
2,000 square metres, started developing stores of over 2,000 square metres in Japan
but soon moved to experiment with stores of just 500 square metres. Another US
category killer firm entering Japan in 1995 was Sports Authority, in partnership with
Jusco. Sports Authority initially opened large stores of 4,000 or 5,000 square metres
but high property and staff costs led to losses. The retailer reduced store sizes,
while keeping the same number of products on offer. Sports Authority also clearly
adapted its product mix for the Japanese market and introduced more seasonal
change than at home.
Other adaptations are more matters of strategic choice, related to perceptions
of opportunity, competition, and consumer taste and expectation. A dramatic
adaptation is that of Tesco. At home, Tesco success was built on rapid growth
of superstores, focused on grocery products, though with strong recent additions
of categories such as health and beauty products. The company also built a capacity
Retail internationalization: how to grow 115

to segment its formats, opening much smaller Metro stores in high streets, Tesco
Express convenience stores attached to petrol stations, and carefully tailoring larger
and smaller superstore offers. Tesco had in the past developed non-food household
goods and clothing departments but abandoned these many years ago. However,
Tesco international ventures are focused on developing hypermarkets, with both
non-food and grocery departments. It is highly unusual in this approach – and
indeed even more notable for the success, which runs counter to the conventional
textbook wisdom. Part III gives some views from Dr Hans-Joachim Körber, CEO
of German retailer Metro. Perhaps the lesson is that what is being transferred and
exploited internationally is know-how, skill and systems – not format.

Learning
Successful international businesses learn from the process of extending their oper-
ations. The process is not necessarily one-way, from home market to new markets.
Ahold is a good example of a company that has developed the ability to share ideas
and best practice internationally. Although its various chains are run separately and
kept quite distinct, it organizes what it calls ‘networking’ to identify expertise and
share knowledge via a series of mechanisms such as virtual knowledge centres,
directories of people’s experience and benchmarking databases. Tesco is another
firm that has begun to import ideas and systems from new markets to the home
market (see Table 5.6).
Table 5.6 Tesco: transfers of management know-how

Source of transfer to other regions

Retail operations
Basic operation systems UK
Hypermarket operation Central Europe, Thailand
Seasonal sales promotion Central Europe
Fresh food operation Korea
In-store bakery operation Central Europe
Non-food operation Thailand
Opening 24 hours UK
Loyalty card operation UK
E-commerce UK
Buying
Private brand strategy UK
Development of simple Thailand
private brand
Retail supply chain
Basic supply chain management UK
Central replenishment system UK
Composite distribution centre UK

Source: Oxford Institute of Retail Management

116 Retail Strategy

Culture
Adaptation involves far more than appreciating different consumer tastes. Business
practices and institutions vary across countries. The structure of supply and of
supplier relationships can be very different from that in home markets. Perhaps
the most extreme example is the difference between Japan and the UK. The
multi-layered complexity of supply in Japan, the rigidities in the system and the
difficulties of making changes, provide a different and unaccommodating environ-
ment for foreign retailers seeking to introduce working practices from elsewhere.
Staff recruitment, training and management are further obvious issues. Retailers
are no different from other firms in that they must learn or acquire the skills related
to working across cultural boundaries in order to become international. What
is different about today’s retailers is their lack of experience. The cadre of man-
agers in retailing who have significant experience of international development is
currently small.

Conclusion and summary

Few retailers are yet truly international, but many see their future as lying beyond
their domestic markets. Cautious and sometimes ill-judged experiments are being
replaced with expansion strategies but few are finding easy returns. Niche retailers
and luxury goods retailers are those who can be seen in many cities around the
world. The really big firms however – those who have entered the Fortune 500 list
over the last decade – are mass-market operators. Profit in mass-market retailing
depends heavily on scale economies in stores or store networks, and sales growth
on the steady expansion of physical space. These are the fundamentals that just a
few retail companies are beginning to achieve in unfamiliar markets.
No easy recipes exist for international success. Part III gives some views and
interesting food for thought from those responsible for strategy. This chapter has
attempted to provide some context, rather than sets of checklists. What does
sustained international success require?
First, we consider skill in location analysis and site acquisition. First movers
do not always win but those early movers who focus on obtaining the right sites
in the right place will build good positions in new markets. In order to estab-
lish a significant presence and a viable network rapidly, this skill is even more
important in entering new markets than it is in building on mature positions
at home.
Next, we consider the importance of skill in brand building. Establishing and
building a brand is crucial in entering a new market where the retailer is probably
unknown – even if selling recognizable products. The competitive landscape may
be quite different from the domestic market and require new work on targeting and
positioning. Retailers will have to develop explicit brand tactics for each market.
There are additional public relations skills in dealing with possible xenophobic
reactions to foreign firms. Beyond this, the PR and negotiation skills of building and
Retail internationalization: how to grow 117

keeping relationships with local and national governments must not be ignored.
There are some distinct contrasts among big retailers in this area.
Skill in finding and managing the alliances or partnerships that ease the entry
into remote markets is a further important factor. There are plenty of examples
of unhappy relationships which have not delivered the hoped for success but as
the opportunities for retailers become more remote from home, they become more
necessary.
Success requires focus. Many international ventures are rather tangential to the
main concerns of management teams. A franchising or international department
exists, but it does not have high corporate visibility. This can be something of a
chicken and egg situation, as the small size of many international operations deters
the investment of management time. It is clear however that top management must
drive the activities of firms that are seeing rapid international growth and success.

Review questions
1 What reasons might a European retailer have for seeking to develop
international activities?
2 What growth strategies can international retailers use?
3 Who are the most international retailers?

Discussion questions
1 In what ways might retailers in different sectors have to adapt themselves
to new international markets?
2 Should companies proceed internationally by first developing in new
markets close to the home country?
3 How can retailers avoid repeating the international failures we have seen in
the last two decades?

References
Alexander, N. (1997) International Retailing. Blackwell, Oxford.
Bergevin, J. (2000) ‘Commercial Communications, eCommerce and the Single Market for
Retailing’. European Retail Digest, 25, March.
Burt, S. (2002) ‘International Retailing’. Chapter 14 in P. McGoldrick (ed.), Retail Marketing.
McGraw-Hill, Maidenhead.
Davies, R. and Yahagi, T. (2000) Retail Investment in Asia/Pacific: Local Responses and Public
Policy Issues. Oxford Institute of Retail Management, Oxford.
Dawson, J. (1993) ‘The internationalization of retailing’. In Bromley, R.D.F. and Thomas, C.J.
(eds) Retail Change: Contemporary Issues. UCL Press, London.
118 Retail Strategy

Fernie, J. and Arnold, S.J. (2002) ‘Wal-Mart in Europe: prospects for Germany, the UK and
France’. International Journal of Retail and Distribution Management, 30, pp. 92–102.
Helfferich E., Hinfelaar M. and Kasper H. (1997) ‘Towards a clear terminology on inter-
national retailing’. International Review of Retail, Distribution and Consumer Research, 7,
pp. 287–307.
Jones Lang Wootton and OXIRM (1997) ‘Shopping for new markets: retailers’ expansion
across Europe’s borders’. JLW, London.
Lupton, R.A. (2002) ‘Retailing in Post-socialist Central Europe’. European Retail Digest, 33,
March.
Retail Intelligence (1999) ‘Retail sans frontieres: the internationalisation of European
retailing’. Retail Intelligence, London.
Vida, I. (2000) ‘Determinants of International Retail Involvement: The Case of Large U.S.
Retail Chains’. Journal of International Marketing, 8:4, p. 37.
Yahagi, T. (2003 forthcoming) ‘The internationalisation process of Tesco in Asia’. Proceedings
of Asia Pacific Retail Conference, Beijing, Nov. 2002.
Chapter 6

Prospects for
e-commerce
Jonathan Reynolds

Whilst disillusionment with the so-called ‘new economy’ would appear to have
reduced the attractiveness of business-to-consumer (B2C) e-commerce as a viable
source of revenue growth for retailers, writing off electronic distribution channels
may be premature. Retailing appears to be polarizing between those companies willing
to embrace e-commerce for longer-term benefit and those for whom e-commerce is
not seen as a desirable route to growth. Similar polarizing effects appear to charac-
terize consumer behaviour. The indirect, informational effect of the Internet on the
consumer buying process and the perception of retail brands are further unantici-
pated but significant considerations for those contemplating multi-channel futures.
The practical logistical and fulfilment challenges of e-commerce provide further bar-
riers. Nevertheless, this chapter seeks to show that the integrative challenges of
multi-channel retailing are capable of being resolved in more than one way, through
an examination of retail choices and constraints.

The rise and fall of the new economy

The student of retailing might well question the merits, if not the good intentions,
of many of the early academic contributions to the debate on the transformative
nature of e-commerce:
There is a euphoria these days about the possibilities offered by
eCommerce. Consumers see low prices and easy shopping;
investors imagine cashing in on Internet IPOs; and start-ups hope
that their business model will be the one that transforms their
industry.
Sinha, 2000
120 Retail Strategy

Two years ago, this author warned: ‘Internet businesses remain at the whim of
fashion, sentiment and confidence on the part of their investors.’
Substantial academic evidence of the ways in which business-to-consumer
e-commerce operations might affect the established retail order started to emerge
(Bakos, 2001; Brynjolfsson and Smith, 2000; Mayer et al., 2001; Sinha, 2000). How-
ever, at the same time, the ‘whim of fashion, sentiment and confidence’ (and poor
financial management) led to many of those same businesses, in which so much
hope for the new economy had been invested, cutting back the scope of their opera-
tions and finally closing altogether. Indeed, the only profitable ventures for some
former Internet high flyers proved to be publishing post mortems of their experience
(Kaplan, 2002; Malmsten et al., 2002).
One immediate consequence was that many retailers de-emphasized the per-
ceived threat of e-commerce on their strategic agendas. Table 6.1 shows, for
example, how home shopping fell to twelfth place in 2002 amongst European food
retail CEOs from being amongst the top four agenda items in 2001 (and indeed
ranked second in 2000). Business-to-business (B2B) exchanges – the next enthu-
siasm in the pipeline – fared little better. E-commerce divisions were disbanded,
or given ambitious (and largely unachievable) breakeven targets, and pilots and
experiments scaled down (IMRG, 2002a).
But have retailers been right to downplay the threat of e-commerce so signifi-
cantly? Perhaps the pendulum has swung too far and too unreasonably against
e-commerce? Certainly, in addition to the scaling down of online competition,
alternative electronic channels to market – such as digital television and mobile
commerce – have not been as successful as had been previously anticipated (Kehoe,
2000; Mayer et al., 2001). In the UK, for example, the terrestrial digital television

Table 6.1 The strategic business concerns of food retail chief executives
across Europe

Rank 2003 Issue Rank 2002

1 Customer loyalty and retention 3

2 Food safety/security 2
3 Internationalization of food retailing 1
4 Global recession and consumer demand 4
5 Formats, services, assortment 5
6 Technical standards/supply chain efficiency 7
7 The retailer as a brand 6
8 Recruitment and retention 8
9 Environment/sustainable development 9
10 Accountability n/a
11 Public image of retailing n/a
12 B2C e-commerce 12

Source: CIES, 2003

Prospects for e-commerce 121

platform ITV Digital went into administration in early 2002 and the two interactive
cable television platforms, NTL and Telewest, have pulled back from an ambitious
e-commerce strategy. Nevertheless, the online population and the value of online
transactions has been increasing, even if more slowly than many had allowed for.
Further, we can argue that, whilst the direct impact of e-commerce has been
relatively small in transactional terms, the informational leverage that Internet
accessibility provides for increasingly large proportions of the population in most
developed countries serves to offer a different kind of challenge: a more informed
consumer, able and willing to challenge the status quo of retail brands. Finally, we
can see that there are some significant choices and constraints facing existing retail-
ers determined to pursue e-commerce goals: most particularly around resources
and degree of integration.

The state of the art: US versus Europe

Electronic commerce is a difficult term to pin down. Statisticians have developed
relatively narrow definitions of what such activity entails. In the US, the US Bureau
of the Census, in thinking about ways in which the electronic economy can be
measured, suggests that:

‘Electronic commerce is the value of goods and services sold over

computer-mediated networks’, whilst electronic business is ‘any
process that a business organisation conducts over
computer-mediated networks’.
Mesenbourg, 2001

The UK Office of National Statistics preferred a more precise definition in its

thinking on this subject:

e-commerce occurs where the decision between seller and buyer

to transfer ownership of goods or services has occurred over an
electronic network. In other words, e-commerce occurred where
the order was placed electronically and payment or delivery can
be by other mechanisms.
Williams, 2001

Focusing on transactions of priced goods has been the natural focus of most statisti-
cal agencies. However, these definitions naturally ignore the many indirect effects
of the Internet on retail sales through pre-purchase marketing and brand-building
and post-purchase customer service, potentially leading to increased customer
satisfaction and patronage, which may be expressed through electronic or – more
likely – conventional commerce.
Internet penetration is still very much a phenomenon of the developed econo-
mies. Even across Europe, a ‘patchwork quilt’ of connectivity reduces the
122 Retail Strategy

350
325
293
300
270
250
250

200
200

150

100
75

50

0
Total France Germany The Netherlands/ Spain UK
Belgium

Figure 6.1 Growth in selected European country e-commerce market volumes, summer 2002
Note: Autumn 2001 = 100
Source: http://www.gfk-webgauge.com

economies of scale in markets potentially available to retailers. Further, European

e-commerce appears to be taking a more varied technical journey from that in the
US, with broadband, interactive TV and mobile platforms being much more evident
in consumers’ adoption patterns and some European consumers (notably from the
UK) having a higher propensity to buy online than a simplistic innovation-adoption
curve would suggest.
The media monitoring group GfK reported that whilst e-commerce sales volume
was up overall by 170 per cent between autumn 2001 and spring 2002 across six
European countries (rising from d4.2bn to d11.5bn), there were marked inter-
country differences, with Germany and the UK experiencing a trebling of sales
volumes, and France experiencing a decline (Figure 6.1).
UK sales have been particularly buoyant. The UK Interactive Media in Retail
Group (IMRG) has been tracking UK online sales patterns for over three years
(IMRG, 2002b), albeit based on returns from only 63 contributing businesses. In
July 2002 they reported online sales growth at between four and five times 2001
levels, with sales volumes in November 2002 reaching nearly £1 billion: ‘online
retailing is still growing exponentially’, they reported, in particular growing some
‘nineteen times faster’ than UK high street sales over the same period (Figure 6.2).
Figure 6.3 shows that according to the US Census Bureau, e-commerce sales
in the US have grown from 0.7 to 1.3 per cent of all US retail sales between the
fourth quarter of 1999 and the third quarter of 2002. Sales exceeded $11 billion
for the first time in the fourth quarter of 2001 (US Census Bureau, 2002). More
importantly, as in the UK and parts of Europe, online sales have been growing at
Prospects for e-commerce 123

1,400

1,200

1,000

800

600

400

200

0
Apr May Jun Jul Au g Sept Oct Nov Dec Jan Feb Mar Apr
2000–01 100 133 129 141 134 143 172 215 230 252 224 274 262
2001–02 262 277 273 291 336 357 422 509 526 435 416 459 485
2002–03 485 531 563 670 690 742 902 993 942 993 839 919 1,152

Figure 6.2 Estimated UK online sales, April 2000–April 2003

Source: IMRG, 2002–3

$13,770
14,000
1.6% retail sales
$11,921
12,000
$10,788
$10,465
$9,761
10,000 0.7% retail sales $9,248 $9,470
$US millions

$8,009 $7,904 $7,894

8,000 $7,079
$6,250
$5,722
6,000 $5,393

4,000

2,000

0
99

00

00

00

00

01

01

01

01

02

02

02

02

03
4/

1/

2/

3/

4/

1/

2/

3/

4/

1/

2/

3/

4/

1/
Q

Figure 6.3 Estimated quarterly e-commerce sales, USA

Source: US Census Bureau, 2002

a significantly faster rate than retail sales as a whole. Between the second quarter
of 2001 and the second quarter of 2002, online sales grew by 24.2 per cent com-
pared to a 2.5 per cent growth in total retail sales. This progress in sales growth
(which is of course from a low base) has served to confound many commentators
who saw the complete demise of e-commerce in the downfall of many dot-com
businesses. Furthermore, many retailers in the US reported that their e-commerce
124 Retail Strategy

operations were ‘already profitable by 2001’ (shop.org, 2002). Whilst operating

margins in the US online retail market averaged a net loss of 6 per cent in 2001,
this was an improvement on an average net loss of 15 per cent in 2000, with
fully 56 per cent of respondents reporting profitable online operations (shop.org,
2002).
How can this be reconciled with the anecdotal reports of retail businesses,
especially in Europe, streamlining new channel operations or even withdraw-
ing altogether from e-commerce? One explanation may be that it is not especially
appropriate to learn from early US experience on this occasion:

The very idea of following in the footsteps of the United States

was probably inaccurate anyway: for a variety of reasons,
e-commerce in Europe was always likely to follow a different
course. For one thing, the technological and cultural
infrastructures are much more heterogeneous in Europe than they
are in the United States. Moreover, European players have had the
benefit of hindsight from seeing what has succeeded and failed in
the United States. The later entry of European companies into
e-commerce also gives them the advantage of applying technology
that has advanced considerably over the past two years.
Cornet et al., 2000

A classic example of this can be seen in the growth of mobile telephony and in
the attempts of telecommunications companies and virtual network operators in
Europe to develop interactive applications. Not all these attempts have been suc-
cessful by any means, but in the examples of SMS (short messaging services) and
music and mobile phone wallpaper downloads, we can see interesting and poten-
tially large markets in Europe and to a lesser extent in Asia, that are simply not
yet apparent in the US (Figure 6.4). What is not clear is whether such custom-
ers (typically younger segments) are willing to pay the price premiums that more
sophisticated so-called ‘third generation’ transactional services may have to com-
mand for telecommunications companies to recoup the expenditure incurred in
their acquisition of 3G licenses and of other businesses; nor is it clear to what extent
traditional ‘bricks and mortar’ retail businesses will play a role in this particular
electronic channel.
A further explanation of the differences between the US and Europe may lie in
some of the clear strategic choices made especially by UK retailers. Recent research
undertaken for KPMG shows that retail e-business in the UK is by no means uni-
form in its penetration and in fact has become quite polarized (KPMG Consulting,
2001). In what they call a ‘quiet revolution’, the researchers make a clear distinc-
tion between types of business that can be regarded as ‘e-pioneers’, ‘e-followers’
and ‘e-laggards’ based upon the extent to which they engage in different types
of e-commerce activity and comment that, whilst e-pioneers are to be found in
all industry sectors, it is retailing – remarkably, given the industry’s historical
Prospects for e-commerce 125

18%

13%

11%
Ringtones and logos
10%
Updates

8% 8% 8% News
7% 7% Voting

5%

3%
2% 2% 2%
1%
0%

Total USA Europe Asia

Figure 6.4 The extent of mobile phone transactions, 2002

Note: Base = Internet Phone Users. Data shows proportion of people in a panel-based survey saying that they
have undertaken transactions
Source: AT Kearney, 2002/Mobinet #4

50
UK retail
45 UK business

40

35

30
Per cent

25

20

15

10

0
Pioneers Followers Laggards

Figure 6.5 Business involvement in e-commerce: UK retail versus UK business as a whole

Source: KPMG Consulting, 2001

attitudes to the application of new information technology (CEC, 1991) – which is

characterized by an ‘all-or-nothing’ approach to e-business (Figure 6.5).
The origins of this polarization become apparent when we examine some of
the recent penetration and conversion data from UK online retailing. Table 6.2
126 Retail Strategy

Table 6.2 Numbers of users of UK retail

sites, December 2002

Rank Website Number of users

1 Amazon 6, 718, 000

2 eBay 5, 066, 000
3 Argos 2, 562, 374
4 Tesco 2, 186, 779
5 Kelkoo 1, 894, 000
6 Comet 1, 458, 945
7 John Lewis 1, 237, 070
8 Currys 1, 126, 089
9 Dixons 904, 907
10 Dealtime 847, 648

Source: Nielsen NetRatings, 2003

provides data on the performance of UK retail websites during the critical

Christmas 2002 period. More than 12 million people in the UK visited an Internet
retailing site in December 2002 – 60 per cent of the country’s online popula-
tion and an increase of 3.8 million over December 2001. This information, from
the data consultancy Nielsen NetRatings service, makes it clear that – apart from
amazon.com and amazon.co.uk – the top 10 is made up almost exclusively of
existing UK retail businesses. Apart from Amazon, the exceptions are new kinds
of business model peculiar to the Internet: the eBay C2C auction site and two
price comparison engines – the French-owned kelkoo.com and Dealtime. Fur-
ther, when we examine the effectiveness of converting ‘reach’ into actual sales,
Nielsen reports ‘the UK’s conversion rate from browsers to buyers is also the
highest in Europe so it’s a safe bet that actual online spend has risen over the
year’. (In the US, 88 per cent of all Internet users who have ever shopped
online did so again for gifts in the holiday 2002 period according to analysts
retailforward.com. Three-quarters of this same group made a purchase.) One
conclusion we might draw from the presence of so many established retailers
is the effectiveness of brand recognition and established retail operational excel-
lence working in combination. The small number of established retailers who
have chosen to make the investment can indeed be successful pioneers in this
marketspace.

Three key issues in electronic commerce

If growth in e-commerce sales and retailer involvement has so far been slower than
many commentators expected, a question remains over the extent of its future
growth. Many agree that a small number of key driving forces affect the pace
Prospects for e-commerce 127

Table 6.3 Driving forces affecting the development of B2C e-commerce

Area Selected factors Elaboration

Consumer Ease of access Fall in price, extent of availability of technical means

acceptance and reliability of access to electronic channels
Time poverty Extent of perceived time poverty amongst target con-
sumer segments and consequent attractiveness of
direct channels to market
Fashionability Extent to which electronic channels to market become
a ‘fashion accessory’ amongst consumers
Technological Convergence/ Speed of hardware and software standardization
progress standardization
Interactivity Extent to which software developments are able
to increasingly mimic or enhance conventional retail
experiences
Capacity Speed with which improvements in bandwidth and
compression technology will enhance the speed and
reliability of the online experience
Competition Non-traditional Ability of new entrants to stimulate consumer demand
competition and prompt a competitive response by conventional
retailers
Global Extent to which conventional retail internationaliza-
competition tion will further complicate choices for conventional
retailers seeking growth
Internal Extent to which e-commerce investment wins out
competition internally in competition with other ways of allocating
a company’s resources to achieve growth
Legislative and Free trade Extent to which harmonization between trade
institutional regions exists in respect of electronic commerce
transactions
Infrastructure Speed of provision of competitive infrastructure,
through telecoms deregulation, strategic alliances and
partnerships, etc.
Consumer Existence of uncomplicated, but trusted and effective
protection pan-regional consumer protection legislation.

Source: Reynolds, 1999

of change in the adoption of e-commerce. Table 6.3 provides one such summary.
However, as increasing evidence emerges of actual company experience as well as
of revealed consumer behaviour, new insights into some features affecting the scale
and character of future adoption of e-commerce are emerging that have challenged
the early rhetoric. We focus on three of these below.
128 Retail Strategy

Consumer acceptance: buying behaviour

One of the key reasons for the high degree of retailer polarization lies in the
emerging characteristics of consumer behaviour online. Despite the apparently
impressive scale of e-commerce sales online reported above, the most recent com-
prehensive US research shows that shopping online is simply one small part of
Internet user behaviour. Even experienced users spend less than 5 per cent of their
time online, on average, engaging in shopping activity (UCLA, 2001). That shop-
ping is not the ‘killer application’ that many had anticipated must work to reduce
the size of the strategic opportunity – or threat – once perceived by many retailers.
It may simply be not that big a deal and, in terms of the factors in Table 6.3, greater
business benefits may come from investment in other, more conventional growth
opportunities.
Nevertheless, these same experienced users spend some 13 per cent of their
online time just browsing – an activity second only to sending and reading incom-
ing email (23 per cent). An element of this browsing behaviour may be linked to
shopping. A US National Retail Federation study based on some 5,000 interviews
in September 2000 found that 34 per cent of store shoppers surveyed looked for or
purchased something in-store that they had seen on the retailer’s website. Equally,
some 27 per cent of store shoppers looked for or bought something online that they
had seen in the store (Shop.org, 2000).
Importantly, therefore, there is a clear role in the consumer buying process for
the electronic channel and, whilst this might not be strictly e-commerce accord-
ing to the definitions of statisticians, the emerging evidence is that interaction
between physical and electronic marketing channels is becoming a more signifi-
cant issue for an increasingly large minority of the online population in making
both store and product choices. This interaction can take two forms. The rhetoric
of the early days of e-commerce proposed that the greatest threat to established
businesses came from the so-called showroom effect. It was suggested that the bricks
and mortar branches of conventional retailers would become merely showrooms
in which consumers would browse, freeload on the service and advice offered by
store staff, before returning to their computers and ordering the identical items
more cheaply online. As a result, a web presence for the established retailer would
be important in order to be in a position to capture some of these sales that would
otherwise be lost to online competitors. Contemporary evidence from the US
(Figure 6.6) in practice shows that this is still something of a minority pursuit
for consumers.
In practice, the use of the Internet to browse at the ‘pre-purchase’ stage prior to
making a physical purchase in store seems to be an increasingly common form of
consumer behaviour, with nearly a quarter of US online consumers reporting that
they would ‘often’ behave in this way. (We have no comparable evidence from non-
US markets on this form of behaviour, however.) A further 42 per cent consulted
web pages ‘sometimes’ before making a physical purchase (UCLA, 2001). Such
‘pre-purchasing’ behaviour allows consumers to establish product availability,
Prospects for e-commerce 129

60
2000
49.7 2001
50 47.2
46.8
43.2

40
Per cent

30

20

10 7.1
6

0
Never Sometimes Often

Figure 6.6 The ‘showroom effect’: percentage of US customers browsing in store before making
a purchase online
Source: UCLA, 2001

70
2000
59.3 2001
60

50
42.2
40
Per cent

34.8

30
24.3 23
20 16.3

10

0
Never Sometimes Often

Figure 6.7 The informed consumer: percentage of US customers consulting websites before
making a purchase in store
Source: UCLA, 2001

specifications and rudimentary price comparisons as well as equipping them for

better-informed conversations in store (Figure 6.7). The Internet has, in practice,
become just one more feature of the consumer’s market research toolkit, and we
might hypothesize that it will play a particularly important role in this regard in
130 Retail Strategy

relation to products or categories of expenditure in which consumers are highly

involved, or where price is important.

Consumer buying behaviour: the role of price

The apparent importance of price in the online consumer’s mind-set was one of
the foundation stones of early commentary on e-commerce and one that frightened
many retailers. The threat was best summed up by Business Week columnist Robert
Kuttner, writing in 1998:

The Internet is a nearly perfect market because information is

instantaneous and buyers can compare the offerings of sellers
worldwide. The result is fierce price competition, dwindling
product differentiation, and vanishing brand loyalty.
Kuttner, 1998

Since Kuttner’s observation, researchers have sought answers to many of the

questions raised by his assertion (Table 6.4). In doing so, the rhetoric of the effi-
cient market and rational economic models of price as the ultimate determinant of
consumer choice online has been challenged, perhaps fatally so.
In part, this may be a consequence of crude and perhaps costly early technologi-
cal interfaces and the very slow movement of some of the driving forces outlined
in Table 6.3. In part, it may be a consequence of the different motivations of early
adopters, which may be other than price (Degeratu et al., 2000). But it may also be a
consequence of consumer irrationality and uncertainty expressed in more general
terms and which confound purely economic notions of consumer behaviour. In
an environment of greater choice, it appears that in general terms, consumers
plump for the brands they trust (Brynjolfsson and Smith, 2000), even if identical
products cost less. The cheapest site does not always attract the most buyers. Evi-
dence shows that, in certain online categories, consumers hold even smaller brand

Table 6.4 Prospective dimensions of internet market efficiency

Dimension Research question

1. Price levels Are the prices charged on the Internet lower?

2. Price elasticity Are consumers more sensitive to small price changes on the
Internet?
3. Menu costs Do retailers adjust their prices more finely or more frequently
on the Internet?
4. Price dispersion Is there a smaller spread between the highest and lowest prices
on the Internet?

Source: Smith et al., 1999

Prospects for e-commerce 131

portfolios in their heads than in conventional shopping activity (Degeratu et al.,

2000). The most trusted site will stand a better chance of attracting return visits
and, ultimately, of becoming profitable, if it performs this role consistently and
effectively.
Of course, the mechanics of and context for price-setting, as well as attitudes
towards price amongst consumers, may not be inherently stable over the longer
term (Bailey, 1998; Reynolds, 2001). Nevertheless, Bakos (2001) argues that whilst
lower search and information costs should push markets towards a greater degree
of price discrimination, the reality is that Internet technology provides a means
for retailers to create differentiation for which price premiums can in practice be
charged. As a result it may be that:

The much heralded shift in market power from producer to the

consumer that many associate with electronic commerce may be
premature, overstated or incorrect.
Bailey, 1998

Distribution and fulfilment issues

Of course, it may be easier for established brands to be trusted, but a transition for
an established retail brand to an electronic channel is not always straightforward.
It is no accident that many of the most profitable e-tailers have managed to avoid
the pitfall of having to physically distribute goods:

top e-tailers sell services that are almost entirely virtual – an

e-ticket from Expedia, an auction platform from eBay. Once fixed
costs are covered, they’re cheap to run and a hefty share of
incremental sales drops to the bottom line.
Mullaney, 2002

We know that product-based fulfilment presents a significant obstacle to prof-

itable business (Kämäräinen et al., 2001; Department of Trade and Industry,
2001). Indeed, no other aspect of electronic commerce has been subject to more
complaint by consumers than that of fulfilment. Early e-tailers neglected the dis-
tribution aspects of their businesses, to their cost. Contemporary debate centres
on factors influencing consumers’ attitudes to fulfilment, and the identification of
an appropriate operational design to deliver sustainable competitive advantage
whilst maintaining alignment with these attitudes (Table 6.5). In the grocery retail-
ing arena for example, this has centred on the relative merits of store-based or
warehouse-based picking systems alongside delivery modes ranging from timed
or unattended home deliveries to collection points.
However, there is now a much better understanding of the implication of dif-
ferent business models for distribution costs: at least amongst retailers. Logistics
and distribution costs clearly require careful evaluation and monitoring. Tollington
132 Retail Strategy

Table 6.5 Factors that affect home delivery options

Factors related to customer behaviour

Whether customers order from many different firms If customers order several goods at a time from a single firm with a
or a few firms with larger product ranges large product range this will generate fewer trips and vehicle than
ordering in individual items from nay different companies
Customer acceptance of in-full delivery If customers are prepared to wait until their entire order is available
this will reduce the number of deliveries and vehicle trips
Customer’s order frequency High order frequencies result in more trips and vehicle requirements
Whether customers only purchase part of their Means that both car and goods vehicle trips take place
regular grocery needs by e-commerce and still visit
a shop for the rest
Whether customers need to view goods in person at Means that both car and goods vehicle trips take place
a shop (especially true of large, expensive items)
Whether customers use their time savings to make Net effect could be increase in van trips with no reduction in car trips
other trips

Factors related to company strategy/operation and customer behaviour

Whether customers demand and companies offer The shorter the lead time between order and delivery, the greater the
rapid order fulfilment number of delivery trips
Whether goods are delivered to customers’ homes Local collection points would overcome problems posed by vans in
or to local collection points which customers pick residential streets, but may increase total number of vehicle trips
their goods up from needed to get goods to customers’ homes if customers use cars to
collect their goods

Source: Department of Trade and Industry, 2001

and Wachter (2001) observe that e-tailing is a niche market that works best when
retail inventory ‘throughput’ is maximized, while, at the same time, favouring
activity-based costing, because of the substantial fixed overhead costs incurred by
retailers – by many of the major supermarket companies, for example.
But consumer perceptions of the perceived relative costs of different models of
fulfilment remain remarkably stubborn. Punakivi and Saranen (2001) estimate that
grocery goods e-commerce can be as much as 43 per cent cheaper than conventional
store visits by consumers – if only they properly accounted for the costs of using
their own car and for the value of their spare time.

Retail choices and constraints

We conclude this chapter with a discussion of the comparative experience of
Screwfix.com and Tesco.com in the UK.

Case Study: The case of Screwfix Direct

Screwfix Direct was recognized as e-tailer of the year by the UK trade magazine
Retail Week in 2002. Screwfix Direct is positioned towards the trade customer, or
Prospects for e-commerce 133

para-professional, segment of the home improvement market and offers 100 per cent
stock availability, next day, evening and weekend delivery. Its experience, as a business
acquired by retailer Kingfisher’s B&Q home improvement division, demonstrates the
subtle back office integration of an acquired company, building upon well-known con-
sumer attitudes towards the category. Screwfix Direct manages over 6,000 product
lines. In addition to producing four 280-page catalogues every year for a database
of 2.5 million customers, the business functions increasingly online, with web-based
sales accounting for 15 per cent of the £140 million total annual revenue in 2001/2,
according to press reports. Sales through the web channel are growing faster than the
business as a whole. It is a tightly-focused segment and the business has, according
to its managing director, ‘a cult following’ (David, 2002). Although Screwfix Dir-
ect has just 0.5 per cent of the UK repair, maintenance and improvement market,
it commands over 20 per cent of the RMI direct market, according to analysts.
However, the Screwfix Direct business – ordering, fulfilment and branding – is kept
separate from B&Q stores and, indeed, from the B&Q web presence, www.diy.com,
although the companies share a buying office in the Far East. A full interview with
John Allan, managing director of Screwfix Direct, can be found in Part III (Chapter 11)
of this book.

Case Study: The case of Tesco.com

In contrast, the considerably better documented and much more broadly-based
Tesco.com business (winner of the same award in 2001) infiltrates the existing store
network, maximizing capacity utilization and benefiting from the sunk costs of an
established infrastructure. The Tesco brand acts as the unifying feature of the Tesco
service irrespective of channel and the Tesco Clubcard provides the seamless informa-
tion flow from shoppers: assisting in the identification and development of detailed
customer segments, which may well be multi-channel. By definition, common buying
and merchandising functions service both physical and virtual channels. From this
established base, the brand has been extended into a series of virtual warehouses
for categories of product that are not available (and for which there is no space)
in store. For the parent business, tesco.com contributes some 3 per cent of UK
sales – £1 million per day – with turnover in 2001/2 at £356 million, that is some
77 per cent higher than the previous year. (For the record, this is approximately twice
the penetration that e-commerce sales in the UK have at present.) Analysts estimate
that the existing store network has the capacity to allow online sales to grow to
between £1.4–1.5 billion before more radical solutions are required. Tesco.com has
had a first-mover advantage within the grocery marketspace. It remains to be seen
how its online market share (some 45 per cent of the UK online grocery market) will
withstand the growth of competitive offers from Sainsbury’s, Asda and Waitrose.
134 Retail Strategy

Summary
Whilst there may be many strides to be made in integrating the content, style and
values of informational retail websites with their respective store brand images
and to matching transactional services to the changing nature of consumer demand
and expectations, the longer term challenge for the most dedicated retailer is to
achieve some degree of overall marketing and distribution channel integration. If
the lesson of this chapter is the not unreasonable assumption that e-commerce sales
will be only a small proportion of the sales of most retail businesses that engage
in the practice, and a higher proportion in only a few – at least in the medium
term future – then cost-effective integration of distribution channels becomes even
more important, even for those businesses with the deepest pockets. Of course,
channel integration has been a major theme in e-commerce amongst retailers for
some time:

The notion that the Web is going to replace bricks and mortar
belongs in a fantasy novel. What the Web may bring to retail is a
more effective way to integrate distribution and marketing.
Underhill, 2000

Whilst significant obstacles still exist to the multi-channel aspirations of store-

based retailers, it would appear that selected established retailing interests both
in the UK and US are winning the battle for integrated distribution channels:
either through selective acquisition (as in the case of Kingfisher/Screwfix or John
Lewis/Waitrose) or through the extension of their existing operational excellence
(as in the case of Tesco/Tesco.com). In both countries, the recognition that retail
brands already command has enabled those ‘e-pioneering’ established retail busi-
nesses to capture the high ground within the online consumer’s ‘consideration set’
(Degeratu et al., 2000).

Review questions
1 What are the key driving forces determining the speed of adoption of B2C
electronic commerce?
2 Why might the indirect effects of electronic commerce be more significant to
retailing than the direct effects?
3 What are the comparative merits of different forms of fulfilment systems?
Prospects for e-commerce 135

Discussion questions
1 ‘Price is now overtaking convenience as the key factor for consumers in
deciding to shop online’. Do you agree?
2 How might online business build customer loyalty?
3 Have retailers been right to downplay the importance of electronic commerce
in the long term?

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Chapter 7

The financial
implications of
retail strategy
Dmitry Dragun

In an internationalizing world, there is a growing pressure on retailers to perform.

They now have direct access to the world’s financial stock markets to replenish the
capital necessary for continuous expansion of business. Yet they are also subject to
the discipline of those same stock markets, with the relentless emphasis put on the
next quarter’s earnings and sales projections. Although not all retailers are as yet
included in the cycle of analytical assessment, pressure to become more accountable
begins to be felt by even the smallest unquoted companies. Financial performance
has become the pinnacle of competitive success, a tool that can either enhance
the competitive standing of a company or lead it to destruction. This more extens-
ive chapter, the final functional chapter in Part II, reflects in its breadth and depth the
contemporary emphasis placed upon effective financial management. It starts with
financial model of the retail business. It then provides an illustration of retail financial
statements, in order to highlight the particular financial performance characteristics
of retail businesses. The next step focuses on financial performance evaluation and
indicators (financial ratios). Building on ratio analysis, ways are discussed in which
ratios can be built into a model suitable for assessing the company’s performance in
a strategic context. The balance of the chapter examines the interaction between
financial performance and stock market returns. Specifically, the chapter focuses on
the performance parameters that the stock market believes are important for valuing
the retail sector, including sales growth, profitability and market share.
138 Retail Strategy

Introduction
In the US, Wal-Mart’s excellent financial performance over the last 20 years has
become a major competitive weapon and the company’s springboard to global
expansion. Conversely, Marks & Spencer’s patchy financial performance, with
significant deterioration of sales and profitability in 1997–2001, remains a burden
even after positive changes effected in later years. Another pressure for improve-
ment comes from a combination of the financial reporting authorities and the
analysts’ community. Until very recently, retailers have been content to report
annual accounts in formats prescribed by national accounting standard-setting
authorities. However, in the late 1990s and early 2000s more and more companies,
including the medium-sized retailers with no prior record of international report-
ing, have sought to present their accounts in a format suitable for comparisons
across national borders. In a climate of improving financial and operating transpar-
ency, financial performance serves as a crucial tool for diagnosing and improving
the fundamentals of retail business.
As Chapter 5 noted, internationalization is a multi-faceted phenomenon. Stra-
tegic reasons for internationalization, changing patterns of international growth,
factors of success and failure are issues requiring continual attention and aware-
ness on the part of retail practitioners and analysts. This chapter examines financial
performance – the pinnacle and ultimate goal of a successful retailer. Businesses are
ultimately judged on their ability to perform financially. Domestic growth, inter-
national expansion, strategic repositioning – each and every strategic decision is
punctuated by the need to generate corresponding financial returns. Understand-
ing the drivers of financial performance, their roots and causes is a must for sound
retail management.

Financial model of retail business

Figure 7.1 presents the basic financial model of retail business: a generic view
on how financial performance fits the general operating processes in retailing. In
reality, the picture is complicated by the presence of other groups such as credit
card companies, banks and property operators and the leasing companies.
The financial cycle starts with suppliers providing merchandise at the retailers’
request (Step 1 in Figure 7.1). Often, this is supplemented by goods manufac-
tured under the retailers’ own brand names. After the merchandise is received, the
retailer prepares the goods for sale (Step 2), which includes assortment and format
assembly, spatial arrangement of the stores, shelf space allotment by categories,
and various other steps intended to ensure that merchandise is accepted by cus-
tomers as goods available for sale. It is on this stage that the value in the retail
business is created, and it lays the foundations of sound financial performance in
retail business.
The financial implications of retail strategy 139

6
Payment

5
Supplied 2 Payment
1
merchandise

Supplied
merchandise
Inventory
Suppliers Supplied Retailers (stock) Customers
merchandise
3 4
Supplied
1 merchandise
Payment

Payment
6

Figure 7.1 Financial model of the retail business

Source: Oxford Institute of Retail Management

Having passed the merchandise formation stage, goods now become inventory,
or the products available for sale (Step 3). The impact of this stage on financial
performance is ‘passive’ in a sense that the customer-facing trading process has
not yet begun. However, this impact is nevertheless significant because essential
parameters such as pricing schemes and cost formation are determined here. The
next stage (Step 4) puts retailers in a direct contact with customers, both operation-
ally and from a financial perspective. Operationally, retailers are now selling goods
to consumers and collecting proceeds at the end of the process (Step 5). Financially,
this generates cash proceeds and provides a basis for payment by retailers back to
the suppliers (Step 6).
Although there is an appearance in Figure 7.1 that the cycle starts with suppliers
and continues with retailers to reach customers in the end, it must be borne in
mind that retail is a business entirely driven by customers. However successful the
retailer might be from a viewpoint of supply chain management or development
of pricing policies, unless customers subscribe to the company’s strategy by gen-
erating enough sales (and corresponding profits), financial performance is bound
to flounder. Therefore, it is also appropriate to see Figure 7.1 from a different,
customer-driven angle. Specifically, starting from Step 4 and moving backwards
gives a clear indication of how reliant financial performance of the retail business
is on the customer base. For example, the inventory stock-outs – common in UK
retailing practice – usually occur not because insufficient inventory was ordered
in Step 1 but because the customer demand in Step 4 had not been assessed with
sufficient precision. Resultant loss of sales and profits is a direct consequence of
ineffective decisions related to customer-facing functions.
140 Retail Strategy

Importantly, financial performance under such conditions becomes customer-

driven too. If customer tastes are not met or the target audience is misjudged,
financial performance is immediately affected. For example, after acquiring Kwik
Save in March 1998 Somerfield attempted to reposition a significant number of
Kwik Save stores by re-branding them for up-market consumers. The efforts
failed, with significant repercussions for Somerfield’s operating and financial per-
formance: Kwik Save’s divisional sales plunged by 16 per cent on average, and
Somerfield lost market share in 2000–01.
As retailing is an intensely cash-generative business, an important characteristic
of any retail operation is ability to ‘recycle’ cash received from sales. This capacity
is often described as the cash conversion cycle.
The cash conversion cycle is a result of interaction among three components:
1 Cash tied up in inventory. This component influences the cycle negatively, since the
longer it takes the retailer to convert inventory into sales, the farther away will be the
period in which cash is actually received.
2 Cash in receivables. This component also has a negative impact, since the proceeds
not yet received from suppliers increase the overall length of collection period, thereby
reducing the cash conversion cycle.
3 Payables. This component can have a positive influence on the cash cycle, since it
represents payments that are not yet made by the company. Put differently, payables
represent an offset against the earlier two components. That is why the cash conversion
cycle is sometimes called the working capital cycle, or the time in days it takes the
company to turn its working capital into cash.
Based on three components, Figure 7.2 develops the concept using two practical
examples as illustration, one for Home Depot and the other for Carrefour. Home
Depot has a significant amount of capital tied in inventory (this is dictated by nature
of the business, home improvement), hence a significant number of inventory
days (70) in the cash conversion cycle. The next component, cash in receivables,

Home Depot Carrefour

+37
+39 –79

Cash Cash +32

+70
conversion conversion
cycle cycle

–37
–148
+6
–6

Inventory Payable Receivable

Figure 7.2 Cash conversion cycles for two retailers

Source: Oxford Institute of Retail Management, Templeton Research, Datastream
The financial implications of retail strategy 141

is insignificant (6 days), and reflects the fact that most of the company sales are
in cash. Finally, the third component, cash in payables, to some extent offsets the
combined impact of two earlier components, producing the final number for the
cash conversion cycle of 39 days. Interpretation of this number is straightforward:
Home Depot turns over its working capital more than nine times (365/39) during
the course of a calendar year. Whether such working capital ‘speed’ is competitively
sufficient can only be established in relation to sector peers. Lowe’s, the closest such
comparator, has a cash cycle of 4 days (working capital speed 91 times a year), and
Courts in the UK, 73 days (five times a year).
Carrefour is the more interesting case in that its cash conversion cycle is negative
(−79) implying that the cash tied up in inventory and receivables is more than offset
by the payables owed by Carrefour to suppliers. Some comparators (e.g. Tesco and
Ahold) also have a negative cash conversion cycle, whereas some (e.g. Kroger and
Walgreen) have positive cash cycles of 7 and 26 days correspondingly.

Retail financial statements

Three financial statements form a base from which the financial performance of
the retailers can be examined: the balance sheet, the profit and loss account (P&L
or income statement), and the statement of cash flow. We will consider each of
these statements in turn, with the financial statements of Wal-Mart being used as
an example throughout the discussion.

Balance sheet
The balance sheet is a point-in-time representation of a retailer’s assets (economic
resources) and liabilities (claims to these resources) at some specified date, usually
the end of the financial year. Table 7.1 presents a balance sheet for Wal-Mart.
Although Wal-Mart is the world’s largest retailer, its balance sheet is fairly similar
in structure to that of other retailers.1 A major component of the retail balance
sheet is inventory (stock). For Wal-Mart, it constitutes 27 per cent of the total assets,
average for the sector. Another large component on the asset side is property, plant
and equipment (PPE), which accounts for over 50 per cent of the asset base. Among
1 A common problem while comparing a company’s performance over time is constantly changing
firm size. The companies merge, divest of assets, acquire new units and start new lines of business. All
these changes affect the firm’s scale of operations and, by extension, size. In order to standardize the
financial statement components and hence be able to compare across companies and sectors, common-
size statements are used. These express the components of the financial statements as percentages
of total assets and sales for balance sheet and P&L account, correspondingly. They also provide
useful information with regard to causality of factors affecting financial performance. For example,
substantial changes in income over time may reflect the variation in costs of good sold. Common-size
statements are therefore the first line of attack while considering the historical progression of retailing
business. Financial statements produced in this chapter provide both the common-size and reported
formats alongside.
Table 7.1 Wal-Mart, consolidated balance sheet (amounts in millions US$)

Fiscal years ended January 31 2002 2002 (common-size) 2001

Assets
Current assets
Cash and cash equivalents 2,161 3% 2,054
Receivables 2,000 2% 1,768
Inventories at LIFO cost 22,614 27% 21,442
Prepaid expenses and other 1,471 2% 1,291
Total current assets 28,246 34% 26, 555
Property, plant and equipment, at cost
Land 10,241 12% 9,433
Building and improvements 28,527 34% 24,537
Fixtures and equipment 14,135 17% 12,964
Transportation equipment 1,089 1% 879
Subtotal 53,992 65% 47,813
Less accumulated depreciation 11,436 10,196
Net property, plant and equipment 42,556 51% 37,617
Property under capital lease
Property under capital lease 4,626 6% 4,620
Less accumulated amortization 1,432 1,303
Net property under capital leases 3,194 4% 3,317
Other assets and deferred charges
Net goodwill and other acquired intangible 8,595 10% 9,059
assets
Other assets and deferred charges 860 1% 1,582
Total assets 83,451 100% 78,130

Liabilities and shareholders’ equity

Current liabilities
Commercial paper 743 1% 2,286
Accounts payable 15,617 19% 15,092
Accrued liabilities 7,174 9% 6,355
Accrued income taxes 1,343 1% 841
Long-term debt due within one year 2,257 3% 4,234
Obligations under capital leases due within 148 141
one year
Total current liabilities 27,282 33% 28,949
Long-term debt 15,687 19% 12,501
Long-term obligations under capital leases 3,045 4% 3,154
Deferred income taxes and other 1,128 1% 1,043
Minority interest 1,207 1% 1,140
Shareholders’ equity
Common stock 445 1% 447
Capital in excess of par value 1,484 2% 1,411
Retained earnings 34,441 41% 30,169
Other accumulated comprehensive income (1,268) (684)
Total shareholders’ equity 35,102 42% 31,343
Total liabilities and shareholders’ equity 83,451 100% 78,130

Source: Wal-Mart Annual Report 2001–02

The financial implications of retail strategy 143

other significant components intangible assets is perhaps the most noteworthy. In the
course of international expansion, Wal-Mart has acquired a number of companies
for which consideration paid had been in excess of the net asset values of the
companies acquired. Such excess is recorded in balance sheet as ‘Net goodwill and
other acquired intangible assets’, a category amounting to 10 per cent of Wal-Mart’s
asset base. Although such proportion is unusually high for the average retailer,
intangible assets are often present on the balance sheets of many retail companies.
On the liability side, the balance sheet is often divided into current liabilities (due
within a year) and long-term liabilities, with expiry periods extending beyond one
year. The biggest current liability for Wal-Mart – as indeed for many retailers –
is accounts payable, a component representing approximately 19 per cent of total
assets. Other current liabilities include accrued expenses such as deferred revenue,
unpaid interest and income taxes. These collectively account for 10 per cent of
the assets. Among the long-term liabilities, bank debt and capital lease obligations
(23 per cent jointly) are the largest categories. One of the most important liabilities
on the balance sheet is shareholder equity, or the capital contributed by owners of the
business. Usually, it consists of three components: common stock at the nominal (at
par) cost (US$445 million or 1 per cent of the total assets for Wal-Mart); capital in
excess of par value at a time of issuance (US$1,484 million or 2 per cent of the assets);
and retained earnings (US$34,441 million or 41 per cent of assets). Retained earnings
are undistributed profits generated and retained in business during the prior years
of operation. Commonly, retained earnings are the single most important source of
internal funding for retail companies. They also serve as the major indicator of the
financial health of a company. Large and consistently growing retained earnings
are a sign of financial health, since they provide a clear indication of the financial
cushion available to a company.

Income statement (P&L) and Cash flow statement

Table 7.2 presents the income statement for Wal-Mart in both the conventional as
well as common-size formats. The structure is fairly typical for a retail company.
A major expense category, in proportional terms, is cost of sales (79%) followed by
the selling, general and administrative (SG&A) expenses, 16 per cent. Although the
exact constituents for each expense category differ among retailers, they generally
include all expenses necessary for delivering merchandise to the stores, preparing
it for sale and closing the transactions by collecting cash from customers. In case of
Wal-Mart, SG&A expenses are comparatively low as percentage of sales, although
the proportion of cost of sales is higher than the industry averages. In some meas-
ure, this is a reflection of the ‘lowest possible price’ strategy Wal-Mart has been
pursuing: the lower retail prices generally mean the higher percentage of costs of
goods sold. Net income represents 3 per cent of sales, a comparatively low number
in relation to the retail industry as a whole.
One of the interesting features of the income statement is a number reported
close to its bottom, net income per common share (earnings per share, or EPS). This
Table 7.2 Wal-Mart, consolidated statement of income (amounts in millions US$ except per share
data)

Fiscal years ended January 31 2002 2002 (common-size) 2001

Revenues
Net sales 217,799 99% 191,329
Other income-net 2,013 1% 1,966
219,812 100% 193,295
Costs and expenses
Cost of sales 171,562 79% 150,255
Operating, selling and general and 36,173 16% 31,550
administrative expenses
Interest costs
Debt 1,052 1,095
Capital leases 274 279
209,061 95% 183,179

Income before income taxes, 10,751 5% 10,116

minority interest and cumulative
effect of accounting change
Provision for income taxes
Current 3,712 3,350
Deferred 185 342
3,897 2% 3,692

Income before minority interest 6,854 3% 6,424

and cumulative effect of
accounting change
Minority interest (183) (129)
Income before cumulative effect 6,671 6, 295
of accounting change
Cumulative effect of accounting – –
change
Net income 6,671 3% 6,295
Net income per common
share:
Basic net income per common
share:
Income before cumulative effect of 1.49 1.41
accounting change
Cumulative effect of accounting – –
change, net of tax
Net income per common 1.49 1.41
share
Average number of common 4,465 4,465
shares

Source: Wal-Mart Annual Report 2001–02

The financial implications of retail strategy 145

indicator provides a link between financial performance and the stock market. Tra-
ditionally, prediction of EPS has preoccupied analysts and the investor community,
and companies are often judged on their ability to ‘deliver’ the expected, or ‘con-
sensus’ quarterly earnings. Although often criticized for their inadequacies, such
as exclusion of risk and short-termism, EPS do provide a good indication of the
corporate financial success or failure. For example, ability to grow EPS in line, or
in excess of, sales growth is often perceived in retailing as a sign of robust financial
performance and of a sound operating strategy. The reverse is equally true. For
example, several quarters of the lower-than-expected earnings growth by Ahold
in late 2001–early 2002 led to a US$10 billion loss of stock market value during
this short time. Conversely, eBay’s rapidly progressing earnings caused the stock
market capitalization to increase by roughly the same amount.
The last financial statement to consider is the cash flow statement. This com-
plements the balance sheet and profit and loss account, although its importance
as a standalone analytical tool cannot be overestimated. The cash flow statement
reports cash receipts and payments in the period of their occurrence, classified
as operating, investing and financing activities. (In the UK, as in a number of
other countries, prescribed formats of cash flow statements may differ from the
one presented here.) Operating activities are the actions of the company in pur-
suit of its line of business. In retailing, this would include anything that leads
to selling merchandise to customers, e.g. sourcing, format arrangement, assort-
ment and collection of receipts. Operating activities result in cash being collected.
Under normal circumstances, such ‘operationally-produced’ cash represents an
overwhelming part of the total cash proceeds generated by the business. For Wal-
Mart, the operating cash flows amount to US$10,260 million (see the cash flow
statement in Table 7.3). It is quite clear that operating activities provided the bulk
of overall cash generated by Wal-Mart. Any indication that the operating cash flows
are proportionately insignificant should generally be taken as a sign of underlying
financial weakness.
Investing activities in the cash flow statement are defined as those that result from
acquisition of sales of property, plant and equipment (PPE); acquisition or sale of
a subsidiary or segment; purchase or sale of investments in other firms. For Wal-
Mart the largest element of investing cash flow is acquisition of PPE (US$8,383
million). The number reflects asset consequences of the relentless programme of
international expansion the company has been pursuing for a number of years.
The other significant component is the costs of termination of investment hedges
(US$1,134 million), the appearance of which on the cash flow statement is mainly
due to the recent introduction of US accounting standards with regard to financial
derivatives.
Cash flows from financing activities include cash flows related to the firm’s capital
structure (debt and equity), including the proceeds from issuance and repurchases
of equity and debt, dividends paid to shareholders in cash, principal repayments of
debt and lease obligations. The main cash source of Wal-Mart’s financing activities
is proceeds from issuance of the long-term debt in the order of US$4,591 million.
146 Retail Strategy

Table 7.3 Wal-Mart, statement of cash flow (amounts in millions US$)

Fiscal years ended January 31 2002 2001

Cash flows from operating activities

Net income 6,671 6,295
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,290 2,868
Cumulative effect of accounting change, net of tax – –
Increase in accounts receivable (210) (422)
Increase in inventories (1,235) (1,795)
Increase in accounts payable 368 2,061
Increase in accrued liabilities 1,125 11
Deferred income taxes 185 342
Other 66 244
Net cash provided by operating activities 10,260 9,604
Cash flows from investing activities
Payments for property, plant and equipment (8,383) (8,042)
Investment in international operations (net of cash – (627)
acquired, $195m in fiscal 2000)
Proceeds from termination of net investment hedges 1,134 –
Other investing activities 103 (45)
Net cash used in investing activities (7,146) (8,714)
Cash flows from financing activities
Increase/(decrease) in commercial paper (1,533) (2,022)
Proceeds from issuance of long-term debt 4,591 3,778
Purchase of company stock (1,214) (193)
Dividends paid (1,249) (1,070)
Payment of long-term debt (3,519) (1,519)
Payment of capital lease obligations (167) (173)
Proceeds from issuance of company stock – 581
Other financing activities 113 176
Net cash provided by (used in) financing activities (2,978) (442)
Effect of exchange rate changes on cash (29) (250)
Net increase/(decrease) in cash and cash equivalents 107 198
Cash and cash equivalents at beginning of year 2,054 1,856
Cash and cash equivalents at end of year 2,161 2,054

Source: Wal-Mart Annual Report 2001–02

The rest of the components are cash uses; they have negative impact on the cash
flows from financing activities. Chief among them is repayment of the long-term
debt (US$3,519 million) followed by the repayment of principal on the short-term
commercial paper (US$1,533 million).
The financial implications of retail strategy 147

The resultant cash position of Wal-Mart is a combination of the initial cash

position and changes in components of the cash flow during a year:
Cash and cash equivalents at beginning of year 2,054m
+ Net cash provided by operating activities 10,260m
− Net cash used in investing activities 7,146m
− Net cash provided by (used in) financing activities 2,978m
− Effect of exchange rate changes on cash 29m
= Cash and cash equivalents at end of year 2,161m
Compared to the previous financial year (31 January 2001), Wal-Mart’s cash posi-
tion appears to have strengthened. Cash flows from operating activities increased
from US$9,604 million to US$10,260 million (+7%). The main positive features were
increased accrued liabilities (cash flow impact of 1, 114 = 1, 125 − 11), decreased
inventories (560 = 1, 795 − 1, 235), and reduction in accounts receivable (212 =
422 − 210). Cash flow from investing activities has changed significantly; however
this was mainly related to termination of the net investment hedges mentioned
earlier; investment in PPE has in fact increased. Cash flows from financing activities
were characterized by a significantly increased level of debt repayment, which was
likely to be caused by the changing environment in which the falling interest rates
made higher-interest debt an unnecessary burden. As a result of counterbalancing
influences, the end-of-year cash position changed little, from US$2,054 million to
US$2,161 million.
Analysis of cash flows, whether performed from the timeline perspective for
a sample company, or on a comparative basis, is a very helpful diagnostic tool.
K-Mart, in bankruptcy since January 2002, developed signs of cash flow weakness
well before that date. In the financial year 1999, the company reported oper-
ating cash of US$1,084 million of which net income contribution was US$633
million. A year later the operating cash flows, although seemingly healthy at
US$1,114 million had nevertheless indicated significant profitability problems:
negative net profit of US$244 million and restructuring charges of US$728 mil-
lion were reported. Also in that year, capital expenditures remained broadly the
same, even though it was becoming clear that deteriorating profitability might not
support the usual pace of business expansion. In the latest financial year 2001–
02 (in which the company was de facto bankrupt although not formally so), the
cash flow statement registered continuing profit erosion (net loss of US$2,587),
increasing reliance on debt funding (proceeds from issuance of debt increased from
US$400 million to US$1,824 million), and growing restructuring and impairment
charges (US$1,262 million). Taken together, the early warning signs alerted the ana-
lyst community to the possibility of bankruptcy in 2001–02 and reduced K-Mart’s
stock market value by US$6 billion in the short period from September 2001 to
September 2002.
Whether such deterioration could be interpreted as leading towards financial
distress or bankruptcy is a topic covered in the next section, which deals with
financial performance evaluation.
148 Retail Strategy

Financial performance evaluation

Assessment of financial performance usually starts with analysis of financial ratios.
The ‘ratio system’ of financial performance comprises metrics designed to convey
the comprehensive picture of financial performance. (Analysts use financial ratios
because financial numbers in isolation are not especially informative.) This ratio
system is often referred to as the DuPont model, after the company that pioneered
the concept. In focusing upon those ratios of most use to retailers, we first describe
the main groups of financial ratios, which then leads us to consider the basic and
extended DuPont systems. (Throughout, the annual report of Tesco for the financial
year 2001–02 is used to illustrate calculations; excerpts are provided in Table 7.4.)
In retail practice, four groups of financial ratios are utilized:
Internal liquidity ratios
Profitability ratios

Table 7.4 Tesco, excerpts from financial statements (amounts in £ millions)

Fiscal years ended February 24 2002 2001 Source

1. Sales 23,653 20,988 P&L

2. Cost of sales (cost of goods sold) 21,866 19,400 P&L
3. Administrative expenses 465 422 P&L
4. Operating profit (1-2-3) 1,322 1,166 P&L
5. Total tax charge 371 288 P&L
6. Tax rate (5/4 × 100) 28.1% 24.7% P&L
7. Earned for ordinary (net profit) 830 767 P&L
8. Interest expense 202 168 P&L
9. Earnings before interest and 1,403 1,222 P&L
taxes (EBIT)
10. Cash and equivalents 670 534 Balance sheet
11. Total equity (shareholder capital 5,530 5,014∗ Balance sheet
and reserves)
12. Current assets 2,053 1,694 Balance sheet
13. Total assets 13,556 11,732 Balance sheet
14. Current liabilities 4,809 4,389 Balance sheet
15. Accounts receivable (trade) 1,830 1,538 Balance sheet
16. Long-term debt (>1year) 2,741 1,925 Balance sheet
17. Total interest-bearing debt 4,230 3,338 Balance sheet
18. Total long-term capital (11 + 16) 8,271 6,939 Balance sheet
19. Cash flow from operations 2,053 1,937 Cash flow statement
20. Capital expenditures 1,835 1,910 Cash flow statement
21. Principal repayments 24 46 Cash flow statement
22. Dividends paid 297 254 Cash flow statement
∗ restated
Source: Tesco Annual Report 2001–02
The financial implications of retail strategy 149

Financial leverage ratios

Earnings coverage ratios.

Internal liquidity ratios

The ratios from this group measure the ability of the firm to sustain current and meet
future obligations. Internal liquidity ratios usually compare the short-term assets
such as cash and marketable securities with the near-term financial obligations
such as accounts payable.
(a) Current ratio. One of the best-known metrics of liquidity, the current ratio addresses
the question of whether short-term company resources (assets) are sufficient enough
to meet corresponding liabilities.

Current assets
Current ratio =
Current liabilites
For Tesco, the current ratio for 2002 is 0.43 (2,053m/4,809m).
(b) Quick ratio. Some analysts believe that total current assets should not be considered
when gauging the ability of a firm to meet its near-term financial obligations, because
inventories and some other assets included in current assets (e.g. accounts receivable
and prepaid expenses) are not liquid enough to fit the definition. The measure reflecting
such considerations is called the quick ratio.

Cash and equivalents + Accounts receivable

Quick ratio =
Current liabilites
For Tesco, the quick ratio is 0.52 (670m + 1, 830m)/4,809m.
(c) Cash ratio. This is the most conservative ratio, in that it only treats cash and equivalents
as suitably liquid assets.

Cash and equivalents

Cash ratio =
Current liabilites
Tesco’s cash ratio is 0.14, calculated as 670m/4,809m.
(d) Cash flow from operations ratio. Sometimes, in order to overcome limitations of
the previous three ratios, liquidity is assessed by comparing the actual cash flows
from operations to current liabilities. The resultant ratio is called the cash flow from
operations ratio.

Cash flow from operations

Cash flow from operations ratio =
Current liabilites
For Tesco, this ratio is equal to 0.43 (2,053m/4,809m).
(e) Defensive interval. This measure compares the most liquid sources of liquidity (cash
and equivalents and accounts receivable) with projected operating expenditures.
150 Retail Strategy

Although definitions of projected expenditures vary, these usually include cost of

goods sold and administrative (or other) expenses necessary for continuation of the
business.
Cash and equivalents + Accounts receivable
Defensive interval = 365 ×
Projected expenditures

The defensive interval is usually interpreted as a ‘worst-case’ scenario indicating the

number of days that the firm could sustain the current level of operations with the
present cash resources assuming that there are no additional revenues. For Tesco, it is
assumed that projected expenditures include cost of sales and administrative expenses.
The defensive ratio is then equal to 365 × (670m + 1,830m)/(21,866m + 465m) or
24 days.

Profitability ratios
Metrics from this group are designed to gauge the ability of the firm to achieve,
sustain and increase profits. Profitability can be measured along a number of
dimensions. First, there is a relationship between profits and sales (margin ratios).
Secondly, profits are related to capital, or investment necessary to generate them
(so-called return ratios). The ratios below reflect each dimension in turn.

Margin ratios
(a) Gross margin. This ratio is a ‘top-level’ indicator of margin sufficiency.

Gross profit
Gross margin =
Sales
For Tesco, gross margin as a percentage of sales is 7.5 per cent, calculated as:
((23,653 − 21,866)/23,653).
(b) Operating profit margin. This ratio reveals the profitability of the retailer’s ‘core’ busi-
ness, excluding the combined effect of investments (income from affiliates), financing
costs (interest rate expense) and tax position.

Operating profit
Operating profit margin =
Sales
Tesco’s operating profit margin is 5.6 per cent (1,322m/23,653m).
(c) Net profit margin. Useful for comparisons across a broad range of companies, this
ratio relates net profit to sales. As such, it represents the ‘bottom-line’ profitability of
the retail business.
Net profit
Net profit margin =
Sales
For Tesco, net profit margin is 3.5 per cent (830m/23,653m).
The financial implications of retail strategy 151

Return ratios
(a) Return on assets (ROA). As a broad measure of profitability, return on assets measures
the management’s efficiency in utilizing assets for profit generation. Usually, ROA is
computed on a pre-tax basis using earnings before interest and taxes (EBIT). The
resultant return measure is unaffected by different capital structures (debt-equity) and
tax positions across firms.
EBIT
ROA =
Average total assets
Tesco’s ROA is equal to 11.1 per cent, calculated as:
1, 403m/(13, 556m + 11, 732m)/2.
(b) Return on invested capital (ROIC). This metric provides a return characteristic similar
to ROA, but on the basis of invested capital, which is different from the total assets
used in ROA calculations.
EBIT (1− Tax rate)
Return on invested capital =
Interest-bearing debt + Equity
The numerator of this ratio is after-tax earnings the company would report if there
were no debt in its capital structure. The denominator represents the sources of
capital on which return must be earned. Therefore, ROIC is the rate of return earned
on the total capital invested in the business regardless of whether this capital was
represented by debt or equity.
Tesco’s ROIC, on the basis of information provided in Table 7.1, equals 4 per cent.
(c) Return on equity (ROE). This measures returns accruing to the residual claimants –
common shareholders. If equity capital contains preferred shares, the preferred
dividends are excluded from the net income in the numerator.
Net profit − Preferred dividends
ROE =
Average shareholders equity
Tesco does not have preferred shares in its capital structure; its ROE is 7.6 per cent.

Financial leverage ratios

From the shareholder viewpoint, leverage represents a trade-off between risk and
return. The greater the leverage (proportion of debt in the capital structure), the
larger are the potential returns accruing to stockholders. This occurs because debt is
a fixed obligation; for as long as the company honours its debt, all remaining extra
profits accrue to the shareholders. However, such profit enhancement potential
of leverage comes with higher risk attached. In an unfavourable business climate
where the company’s ability to sustain the level of profits is curtailed, increased
leverage implies greater risk because debt obligations are fixed irrespective of oper-
ating environment. Leverage ratios serve to capture the extent to which a company
is exposed to fixed funding costs. Table 7.5 provides a brief description of the most
common leverage ratios, with the appropriate values for Tesco computed as an
illustration.
152 Retail Strategy

Table 7.5 Financial leverage ratios

Ratio Description Formula Value for Tesco 2002

Gross leverage Indicates size of the Total assets 3.20
asset cover from Total debt
which accumulated
debt is serviced
Debt-equity Provides a gauge of Long-term debt 0.49
size of equity cover Total equity
in relation to
accumulated debt
Long-term Specifies the size of Long-term debt 0.33
debt-total long-term debt Total long-term capital
capital versus the size of
total long-term
capital, including
equity

Source: Oxford Institute of Retail Management, Templeton Research, Tesco Annual Report, 2001–02

Earnings coverage ratios

In addition to the measures described earlier, investors and analysts often use met-
rics called ‘earnings coverage’ ratios. In essence, earnings coverage ratios evaluate
the flow of earnings available to service the debt and lease obligations. In contrast
to the ‘point-in-time’ ratios such as quick or gross leverage, earnings coverage
ratios assess financial performance on a continuous basis as the financial reporting
frequency allows. Table 7.6 describes three most common indicators.

Limitations of ratio analysis

Despite having an important role to play in strategic performance management,
ratio analysis has certain limitations. First, the ratios described earlier are only suit-
able as a top-level analytical tool of financial management. Deeper understanding
of the underlying business must rely on thorough appreciation of retail funda-
mentals and realities, supplemented by analysis of competitive environment and
interaction of the interested parties (‘stakeholders’). Further, ratio analysis is mean-
ingful only if applied in time-series or cross-company contexts. For example, a
value of the interest coverage ratio for Tesco (6.94) computed in Table 7.6 using
the figures provided in Table 7.3, is not by itself informative or particularly use-
ful unless put in a comparative context in relation to other retailers, or compared
across time. Finally, ratio analysis ignores the different levels of operating and
financial risk among the companies. If retailer ‘A’ has higher ratios, but also has
a higher aggregate risk profile than retailer ‘B’ (e.g. more highly leveraged, has
The financial implications of retail strategy 153

Table 7.6 Earnings coverage ratios

Ratio Description Formula Value for Tesco

Interest coverage Indicates if the EBIT ÷ Interest expense 6.94

earnings are
sufficient to cover
the interest expense
outlays
Times debt burden Estimates the EBIT ÷ (Interest expense + 5.96
covered burden the company Principal repayments∗ )
carries in both
servicing and
repaying debt
Times common Determines if the EBIT ÷ (Interest expense + 2.16
covered earnings are Principal repayments∗ +
adequate to cover Common dividends∗ )
the costs of all
external sources of
funding, including
both debt and
equity
∗ Principal repayments and common dividends on a before-tax basis. Calculation: Principal repayments on
the before-tax basis = Principal repayments on an after-tax basis/(1 − Tax rate). Common dividends on a
before-tax basis = Common dividends on an after-tax basis/(1 − Tax rate)
Source: Oxford Institute of Retail Management, Templeton Research, Tesco Annual Report, 2001–02

greater exposure internationally, or pursues uncertain diversification strategies),

these comparatively higher ratios will be misleading. On the contrary, retailer ‘B’
may have a relatively low risk profile even though its ratios are lower. The balance
between the operating characteristics of a company and its risk profile is one of
the most important considerations in the analysis of interaction between financial
performance of retailers and their stock market valuation.

An integrated analysis using ratios

In order to overcome some of the limitations of ratio analysis, the DuPont model
of financial performance is used. The DuPont model decomposes financial perfor-
mance into easily accessible and highly informative performance factors. There are
two variants of the model. The first (‘basic’) presents return on equity, ROE, as the
product of three components: profit margin, asset turnover and gross leverage. The
second, ‘extended’ model is a more detailed five-factor framework that provides
additional insights into effects of financial leverage and tax position on the firm’s
financial performance. Both models are presented in Table 7.7.
154 Retail Strategy

Table 7.7 DuPont model

Model Descriptive formula

Net Profit Sales Total Assets

DuPont basic ROE = Sales × Total Assets × Equity
    
NET PROFIT MARGIN TOTAL ASSET TURNOVER GROSS LEVERAGE
⎛ ⎞
EBIT Sales InterestPaid
DuPont extended ROE = ⎝ Sales × Total Assets − Total Assets
⎠
      
OPERATING PROFIT MARGIN TOTAL ASSET TURNOVER INTEREST EXPENSE RATE
Total Assets Tax Paid
× Equity × 1−
  EBT 
GROSS LEVERAGE TAX RETENTION RATE

Table 7.8 Components of the extended DuPont Model for Carrefour, 1992–2001

Component 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Operating profit margin 0.87% 1.19% 1.58% 1.84% 2.34% 2.92% 3.19% 3.45% 3.70% 3.54%
Total asset turnover 2.26 2.32 2.32 2.26 2.05 1.97 1.59 1.12 1.50 1.63
Interest expense rate 1.11% 0.97% 0.72% 0.50% 0.50% 0.48% 0.86% 1.39% 2.01% 1.54%
Gross leverage 5.50 4.45 4.54 4.14 3.97 4.17 4.40 5.28 5.67 6.09
Tax retention rate 71.0% 78.7% 71.0% 73.0% 68.0% 65.3% 65.4% 61.7% 61.6% 67.7%
ROE 3.3% 6.3% 9.5% 11.1% 11.6% 14.3% 12.1% 8.0% 12.4% 17.5%

Source: Oxford Institute of Retail Management, Templeton Research, Carrefour Annual Reports, 1992–2001

To illustrate how DuPont model is used for evaluating financial performance

strategically, Table 7.8 provides components of the extended DuPont model for
Carrefour during a ten-year period 1992–2001.
Figure 7.3 illustrates some of the implications of the data in Table 7.8. Figure 7.3(a)
shows the progression of ROE during the study period. This is accompanied by
the corresponding time series in Figure 7.3(b) showing the changes in two of the
explanatory components, gross leverage and total asset turnover. During the ten-
year period, Carrefour’s ROE increased significantly, from 3.3 per cent in 1991
to 17.5 per cent in 2001. This increase, however, was not uniform: ROE suffered
substantial decline during 1998–99 (from 12.1 to 8 per cent), followed by recovery
in the subsequent years. As operating profit margins kept rising at a steady pace
(Figure 7.3(a)), what other factors could explain the ROE fluctuations experienced
by Carrefour in 1998–99?
Figure 7.3(b) provides the answer. During the short interval of 1998–99, Carrefour
commenced a wide-ranging expansion programme, which culminated in acqui-
sitions of Comptoirs Modernes in October 1998 and Promodès, in August 1999.
The company also scaled up its presence in a number of strategically important
The financial implications of retail strategy 155

(a) 20%
17.5%
14.3%
15%
12.4%
12.1%
10% ROE

8.0%
5% 3.70%
Operating profit margin 2.92% 3.19% 3.45% 3.54%
3.3%
0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

(b) 6 6.09
5.67
5.28
Gross leverage
4.17 4.40
4

2 1.97 1.63
Total asset turnover 1.59 1.50
1.12

0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Figure 7.3 Components of the extended DuPont model for Carrefour, 1992–2001

emerging markets of Central Europe and Latin America. To finance the growth
effort, Carrefour had to borrow massively, thereby increasing financial leverage.
An immediate impact on ROE was positive, according to the formula for the DuPont
extended model. (Growing debt causes the proportion of equity in the total amount
of debt and equity to decline, hence the enlarged proportion of company’s profits
accrue to a smaller equity base, boosting ROE.) However, this positive impact
was more than offset by negative effect inflicted by declining asset turnover. This
happened because the consolidated company, although having increased the asset
base, had not yet realized commensurate returns. Post-merger integration usually
requires some time to execute; Carrefour’s acquisitions were no exception. An
auxiliary sensitivity analysis shows that if Carrefour’s leverage remained the same
in 1999 as it was in 1998 (4.4), ROE would have declined further to 6.7 per cent.
As the other factors in the model (operating profit margin, interest expense rate
and tax retention rate) did not change significantly during 1998–99, the interaction
between total asset turnover and gross leverage determined the overall dynamic
of ROE.
As Carrefour’s example demonstrates, both the basic and extended DuPont
models allow for meaningful analysis of various factors underpinning financial
performance. From the managerial perspective, these models could be used to
pinpoint the exact causes of changes in return on equity. Table 7.9 summarizes
156 Retail Strategy

Table 7.9 DuPont model actions

Components of the Expression Actions

DuPont model

Operating profit margin EBIT Augment operating profit as percentage of sales by

Sales leveraging the store portfolio, sustaining and enhancing
format profitability, and streamlining supply chains and
store delivery systems
Total asset turnover Sales Increase asset productivity by reducing fixed asset base
Total assets (land, buildings, equipment and fixtures) and optim-
izing the working capital requirements (inventory,
receivables, prepaid expenses and payables)
Interest expense rate Interest paid Minimize the interest paid in relation to asset base by
Total assets borrowing at appropriate times and by leasing instead
of borrowing
Leverage Total assets Achieve a level of debt in the capital structure which
Equity would allow efficient use of interest tax shields
without causing financial distress or excessive servi-
cing requirements
Tax retention rate Tax paid Minimize corporate taxes in relation to operating
EBT income by utilizing the permitted tax allowances
and using tax offsets among national jurisdictions if
allowed

the actions that might be required to enhance each of the components of financial
performance, according to the DuPont model.
Notice that the managerial actions described in Table 7.9 are forward-looking in
nature even though the ratio analysis itself is based on historical data. This illus-
trates the dilemma that retail practitioners face. On the one hand, all the financial
information is historical, and hence is not particularly relevant for a fast-changing,
constantly evolving business environment. The only constant present in formu-
lation and implementation of retail strategies is uncertainty. It is uncertainty that
eventually leads to acceptance of the strategy as a distinctive competitive advan-
tage and a driver of financial performance in retailing. On the other hand, historical
financial performance conveys useful information and forms a basis for sustain-
able business development. Also, it is often argued that historical results are the
best predictor of the future, since they constitute the only reliable dataset readily
available for decision-making.
The job of reconciling the rear-mirror view – as portrayed by historical data –
with the forward-looking picture – as represented by the changing business envir-
onment – is often left to the stock market. In the context of efficiently functioning
stock markets, the financial performance of each quoted company is continuously
The financial implications of retail strategy 157

scrutinized, benchmarked and valued. The resultant stock market valuations

combine historical data with the expectations of future returns. The modes and
outcomes of interaction between retailers and financial markets are often com-
plex, uncertain and multi-directional. In the next section, we consider some of the
elements of such interaction.

Financial performance and the stockmarket

Valuation factors
The assessment of an individual retail company by the stock market is a multi-stage
continuous process (Figure 7.4). As the starting point, the retail business environment
is assessed. This includes an evaluation of the macroeconomic climate (current
and projected growth in GDP, consumer and manufacturing confidence, expected
inflation and industry fundamentals). At the next stage, the strategy pursued by a
retailer is evaluated. Various parameters of the strategy, such as brand positioning,
store portfolio development and intended versus actual growth are assessed.
The subsequent stage, sales growth, is particularly significant in retailing. Given
the relative scarcity of other sources to enhance financial returns, expanding sales
is the singular most important driver of financial performance in retailing. A manu-
facturing company, for example, may use its product research and development
(R&D) base to augment sales and profits via a range of new products. There is

Business
environment Strategy Sales
growth Profitability EPS forecast
Market
and current Dividends
share

Market
Valuation inputs ← Financial performance ← Company communication
value (MV1)

Business
environment Strategy Sales
growth Profitability EPS forecast
Market
and current Dividends
share

Market
Valuation inputs ← Financial performance ← Company communication
value (MV2)

Figure 7.4 Stock market valuation in continuous loop

158 Retail Strategy

no product per se to develop in retailing, and gains to be potentially reaped from

innovation come mainly via more skilful (and thus more incremental) changes in
the composition of stores, formats and merchandise. As a result, analysts tend to
pay more attention to sales growth in the retail sector.
Profitability follows sales growth as a factor of importance. Operating and net
profit margins complement the sales figures analytically, by giving additional
insights into the nature of sales growth. In the financial community, there is a
firm belief that successful retail businesses grow both ‘top line’ (sales) and ‘bottom
line’ (profits).
As we have suggested, both forecast and current earnings per share (EPS) provide
the first visible link between financial returns achieved by the company and the
stock market valuation of these returns. Commonly, EPS is interpreted as a simple
measure of the company’s ‘fundamental’ earning power. EPS is perceived as ‘fun-
damental’ because its shows the ultimate ability of the management to deliver
returns per unit of shareholder stock, irrespective of other factors such as size,
strategy, and business models. Thus, EPS may serve as a uniform gauge of finan-
cial performance across companies and sectors. Growing EPS is interpreted as a
sign of sound financial performance. Conversely, slowing or declining EPS is often
seen as a warning signal.
Market share, although not an immediate concern addressed in course of a stock
market assessment, could nevertheless have significant repercussions on valua-
tions. In the UK, the declining market share of Sainsbury’s during 1997–2000 led
to a profound de-rating (lowering of the stock market valuation) of the company.
Generally, market share trends are essential in assessing financial performance of
smaller-size or niche retailers. This is so because for such retail operators each basis
point of market share lost to the larger rivals is much more intimately linked to the
survival of the business. For the bigger retailers, on the other hand, market share
gain is proportionately less important.
The final factor, dividends, is often considered a permanent feature of retail fin-
ancial performance. Being in an intensely cash-generative business, retailers are
usually in a position to support dividend payouts ratios exceeding those of some
other sectors such as manufacturing and services. Dividend payout ratios are not
uniform across the industry however; they vary by country and format affiliation.
In the US and the UK, retail dividends tend to be higher than in Europe and Japan.
Discount operators such as Wal-Mart and K-Mart have traditionally had dividend
payouts lower than those for department store retailers.
After factors in Figure 7.4 have been assessed (‘discounted’, in the language
of analyst community), the evaluation process culminates in market value MV1 .
This is depicted in the figure by a straight arrow. Valuation is an iterative process,
and the cycle repeats itself to arrive at MV2 , the market value of the company
in the next assessment period. Such a continuous loop ensures that all quoted
retailers are subjected to on-going evaluation. Market values estimated at each
cycle of the loop represent point-in-time approximations that integrate both the
historical information and forward-looking assessment of business potential. The
The financial implications of retail strategy 159

system is never stationary: continuous input, combined with diversity of analysts’

opinions, ensures that the stock market attitude towards the company is always
in flux. Hence, as noted above, the interaction between financial performance and
the stock market valuation is essentially dynamic, non-linear and uncertain.

Stock market metrics

We noted that ratio analysis, although a useful tool of financial assessment, has a
number of limitations such as the exclusion of risk from consideration and an essen-
tially historical orientation. In trying to overcome the limitations of ratio analysis,
the stock market uses a number of other metrics described below.
(a) Price-earnings (pe) ratio. One of the most widely used indicators of relative valuation,
the pe ratio is a simple quotient of current share price over current earnings per share.
Figure 7.5 provides an illustration of the pe ratios for the leading European retailers.
As can be seen from the chart, the ratios vary widely. Carrefour commanded a ratio of
nearly 50 in December 1999 whereas Ahold has recently posted a value of only 9.3.
Although the pe ratio is a simple and convenient tool of comparative valuation, it
also has significant limitations. One such limitation concerns risk. Specifically, by its
very composition, the ratio does not provide ‘risk equalization’ across the companies
compared. In other words, the higher ratio for Carrefour in comparison with Ahold
may be interpreted as a higher stock market award for better financial performance on
part of Carrefour. However, the higher pe value for Carrefour may also reflect a lower
risk attached to the company shares by comparison with Ahold’s. The composition of
the pe ratio (in part attributed to financial performance and in part to different levels
of risk) can never be established with precision. This seriously limits applicability of

50
Carrefour (17.1)
Carrefour Tesco (18.1)
Ahold (9.3)
40 Sainsbury’s (15.4)
pe ratio

30
Tesco

20

Sainsbury’s Ahold
10
Dec 97 Dec 98 Dec 99 Dec 00 Dec 01

Figure 7.5 pe ratios of the leading European retailers

Note: The ending values as at 8 September 2002.
Source: Bloomberg, Datastream
160 Retail Strategy

pe ratio as a valuation tool beyond quick, rule-of-a-thumb applications. Another, often

overlooked, limitation of the pe ratio lies in its definition. The ratio can be computed
using either the past period earnings in denominator or the earnings projected for the
next period. The method preferred by the analyst community is to use the latter as
it is believed that the next period earnings are forward-looking and thus have better
informational content. However, this opens the door for subjectivity, dubious inter-
pretations and inflated valuations, especially since the next period earnings tend to be
‘revised’ by the analysts on a regular basis. Under such conditions, no amount of analyt-
ical effort will ever be enough to establish the true, or ‘intrinsic’ value of the company
because it will always remain a product of revised estimates, not factual data.
(b) The price-to-book (PB) ratio is also a tool of relative valuation, computed by dividing
the current share price by the book (balance sheet) value of the common equity. The
ratio has received considerable attention since Fama and French (1992) found it to
be a good predictor of future returns. In a practical context, the measure is usually
used to estimate how valuable the intangible element of company value is. A PB value
close to 1 is regarded as a sign of weak valuation and low productivity of intangible
assets such as brand, market position, and innovation. A PB value well in excess of 1
is usually considered a positive signal implying profitable utilization of the company’s
intangibles. There is no consensus, however, as to the optimal range of PB values. Is
a PB value of 3 too low in light of the company’s dominant position in a particular
market? For another company, is PB value of 12 too high considering the declining
sales momentum, hence implying over-valuation of the company shares? The definitive
answer has yet to emerge, hence the price-to-book ratio should be used cautiously as
a supplement to other valuation metrics.
(c) Dividend yield. We suggested that the dividend payout is one of several factors con-
sidered by the stock market in assigning values to companies. We also noted that
regular dividend payouts are long accepted by investors as a permanent feature of
retail business. Dividend yield, on the other hand, is a variable metric expressing the
dividends paid per share as proportion of share price. Wide variation in dividend
yield is a common feature, and short-term fluctuations are usually not considered
particularly meaningful. However, under some conditions, such as in a period of falling
valuations and with the uncertain earnings projections of the general stock market
observed in 2000–02, dividend yield does become important. This happens because
as share price appreciation is limited or non-existent, dividend payouts provide the
lion’s share of total income from the stocks (share price appreciation + dividends).
Table 7.10 reports the current dividend yields for a number of retailers.
As the dividend payouts remain very stable in absolute terms, it is useful to remem-
ber that the dividend yields are often a mirror reflection of the share price. They
also reflect the stock market valuation of a particular retailer relative to its peers. For
example, dividend yields for Wal-Mart and H&M are the lowest (see Table 7.10). How-
ever, this is not because these companies do not pay sufficient dividends. Instead, the
explanation lies in relative valuation: Wal-Mart’s and H&M’s pe ratios are the highest
in the group. Dividends paid per share are compared against relatively higher share
prices; hence the lower dividend yields for Wal-Mart and H&M.
The financial implications of retail strategy 161

Table 7.10 Retail dividend yields

Company Country Dividend yield, % pe ratio

Ahold The Netherlands 4.5 9.3

Carrefour France 2.0 17.1
Delhaize Belgium 5.1 18.8
Hennes and Mauritz Sweden 1.0 37.0
Metro Germany 4.4 10.0
Tesco UK 2.9 18.1
Wal-Mart US 0.6 32.0

Note: Values as at 8 September 2002

Source: Datastream

Value metrics
Dissatisfaction with the limitations of ratio analysis and stock market metrics has
led to the emergence of a relatively new class of measures called value metrics. The
idea behind a value metric is simple and powerful: value is only created if the
company generates return on capital exceeding the cost of that capital. A publicly
quoted retailer usually has two sources of capital in its disposal: debt and equity.
Each of the sources has its cost. For debt, the cost is interest expense required to
serve the debt. For equity, the cost is the rate of return on common stock expected
by the shareholders. Cost of debt is easier to deal with, since the cost of the debt
capital is simply the interest rate fixed in the indenture (debt finance agreement).
The cost of equity capital is harder to establish because it depends on the uncertain
factors such as overall stock market risk, return expectations and the risk-free rate
of return available to investors. The model most widely used to assess the equity
cost of capital for an individual company is capital asset pricing model or CAPM
in short (see Brealy and Myers, 2002 for details). CAPM defines the cost of equity
capital as

re = rf + β × (rm − rf )

where re is a cost of equity capital (expected return on the common equity), rf is

the risk-free interest rate, β is the sensitivity (covariance) of the company’s stock
price to movements of the general stock market, rm is the observed stock market
return. In essence, the cost of equity capital is a sum of two components: risk-free
interest rate (rf ) and premium for holding the risky stock β × (rm − rf ). In this later
expression, (rm − rf ) represents the equity risk premium (ERP), or extra return on
equity investors demand comparatively to safer instruments such as government
bonds.
After having established the cost of debt and equity capital for a company, the
weighted average cost of capital (WACC) is computed as the weighted average
162 Retail Strategy

of the two, with the proportions of the debt-equity capital used as weights. For
example, if a company’s cost of debt and equity capital is 5 per cent and 8 per cent
respectively and the capital structure is 40 per cent debt financed, WACC will be
calculated as follows:
0.4 × 5% + (1 − 0.4) × 8% = 6.8%
In contrast to standard indicators of returns such as ROA or ROE, value metrics
explicitly recognize the cost of equity capital by adding a charge on the capital
employed to the total cost of running business. Traditionally, such adjustment is
never reflected in the financial statements, as accounting rules prevent putting on
balance sheet the assets and liabilities whose values cannot be measured precisely.
Such calculations nevertheless could lead to a concept of economic profit, or all-
inclusive costs of running a business.
The most widely used measure of economic value is economic value added (EVA),
patented and propagated by Stern & Stewart Co. EVA is calculated according to
the following formula:
EVA = Net operating profit after taxes – WACC × Capital
The equation presents EVA as a difference between net operating profit after
taxes (NOPAT) and the capital charge as described earlier. In practice, there are
also a number of accounting adjustments made to convert the numbers as reported
in financial statements to their ‘economic’ equivalents. For illustration purposes,
Table 7.11 presents simplified EVA calculations for Home Depot in the financial
year ended on 3 February 2002 (for more detailed explanations see Ehrbar, 1998).
EVA as computed in Table 7.11 is significantly lower than the net income reported
by Home Depot in the financial year 2001–02 (US$3,044 million). The comparison
illustrates that economic profit measures such as EVA are unforgiving performance
indicators. By explicitly incorporating the cost of equity capital into a cost base via
accretion of capital charge, EVA sets a high performance hurdle for any company.
Taking a step further with the Home Depot example, we may also calculate an
economic profit return, by relating the economic profit, or EVA, to the capital base
that generated this profit: 961m/19,337m = 5 per cent. Comparing this number
with the average cost of capital of 10.4 per cent makes it immediately clear that
the company destroyed value, even though it reported significant accounting profit.
The example demonstrates a general principle used in construction of the value
metrics: if the economic profit return is lower than the cost of capital, value is
destroyed; if the opposite happens, value is added.
The market value added (MVA) metric is also a measure of value creation. However,
in contrast to EVA, MVA is a purely stock market-based measure. MVA is calculated
as a difference between the market capitalization of the equity and the capital
employed in business. For Home Depot, MVA was US$96.1 billion as at 3 February
2002 (market capitalization of $115,437 million minus $19,337 million of capital
employed). Rather than looking at the absolute value of MVA (which is highly posi-
tive in case of Home Depot), changes in MVA are usually measured to see if stock
 The financial implications of retail strategy 163

Table 7.11 Calculation of EVA for Home Depot

Component Amount Calculation/source of information

1. Operating profit before taxes 4,901 Income statement

2. Income tax expense 1,913 Income statement
3. Decrease in deferred taxes 6 Balance sheet
4. Tax benefit from interest expense 10 Interest expense (US$28m) ×
Marginal tax rate (35%). Income
statement
5. NOPAT 2,972 Item 1 − Item2 − Item 3 − Item 4
6. Capital 19,337 Total capital invested in business
(interest-bearing debt 1,255m + equity
18,082m). Balance sheet
7. Debt-to-equity ratio 6.9% Interest-bearing debt/Equity
(1,255m/18,082m). Balance sheet
8. Cost of debt 5.9% Footnote information
9. Cost of equity 10.7% CAPM was used; equity risk premium
assumed 5%. re = rf + β × ERP =
4.9% + 1.15 × 5% = 10.7%
10. WACC 10.4% Weighted cost of debt and equity
capital:
5.9% × 0.069 + 10.7% × (1 − 0.069) =
10.4%
11. Capital charge 2,011 Item 6 × Item 10
12. EVA 961 Item 5−Item 11

Note: Amounts in millions US$. Fiscal year ended 3 February 2002

Source: Oxford Institute of Retail Management, Templeton Research, Home Depot Annual Report 2001–02

market value is being added. Continuing with the Home Depot example, MVA on 3
August 2002 or six months after the reporting date stood at US$47.6 billion (market
capitalization of $66,949 million minus $19,337 million of capital employed). Loss
of value during the six-month period from February to August 2002 was therefore
US$48.5 billion (calculated as difference between MVA in February and August:
96.1 − 47.6).
Table 7.11 for the EVA calculations and the MVA example presented above
demonstrate some of the weaknesses of value metrics. For EVA, one of the major
practical shortcomings is the complexity of calculations. Adjustments necessary to
transform the reported accounting items into their economic equivalents are often
non-intuitive, cumbersome and time-consuming. In their proprietary versions of
EVA, Stern & Stewart Co. utilize up to 160 such adjustments. Although perhaps
useful as the ‘ultimate’ measure of value, an EVA constructed in such a manner is
most likely to be incomprehensible to anyone without accounting certification. For
MVA, the main criticism hones on perceived inadequacy of the measure as a tool of
164 Retail Strategy

practical management. Main ingredient of MVA, share price, reacts to a plethora of

factors among which the management’s actions are only a subset. Thus, day-to-day
operating activities cannot be guided by MVA as there is little or no relationship
between changes in MVA and managerial actions. It is perhaps because of these
limitations that companies in the retail sector do not make extensive use of value
metrics, although some of them – Ahold, Escada, JC Penney – are starting to use the
logic of added value to reduce operating costs, improve the margin performance
and develop incentive schemes.

Does corporate consolidation in retailing destroy value?

The financial performance consequences of corporate consolidation are a topic
of active debate among academics and practitioners alike. Academic researchers
emphasize the important role corporate consolidation plays in disciplining under-
performing managers and imposing operating efficiencies (Healy, 1992; Jarrell et al.,
1988); practitioners view it as a forthright tool of market share expansion and an
effective response to a plethora of competitive challenges (Howell, 2002; Read,
1999).
Retail consolidations, although a small proportion of the total consolidating
activity, remain the pinnacle of attention because of their huge impact on pub-
lic welfare, environment and businesses involved in supply and transportation
of merchandise. As the world’s largest retailer, Wal-Mart has become a sizeable
player in a number of the key European markets via acquisitions in the UK and
Germany. The French national champion Carrefour responded by first acquiring
Comptoirs Modernes in 1998 and merging with Promodès in 1999. Although a
flurry of consolidation activity had been anticipated ever since, the actual con-
solidation trends were more subdued. With the exception of Casino-Monoprix
merger in October 2000, the leading European retailers preferred to pause for a
while, in the meantime expanding into the emerging markets of Latin America
and Europe.
A significant body of evidence has been accumulated regarding the value effects
of mergers and acquisitions (M&A), the most visible form of consolidating activity.
From the stock market perspective, this evidence (called ‘stylized facts’) suggests
that M&A activity generates positive gains for the shareholders of the target com-
panies, but brings no benefits to shareholders of the acquiring companies, and leads
to a systematic reduction of the post-merger share price in the year following the
event (Dodd, 1980; Eckbo, 1983; Jensen and Ruback, 1983). From the financial per-
formance perspective, the results of various studies are more contradictory. Healy
(1992) discovered that mergers did improve asset productivity and operating cash
flow for 50 companies studied, but Loughran and Vijh (1997) concluded that the
long-term investors in 947 acquisitions did not experience any post-merger gain
arising from operating improvements.
The financial implications of retail strategy 165

Retail-specific consolidation studies are sparse. Hazel (1997) reviewed the US

retail scene and the regulatory and legal implications of the continuing consolida-
tion drive of American retailers. Read (1999) undertook to analyse the direction and
impact of consolidation on the global retail landscape and leading retailers. Both
authors did not arrive at any testable conclusions. One of the most recent studies
(Dragun, 2002a) attempted to establish the value effects of corporate consolidation
in the context of European retailing (26 M&A transactions were studied). The study
findings were broadly consistent with the stylized facts. M&A transactions gener-
ated stock gains for the shareholders of the targeted retail companies, although this
added value was transient and reverted to losses within a year after the transaction
took place. Also, M&A deals destroyed value for the shareholders of the acquiring
retail companies. Taken together, these results suggest that corporate consolidation
in European retailing is not an area where value is created.
The global picture is not as clear-cut, mainly due to the lack of relevant stud-
ies. The most recent large cross-border acquisition, of Asda by Wal-Mart in the
UK, appears to have changed little, apart from an immediate increase in sales for
the parent. Under the Wal-Mart umbrella, Asda centralized its customer service
response system, streamlined the supply chain, and generally aligned the business
processes with those of the parent. However, the changes have not yet fully found
their reflection in Asda’s operating performance or market share comparative to
other UK retailers.

Summary
The implementation of strategy requires retail managers to be aware of the financial
implications of their decisions. In such an intensely customer-oriented and detail-
driven business as retail, there is always a temptation to see financial performance
as something for senior executives to worry about. This view is mistaken. Unless
the financial factors of success are clearly understood by everyone in the company
and applied for improvements in financial performance, no operating strategy has
a chance of succeeding.
This chapter introduced a financial model of the retail business. Major compo-
nents of the model are customers, suppliers, and the retailers themselves. Building
upon the model, we then reviewed real-world retail financial statements. The pur-
pose was to understand the structure, linkages and interaction among various parts
of the statements, as well as to form a fundamental understanding of the financial
side of retailing. A review of financial ratio analysis followed, supplemented by
discussion of how disparate ratios could be integrated into a model suitable for
evaluation of the company’s financial performance from the strategic perspective.
Aframework used for such evaluation (commonly referred to as the DuPont model)
reflects various factors of financial return, and also provides the operating guide
for improving financial performance.
166 Retail Strategy

Useful for analytic purposes, DuPont models have limitations, of which one in
particular relates to the fact that the managerial actions required to improve per-
formance are forward-looking in nature whereas the data used in calculations are
historical. Thus the model alone may not be sufficient to provide adequate support
for a rapidly evolving retail environment. Counterbalancing such a view is the
realization that historical financial performance does convey valuable information
by providing a basis for understanding of where the business currently stands.
Also, it is argued that historical results may be the best available predictors of
the future, since they constitute the only reliable dataset readily available to retail
decision makers. The chapter addresses these issues by describing the interaction
between financial performance and stock market returns. The market’s agents such
as stockbrokers, asset managers and research analysts are the forces that drive the
expression of the company’s financial performance in the stock market domain.
This expression is the market value, or the total worth of the company’s common
stock. It is determined by a number of factors, such as business environment, sales
growth, profitability and market share, to name but a few. Stock market assessment
is a continuous process (valuation cycle), and it results in a value being assigned to
the company’s shares. In order to sustain the positive interaction with and flow of
communication to the stock market, the retailers are required to demonstrate the
sustainable financial performance and ability to generate (‘add’) economic value.
Measures of the economic value (EVA and MVA) are presented in the chapter, with
the concluding remarks devoted to discussion of advantages and deficiencies of
such metrics.

Review questions
1 Describe a financial model of the retail business (it does not necessarily
have to replicate the one presented in the chapter!). Include the major play-
ers (components) and the interactions among them. On the basis of your
description, make the case for or against the following statement.
2 Financial performance in retail is a fluke because it never depends on retailer.
The only players determining financial performance are the customers and
suppliers. The best way to improve financial returns is therefore to cater
most effectively to the needs of these two groups, by giving the best prices
to both.
3 Explain the concept of cash conversion cycle. Why is it important in
retailing?
4 Describe (and provide formulae for) the most common ratios used to assess
financial performance in retailing. As a retail manager, how would you go
about improving each of the ratios you described? What might be the impact
of improvement in each ratio on the overall financial performance?
The financial implications of retail strategy 167

Discussion questions
1 Discuss what is meant by ‘financial model of retail business’. Does every
retailer have a unique financial model? To what extent do you think the
financial models differ among retailers? What are the factors that account
for such differences, if any? Could a single, uniform financial model suit
every retailer?
2 An excerpt from the interview with Michael Mirrors, CFO of Ahold, is
given below (source: Fair Disclosure Financial Network, transcript of June 6,
2002).
We don’t manage credit rating and obviously we give full
disclosure to the rating agencies. But when we look at our
numbers and our indebtedness we look at two ratios; one,
is interest coverage ratio, and the other is net debt over
EBITDA [earnings before interest taxes depreciation and
amortisation]. We do not expect our net debt to go up
until we expect a rolling EBITDA to improve over the year
as a result of the impact of the acquisitions.

(a) Explain why the interest coverage ratio is important in sustaining

creditworthiness.
(b) Discuss possible reasons for Ahold’s preference to use EBITDA instead
of EBIT. (Consider Ahold’s growth strategy and impact of acquisitions
on profitability.)
(c) What does the last sentence in the quote tell us about Ahold’s current
and future debt policy?
3 Assessment of financial performance by the retail analysts often produces
contradictory conclusions. Below are the statements made by two analysts
describing the financial results of Sainsbury’s for the first quarter of the
financial year 2002–03 (source: InvesText)
Sainsbury fails to maintain momentum. Sainsbury needed
to show in this quarter [April–June 2002] that it could
sustain the outperformance and recovery of last year, in
order to achieve a better rating versus industry leader
Tesco. But the outcome announced today was
disappointing, with 3.1% LFL [like-for-like] growth in the
UK barely better than that for the struggling Safeway. The
slowdown to only 0.5% LFL sales growth in the US for
Shaws [Sainsbury’s US subsidiary] is also disappointing.
Nick Bubb, SG Securities, 25 July 2002
[Sainsbury’s] Q1 sales were a shade drab reflecting
aggressive promotions by competitors. But momentum has
improved significantly and the margin/cost interplay
168 Retail Strategy

looks more attractive than the peer group. The company has
begun to win back the customers lost to Tesco. Customer
numbers increased by 2–3% we estimate in Q1 and the
momentum has picked up further in Q2 we believe.
Sainsbury’s profit recovery remains on track due to a
combination of sales growth, margin stability and cost
efficiencies.

Simon Dunn, Dresdner Kleinwort Wasserstein, 24 July 2002

4 Discuss why the analysts’ views might differ so substantially. From the stock-
market interaction perspective, what is more beneficial for a retail company
to attract – diversity of opinions or their uniformity?

References
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European retailing’. The European Retail Digest, 34, pp. 51–9.
Dragun, D. (2002b) ‘The “ideal” financial performance retailer: Is globalisation worth it?’
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Economics, 11, pp. 241–73.
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structure in the state/globalisation debate’. New Political Economy, 7:1 (March), p. 5.
Howell, D. (2002) ‘Bankruptcies, closings and M&As’. The DSN Retailing Today, 7,
pp. 25–36.
The financial implications of retail strategy 169

Jarrell, G., Brickley, J. and Netter, J. (1988) ‘The market for corporate control: the empirical
evidence since 1980’. The Journal of Economic Perspectives, 2:1, pp. 49–68.
Jensen, M. and Ruback, R. (1983) ‘The market for corporate control: the scientific evidence’.
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acquisitions?’ Journal of Finance, 52:5, pp. 1765–90.
Perraton, J. (2001) ‘The global economy – myths and realities’. Cambridge Journal of
Economics, 25:5 (September), p. 669.
Read, N. (1999) ‘UK: Emerging mergers’. Retail Week, December 3, pp. 12–15.
Reilly, F. and Brown, K. (2000) Investment Analysis and Portfolio Management (6th edition).
Fort Worth, The Dryden Press.
Walters, D. and Hanrahan, J. (2000) Retail Strategy. Planning and Control. Houndmills and
London, Macmillan Press.
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edition). New York, John Wiley & Sons.
This Page Intentionally Left Blank
Part III

The view from

the bridge
This Page Intentionally Left Blank
Chapter 8

Supply chain: a
core competency
for retailers
Interview with Armin Meier, IT and logistics
director of Migros
Migros-Genossenschafts Bund, Limmatstraße 152, Zürich 8005, Switzerland
Tel.: +41(0)1/27 72 11 11; +41(0)1/2 77 25 25

Richard Cuthbertson

Switzerland is a federation of 26 independent states or cantons in the geographic heart

of Europe. The country borders France, Germany, Austria and Italy, and German,
French and Italian are all official languages. Switzerland recently once again decided it
did not want to join the European Union, although dialogue continues.
Despite being a small country with a population of only just over 7 million,
Switzerland is one of the wealthiest nations in the world and has a highly com-
petitive economy. Retail concentration in Switzerland is high, and dominated by a
small number of domestic players, particularly in the food sector.
With gross retail sales in 2002 of around d14 billion, employing over 80,000 per-
sonnel (Migros is Switzerland’s largest employer) and nearly 2 million co-operative
members, the Migros Group is the largest retailer in Switzerland.
The Migros community comprises ten regional co-operatives with a high degree
of regional autonomy. Sales in the Group are roughly equally split between food and
non-food. Outlets include bookstores, department stores, DIY stores, hypermarkets,
office equipment, sports and leisure, furniture stores and others. Migros are to
be found on garage forecourts, in out-of-town centres and high street locations
174 Retail Strategy

throughout Switzerland. The Migros online shop is a small part of the business as a
whole. Migros is also involved in activities such as financial services, publishing and
printing.
Migros has a small presence in neighbouring France and Germany, with no
immediate plans for further expansion beyond the domestic borders.
In this chapter, Armin Meier, IT and logistics director, discusses the chains that
supply Migros supermarkets and restaurants in Switzerland.

Migros supply chains

There are three main supply chains in Migros: non-food, dry products and fresh
products. Migros has 530 supermarkets and over 200 restaurants. The regional
supply chain of fresh goods and fresh products and the fastest moving dry goods
assortment are delivered out of ten distribution centres throughout Switzerland
with about 7,000 SKUs and over 20,000 pallets per day. However, with 40 specialist
markets such as do-it-yourself and garden outlets, the national supply of non-food
products has over 200,000 SKUs and about 6,000 pallets per day. The dry product
supply chain of slower-moving food and beverages has about 4,000 SKUs and
roughly 5,500 pallets per day.
In addition to those three main supply chains, we have specialist supply chains
for frozen goods, e-business and home delivery. Currently, the e-business and
home delivery supply chain is centrally organized. However, we have observed
the Tesco model and we might consider commissioning the goods in one or more
stores. Tesco have in any case hinted that they may go to a centralized system
and so the debate continues. The question is how the market develops in terms of
volume and acceptance of e-business throughout Switzerland.
It has become more and more obvious that specialization of the supply chains
makes a lot of sense. As already mentioned, we have frozen goods home delivery
and small shop delivery, and we have now acquired a company whose core busi-
ness is to deliver to restaurants, hospitals and other institutions. It may be that in
the future we concentrate the whole supply chain for restaurants on this company,
because, as discussed, our core supply chains are based on pallets, but pallets are
not necessarily very practical in a kitchen.

Balance between centralization and regionalization

Supply chain systems for non-food and dry foods are centralized because the
assortment is highly standardized throughout Switzerland and there are no
huge regional adaptations. They can be managed much more effectively cent-
rally, supported by a SAP system. Centralization brings considerable advantages
Supply chain: a core competency for retailers 175

such as professionalism of the assortments, centralized delivery and centralized

replenishment.
In the dry goods area, about 90 per cent of our goods are private label. Many of
those brands are produced and delivered through our own industry. The producers
are supplying our chain directly and we believe that we can get many synergies
out of centralization, for example in the way we deal with each other, the way we
keep the stocks, and the way we deliver, thus providing efficient processes that we
can exploit. However, the fresh products are regionalized: currently in 10 regional
centres. They are the fast movers and they have to be on the shelves quickly to
be seen as a really fresh product. We believe that the regional distribution centres
make a lot of sense in the case of fresh products in terms of delivery time, trans-
portation, distance, and so on. In fact, many fresh products are sourced regionally.
They are regional products that have been produced regionally and consumed
regionally – our customers like that very much. That is part of the reason why
we believe that regionalization also makes sense, even in such a small country as
Switzerland.

Supply chain is a core competency of a retailer

It is our belief that we should control the logistics, and that logistics and the supply
chain is a core competency of Migros as a retailer. Therefore, it is quite natural that
we outsource very little of the management control of the supply chain. Of course,
we control the supply chain centrally in the case of the centralized supply chains
and regionally in the case of the regional supply chains for the fresh products but
we do not transport it ourselves. Here at the Federation of Migros Co-operatives we
do not own trucks but sub-contract to either Migros regional trucks or to external
companies. We make extensive use of the rail system in Switzerland because roads
are heavily loaded already. For example, a standard waiting time for a truck at a
mountain pass is four hours, making delivery of fresh goods impossible. Also, we
are not allowed to move trucks during the night. Rail is slower, but rail is much
more predictable, which is an important part of our promise to the stores. In general
we keep control over our supply chains as much as necessary but the transportation
is heavily outsourced. With very small exceptions, all the distribution centres are
Migros-owned and run by Migros employees.
We have established comprehensive control of our logistics and the task is to
ensure that we do not lose time, money or people over the whole supply chain.
Rene Meyer and his group offer consulting services to the individual activities in
the supply chain, bringing know-how to improve those activities. The group also
has the task to control the whole supply chain in terms of, for example, knowing
the money we spend on logistics, the time we lose, the problems we have, the ware-
house space we need and the head count. He reports twice a year to the board. We
have certainly improved over time but we need to do still more. We are in the middle
176 Retail Strategy

of a reorganization of the whole logistics landscape and the whole supply chain.
We have not completed the implementation but the results so far are promising.

Careful decision-making for speedy implementation

We are a co-operative of co-operatives, the headquarters is a co-operative that is
owned by co-operatives. There is a contract in place between those co-operatives so
we know each role. We have quite a strong influence on the regional co-operatives.
They are allowed to take their own decisions but we are all so dependent on the
whole network.
Typically, it takes a long time to get a clear decision in such a network but when
you have a decision it is quick to implement because by that time everybody has
‘bought in’. In other companies the decision-making may be easy but implementa-
tion is made much more difficult as people are not convinced about the change.
Here it takes a long time to discuss, sit together, influence, convince and make the
arguments but when you have the decision it is easy to implement.
However, we believe that a regional anchor is very important for us because
people for example in the western, French speaking, part of Switzerland are dif-
ferent from people in the German speaking eastern part of Switzerland and again
compared to the southern part of Switzerland where people are more influenced
by an Italian culture. They see the world differently and we have to adapt to those
different needs. That is why the regional presence with a limited amount of regional
decision taking also makes a lot of sense.

Responsive and flexible

The reorganization of the logistics function means we are on the right track for the
future, prepared for a world that will be much more competitive. We came from
an organization where the whole supply chain was carried out regionally in 20 or
more centres and we are transforming that to a more responsive structure.
Centralized product assortments are replenished automatically, typically within
24 hours. Twenty-four hours is our standard order delivery time for dry goods as
well as for non-food. However, in non-food it does depend on whether the product
needs to be replenished within 24 hours. It may be that 48 hours is appropriate and
seasonal products may be longer if warranted.
Each shop has the opportunity to influence the number of goods replenished, so if
a shop manager thinks of a special situation he has in his surroundings, for example
a celebration or festival, he might increase the number or type of goods delivered
the next day. Therefore, he has a window every day where he can influence the
number of goods replenished. Our expectation was that about 2 per cent of the
goods would be influenced manually every day. In reality, some shops are much
higher and others are lower.
Supply chain: a core competency for retailers 177

In fresh goods, where the supply chain is distributed, things run a little bit
differently. There, the manager of the shop orders what he needs and he gets it
within 24 hours, and it is possible to make a delivery within a couple of hours if
necessary.

Planning is the key

Obviously, when you are replenishing an item that has a fairly standard, predicable
demand (no item seems to have constant demand) when it is well managed with
good information systems it works well. However, promotions are a very important
part of our business as well, requiring a more intelligent response. Planning is
the key.
It is possible for a regional centre to run a promotion on fresh products but
the standard promotion is a centralized, countrywide promotion. This requires
a promotion to be organized, involving several departments as well as logist-
ics. With the changes we have made to the supply chain, people have had to
re-think and re-learn their role because they have new responsibilities. Previously,
someone responsible for buying goods would pass them to the shop and the shop
did the rest but now the whole process has to be considered. So the volumes are
planned and each and every shop receives an initial delivery either directly from
the supplier or delivered through our supply chain but without waiting at a dis-
tribution centre. Subsequent re-ordering during the promotion time is done in
the standard way. So the initial planning is essential, and the closer you get the
better it is.
Following the promotion, we have a de-briefing. We want to know whether we
can learn anything, and the learning cannot be achieved through the systems but
through people. People need to understand what can be done better next time.
Undertaking a good assessment of the situation, trying to understand what went
wrong, leads to better results next time.
Seasonal periods such as Christmas or Easter have the same dimensions as big
promotions. For example, at Easter, all stores are filled with Easter bunnies – thou-
sands of pallets. Normally, there is the initial stock order and then replenishment
through the normal process. Except this year. At Easter 2002 we had a problem
because a distribution centre burnt down with all the Easter products. Forty per
cent of the Easter chocolate was lost in one night! Four million Easter bunnies! So
we had to re-produce it. Part of the reason we were able to manage that is because
the supply chain is very integrated. The producers of chocolate for Migros, rather
than take their usual break after the seasonal production, continued to produce.
In addition, there was no space available in the burnt-out distribution centre.
It was necessary to create a new system of delivery for one week while all the
products were distributed; using services we had in hand for other operations. That
is a demonstration of the strength of our supply chain and this kind of distribution.
178 Retail Strategy

Products were moved to another distribution centre and after one week it worked
again, with the information system installed.

Integrating people and processes

Something that struck me on arriving at Migros is the very high professionalism of
the people. There are many people who have been working for Migros for many
years – 20 years and more – and they really think in an integrated way. We have
been growing and building different channels but Migros people still think as part
of a whole – and that was very important in the Easter bunny crisis. People sat
together and developed solutions, and the next day it worked. They are flexible
and pragmatic.
To support integration, we have to a great extent standardized the IT landscape.
The whole supply chain is SAP, including the suppliers and stores. Every supplier
is able to see and understand the stock behaviour. They are also ready and able
to adapt their production plans according to the needs of the stores. Numbers are
updated overnight. So for today, the suppliers have figures available from yester-
day. Naturally, we also do some forecasting automatically, taking into account the
day of the week, the season and so on.
With the external suppliers, it depends if they are linked to the system as an
efficient customer response supplier, linked using EDI or not linked at all. There-
fore, we have different levels of linking suppliers to our supply chain. The level of
linking largely depends on how important the supplier is to Migros.

Performance measurement across supply chains

When it comes to measuring supply chain performance, it is again the area where
Rene Meyer and his team excel. They do the planning mainly for the core supply
chains but also for the specialized supply chains. For example, they are currently
conducting research to understand whether it makes sense to concentrate the res-
taurant supply chain into one channel, and another to consider frozen goods. Where
volumes are small, frozen foods for a petrol station for example, a pallet or a trailer
unit is very big.
When we remodelled our supply chains, we defined targets for dry food, non-
food and fresh goods. Different formats need different supply chains and this is
where Rene Meyer and his team are working on different models. They undertake
a variety of studies aimed at really understanding the market, and according to
what they discover we start to adapt. For example, should the distribution be more
regionalized via trucks or centralized via rail? We consider the combination of
factors, such as space utilization and head count that allow us to reach our own
targets and compare ourselves to the European standard. For example, we can
benchmark the fresh food distribution across the distribution centres each month.
Supply chain: a core competency for retailers 179

They can compare their key performance indicators such as cost per employer or
per case as required.

Global and local suppliers

We have a number of global suppliers in non-food and some even in food. We
have an importation centre and naturally there are some differences in the way we
operate outside the region but the methods of collaboration remain very similar.
Pet food, for example. Our own label pet foods are made by the two or three global
manufacturers but in the same way as for any Swiss-made products, we decide on
the promotions and we work together with the manufacturer. Buying is a part of
the marketing function, which is normal and reasonable.

Reverse logistics
Switzerland is top of the world league in recycling packaging materials and this is
an important aspect of supply chain management. In fresh goods, the backstream is
around 80 per cent of the forward stream at Migros, since we take re-usable crates,
pallets and packaging material. There is a substantial area in each fresh distribution
centre for all the reusable and recyclable materials, and we have recycling centres
there. We also bring back out-of-date or unsold goods and seasonal returns. In time,
consumers will be forced by law to return products such as batteries and electrical
devices, and we already take back bottles.

Retailing is all about distribution

The Migros logistics function is essential to what Migros is doing as an organiza-
tion. The contribution to the commercial value of Migros as whole is tremendous.
Logistics and the handling of goods in an efficient way is a core competency of
Migros and it is also a huge portion of the total costs. About one third of the total
operational costs of Migros might be termed ‘logistics’ so it is both essential and a
considerable cost to the whole operation.
There is a threshold that logistics has to provide in terms of the service that
reinforces the marketing of Migros as a fresh food retailer. If shelves are empty,
then the logistics may be at fault, but if it works, you don’t see it. That is real
success.
One of the main added values that a retailer provides to the consumer is logistics
because we collect together all the items the consumer wants at a location that is
convenient. Without the retailer, the consumer would be forced to go to the farm
for eggs. Sometimes, when we think of retailing we see the stores and the products
180 Retail Strategy

but really retailing is all about distribution. We bring the goods to the consumer.
Nothing more, nothing less.

Outlook for Migros

The big issue is optimization of the whole logistics network throughout Europe
– constant optimization of time versus cost. Ideally we would like to deliver the
products to the shop five seconds before the customer enters the shop and takes the
products away. If that were possible, the costs would be very high. On the other
hand, if you try to be on the safe side and keep stocks on multiple levels then you
also run into cost problems. So the question is how to optimize the whole logistics
network.
The stock should be on the move. For example, in dry goods: before we started
the logistics re-organization, we had an average stock time of 32 days from when
it arrived into the Migros system until it reached the shelf. That is a very long
time and now we are aiming at ten days or even lower. It is different for different
products of course but we are approaching a more just-in-time behaviour. On the
other hand, we see that transportation is getting a really big issue, and that will be
a challenge for the future.
The second challenge we see is that there is increasing regionalization. Even in
a small country like Switzerland, people want to see a regional product in their
regional shop. Many consumers value their regional products as highly as, for
example, branded products or organic products. They want to see products from
local farmers on the shelves. This is a logistical problem, timing versus money.
An additional challenge for us in Switzerland is expansion. We would like to
expand our network and grow the service but we have very limited opportunities
remaining within the Swiss border. For example, it is very difficult to get permis-
sion to build a new shop. We see continuing consolidation of small chains here
in Switzerland as in other parts of Europe. The small chains are either very much
focused on a niche where they are strong but limited in size or they are getting
sucked in by other chains. It is tempting to expand that way but it is always a ques-
tion of price. It is a strong competition and the tendency is that you pay too much
for such an acquisition. It is necessary to maintain a balance and be reasonable in
decision taking. We have an expansion plan set up and agreed, and we are starting
to implement it. The advantage of being regionalized is that we can use a variety
of methods to expand.
Chapter 9

Bridging the gap

between IT and
the business
Interview with Dick Dijkstra, chief information
officer and Eric Polman, director, IT strategy
and architecture, Ahold
Royal Ahold, Albert Heijnweg, 1, 1507 EH Zaandam, The Netherlands
Tel.: +31 75 659 9111; Fax: +31 75 659 8350

Christine Cuthbertson

Ahold is a multi-channel food retailer and food service operator with 35 companies
trading under their local brand name, in 28 countries across four continents. The
Ahold company network generates considerable synergies in facilities, knowledge
exchange, and innovation. In this way, they can operate locally in many countries while
leveraging the advantages of scale, co-operation and network. Ahold outlets in Europe
range from large full-service supermarkets, hypermarkets, compact hypermarkets and
speciality stores, to neighbourhood convenience stores in 13 countries, with sales in
2001 of d21.8 billion.
Dick Dijkstra is chief information officer at Ahold’s European Competence Center
in Zaandam. The European Competence Center was established in 1999 to share
know-how and maximize synergies across different businesses. With a background
in consultancy and eleven years with Ahold in various positions, including four years
in a non-IT capacity, Dick Dijkstra considers himself a retailer.
Eric Polman is director of IT strategy and architecture. Eric joined Albert Heijn, the
flagship supermarket company of Ahold in The Netherlands, in 1994 after nine years
182 Retail Strategy

with consultants Accenture and Deloitte & Touche. Eric’s background is very much in
supply chain and IT. Like Dick, he would not call himself a technician but a generalist
working with business processes using information to realize the business strategy.

IT-oriented business people and

business-oriented IT people
In both our backgrounds there has always been an element of IT but not ‘hard’ IT
for its own sake. It has always been from a business perspective. Of course, there is
an important role for the IT specialist. However, the real challenge lies in ensuring
that IT is linked to business. Increasingly, people in the rest of the business are
likely to know about IT, but there is always a struggle when linking IT to business
imperatives.
We did some research to explore the options for leveraging IT at a global level.
One of the topics in that research was the position and background of the CIO. One
began with IT specialists and increasingly IT-oriented people became business-
orientated people because everyone experienced the gap between what business
people wanted and what IT people provided. However, we see some organizations
going back to recruit more IT-orientated people to senior positions. I think it has to
do with attitude in senior management. Management itself feels somewhat more
comfortable and no longer see IT as something they should not touch but similar to
finance or human resources or logistics. Senior management increasingly realizes
that an IT specialist is not somebody with a screwdriver in hand but is a profes-
sional. When business managers have a greater understanding and awareness of
IT and its potential, communication becomes easier, IT is not such a risk and you
can forge the link with the business.
At Ahold, business management feels responsible for IT. The present generation
is knowledgeable about IT and it is so important for the present operation. This is
particularly true in the retail industry, where IT has been used to gain and sustain
competitive advantage, in logistics, consumer marketing and so on.

More than a collection of companies

Ahold has several operating companies, or ‘OpCos’, in Europe. By the end of 2001,
Ahold operated over 6500 stores in 13 countries. In The Netherlands, Ahold oper-
ates five store chains: supermarket company Albert Heijn, speciality stores Gall &
Gall (wine and spirits), Etos (health and beauty), De Tuinen (natural products) and
Bridging the gap between IT and the business 183

Deli XL (food service provider). At www.albert.com, Ahold’s joint Internet-based

home delivery service in The Netherlands, customers can access all five Dutch
subsidiaries in completing one order. We have a joint venture with the ICA Group,
with stores in Sweden, Norway, Denmark, Latvia, Lithuania and Estonia. In South-
ern and Central Europe, Ahold operates stores in Spain, Portugal, Poland, the
Czech Republic and the Slovak Republic.
All these companies have their unique propositions in their own markets because
they are very different in terms of buying power, culture, maturity, etc. This
approach is also partly because of acquisitions, since it makes no sense when you
join forces with a popular Swedish brand like ICA, to change that brand. So all
the companies are focused on their local customers. Company CEOs have a strong
bottom line responsibility, all directly reporting to the Ahold executive board.
It is natural to query whether Ahold is more than simply a collection of world-
class companies. The answer lies not so much in trying to find synergies in the
front office but in working backstage. So, as far as strategy is concerned we have
made that distinction between the front office and the back office: buying, real
estate, finance, HR, logistics, retail development and IT. Our approach is to do
only those things that make sense in terms of delivering synergy benefits. Each
function is treated differently. For example in buying, we have centralized some
of the sourcing responsibilities so we have a central buying department where
applicable.
We have been actively looking for synergies since the late 1990s. Before then
there was some synergy within Ahold companies but that was incidental. There
was no structure in place to initiate, control and co-ordinate. The structure is
now provided by the European Competence Center, which we have had in place
for about three years and now we have a vision to increase and create synergy
in the back office. For buying, much of the sourcing process can be central-
ized but for logistics it is more limited because logistics are, by definition, very
regional.
The synergy effect is growing and we are learning to distinguish between
processes that are suitable and those that are not. However, we do not have the
luxury of unlimited time. There is a need, an urgency to work together because our
competitors are doing so too. So this is really a thing we have to do, rather than
a matter of choice. However, a big European headquarters with responsibility for
Europe is not the answer. We have tried to do it the smart way.
It is really finding a balance between local autonomy, speed and commitment
but at the same time sharing business opportunities, creating economies of scale,
cost savings and so on. Different retailers tackle it in different ways. It might be
called ‘the race to the middle’, with Wal-Mart and Tesco coming from one angle and
Ahold from another. Wal-Mart and Tesco are rather more centralized. They take
one format and try to adapt it to the local markets. We come from another angle
where we have a strong position, and strong brands but autonomous operations
and we have encouraged co-operation in order to be as efficient as our competitors
on a multi-local scale.
184 Retail Strategy

Role of the European Competence Center

Of course, it is impossible to draw a line to say where the front office ends and the
back office begins. There is tension in this model but the tension is necessary to
keep everyone sharp. There are no absolutes. The European Competence Center is
correctly named because it is not a central functional department, not a European
‘Polit Bureau’, but it is about competence. We are delivering competence and that
should be our commitment to all Ahold companies.
Each company has a CEO and of course ultimately, they ’call the shots’. We
are part of the meeting but they define the problem. Of course, we give direction
where possible in our functional area. We present proposals that ensure we gain
optimum benefit from our scale, and determine the direction in terms of architec-
ture but ultimately it is the business that decides what is to be done. For example,
at ICA we are dealing with an operating company with a long history of autonomy
and of being very successful in the local market and we can still learn from each
other. In our vision, we all want to compete in an international market with the big
operators around who are able to leverage their scale. We have only been work-
ing together for a short time and we are getting into shape, becoming more and
more of a team. Although we are all different, you will see Ahold vision emerging
out there, and it is the European Competence Center that is helping to make the
change.

Competence Center organization

The real estate organization based here in Zaandam has satellites in each of the
markets responsible for the really big projects. In Poland, for example, we have
developed complete shopping centres including entertainment and that is special-
ist work. The CFOs in the operating companies report to finance in the Center.
Human resources is responsible for direction-setting in the different countries but
it also has to be part of the execution. For example, management development
should always be in one place.
For logistics, it does not make any sense to operate a distribution centre in Poland
from Zaandam but it makes sense if one of the expertises in Holland is in how to set
up a distribution centre or how to organize your supply chain between suppliers
and retail. The role of the European Competence Center is very much in this area of
knowledge exchange, dissemination of best practice and help in setting direction.
We really want to leave it as mean and lean as possible.

Shaping the organization

What we are really doing is shaping the organization, and a year from now you will
see a completely different picture. The Center has to be very sharp in determining
Bridging the gap between IT and the business 185

where we place the responsibility, on a European or on local level. And the other
important question is whether it is a task, a responsibility, a process that we should
do ourselves or should we look to outsource. The answers to those two questions
will determine the future shape of the organization.
We want to implement systems cheaper and faster to support the business.
An important way of achieving those kinds of efficiencies is in a convergence of
our application portfolio. Although it is in no way our intention to standardize
overnight, we believe that greater efficiencies lie in having the same systems in
our application portfolio. For example, two or three years ago, many of the ICA
Group’s core applications were reaching the end of their useful life. At around
the same time, we were establishing a European vision and so it was decided that
the ICA solution would be a common initiative. This means that the core applic-
ations being developed now have been selected as part of a common application
portfolio. The migration is not forced but the opportunity came in response to
the business need to innovate. So, the main drive is not towards standardiza-
tion but is in supporting a business strategy and doing that in the cheapest and
fastest way.
A pre-requisite for achieving that is sufficient overlap in synergy in the business
strategy and business process. This is also the role of the Competence Center and
the vision of the board. We believe that despite the differences in culture and
market position, there is a lot of agreement on how to compete for the future.
Ahold wants to compete by bringing very consumer-specific added value in retail
and broadening the retail scale. We can see this happening. In every operating
company and joint venture partner you will see it differently but there is a lot of
overlap in what every company is doing in its local market and the processes that
are needed to operate on an efficient scale. That also requires the development of
specific IT solutions. We are confident that all European companies will eventually
benefit from those solutions, and ICA and Albert Heijn are very much leading that
process.
So when we say we are converging we need to have a focal point where we will
converge and the Center is here to define the path and the tools required to get there.
The business strategy is not developed centrally but the business strategy is very
much centred on providing a customer-specific offering, entering a world where
Ahold will have a network of contact points with our customers. It is a challenge
and to win we have to do it in an efficient way without losing differentiation. Lots
of added value that goes beyond being the cheapest but having the right product,
at the right time, with added value, lots of choice, rather than becoming cheaper
and cheaper.
That vision has been translated into timescales and methods to meet that
challenge in a cost effective way. Our most important role is to try and link busi-
ness process, the applications architecture and the technical architecture within
Europe. In this way we are developing back-office synergy to support front-office
diversification. So the business strategy is the main input and there is very close
communication with operating companies because it is there that the process
186 Retail Strategy

modelling takes place. We give direction from the Center, the implementers are
working in the operating companies and they have to bring those ideas to life.

Communication and innovation

The Center provides the structure by networking, communicating and working
together. We have described functions but this is not a hierarchical relationship.
The Center has a few technical architects who define technology and standards.
There is a lot of knowledge in people in the business as well. There is a formal
decision process that sets the direction and we will advise. Communication ensures
we share knowledge and achieve commitment.
The way we organize our business is innovative in itself. We are innovating from
the heart of our business. The tools required are completely new tools. For example,
typical enterprise resource planning solutions are not suitable so we cannot simply
select an ERP package and roll it out throughout the organization. We select a
combination of packages for the less core or competitive processes but undertake
custom development in the areas where that is appropriate.
For example, merchandising or replenishment, both of which are very much
at the heart of a retail business. We have typically seen that the standard tools
on the market are not really appropriate. They either come from a non-food or
manufacturing standpoint, and so our core processes are not supported. This has
led us towards developing some of our own systems and integrating them with
the existing environment. Integration is a big issue because you are not building
one system, you are building various components and not at the same time and so
integration in all these steps is naturally a big issue for us.
At the moment, we are working mainly with ICA and Albert Heijn. Our vision
gives us a step-by-step approach to identifying and incorporating those parts which
it makes sense to include in a consolidation of the operating companies, and to
really share operational service centres for some of the major operation areas, such
as running a European network and running a Unix service centre. We are at the
beginning of that change. If we see that any software facility service provider can
do it cheaper, then we consider outsourcing.
We have progressed in aligning ideas at a global level because the structure here
is more or less mirrored in the US and the communication between Europe and
the States is strong. We have centralized IT procurement and can approach the big
suppliers on a European or even a global scale. We approach IT suppliers more
and more often as one customer whenever possible.
Two important balances, then, are between in-house or outsourced and central-
ized or decentralized. We strongly believe that our core competence is in finding
the balance that is right for the business. And not just the business but our busi-
ness, and even more specifically, the Albert Heijn business, the ICA business
or whatever. If our intention is to produce the best solution for the operating
Bridging the gap between IT and the business 187

company, then it does not make sense to have all the IT people in a big build-
ing in the centre of Europe, well away from the business. They should know their
business.
It is very clear, from the CEO level down, who is the owner of all the IT devel-
opments. There is always someone clearly accountable and the Center retains a
functional line into the operating companies. So the operating company IT groups
do all the day-to-day applications support, and they run the applications devel-
opment projects but their remit is always one operating company and usually one
competence such as merchandising or supply chain. So, for example, when we
undertake the development of the next generation of merchandising systems, we
will bring those specialists together in a joint or common project. The project mem-
bers, then, are not resourced from a centre pool but are resourced from the operating
companies’ pools to participate in common projects. For example, the merchandise
project is hosted by ICA and therefore they may bring a little more business com-
mitment but the co-operation and benefits are wider, especially in the first stages
of the project where we have the definition phase and some of the design takes
place. There you can really see that there is very much in common and it does not
make sense for the two big operating companies to separately design screens or
whatever. So we have this concept of the lead operating company, where one oper-
ating company takes the development deliverables and develops something that
can be rolled out later throughout Europe.

Project and programme management

The interesting question comes when we consider how IT developments that span
operating companies and have the direction set centrally are justified, appraised,
funded and evaluated. It is essential to have highly structured and well-formulated
project governance around this kind of project. In Ahold, there is always a steering
committee. The chair is the business representative of the lead operating company
and there are representatives from the other operating companies. For example,
in a merchandising project, the merchandising VP from ICA will be chair, the
VP merchandising from Albert Heijn is a member, as are IT directors from both
operating companies, and myself as CIO.
For programme management, we have an IT policy board in each operating
company. As members, we have the CEO, the CFO, the IT director and myself
to ensure that the operating companies go in the required direction and that we
are not going to re-invent the wheel. There is also the European IT policy board,
comprising the CEOs and IT directors of the main operating companies as well
as myself, all working together, to get the right alignment and an escalation level
throughout Europe.
As for funding, we have recently agreed funding principles, and although they
may be reconsidered, they are working at the moment. During the definition phase
of each project, we establish a role for each operating company: lead operating
188 Retail Strategy

company, development partner or implementer or external consultant. Once the

roles are identified, it is how the project is to be funded. There is no central budget
and so the Center does not fund any part of the project. It is not an easy thing
to achieve, but the good thing about this whole scheme is that the project has
commitment from the start. Nothing is developed unless there is a business need
to drive the change. It is their project and they do it together, they run it together,
they own the budget and they own the benefits so if an operating company has a
share of the benefits, they also have a share of the costs.
At the European Competence Center, we determine the rules of engagement,
ensure the deals get done and support the project along the way but it is not our
project, it is their project and that is the way it should work. Implementing a new
system is not the main objective. We are chiefly interested in getting real business
value out of such a system, and that only can be done in the operating companies.
This is more or less a federated model.
The operating companies really do have to justify when they are going to make
a major investment in a system that is not aligned with the plans and the business
strategy. This has the effect that over the last eighteen months or so, over 80 per cent
of major developments within Albert Heijn and ICA have been within the context
of this programme. Whether you call it decentralization or democratization, when
you really look to the deliverables, it is very much centralized.
Our core competence is really using IT, understanding the business, and under-
standing how we can benefit from our scale. We will increasingly use third parties
for development, and also perhaps make them responsible for maintaining some
applications. For example, in Poland, we could start from scratch, and we have
learned from experience so we do not have developers there. Albert Heijn and ICA
have a history, but they have also moved in that direction. The policy has an effect
on the way we hire people and how their career is developed. It should be natural
that people spend some time in IT but then work in other areas of the business.
Our own careers are an example and although it is not general now, it will be in
the future because it is really necessary.
There is a place for the specialist, of course. We need technical expertise to, for
example, evaluate new technologies but they should be real experts and in there is
a dearth of real experts.
Ahold has traditionally been excellent in operational activities, and also excellent
at a conceptual level. With our mission to bridge the gap between IT and the
business, what we are developing is the ability to translate the conceptual into the
operational. We need people, middle managers, who can understand and explain
the concepts so that the concepts are implemented in a timely and practical way.
Without those people bridging the gap, there is the danger of spending too long
in the exploratory stage, and a chance of losing a potential source of competitive
advantage.
This is perhaps particularly important in retail, where vast numbers of people
are on the shopfloor. They are selling – that is what retail is all about. Even the
store managers are very operational of course. Many members of our middle
Bridging the gap between IT and the business 189

management are operators and it is a challenge to develop or attract middle

managers with the capability to conceptualize to take on this essential bridging role.

E-business initiatives
We take e-business very seriously so we have www.Albert.com. Although Albert
is more associated with Albert Heijn, it is conceived as a brand in its own right,
bringing together Albert Heijn and the speciality stores in The Netherlands.
The website has been launched to some acclaim and from a functionality point of
view, it is regarded as a top site. It does not bring in big money yet but it is perhaps
a pre-requisite to be successful in the future. It is still very much a strategic issue,
initiated because of a strong belief that it will continue and will grow.
If you talk about B2B in the sense of co-operating with suppliers, I think you
can say that Ahold has always been very advanced. We are a very enthusiastic
supporter of ECR (efficient customer response) and I think Ahold has always tried
to co-operate well with suppliers because it benefits us and will benefit them. So
we were, at least in The Netherlands, the trendsetters for EDI standards.
We have been implementing EDI traditional technology very intensively and of
course the new technologies are a natural progression. For example, Albert Heijn
has a very advanced supply chain system giving regular updates to our main
suppliers on stock positions in the warehouse to really make the supply chain
very responsive. We use B2B websites and Ahold is a founder member and strong
supporter of WWRE (WorldWide Retail Exchange). WWRE plays an important
role in establishing the infrastructure and the architecture and CPFR (Collaborative
Planning, Forecasting and Replenishment) too will help implement new concepts.
We will support developments of that kind. It is not going as fast as we sometimes
hoped but I think as far as that is concerned, it has been important and it will
continue to be important.
Standards are a requirement to make progress in this field. We have an internal
department representing WWRE in Ahold, working on a global level. They are
translating the business needs of Ahold into WWRE and the other way around.
One project, for example, is to develop a ‘buying catalogue’ and associated buying
systems to support all the buying departments of Ahold in Europe. The team are
using tools and concepts that are co-developed with the WWRE.
Technology is not unimportant. The B2B market places do struggle with some
of the technology issues. However, we see the WWRE and B2B very much as
business-driven and of course the technology helps but in the end it is about
business processes and co-operation in businesses, which we have been doing
for several years and will continue to do. There is nothing new there!
Chapter 10

Leisure and
retailing:
legoland parks
Interview with Mads Ryder, head of legoland
parks and director of legoland, Billund,
Denmark
LEGOLAND A/S, Nordmarksvej 9, DK-7190 Billund, Denmark
Tel.: +45 7533 1333; Fax: +45 7535 3179

Jonathan Reynolds

There is much talk across Europe amongst retailers of the future importance of leisure
services, entertainment and of theatre in retailing. Consumers, goes the argument,
are tired of the sameness of retail formats and are eager for different experiences. It
also appears that consumers are willing to pay more for services than for products and
that leisure services therefore provide an attractive and potentially profitable route
to brand differentiation for retailers. One strong brand to have sought differentiation
through leisure is LEGO, with four LEGOLAND theme parks.
First produced in 1932, the distinctive LEGO brick was named Toy of the Century
in 2000 by the British Association of Toy Retailers and in 1999 by Fortune Magazine.
Over the past 60 years global sales of LEGO bricks have exceeded 320 billion – the
equivalent of 52 LEGO bricks for each of the world’s 6 billion inhabitants. LEGO is
a privately-owned business, seeking to offer children and young people ‘creative,
developmental and amusing products and experiences’. In addition to the basic play
materials, this has included software (including PC-programmable bricks), lifestyle
products (such as clothes and watches), retail stores and leisure parks. A num-
ber of joint licensing deals, with companies as diverse as Warner Brothers, Disney,
Leisure and retailing: LEGOLAND parks 191

Nike and HIT Entertainment (producers of Bob the Builder), have allowed new and
contemporary themes to be developed.
Financial performance at LEGO has recovered somewhat following extensive 1 billion
Danish kroner losses in 2000 and subsequent restructuring. Lego Systems posted a
net profit of 530 million Danish kroner for 2001. LEGO forecasts a 4.0 per cent year-
on-year increase in turnover for 2002, although the important fourth quarter was
disappointing because of poor US and European Christmas sales.
Here we interview the head of LEGOLAND, Mads Ryder, to determine how straight-
forward brand extension into leisure services can be and what lessons can be learned
by retailers.

Origins and growth

Mads Ryder hands me two business cards. ‘I have two cards but only one salary’,
he observes sadly. Ryder is both director of the first legoland at Billund in cent-
ral Denmark (which attracts over 1.5 million guests every year) and head of the
parks business unit, incorporating parks in Windsor, UK, California and the new
development in Germany that opened in 2002. He certainly seems to have enough
energy for two jobs, as he leaps across the office to show me a neat, customizable
lego pen set. He offers me a boiled sweet. First name terms are the rule in lego and
this is indicative of an informal business culture so common amongst Scandinavian
organizations, in this case derived from the continuing family interest in the com-
pany (now in its third generation). The values associated with this culture have
strongly determined the way lego’s leisure services have developed.
The Billund legoland opened some 33 years ago, largely as a result of the
number of requests the company had to ‘see behind the scenes’; tour the factory
(adjacent to the park) and meet the designers. Almost certainly, says Ryder, lego
had not intended to enter the theme park business but got there by accident. Some
250,000 visitors in the first year and 600,000 in the second meant that the company
had to get serious about managing this new venture. In the early 1990s, with visitor
numbers running at 1 million per year (half of these from outside Denmark), it was
agreed to examine the potential for international growth. An early joint venture
in Germany had not been successful and in examining the reasons behind this, it
became clear that the significant challenge was ensuring that the company’s values
were translated into an effective theme park experience.

Brand values and positioning

Ryder has just two objectives in running the parks: they must make a profit (in
other words the parks are not a marketing cost to the business but standalone
192 Retail Strategy

business units); and they must act as a ‘brand house’ for lego, providing a means
of exhibiting the product and the values attached to that product. lego’s value set
is unusually clearly articulated. It centres on relatively innocuous themes of fun,
coolness and interactivity; but there is also a set of strong moral messages. lego
is about family togetherness; it focuses upon achievement through construction,
backed up by a systematic approach to the task in hand. He gives an example:
the pen-cum-construction set he showed me earlier epitomizes the creativity and
interactivity of the brand, based upon the building block system. The owner has
a choice about how the pen looks and feels and it’s fun to put together (it is, too).
Another example – a lego-branded product sample plastic mug – is less clearly
linked to the value set. It’s less distinctive and could be advertising anything.
The legoland theme parks seek to differentiate themselves from the competition
through this focus on creativity, on the product, and through the target demo-
graphic – 2–12 year-olds (2–10 in California). Ryder suggests that there is actually
relatively little for this age group in legoland’s host countries, with most theme
parks aiming at teenagers. Perhaps, I suggest, this is because many kids – partic-
ularly towards the end of his target age spectrum – no longer find leisure offers
ostensibly aimed at them fun – they are continually aspiring to teenage activities.
Ryder agrees; he believes kids are getting older younger. The combined effects of
television, of the Internet and of computer gaming also create expectations that can
be difficult to deliver against in the ‘real’ world.

Financial challenges
The lego Group has expanded rapidly over the last five years. The new product
development cycle has been especially quick. Extraordinarily creative mainstream
products such as Mindstorms and Bionicle have sought to address children’s more
sophisticated expectations; product tie-ins such as Star Wars and Harry Potter
exploit cross-selling opportunities, whilst staying true to lego brand values. The
brand has also been extended into software and clothing. This expansion, in the
context of a fall in sales worldwide during 2000, caused the company some finan-
cial problems. Non-core activities were closed down and costs reduced; some
production facilities were closed.
What has been the impact of this on the theme parks? The parks themselves are
distinctly core, Ryder emphasizes, a natural and logical extension of the company’s
core business of toy production. Whilst there is unlikely to be short-term growth in
park numbers following the opening of the German park in 2002, he believes that
2003–04 will see new developments being commissioned. Not least, this will avoid
splitting up the talented team that Ryder and his colleagues have put together
to create the parks. Three designers are at the heart of this team, responsible for
translating product into attractions on the ground.
The diversification of the product range brings with it new opportunities and
challenges for the parks. Whilst there is never a shortage of new product ideas, the
Leisure and retailing: LEGOLAND parks 193

life cycle of theme park attractions needs to be considerably longer to justify the
initial investment of resources. For example, the UK TV character Bob the Builder
may have a two or three year spell at the front of children’s consciousness – a ride
or other attraction may have to last ten. Managing the mix between short-term
fashion and longer-term attraction is a difficult balancing act. legoland manage
this by using ‘soft’ investment in events and theatre to complement the strategic
investments in such attractions as Pirateland and Adventureland. The Billund site
has an Imagination Theater presently featuring the Bionicle product. They also
seek to identify ‘generic’ themes that can be promoted in the longer term. For
example, racing is a theme that will be actively supported through the development
of Technics ranges and matching attractions in the years ahead.

Marketing and local differentiation

Each of the park sites has its own set of issues. In Windsor, for example, the historic
nature of the site and the UK development control process means that planning
any new investment can be a protracted and prolonged affair. Its closeness to
Windsor Castle and the Great Park carries additional sensitivities. Yet the UK park
is only the size of Billund (itself on a restricted site) and the scope for expansion is
considerable. Billund, on the other hand, faces an over-trading problem; with very
high peaks in demand during the Danish and German school holiday periods.
Marketing the non-Danish parks is a continuing task. In Denmark, only some
5 million people live within 2 hours of Billund. In the case of Windsor, the figure is
nearer 15 million. Yet the visitor numbers are similar – between 1.4 and 1.6 million
per annum. The new German park attracted 1.2 million visitors in its first season.
Whilst in Billund’s case, half these visitors are foreigners, increasing visitor num-
bers and loyalty is still a challenge for the parks business. Season ticketing has
worked well in improving customer loyalty and increasing the number of return
visits. In Billund, off-peak season ticketing (April–June and August–October) has
proved popular, with some 60,000 Danes visiting up to four times a year. Shift-
ing 100,000 visits from peak to off-peak days has a significant effect on reducing
overcrowding.
Focus groups in Denmark and California explored the sensitivity of guests to
discounting as part of season ticketing and found, surprisingly, that price was not
necessarily an issue for the most loyal guests. What they wanted was exclusivity
and the ability to get closer to the company – especially access to the factories
and designers. Breakfasts with model builders have proved very successful in
California, for example. The team of 60 or so model builders are the creative heart
of the business and have a wacky sense of humour. In the UK and Denmark, going
‘behind the scenes’ and invitations to preview launches of new attractions, has
allowed the company better to cultivate enthusiasts for the brand.
The website lego.com is also seen as a legitimate marketing tool by legoland,
although it is a self-contained business unit. The site is very successful for the
194 Retail Strategy

company in terms of numbers of hits and legoland itself has ambitions to sell and
allow guests to print out park entry tickets from their PCs.

Retail opportunities
I was surprised to see so many shops on the Billund site, compared to Windsor.
There are 12, some by the exit, but other themed units are sprinkled around the
park, designed to allow guests to buy products related to the attraction they have
just visited. This is a difficult area for lego, admits Mads Ryder. The opportunity
to cross-sell is clearly an important one – there are visible synergies between the
leisure and retailing functions – but at the same time, the commercial aspects of the
operation must not be allowed to eclipse the entertainment value of the parks and
the philosophy of the brand. ‘So many parks’, says Ryder, ‘force you to go through
the gift shop on the way to the exit. We must be careful about balancing commercial
pressure and brand values.’ So although the Windsor park saw more shops being
introduced during 2002, including a childrenswear outlet, this will always be a
measured introduction. What we have also seen is the marketing of the park as a
retail destination in its own right. Since Christmas 2001, UK visitors have been able
to shop without necessarily entering the park. lego has also experimented with
a standalone shop in the Bluewater development in Kent and in Milton Keynes.
The company has been approached on numerous occasions by shopping centre
developers wanting a mini-legoland in their developments. Only the Mall of
America has one at present – an indication of lego’s desire to keep the brand
exclusive.
Nevertheless, Ryder is quick to say that as retailers, lego still have much to learn
in terms of store design and operations. Has legoland then thought of outsourcing
the retail aspects of their parks business? Ryder observes that, whilst there are a
number of product partners in the parks (for example, Nestlé, Coca-Cola, Carls-
berg and Fujifilm, and Audi in Germany) these are more in the way of vendor
relationships than true partnerships. legoland, he feels, would not be averse to
identifying what he calls a ‘megapartner’ with whom to work – but the degree of
brand alignment between lego and any prospective partner would be critical, as
would the logic of the brand association. It would be ineffective to have – say – a
carpet company sponsoring an attraction, if there was no apparent relevance to the
attraction. It is interesting to note that in November 2002 lego announced a global
strategic alliance with Nike, centred around the Bionicle product range.

The future of brand extension

Despite its present financial difficulties, legoland is always looking for ways to
extend its brand directly to support its core activities. I had just been ejected from
my room at the Hotel Legoland – adjacent to the Billund park – because the hotel
Leisure and retailing: LEGOLAND parks 195

would be full on the following night. Ryder was sympathetic but not surprised.
The Danish hotel runs at 83 per cent capacity year-round (catering for business
guests and conferences outside peak holiday periods). This is a figure many in the
hotel industry would love to achieve. If he had planning permission, Ryder says
he would build a Hotel Legoland in Windsor ‘tomorrow’. But these developments
would be to support the parks – legoland is not in the hotel business. In the same
way, the German legoland has a lego campground adjacent to the development,
for those guests not wanting or able to afford hotel accommodation.
What lessons can lego offer retailers seeking to use leisure services as a way of
extending their brands? Brand extension works, concludes Mads Ryder, when it is
a relevant, natural and logical extension of the core brand. It was a short leap for a
family-centric toy manufacturer to move into family theme parks – for a retailer it
might be a very different proposition. Further, lego’s core values and the product
itself provides for exclusive and differentiating features in the legoland offer that
are significantly distinctive from the competition. Mads shows me out into the
park. ‘Have a fun time and come back soon,’ he says, looking at the blue sky ‘it
shouldn’t be too crowded – it’s going to be a 3–4,000 guest day.’ Leaving Mads
smiling at the door, I am startled by a loud snore from the life-size lego statue of
an old man sitting on a park bench. Clearly, the model-builders have struck again.
Chapter 11

Everything for the

trade – next day:
Screwfix Direct
Interview with John Allan, managing director of
Screwfix Direct
Screwfix Direct, FREEPOST, Yeovil BA22 8BF, UK
0500 41 41 41

Jonathan Reynolds

Screwfix Direct was founded in 1970 as the Woodscrew Supply Company. Now
owned by the Kingfisher Group, the company is estimated to have turnover of some
£200 million. The company is active in the repair, maintenance and home improvement
market in the UK, of which it has a 0.5 per cent market share. However, it commands
over 3.5 per cent of the UK trade market, and is the dominant player in the RMI direct
market. Screwfix Direct operates one of the largest DIY websites on the Internet. It
seeks to offer the lowest prices, with next day delivery and superior service.
Presently headquartered in Yeovil, Screwfix Direct also operates from a warehouse
facility in Leicester and is constructing a new headquarters in the Potteries, in the
North Midlands.
In this chapter, John Allen, managing director of Screwfix Direct, discusses some
of the distinctive characteristics of the business and the reasons for the company’s
success in managing hybrid channels to the consumer.
Everything for the trade – next day: Screwfix Direct 197

Older than you think

The reception area, the corridor to the managing director’s office, and the office
itself, are full of awards. UK company Screwfix Direct has just picked up the
Investors in People Award, as well as E-tailer of the Year 2002 and West of England Busi-
ness of the Year. No wonder John Allan, Managing Director since 2001, is looking
pleased. He leans across the table: ‘I love this job.’ Many people would be forgiven
for thinking that Screwfix Direct was one of the few companies to emerge with
flying colours from the dot.com debacle in 2001. In fact, the business has substan-
tially deeper roots. Founded in the late 1970s as the Woodscrew Supply Company,
it relied on mail order and advertising in Exchange and Mart for its business. The
company had no way of recording the names and addresses of its customers and
dealt with one-off orders from tradesmen. But it prided itself, as it does now, on
product quality, depth of offer and customer service. The business was purchased
by Kingfisher in 1999 as it sought to develop a portfolio of new ventures that might
enhance the future strategic development of the group and which might harness
the electronic sales channel. It has proved a canny acquisition.

Growth and transition

The transition from an essentially entrepreneurial small business turning over
£100,000 in the early 1990s to over £1 million by 1995 and to a concept worth,
according to analysts’ estimates, some £200 million in sales today, created many of
the challenges typical of a fast growing firm. Great commercial success led in par-
ticular to significant infrastructural challenges. At the end of the 1990s, the business
was trading out of just 80,000 sq ft of warehousing. Allan’s appointment in 2001
was prompted by the need to put into place the systems, processes and resources
required to manage a nine-figure turnover business and an exponential growth
curve. Screwfix now trades from 580,000 sq ft from a range of buildings in Yeovil,
has a sister unit of 500,000 sq ft in Leicester and an extendable facility of 317,000 sq
ft opening in 2003 in Trentham in Staffordshire. ‘On the growth curve we are on,
the business planning process must be different. It takes four years to put in place
what we know now will be needed by 2005.’ Screwfix sources over 6,000 product
lines. In addition to producing four 280-page catalogues every year, the business
functions increasingly online, with web-based sales accounting for an estimated
15 per cent of the £140 million total annual revenue in 2001/2.
But there are dangers in becoming too efficient from the supply side perspect-
ive, stresses Allan. Whilst a supply chain discipline is critical, mechanization and
ultimate supply side efficiency can work against the customer’s interest. With a
fulfilment system that is especially designed to handle small orders, too much
automation in any case is difficult and expensive (as companies like Webvan dis-
covered). John Allan’s more flexible focus on the customer creates a virtuous circle
198 Retail Strategy

in which the business can be seen to respond to not just exceptional circumstances,
but evolving customer needs.

The cult of Screwfix

And these customers are very particular animals. ‘Screwfix Direct does what it
says on the tin’, says Allan. ‘It’s as simple as that.’ And that is ‘Everything for
the trade, next day and at trade prices’. The business is fortunate enough to
have a highly defensible and arguably low risk niche market. The key target is
the ‘light trade’ buyer. Although Screwfix has just 0.5 per cent of the UK repair,
maintenance and home improvement market, it commands over 3.5 per cent
of the UK trade market and is the dominant player in the RMI direct mar-
ket. Screwfix is driving the direct market – and there’s plenty of headroom.
The light trade and so-called ‘paraprofessional’ market (the grey market of indi-
viduals who slip in and out of self employment alongside professional DIYers)
has been on a long term growth trend in the UK. Typical is the customer who
has learned a trade at some point in their life and who undertakes a big pro-
ject in their own house – and who then may go on to help out a neighbour
– and is paid in cash. And for these customers, Screwfix has become some-
thing of a cult. Screwfix is not for the Changing Rooms generation. Allan
thinks that the Changing Rooms bubble has burst. By far the more reliable
market is the ‘bread and butter’ collection of serial house renovators and the
growing number of self-build home-makers. There is also a growing interest in
the business from facilities managers. Indeed, as Figure 11.1 shows, the busi-
ness’s market segmentation provides a number of complementary avenues for
growth.
How resilient is this market to the prospective slowdown in the housing market
and to the economic rumblings of UK plc? Allan regards the business as being well

Do it yourself?
Yes No

Wholesale
Personal invoice?

Yes Tradesman
(not served)

Facilities
No DIY
management

Figure 11.1 Screwfix Direct market segmentation analysis

Everything for the trade – next day: Screwfix Direct 199

protected from the economic cycle. If the market turns down, people stay with
their existing homes and invest more in them. In any case, Screwfix does not sell,
by and large, to those individuals; it sells to the largely self-employed who work
on properties. Nor is the market especially seasonal: the month-on-month sales
range from slow growth to accelerated growth. There is a modest January–March
peak, and Christmas is usually quieter, but the even nature of demand compared
to other retailers means that staffing levels can be kept constant.

Culture club
Allan’s commitment to customer focus and requisite flexibility, and his rejection of
efficiency and mechanization for the sake of it, is most clear in terms of the Screwfix
Direct culture. ‘Culture is a fascinating thing’, he comments. ‘It comes from the
workforce – it’s not something that can be hammered in.’ Allan sees the profit-and-
loss as the scorecard, not the game. The game is meeting customers’ needs.
For example, the contact centre staff has no targets on call duration, as is common
with other call centres and this leads to a much more positive atmosphere. They
make sure that the customer gets what the customer wants, no matter how long
it takes. Both they, and the distribution centre staff, are ‘tuned into success’ and
are flexible. Whilst I was waiting in the reception area, the receptionist shifted
smoothly and professionally from handling visitors to handling a customer query
that had come through to the head office number by mistake. Rather than forward
it to the call centre and putting the caller on hold, she dealt with the request then
and there.
Of course, the historical origins of the business and its primary location in the
small town of Yeovil has made it one of the biggest employers in the area and
makes a ‘local’, more intimate culture easier to maintain. But the huge change
of moving from 24 people in 1995 to 1800 today has provided considerable chal-
lenges; and these are not likely to be reduced as the company now operates from
a second facility in Leicester and will shortly be commissioning its Staffordshire
distribution centre. How does Screwfix Direct manage to maintain its flexible per-
formance culture in the context of exponential growth? Allan claims that this is
because although they recruit frequently and often, the business brings people
in in small numbers, allowing them to become ‘infected’ by the existing work-
force. Opening the Leicester warehouse as a new build operation with large
cohorts of new recruits was a significant challenge in cultural terms: how to
recreate and sustain the achievements and values fostered in Yeovil? ‘We took
a few disease carriers along,’ chuckles Allan, ‘and they did the job for us.’ The
business is not unionized, although USDAW has been making strident efforts
to force recognition on the retailer. Richard Butler, Screwfix Direct’s HR director
comments that whilst ‘we respect USDAW’s right to canvass our staff, we don’t
want formal presentations. We think we have a dynamic, fair and supportive
business.’
200 Retail Strategy

Where’s the web?

It seems curious that a case selected to address e-commerce issues is only now
turning to the company’s objectives and achievements in relation to its website.
This is not accidental. The fundamentals of a rapidly-growing established busi-
ness must be well understood and sound irrespective of the superficial merits of
its online platform. John Allan’s view was that many potentially successful dot-
com businesses got to a scale where they were comfortable managing themselves
entrepreneurially in terms of turnover – say between £30 and £50 million – driven
by the capabilities and constraints of their web presence, but could not get beyond
that point.
But a further important consideration is that Screwfix Direct – despite being
recognized as 2002’s e-tailer of the year by UK trade magazine Retail Week – is
not dependent upon the web for sales. It is a truly integrated business in terms of
marketing channels. The business deals with all direct channels: web, phone, fax
and even a few orders received by post. Allan says that he has sought to turn on its
head the usual rhetoric about ‘a single view of the customer’; he wants the customer
to have ‘a single view of the organization’. This requires a meticulous consistency
of approach in relation to sales channels. So there is no deliberate incentive for
customers to order online (unlike other businesses such as easyJet, who provide
discounts to online customers as a way of reducing the costs attached to other
marketing channels). Indeed, until the end of 2001, the web channel performed
a complementary role to the catalogue as an alternative ordering channel. Only
recently has it started performing as a sales generator in its own right. Allan wants
the web channel to ‘reach its natural level’. Its success to date, he believes, also
comes from its being very basic and very simple.
This simplicity has meant, so far, that it has not been possible to offer the degree
of personalization and flexibility in the web channel that has been available, for
example, over the phone. This is soon to change. A beta site is undergoing user
acceptability testing and will better harness the Internet’s capabilities to person-
alize the customer’s online experience. The site, developed with the support of
Javelin Group (whose clients include Marks & Spencer, John Lewis as well as other
present and former operating companies of Kingfisher) will include order history
and tracking and targeted promotional merchandising and is due for release next
year. The redesign will also better integrate the website with the contact centre and
fulfilment operations.

Conclusion
What comes out of a discussion with John Allan is that, not surprisingly, it is
the viability of the business concept, the durability of the market positioning, the
capabilities of the people and the culture within the firm that must be right before
issues to do with the practical mix of marketing channels used to deliver sales
Everything for the trade – next day: Screwfix Direct 201

can be addressed. Effective channel integration is a consequence of the clarity of

this vision and attention to detail in the quality of execution. What also becomes
clear is that a business concept does not have to have been invented yesterday
in order to be relevant to or successful in an electronic marketing environment.
The Woodscrew Supply Company found its niche well before most of the Internet
generation were born.
As we leave the building, John Allan shows me the first flyer produced by the
company in the early 1970s, framed alongside some thirty other flyers and cata-
logue covers. Although the xeroxed sheet of paper has not weathered well over the
years, it is possible to make out a preoccupation with product quality, knowledge
and customer service that still prevails today.
Chapter 12

Uniquely Auchan:
retailing as
invention
Interview with André Tordjman, marketing
director of Auchan
Auchan, Rue de la Recherche, 200, 59650 Villeneuve d’Ascq Cedex, France
Tel.: +33 3 28 37 67 00; Fax: +33 3 20 67 55 20

Richard Bell

In France, Auchan has over 100 hypermarkets and over 260 supermarkets with a
combined staff of over 60,000 making net sales of over d27 billion in 2001. Auchan
now has a presence in 14 countries, including 160 outlets in Spain and others in
Portugal, Italy, Morocco, Asia, and central and eastern Europe. With a reputation for
surprising the customer, Auchan makes an interesting marketing case study.

Auchan perspective
Retailers sell goods and the goods that one retailer, for example Carrefour, sells
are often the same as the goods that another retailer, perhaps Auchan, sells. The
question is how to create a unique positioning, a difference between us and the
competition. In the past, the key to retailing was to buy at the lowest price in order
to sell to the consumer at the lowest price. Although this has led to success for
retailers in the past, it will not be enough to be the best in the market of the future.
Today, we are moving from a distributor focus to a brand focus. However, there
is still a lot of work to do. First of all it is necessary to change the way of doing
Uniquely Auchan: retailing as invention 203

business. In the past, retailers sold what they bought. Today, we have to first define
what we want to sell. If we want to become the best and to achieve uniqueness, it
means that we have to have a brand mission. When we sell 450 different categories,
from fruit and vegetables to computers, to clothing, to pet food – what could be
the common element that makes us different from the competition?

Creator of better solutions

At Auchan, we want to move away from being a distributor of products to being a
creator of solutions that improve the standard of living for the majority of people.
However, there remains the question of how to organize to make sure that this posi-
tioning brings uniqueness to the market. First, becoming a brand means providing
proof every day of the meaning and value of the brand. Creating and delivering
solutions means thinking about products, packaging, services and the store, in a
way that improves shopping and living. We have done this with Auchan products
on a day-to-day basis.
A simple example of an innovative Auchan product is found in our plastic food
storage boxes. The main difficulty when opening a cupboard to retrieve a storage
box is to find the lid that fits the box. The colour on an Auchan box matches the
colour of the lid. So if you see a red box and a red lid, it means that they fit together.
It is a small thing but we have perfected it. For a further example, a child at a
swimming pool or the sea might have an inflatable ring. The main difficulty for a
small baby using a ring is that he cannot move his arms. We have developed an
inflatable that is not round but is in a figure-of-eight so that the baby has freedom
of movement.
For an example of uniqueness in services, if a customer buys a washing machine
in Auchan and the washing machine is out of order for more than 48 hours, we have
to find a solution. When a family of four has no washing machine, it is a disaster.
Our commitment is to provide a washing machine during the time that we fix the
machine. For another example, if a customer wants to have dinner tonight but is
unsure what to cook, she can telephone Auchan and ask a chef for recipe ideas. If
the customer is trying to lose weight, on the same telephone number Auchan can
provide advisers.
A further example of uniqueness is provided by our new store concept, organ-
izing a store not as a manufacturer might, by product category, but in the way that
people consume the product. The Auchan store in Valle D’Europe is organized
this way.
These small examples demonstrate Auchan’s unique approach to the product
lines, stores and services – improving life on a day-to-day basis. But why have we
become inventors? The answer is that our role is no longer to copy but to solve a
problem from a consumer point of view, in using, eating or handling the products,
whatever the problem. This creates the Auchan uniqueness.
204 Retail Strategy

L’Institut Auchan
To further Auchan’s mission, we have created L’Institut Auchan as the guardian
of customer values throughout the company. The institute is responsible for moni-
toring the evolution of some aspects of French society, and undertakes research
on the way that people – seniors, the young, people on holiday – live, move and
communicate. Reports are produced that offer insight into French society. All of
the Auchan management receive the report summarized and in full. Each report
considers an aspect of the evolution of society and the implications for Auchan.
It is important not to have the research divorced from the operations. So although
the researchers are from my market research department, the people who decide
which studies should be undertaken and the implications of the results of the
studies are the operational people – store managers, market managers and category
managers. This way, we make sure that we are people-oriented. With a prime task
not to write the report or to research, but to make sure the research we have done
answers the questions that the operational people have asked.
There is an operational committee, which is different depending on the topic.
For example, we have an operational committee at the moment working on young
people because we know that young people do not often go to hypermarkets. The
committee is composed of people at the store, the market people at marketing level.
To summarize, the operations group identify the subjects for research, the insti-
tute undertakes the research, and then the operations side have to respond to the
research with solutions to the problems that they had identified. In this way, they
are their solutions, and so the solutions will be properly implemented.

Private-label products
In the Auchan view, private-label products are not essential to achieving unique-
ness. First of all because the brand mission statement is to provide better solutions,
a better life, and the better solutions cannot only be found with Auchan products.
The Auchan product may be part of the solution but it is not always essential to the
solution. Auchan should always provide the choice to its consumers. If we reduce
the choice, we reduce the solutions.
We must keep the big and high quality brands and add our own products to
these brands. The market share of the Auchan product will be what the consumer
decides, not what we decide for the consumer. We will never, never, never reduce
the choice to the consumers and we will never decide that the Auchan product
must be in a better position than the other brands.
Even with no Auchan products, we should be able to achieve uniqueness because
the world of market management today is not simply to have an assortment based
on what I have bought but to have an assortment of what we decide to sell. I ask
each market manager for a marketing plan for his or her category. In this way, the
manager demonstrates his or her understanding of the market and predictions for
Uniquely Auchan: retailing as invention 205

the future of the market but they also include what they want to be on the market.
We cannot be everything to everyone. For example, we cannot sell every type of
clothing to every type of person in France. We have to decide which clothing is
for whom. This is why, even if we did not have any Auchan products, we could
achieve uniqueness by managers deciding where they want to be in their market.

Consistent proposition
However, it is important to ensure that what one manager wants for his or her
category is consistent with the overall proposition of the Auchan brand. This is
part of the role of the marketing director. Each completed document comes to
me and I make sure that it provides a clear analysis of the market, because if the
analysis is clear, the position is good. For example, if I decide that Auchan will be
the most environmentally friendly hypermarket in the world and I will sell only
organic food, this is my position. I must make sure that in all the categories, the
emphasis is on organic food – whether it is for pets or for humans. That would be
my position, and I have to make sure that all the market categories are consistent
with this position.

Brand equity
Once you begin to build a brand based on providing solutions, it raises the issue of
brand equity. One classic measure of brand strength is that price elasticity is low.
However, there should not be a conflict between branding and price position. The
difference between branding in retailing and branding in manufacturing is that,
for manufacturers, a good brand has ‘good will’ in the price. You are willing to
pay more for a Mars Bar, for example. However, from a retailing point of view, it is
very difficult to make a consumer understand that, because there is a better choice,
a service is provided. For the consumer, if you take a bottle of Evian or Badoit, it is
difficult to explain that there are two different prices. However, becoming a brand
does not mean that prices should increase. We have to throw away the idea that
marketing always brings higher prices. Marketing should bring value and value
does not mean increased prices.
To be able to afford to invest in our research and development, to innovate, to
invest in new concept stores, to improve stores, to invest in service; we should try
to lower our costs. The best method of lowering our costs is not in buying but in
better economy of costs in the stores. Today, many members of our sales force are
responsible for replenishment. However, we should be devoted to consumers, and
so we have to find a way to be more competitive in the methods of replenishment.
This is why, while we are creating the brand, we have to find economy of scale
by better information systems, which provide free time for employees to devote to
206 Retail Strategy

consumers. For the first time since the creation of the hypermarket, we are fash-
ioning a new organization for the hypermarket. We will still have a store manager
but below him or her there are two important roles, a marketing director and a
logistics director. The marketing director is responsible for defining the marketing
plan for the store.
The brand gives power to the promotion. The brand campaign gives my promo-
tion more importance because the brand campaign is unique. Anyone can reduce
the price of a bottle of Badoit, but the brand campaign makes the promotion unique.
Part of each advertising budget should be invested on pure branding. Now, the
question is, can you communicate both on values and on promotion? This is how
Auchan communicates in advertising, consumer material and promotional activ-
ities. Sometimes principally communicating the brand and sometimes chiefly the
promotion but always the same great product.
For the future, Auchan can do more in terms of the upstream functions of the
business. However, our main focus is to be very good at the basics. Basics means
that the store is clean, the products are on the shelves, the tag is well done, and
so on. These are the basics. You cannot become a good brand if the basics are not
right. It is a little like an iceberg. The tip of the iceberg is what we see in terms of
consumer loyalty but below this level there are a lot of activities going on to ensure
delivery at store level.

Marketing directors at store level

The retail brand exists only at the store level. If we are not able to have 52,000
ambassadors of the brand (that is to say, the employees of Auchan) we are not able
to become a brand. To be able to achieve both global and local strength, the role
of marketing is not to decide on the store identity. The role is to give the frame-
work within which each store acts. A marketing director at the store level cannot
try to be marketing director for all of Auchan because we cannot afford to have
120 marketing directors. The brand is unique, so we cannot have 120 brand mission
statements and 120 different ways of communicating. We have one brand mission
statement.
However, each store is different: different in size, competition and consumers.
Therefore, the store is left to define the store position, and to identify the most
important markets. For example, in an area where there are a lot of young, work-
ing people, I may not carry bicycles for children. I will have bicycles for young
managers wanting to de-stress at the weekends. However, where there are a lot
of children, Auchan should carry bicycles for children. I, as marketing director
for Auchan, should not decide what each store should carry but I should decide
what position Auchan wants to have on bicycles, provide a number of different
models and let the store chose. However, they must select a consistent position.
A store cannot be a little bit of this and a little bit of that. This approach would not
produce a clear image. The brand provides the framework and the store nourishes
Uniquely Auchan: retailing as invention 207

the framework. To make that possible, it is necessary to elevate the competences in

marketing at the store level. It is why, today, we have a marketing director at the
store level. The decision must be taken at the place closest to the consumer.

The role of the marketing manager

There is a lot of talk about category management. I never use the term category
management in my work at Auchan because what has been done well in category
management has been done principally by manufacturers and does not adapt well
to retailers. I do not ask people to manage a category, but rather to understand the
market, identify a place in the market and only then decide on the category. Today,
we need to build a marketing plan rather than undertake complex data analysis.
That is not to say that I do not need to know the size and other properties of the
category. We do analyse all these characteristics, but it is most important to define
your position in the market if you want to be ahead of the market. In the past, stores
were always the same because they were created around the categories. Now the
question is one of market position, and this makes for a very different strategy.
This is a world that is going to be dominated by the marketing manager. For
example in meal solutions, perhaps Auchan want to be good and cheap. Well, that
is good news; it is better to be good and cheap than bad and expensive. However,
that is not enough. Meal solutions may be ready to eat, ready to cook, use organic
products, gourmand meals, exotic, traditional, speciality or every day. It is not easy
to identify a market position, but when the marketing manager is able to define a
position, only then it is possible to perform an analysis.
So, the term marketing manager, rather than category manager, focuses on the
market and focuses on the consumer. We have separated the buyers from the mar-
keting managers. The marketing managers define what we want to sell and the
give the buyers the responsibility of negotiating the buying. This means that the
buyers are no longer deciding what we are going to sell. The marketing manager
decides what we are going to sell and the buyer executes the buying. We have
separated the functions and the marketing manager must make sure that what we
want to do is consistent with the marketing strategy.
Suppliers have marketing people that understand the consumer potential and
they have sales people who negotiate with buyers. Our marketing people talk
to the marketing people of our suppliers. This is an enriching and constructive
dialogue, and will become more so in the future. We have to change. We have
hired people from outside and they have to learn what we are doing in the market.
We have people from Auchan, and they have to learn what marketing involves.
The combination of the two types of people is very powerful, now they start to talk
to suppliers. My role as marketing director is to elaborate some dialogues at the
strategic level. The problem I face today is that suppliers have been used to defining
the strategy they think we want Auchan to have. Now, they might provide input
208 Retail Strategy

to the strategy and we might share ideas but they no longer formulate the strategy.
I am not going to delegate that role.

Summary
In less than two years we have built the brand mission statement, we have reor-
ganized, we have created the new advertising campaign, we have a new concept
for the stores, and the new product Auchan design. Now this is all very new. In the
future we will be able to tell manufacturers what we want to be about. For example,
we might want to provide solutions for pets, food, health and so on. We might ask
a manufacturer to help. However, they would have to understand that we are not
willing to carry all the product categories but we are going to take products that
support our position. It is why my store will be different from Carrefour because
Carrefour may have a similar approach but will not be doing the same thing.
Chapter 13

Straightforward
British approach
works in China
Interview with Steve Gilman, international
director of B&Q
B&Q plc, Portswood House, 1 Hampshire Corporate Park, Chandlers Ford, Eastliegh,
Hampshire SO53 3YX
Tel.: +44 (0) 23 8025 6256; Fax: +44 (0) 23 8025 7480

Elizabeth Howard

B&Q was founded in the UK in the late 1960s and is now the UK’s leading DIY and
garden centre retailer. The format has proved popular in other regions of the world,
and B&Q now has over 20 stores in Asia and further outlets in Poland and Turkey.
B&Q had a turnover in 2002/3 of £3.7 billion, with a profit of £360 million and over
30,000 employees.
Steve Gilman is the international director of B&Q and sits on the B&Q main board
reporting directly to Bill Whiting, the CEO. B&Q is part of CDI, a joint venture
between Kingfisher and Castorama. Steve has been with the business for 22 years in
total, joining as an assistant store manager. Today he spends about two weeks out of
six in Asia, as well as time in Turkey and Poland.

B&Q’s international focus

Most of the focus over the last three and half years has been on China and Taiwan.
B&Q is part of CDI with Castorama of France, and Castorama have an international
division just as B&Q do. We have an informal agreement about where we focus
210 Retail Strategy

our time, so the Castorama international team is focused on European develop-

ment and South America. I focus my time and energies on Turkey and the East.
Kingfisher own about 34 stores in Poland under the NOMI brand, and I run those
as well.
B&Q have five stores in Turkey. That was a relatively recent entry, where we
bought a 50 per cent stake in Koçtas, a subsidiary of the Koç Group. The Koç
Group is a big conglomerate, very much like Samsung in Korea or Mitsubishi in
Japan. Because of the volatility of the Turkish economy, many western partners get
concerned. The indigenous companies feel more comfortable with hyperinflation,
hyper interest rates, cash management and all things that we have had to learn in
a new way in Turkey.
However, we inherited a number of stores, we closed one small store, we built a
brand new warehouse and we did all that during the course of 2001, which has been
one of the worst years economically for Turkey. We are still there and we are doing
OK. We will continue to work out how we are going to build a business in Turkey.

Excitement and potential in China

If the market in China keeps on growing at 7–8 per cent, they will catch up with
America over the next 25–30 years or so, which in China, they consider a blink of
an eye. For the last two years we have been talking about our pan-Asian vision. We
entered Taiwan initially on a fact-finding mission in 1995. Our partner in Taiwan
was Tony Ho – the CEO for Test-Rite. Test-Rite have been a major supplier for
B&Q for about 20 years. Tony had a vision that Taiwan was ready for a home
improvements store. We opened in a low cost way, realized that there was a market
and we have been building that business for the last five years. B&Q now have 13
stores, we are profitable and we are opening another three stores this year. It has
been a great test bed. Taiwan is a good place to start for western companies that
have never worked in an Asian context before. Arguably, Hong Kong is better but
more expensive.
Taiwan is a good starting place partly because of the American influence over
the last 50 years. The facilities, such as schools for westerners, are good. There is
empathy for working with westerners. Shanghai has a similar sort of appeal when
you enter mainland China and it is likely that most B&Q employees who have
worked out there would say they would rather live in Shanghai than Taipei. And
I think I would as well if I was to go back there.

Learning as a team and as an individual

We are fairly confident that we know what makes a good person for us. One of
the necessary skills is the desire to learn. When you first go out there, you do not
know the language, you do not know the culture, you do not know the customers’
Straightforward British approach works in China 211

behaviour at home, you do not know what is important and not important to them
and you do not know how to motivate people. You realize you have to start again.
Now that is part of the fun because you start to learn that it is about relationships.
The Chinese will say that a contract is just an intention to do something, and a hand-
shake means it really will happen. That is not the way we do business in the UK. So a
lot of the time you are conducting business the reverse way you do things in the UK.
Good communication skills, even if you are unable to speak Chinese, are crucial.
We are having Chinese lessons, and there is a couple in my team who can speak
passable Chinese. Personally I am careful about my tone of voice. I deliberately slow
down and am much more measured. I am quite excitable but until my relationship
with somebody is very good I am much quieter in the way I speak. You have to
learn so much. I think I have still got an awful lot to learn and the same goes for
anybody in the team.

Approaching the Chinese market

Obviously, what B&Q ‘brings to the party’ is all our experience. Our approach to
any country is enter in a low cost way, delivering what we believe the customers
want and having done the market research. Once we establish that the customer
is there and that we can find an economic format that will work, then Kingfisher,
our parent company, is very supportive.
For example, in information systems. Our initial system in mainland China came
from a Chinese domestic software company, who were a derivative of the Chinese
missile programme. They had developed a retail software package for a couple of
local retailers. Working in collaboration, we reached the stage where it was good
enough to do what we needed to do, and at relatively low cost. The system was
not going to be the solution for the future but now we have replaced all our local
systems with SAP, again in a low cost way. It may have been more expensive than
the original, but low cost from a European perspective.
B&Q’s principle is not to go in with big investment until we know that we can
make money. Being low cost is a real quality. If you look at our businesses you
see that we try to get as much of an international standard as we can but with the
lowest possible cost. Boots and Marks & Spencer – and I would not necessarily
want to criticize them – have always gone in with a much bigger budget. They
have put in state-of-the-art stores, which means the economic model is built on a
difficult cost base. Obi, a German competitor of ours in China, is trying something
similar currently.

B&Q image in China

We have only five UK expatriates in mainland China. Of the top four management
positions, one is English and three are Chinese. Our president is Chinese. Certain
212 Retail Strategy

jobs in Carrefour, in contrast, are nearly always expatriate jobs, so it produces a

glass ceiling with the locals.
You can find very, very well educated young people in China, who are very
ambitious, and want to learn. In China, if I said ‘tomorrow morning at 3 a.m.
we are going to run a course on . . . whatever’ we would probably have 100 people
attending voluntarily! When we are recruiting, obviously salary is important but
it is not as important as the learning opportunity. People have a tremendous desire
to learn.
The next challenge is how to get people to think ‘outside the nine dots’, that is, to
think more widely. To do that we must provide an environment where they start to
believe that this is not a traditional Chinese environment, this is a Chinese/British
environment. That takes a while, and comes back to personality and attitude and
learning. If they want to take an initiative, even if you are pretty sure it’s wrong, it
is good to let them have a go. Then don’t shoot them when they make the mistake.
The Chinese are very self-critical anyhow, that is part of their education system.
So my inclination if someone comes and makes a suggestion is to consider how
can I make that happen for them and what is the risk? If the risk is small, then
I encourage it. That is the behaviour that you really want people to learn. In the
beginning, most of the initiatives in store were British and now it is probably
50/50. In a few years time, it will be 80/20 Chinese, which is probably where it
should be.

Customers and lifestyles

Chinese customers, Turkish customers and Polish customers all want to live in
a better way than they did before. In China, previously state-owned housing is
now being sold off very cheaply to people who have lived there a long time, and
virtually all new housing is private. So there is massive social change in China. And
everyone wants to improve his or her home. Chinese employees want to live in a
better home and their customers want to live in a better home, but none of them has
had the 30–40 years experience of home improvement that we have. Initially it is
about bringing in the plumber or the decorator, but then more and more customers
choose their own things and learn how to do-it-yourself. We promote it as being
something that is fun and enjoyable. We encourage with ‘how to’ displays in our
stores, with our learning centres, and with our demonstrations.
Another important aspect is that in China (and in most countries) people believe
that workmanship standards are quite poor and shoddy. So if they bring in someone
to do something, they are probably not going to do a very good job. The risk of
them using fake or poor quality products is also high. If they come into a store like
ours, they know that if it says ICI on the can, it is ICI inside. Our own brand paint
is also particularly successful. It will cover all surfaces. Now that is quite attractive
to the UK customer, but to an Asian customer who is worried about how to do
Straightforward British approach works in China 213

things, it is brilliant. So the B&Q brand means an awful lot more to consumers in
Asia than it does in the UK.

Differences from the UK business

We include more furniture in China than in the UK. It is a different product range to
the UK: more tailored to the customers. We also set up our own home decoration
service, first in Shanghai and later in all the businesses in China. About 20 per
cent of our turnover is driven through the decoration service. We will go into the
typical, completely bare, new flat, and we will design it with the consumer. We
will understand their budget, their lifestyle, whether they want modern or ultra
Chinese. Then we will give them a quote that shows the cost of all materials bought
from a B&Q store, the cost of labour, and a management fee. If they say yes, then
over two to three months we will completely do out their whole apartment for
them.
Customers perceive us as very experienced and knowledgeable, with high qual-
ity, and reasonable value for money. They do not see us as the cheapest, even
though most of the time we are actually leading edge on price. Even people who
have never even been to a B&Q store have enormous trust and confidence in us.
When they actually go to a store then they also say that our prices are OK.

Trust in the brand

Let me tell you a story about trust. About a week after we had set up the decora-
tion service, a guy came into our first store, and said: ‘I’m a local from Shanghai
but I live most of my time in the UK now and I know B&Q. Here’s 100,000 ren-
minbi (RMB). I have just bought an apartment and I like a fairly modern style,
please get on and decorate it for me.’ He gave us the keys to his apartment
and gave us the cash. A week later we faxed him a copy of a design for the
apartment, he said it looks good, just get on with it! The next he knew was
when he came back three months later and it was finished. That says something
about B&Q branding in the UK but it also says an awful lot about the brand in
China.

Private-label strategy
Private-label will probably be greater elsewhere than in the UK for B&Q. In all the
countries we are in, the vast majority of products that we want to sell are manufac-
tured in those countries. We import to add innovative and different products. In
China, one of the reasons for going for private label is that many of the big brands
214 Retail Strategy

are already available in the marketplace, but they still account for a small propor-
tion of total turnover. For example, we own-brand a large proportion of our lighting
– now that is not the case in the UK. That reinforces confidence in our brand but
it also helps us to differentiate ourselves in the market place. Chinese consumers
are very, very price conscious. If we can put a product out that is ours, which
we believe offers very good value for money and is guaranteed in the consumer’s
mind by B&Q, then the price comparison is less in the customer’s mind.
For example, the B&Q brand of paint has been developed in the UK with the UK
in mind. The tub is clear plastic so you can see the colour of the paint. The present-
ation is innovative and the quality of the paint is very good. We were shipping
some of this paint from Germany, where it was manufactured, directly to Shang-
hai or to Taiwan. I was paying shipping costs and import costs and did not have
the language right. So own-brand paint became a very expensive and not neces-
sarily very innovative product in the range. We will launch paint manufacture in
China in March. The tub is still being made in Europe but it is now completely
Chinese labelling, in fact we have distinguished between the simplified Chinese
for mainland and the complex Chinese (Mandarin) for Taiwan.
We still make the tub in Europe, but this is Asia so you know it will get copied
fairly quickly. Soon we will be able to do this in China as well. The development
cycles are much quicker in China, and it is not simply copying. Think about money
for instance: the UK went from cash to cheque, and then to credit card. China has
just moved straight from cash to credit card. They do not simply go through some
of the cycles more quickly – quite often they leapfrog. That is one of the interesting
things about China: some things are 20 years behind Europe and some things are
10 years in front.

The Castorama connection

The main thing that Castorama have learnt from us about internationalizing is
probably our approach to property. If we want a piece of land then my team will
negotiate and get a price. Then I will introduce an international property company
and they will give their opinion on the value of the land. That then gives my
Chinese team and me a new target. It is Castorama’s view to go in and buy land
more quickly. I think ours is the best way on that, but there are aspects of their
business that we learn from.
B&Q and Castorama have very different approaches. For example, B&Q have
as few expatriates as possible and a mostly local management team. Then we
have an experienced central team who support all the functions in each of the
businesses. Castorama’s way is to build a slightly bigger expatriate team who are
able to do most things in their local country, with a slightly smaller central team.
But Castorama has of course been a decentralized company at home in France.
They have been becoming a more centralized company over the last 12–18 months.
Straightforward British approach works in China 215

Triggers for entry into new markets

It is only four years ago that the Chinese government made retail an ‘experimental
industry’. It is still experimental although I think it will be completely de-regulated
within three years. So it is really only in the last four or five years that the oppor-
tunity has existed. The next thing is that you have to have the guts to go and do it.
Because we said we were prepared to enter in a low cost way and learn, we were
able to go in when other people did not. Obi had an office in China for nearly two
years before we did, but they opened their first store six months after us. I think
that says something about us and about what our values are.
‘Can do’ has always been a B&Q value. Basically we have said: biggest market,
biggest opportunity – we will make it happen. There is a bit of bloody-mindedness
about B&Q, about me and about the people in our team. It has given us the first
mover advantage.
Meeting Hansen Tian, now our president in China, was also important. About
six years ago, the first home improvement store in China was opened, an indi-
genous one called the Homeway in Tianjin. Bill Whiting asked me if I would go
over with three other guys to have a look at this business. They were looking for
an investor. In the end our recommendation was that we should not invest but
while we were there we met Hansen, their finance and systems VP. We do unearth
some excellent people and when people spend a little bit of time with us they love
the culture.
When they compare us against, for example, the French or the Germans or other
Asians, they think that we British are unique. Government officials seem to like
working with the British, certainly since Hong Kong went back to China. They per-
ceive us as being straight: if we say we are going to do something, we actually do it.
They see the French as being nimbler than the British but perhaps feel that they can-
not trust them as much. The Germans are seen as too pedantic. The Americans love
the investment but do not like the need to rely on trust. We fit in pretty well there
at the moment. Being British is quite helpful in a lot of ways with our negotiations.

Possibilities in Japan and Korea

We had an office in Japan for nearly a year that we closed down last year.
Japan is the second biggest market in the world after the United States but it
does have 3000 home centres already, that is ten companies with more than a
US$1 billion turnover. The opportunity is there and there are ways of entry but
all require a very deep pocket. The supply chain is just bizarre and needs to
be taken apart. For example, a one-ring gas burner: a couple of years ago we
were selling them in the UK for £10, in Taiwan we were selling for £5 and in
Japan they were £25. A basic 16oz steel claw hammer we were selling for £2.99
in the UK. It retails for about £2.00 in Taiwan. The cheapest one in Japan is about
216 Retail Strategy

£14.00. The examples are endless. The opportunity is there but property is enorm-
ously expensive, people are relatively expensive, and the supply chain needs
re-structuring but no domestic retailer wants to start that process and it would
be a long fight.
We have an office open in Korea and we are still investigating the Korean market.
I believe the Korean market is a good one. We still have not found the right way of
entering that market but we are working on that.

Partners and relationships

The situation with partners is different in every country. In Poland we now own
100 per cent. Our other three businesses are all partnerships, and in Korea we
have being looking at partnerships but also considering the possibility of working
without a partner. Our preference is to have a partner. Obviously in mainland
China a partner is essential because the maximum we are allowed to own under
current law is 65 per cent.
With all our partners we are very clear about what we have to offer and about
what we want the partner to provide in the relationship. Absolute clarity is essen-
tial from the outset. We provide investment and 30 or more years experience of
retailing. We can adapt and adopt our format based on market research to satisfy
customer needs. We know we are not going to get it right with the first store and
that is good: we always make mistakes but we know how to learn from them, and
get it right before we start to move out. We have got an approach that works
for us. We want the partner to be very flexible and prepared to be a partner.
It is also important to us to have the possibility of an opt-out some time in the
future.
There are two things we really want partners to bring: political relationships
and property. We want them to bring us political relationships, they need to help
us with that, though we are not completely reliant on them because our man-
agement team are very able at building these relationships too. In China you
have to hit all levels at the same time. People that can help with that and even
low level things like getting your gas supply turned on a bit quicker than nor-
mally is very helpful. The other side is property: having people who can help
you find the right sites at the right price. For instance in mainland China, as
a foreigner you have to pay taxes when you buy land use rights, there is no
such thing as total freehold. We do 40-year deals, however – almost freehold.
You can hire lawyers and property consultants but having people who actually
know the way things work means that you can buy property at the lowest pos-
sible price for a foreigner. It will always be more expensive than for the locals but
you can shrink the gap quite considerably. Advice about strategic direction and
cultural advice is important, but the two key things are political relationship and
property.
Straightforward British approach works in China 217

B&Q’s future in China

Geoff Mulcahy, Kingfisher’s chief executive, announced some six months ago that
we would open 58 stores by the end of the year 2005. That is the target we are
working towards. It is mostly on the eastern seaboard but we are looking at Wuhan,
which is considered western and we are already trading in Kunming, which is near
the Vietnam border. Whether we achieve 58 in 2005 or not is dependent on lots of
circumstances: it is a very ambitious pace. We have five stores trading now, we will
open another six this year with plans to open seven or eight next year. Therefore,
20 stores by the end of 2003 is the interim target.
I want to make sure we open all our stores well and not just quickly. Some of that
is about making sure infrastructure is in place and a lot is about people. We continue
to recruit excellent people, but quite often with relatively little experience in what
we want them to do. Training is necessary but training is also time-consuming and
costly.
Another fundamental building block is the SAP system, which we launched very
successfully in December 2001. The next is logistics. China is a very big place, so we
have entered into an agreement with Maersk Logistics and they are providing the
logistics to our two stores outside Shanghai. Kunming is 1,958 km from Shanghai:
50 per cent of the stock will come from the central distribution centre in Shanghai
and 50 per cent will be Kunming sourced. You cannot start moving plasterboard
from one end of China to the other – it does not make sense. Together we are
learning how to make the logistics work. We have only been out there three years
and we are already accelerating away. I must stress the importance of the balance
between being quick and doing it well. I am not by nature 100 per cent – getting
80 per cent result through 20 per cent effort does me fine.
Most of the countries in Europe are mature home improvement markets, and
there are big decisions to be made if you want to enter. My decisions at the moment
are smaller decisions, involving smaller amounts of money. I will worry about
how I can justify relatively small investments in these countries that do not drain
resource from the main business but a few years out when the company is looking
for real growth streams of profitability, then I will be ready. My vision is that in ten
years time the international businesses will be a very significant part of B&Q’s total
profitability. It is not just about opening new stores. We probably have 2,500 or 3,000
new manufacturers supplying us in China that have no relationship with the UK or
France. Obviously we’re starting to build those bridges. New manufacturers will
bring new products to Europe, which will also help the profitability of the business.

. . . and finally
If I could be granted one wish, it would be for access to more and better people.
That does not mean to say that the people I have got are not great, but I would like
even more of them and even better. This business is all about people, the people
who are making things happen.
Chapter 14

Metro in China or a
Chinese Metro?
Interview with Dr Hans-Joachim Körber,
chairman and CEO of Metro AG
METRO AG, Metro-Straße 1, 40235 Düsseldorf, Germany
Tel.: +49 211 6886 0; Fax: +49 211 6886 2178

Richard Bell

Metro AG was created in 1996 as a result of the merger of Metro Cash and Carry,
Kaufhof Holding AG and Asko Deutsche Kaufhaus AG. In 2002, the group generated
net sales of d51.5 billion and today has over 2,200 outlets in 26 countries. The six sales
divisions of the Metro Group are Metro Cash and Carry GmbH, Real SB-Warenhaus
GmbH, Ezxtra Verbrauchermärkte GmbH, Media-Saturn-Holding GmbH, Praktiker-
Bau und Heimwerkermärkte AG and Kaufhof Warenhaus AG. In addition to the sales
divisions, the Metro Group has several cross-divisional service companies to perform
such tasks as purchasing, logistics and IT.
Dr Hans-Joachim Körber has been CEO of Metro AG since January 1999. In this
chapter, Dr Körber discusses some of the issues facing a truly international retailer.

Global retailing?
Food retailing is still far from being a global business. The top ten food retailers
have a worldwide market share of approximately 11 per cent. No retailer has a
comprehensive presence in all regions of the ‘triad’ – North America, Western
Europe and Japan – and the triad regions account for more than 65 per cent of world
retail sales. For example, Wal-Mart is only in ten countries and 90–95 per cent of
Wal-Mart’s business is the United States.
Metro in China or a Chinese Metro? 219

Nevertheless, given more or less stagnating home markets and the growth oppor-
tunities abroad, internationalization is a major part of the strategy of many of the
big players in retailing. With a sales share of more than 42 per cent outside our
home market, Metro is one of the most international retail companies.
We saw a lot of merger and acquisition activities in European retailing in 1999,
including Wal-Mart/Asda and Carrefour/Promodès. The year 2000 was rather
quiet in this respect. We have seen no bigger national consolidations and no signi-
ficant cross-border alliances. One reason is a higher valuation of possible take-over
targets. Such prices can only be financed by synergies and synergies are still very
hard to realize across borders. It is still very difficult to create synergies across the
whole of Europe. Additionally, integrating acquired companies can be a difficult
task, as we can see from Wal-Mart’s last acquisitions in Germany.
For the future, I expect consolidation to gain momentum again. In the long run,
global retailing will be characterized, but not dominated, by global players. At the
end of this decade I estimate that the top ten retailers will have a market share
of around 20 per cent. There will always remain sufficient potential for successful
national niche competitors. In other words, the mix of retail players is likely to be
similar in the future to the mix we see today; some international, some cross-border,
some national, some regional and some local.

Strategy for growth

One major value driver of Metro AG’s strategy is sales growth, especially through
international expansion where we achieve above-average growth rates. We are
taking four of our six operating concepts abroad. Over the last few years, we have
consequently increased the foreign sales proportions of operating divisions and of
the group.
Metro AG is targeting store openings primarily in those divisions where the
concept is most advanced and therefore the value creation is highest, namely
cash-and-carry and consumer electronics. With our ambitious store-opening
programme, we will generate approximately 50 per cent of Group sales abroad
in the medium term via organic growth.
It is worth commenting that internationalization is not a one-way street. For
example, Metro Cash and Carry, France, has very extensive know-how in fresh
food. This helped us to improve our fresh food offering at Metro Cash and
Carry, Germany. For formalized knowledge transfer, we founded the Metro Fresh
Academy affiliated to Metro France.

Concept adaptation
Among the most difficult tasks of internationalization is surely the adaptation of
the concept to the specific market conditions. Retail relies more than other sectors
220 Retail Strategy

on interaction with people. In contrast to the production industry, retail never

functions as an enclave, for example like a factory does in another country. In order
to be successful, a retailer must integrate with the community and the society of a
country. So the concepts, and especially the assortments, must be adapted to the
different languages and customs of the consumers.
Different attitudes and shopping behaviours arising from different customs, reli-
gions, climatic conditions, etc. require that the assortments be individually adapted
to each country. For example, we have learned that ‘fresh’ in China, with regard
to fish, means nothing less than ‘alive’. Although consumer habits are converging
in certain product groups, there are still significant regional differences in con-
sumption and taste. The varying purchasing power of the customers and widely
differing income distribution require individual adaptation of the assortment struc-
ture, particularly in the non-food segment. The only answer is local and national
management. We could have a Metro in China, or a Chinese Metro. It is always
more successful to develop a Metro in China.
It is important to have a supporting structure, a super-national organization on
top of a national organization. Most of the assortment is sourced in the country.
With retailing you are doing business in a country, with a country, with the people
in the country. In this respect, retailing is much more complex than, for example,
manufacturing. Some retail concepts have relevance in certain countries but do not
necessarily have a universal relevance. For example, Carrefour demonstrated the
applicability of the hypermarket concept to Latin America, southern Europe and
Asia-Pacific but have never been successful in Germany.
To be a successful international retailer, you need a success story in your own
country. You should never go abroad if you do not have a successful formula.
The question is then concerning the extent of adaptation necessary. There may be
one format for Europe or many adaptations by country or region. The extent of
adaptation is not easily determined.

Human resource issues

In order to ensure an intelligent adaptation, Metro generally employs country
managers who are from the respective country and are therefore very familiar
with the local market conditions. Before beginning their jobs, these managers go
through a comprehensive training programme in our company in various countries
and divisions.
We have a strong human resource development programme that has evolved
over many years. Whatever you have in mind, you need the people who know the
concept and you need people who know the country. So normally at the top levels
of country management we have a mixture of people from the country and people
from Germany. It is attractive for young employees to work in a company that has
international opportunities.
Metro in China or a Chinese Metro? 221

International, national and group culture

When you judge the success of any kind of merger or internationalization, the really
crucial issue is culture. When you see the failure of acquisitions, the difficulties are
also cultural. Despite a need to adapt, it is necessary to create an international
culture. For example, in our cash-and-carry business, from the secretaries to the
top management the language of business is English. A member of a local cash-and-
carry is also part of the bigger group. However, creating an international culture
takes more than thought. Retailers really need to invest in human resources.
Acorporate culture is also very important. What makes a Chinese manager proud
to do his job for a German company? Is it the way we think, the way he is treated,
the opportunities he is offered? It is not easy to determine the answer. The big food
retailers like Metro and Carrefour have a long-term development programme of
internationalization. When a retailer has been internationally active for more than
thirty years, it is easier to speed up. To start from scratch, as Wal-Mart did, is not
so easy.

Identifying new markets

When Metro AG are seeking opportunities in new countries, we always start with
a comprehensive feasibility study. We send a very capable and knowledgeable
management team. They analyse the whole infrastructure, the environment, dis-
tribution and customer structures, the legal and tax frameworks, and so on to find
out whether cash-and-carry is possible.
Then we have some discussion about the opportunities offered. We start with
the big international suppliers and explore the nature of the consumers. You have
to procure for the local demands of the customers and then the adaptation is about
knowing the assortment, layout, and so on. It is not prescriptive.
The cost of land is an important issue. In some countries land is extremely
expensive. For example, in high inflation countries, like Turkey, it is extremely
expensive. It is then a question of construction, labour costs and margins – so we
have a ten-year business case.
Usually Metro Cash and Carry reaches break-even in a country within two to
three years. After an initial investment of d15–20 million per store, a country
will autonomously finance further expansion with three stores. This strong self-
financing capability due to high stock rotation and a high negative net working
capital is a major asset of cash-and-carry. Of course, profitability always depends
on the speed of expansion. For us it is most important that we see that our concepts
work in the country.
We may sometimes use partners. We started our European operation with part-
ners. At that time, in the late 1960s, early 1970s, we believed that it was necessary
to have somebody for issues such as tax and licensing. However, our experience
with partners has not been good in the long term. In a lot of countries, for example
222 Retail Strategy

in China, we are forced to have a partner. In other countries, when we fear that
countries are fairly difficult, perhaps because of the legal framework, then we look
for a partner. This is the case in Japan. So it depends on the country.
The efforts to enter a country are always the same. You have to put in a manage-
ment team, and you have to conduct the feasibility study. Once an opportunity is
identified, the rest is almost mechanical. So our focus is on the most appropriate
areas and cultures for our successful formats.

Benchmarking
We see benchmarking as a key measure of success in each of our formats. We start-
ed a benchmarking programme in the mid-1990s. Every one of our distribution
divisions has a national, and an international benchmark, not in the sense of copy-
ing but in identifying and exploring the differences so that we can have a much
more informed discussion on strategy. We go much deeper than simply turnover
per square metre. Productivity is an issue but I am more interested in a discus-
sion about concepts. We look at how our competitors structure their shops, how
they present themselves, what kind of lighting they use. In this way we can follow
developments across the world.
Our benchmarking may be based on our observations or on open discussions
with our competitors. We try for some kind of cooperation. Sometimes that is not
possible but our intention is to have open discussions and most retailers are open-
minded. It has helped us to have an informed discussion about our opportunities.
In retailing it is very simple: you should know your competitor locally, regionally,
nationally and internationally.

Multiple format strategy

Cash-and-carry is a core business for Metro, a great strength, and it is a system that
supplies professional customers like independent retailers, businesses and institu-
tions. All over the world there are professional customer groups. Their formats and
businesses may differ and the products that they sell may differ but fundamentally
the price of products is reduced for them. That is truly a global concept. It is the
reason we are in 22 countries today, and have decided to have a stronger focus on
Asia. There is always an opportunity for a cash-and-carry business, adapted to the
local needs.
Cash-and-carry is our most international format. We achieve 75 per cent of sales
outside Germany. Major expansion regions for cash-and-carry are eastern Europe
and Asia. Asia will account for 15 per cent of sales in the medium term.
In many countries of Europe we see the decline of department store retailing
but Germany has been much more successful. There are only two significant play-
ers in German department store retailing, Kaufhof and Karstadt. Kaufhof with its
Metro in China or a Chinese Metro? 223

Geleria concept is the quality leader in this segment. It is important for the quality
of the distribution infrastructure of the country to provide attractive retailing pro-
positions out-of-town as well as on the high street. Innovative department store
retailing will always have potential. Our success is the result of investment. We
have invested a lot in the stores. We have moved away from the original strategy
of the department stores to have ‘everything under one roof’ and towards creating
a life-style approach for customers. We have a much stronger focus on fashion. We
are very much in the lead in this segment.
Autonomous management teams run each of the six operating divisions. In regu-
lar meetings we discuss strategy, targets and business development. Our central
management tool is EVA – economic value added. In this respect we at Metro
AG level act as portfolio managers. Service companies that take care of cross-
divisional synergies in purchasing, IT, advertising and logistics support Metro
AG’s infrastructure. Analysts are always fast to determine sum-of-the-parts values
without taking into account group structures and benefits. Metro AG’s portfolio
still bears enormous potential for value creation. From an economic point of view
there are no right or wrong portfolios but only successful and not successful ones.
The responsibility for the assortment is in the divisions. Although the decision
on assortment is made in the divisions, synergies are found across formats on the
import side. We have a structure where sales is separated from buying but there is
a strategic unit bundling the volume. Nothing interferes with the local assortment
but there should be some benefit to being an international retailer. It is necessary
to manage the complexities and gain advantage from the structure.
The benefits of internationalization are not obvious in all retailers. At Metro AG,
the clear answer is to have businesses that are close together so that synergies can
be realized and the formats can support each other in entering a country.

Retail branding
Retailers can only be successful if they succeed at building a brand. Of course,
when you take over a company there is always a discussion whether you convert
the original brand name, as we did in Germany with Allkauf and Kriegbaum, or
do what Carrefour is now doing with Promodès. Long-term, the only solution is
one brand. But when you change a brand name, you have to change something
and normally the customer reacts. It is not always easy to see what makes a brand
attractive to the customer. We have not yet made the decision as to whether we
change Makro to Metro or the other way around but I believe it will be more
successful as one brand.
Brands provide differentiation. For example, Lidl and Aldi. Aldi has only private-
label products. Lidl has brand products and so there is the differentiation. The
highest brand of all brands in Germany is Aldi. Nobody can copy Aldi. Our own
brand strategy is that we have two kinds of product, the first one is a low cost,
224 Retail Strategy

low price product, and then we have the higher quality own brand. This provides
an additional way for the customer to get lower prices.
Branding is principally an emotional relationship with our customers because
you can copy a store and you can copy the product range but you cannot copy
the emotional relationship with the customer. The customer relationship is built on
system delivery and the build up of trust over time. And the relationship depends
on qualified staff.

The Wal-Mart factor in German retailing

Wal-Mart are, as we all know, the biggest retailer in the world, mainly on the basis
of their US business. There have been all sorts of comments written about their
approach in Germany. In the longer term, Wal-Mart is an international competitor
but they are not better retailers than we are. Germany is a difficult market and, as
said, adaptation is a crucial success factor.
The essence of Wal-Mart’s success in the United States has been based on a very
efficient logistics system, which enables them to take cost out of shelf replenish-
ment, range rationalization and bring the price down for the consumer while still
making money. So they have made money through efficiency. If they apply that
concept in Europe, one of the consequences may be that they would induce the
same levels of efficiency in European replenishment as we see say in Wal-Mart in
the United States.
However, Wal-Mart has not yet reached European standards. For example, they
presented ‘every day low price’ in Germany as something new. They still have to
adapt to Germany. For Wal-Mart there is a long way to go.
Chapter 15

Music, movies,
more: the specialist
retailer
Interview with Alan Giles, chief executive of
HMV Media
HMV Group plc, Shelley House, 2–4 York Road, Maidenhead, Berkshire SL6 1SR
Tel.: +44 (0) 1628 818300; Fax: +44 (0) 1628 818301

Christine Cuthbertson

The HMV Media group was formed in March 1998, and includes HMV music stores
and Waterstone’s bookstores. The principal markets for HMV are the UK, Canada
and Japan. HMV is also market leader in Hong Kong and Singapore, number two
in Australia and has a smaller presence in the US and Germany. Waterstone’s, the
leading UK bookseller, is principally a UK brand. In May 2002, HMV Group plc was
listed on the London Stock Exchange.
Alan Giles was educated at Blandford School, Dorset, Merton College, Oxford
and Stanford University. He was appointed chief executive of HMV Media in 1998,
after positions with Boots and WHSmith. Alan Giles is also a non-executive director
of Somerfield. In this wide-ranging interview, Alan Giles explains the management
challenges facing a specialist retailer in today’s marketspace.

The HMV and Waterstone’s brands

Both HMV and Waterstone’s are great brands because there is an immediate and
very strong association on the part of a group of valuable customers. The primary
226 Retail Strategy

appeal of both brands is to the most committed, knowledgeable and frequent con-
sumers of music and books. Consumers of music and books might appear quite
fanatical in their interests. This commitment gives the brands some protection from
the economic cycle because people who are passionate about books and music don’t
stop buying books and music, they give up something else. What makes the brands
great is much less a consequence of imagery developed through advertising and
much more about the consumer experience. The format of the stores, the layout of
the stores and the commitment to width and relevance of range are all-important
elements of the proposition.
We do actively promote, edit, select and recommend, and there is a plethora of
choice available to the consumer with both books and music. All our experience
is that even very knowledgeable, very committed consumers want some advice in
making those choices. The help comes partly through the format and management
of the stores but also through the expertise and enthusiasm of the employees.

Branding and the employees

The brands are inextricably linked with the culture of the organizations, includ-
ing the attitude and nature of the employees. The great strength of both brands
is that the employees are also consumers because the people who work in
Waterstone’s and HMV are incredibly passionate about books and music. Our
employees have a tremendous shared interest with the customers, and one of
the most important and powerful things we do is to present our customers with
store-based personnel who are as knowledgeable and enthusiastic as they are
themselves.

Similarities in the brands

There are many similar characteristics in the HMV brand and the Waterstone’s
brand. Both have incredibly wide ranges. An average supermarket rarely has
more than 30,000 SKUs. The largest Waterstone’s and HMV stores have 250,000
SKUs. Within that, 20 per cent will change during the course of the year, so
managing a product lifecycle is incredibly important. Even very professional retail-
ers like food retailers tend to be found wanting in these markets because they
are not used to having to manage products with a very short life expectancy.
Clearly, a lot of grocery goods are perishable but out-of-date bananas are replaced
by more bananas. In music and books the replacement is a completely different
title.
There is a strong element of needing to respond to, and perhaps lead, fashions
in consumer taste. Books in particular are an indicator of broader interests and
trends in society. People read about what they are interested in. So what the brands
also have in common is the appeal to the high-end, committed, most frequent
purchasers.
Music, movies, more: the specialist retailer 227

The brands also share the consumer perception that shopping for books and
music is not really shopping. It is a pleasurable experience. It is a recreational
activity, more akin to going to a gallery or a restaurant rather than shopping. This
has implications for the type of environment that we try to create in the stores.

Brand evolution
It is true that the brands are constantly changing but there are many core attributes,
giving continuity. An area in which the brands do have to adapt and develop is
in the channels to consumer. For example, with both brands we have developed
an on-line presence. There is clear evidence that when consumers shop on-line
they feel comforted by the reassurance and security of known brands, brands
that they recognize, brands that have a certain stature and physical presence, and
brands that they trust. In both the markets, and perhaps in society, there is a trend
towards the mainstream – the obvious becoming more important. So, if you look
at music over the last two or three years there has been a pronounced resurgence in
mainstream pop and more demanding types of music have proved more difficult
to market and sell. In books, there is a clear move to a concentration of demand
on a narrower range of more popular titles. Again, more demanding literature is
proving more difficult to sell.
The change is consumer-led. A difficult judgement for us is the extent to which
we will follow those trends. Strategically, those trends could be viewed as not
particularly helpful for specialist brands. Both brands have been given a broader
appeal, so that the less confident, less familiar consumer can feel comfortable in
going into the stores and not feel threatened by lack of knowledge. At the same
time, we have to be careful not to reduce the quality of the experience for the very
committed customer – and that is a difficult trick to pull off.
Employees have an effect on the titles we stock. Whilst in order to secure eco-
nomies of scale because we have 200 bookshops, we have had to move some of the
decision making away from the stores, there is still not a single book that appears
on the shelf in a Waterstone’s store without it being a proactive decision on the part
of someone based in the store.
In most stores, the majority of people who work in the store have a specific area
of buying responsibility. There are over a million titles in print and the task of opti-
mizing the selection of which 150,000 you put into the store in Oxford is impossible
to do from the head office, no matter how sophisticated your information systems.
Much the most effective way is to put the decision making into the hands of people
working on the shop floor in Oxford, and make sure that they have the skills and
the expertise to know.
A happy consequence of that is that it is a more fulfilling job. It gives a sense
of focus, so it allows us to recruit and maintain a higher calibre of personnel than
would otherwise be the case. And the customer gets access to somebody of higher
calibre than would otherwise be the case. So despite pay rates typical of retailing,
228 Retail Strategy

80 per cent plus of the Waterstone’s store-based personnel are university graduates.
That is quite a telling statistic.
Many people who are very interested in books will also be very interested in
film and music, so there is a significant cross over. We know and can measure that
because our gift vouchers are redeemable in both brands and there is a lot of cross
purchasing.

The specialist market

Strategically, a weakness for both businesses is that we are somewhat exposed to
the creative cycle. So you have years where there are a lot of great albums and you
have years where there are not. The same is true to a lesser degree with books. That
lies beyond our control. We are not publishers, so we do not go and find artists and
authors. A fashion chain can ‘make luck’ by sourcing and developing merchandise
but we are exposed to what other people are able to bring to market.
The creative cycle has hit us quite hard in a place like Hong Kong, where the
record labels, because of the economic difficulties, have significantly reduced their
investment and artist development. There is therefore a dip of new artists now
coming to the market and other than lobbying the record companies, as we do,
there is nothing that we can directly do about it.

Competitors
The supermarkets now offer both books and music but the supermarket share is
static. In both books and music, the sector that is gaining share is the specialist.
There are significant limitations on what you can achieve in the supermarket in
terms of width of range, staff expertise and knowledge and relevance of store en-
vironment. A supermarket feels like shopping, so it is a very different psychological
experience. Supermarkets do have a valuable opportunity for impulse purchases,
and books and music can be used to reinforce price credentials. Ultimately, how-
ever, supermarkets find it difficult to justify investment of space in books and
music.
From the point of view of HMV Media, the supermarket offer is good news,
particularly on something like books where the specialists can be intimidating. It
is great if there is a way of putting books in front of potential consumers. In the
longer term there is benefit for us in that. Additionally, if an eight year old is in an
environment where she can persuade her parent to put a CD in the trolley and that
creates an interest in music, then we will reap the benefit in subsequent years.

Segmentation
There is always going to be scope for some segmentation because the nature of
the market means that it is difficult to create a store proposition that effectively
Music, movies, more: the specialist retailer 229

meets the needs of all purchasers of that category. We have had to broaden the
offer at Waterstone’s but there are limits as to how much you can do before the
quality of the experience for the heavier, more committed, purchasers becomes
diminished.
There are quite a few differences, some contradictory, between different types of
consumer. It would be impossible to develop a model that satisfied them all. There
are consumers whose requirement is to get in and out of the store very quickly, to
select something that someone else has effectively chosen for them at a low price,
very quickly. There are other people who greatly resent any efforts from the retailer
to help them with their purchase, who just want to get lost in an oasis of books. It
is quite difficult to develop a format that caters for both needs.

Technology in book and music retailing

Technology is fundamentally important in any retail business. The vast majority of
the technology we have is store-based because that is where most of the decision
making takes place. Most of the investment we make is in inventory management
systems. One of the benefits of bringing the businesses together is a world-wide,
common systems infrastructure, with software which has been extensively adapt-
ed. It is backward integrated with the accounting function, so the whole back-office
is integrated with the front-end and in HMV the off-line presence is also integrated
with the same back-office on a common systems platform. So, for a group that
prides itself on decentralization, systems have allowed some consistency world-
wide and that has been very helpful. Like most retailers, over the last ten years,
we have come up from no technology at all to it being one of our most important
areas of expenditure.
It is interesting from a broader technological standpoint, to see the pressures
created by the greatly enhanced expectations of our customers. The investment
required to fulfil those expectations is very significant indeed. The investment
of demonstration facilities is very high. For example, in our new HMV store in
Oxford Street we have put in a DVD cinema. It is an expensive investment but it
really brings home the power of the sound and visual experience that the digital
technology permits.
The number one issue on the minds of all executives in the music industry world-
wide is how to plot a transition from the old model towards a future in which
digital signals can be delivered to the consumers. And there is a vast amount of
experimentation going on with a whole array of different pricing models, some
of them being more akin to a rental model as opposed to an outright purchase
model. New models challenge the traditional creative concept of the 40–70 minute
album. That may not be what the customer wants and maybe the customers want
to choose the order and content. However, there are a significant number of barriers
to further progress.
230 Retail Strategy

Barriers to progress
The technology is a barrier in some cases. Clearly the potential is there but the
bandwidth is very limited. A consideration of WAP technology shows that it is
very easy to fall into the trap of promising more than can be delivered.
The second barrier is the original creators of music. Artists have quite legitimate
views on how their work should be presented to the consumer. However, the
technology offers the consumer the opportunity to alter the product and the original
intention is lost. Artists may have contracts that prevent alteration to the product
downstream in the supply chain.
The third barrier is clearly around fears of piracy, and music communities like
Napster are creating a huge impediment to unlock what the technology can do
because the creators, promoters and distributors of music will not get the rewards
of their investment if it is pirated.
The fourth impediment is the attitude that consumers have towards the Internet.
There is a perception that somehow the Internet is not about commerce but about
free and cheap products. Therefore there is a big question over whether customers
are prepared to pay the premium for home selection and delivery.
Both online and in our stores we are doing a vast amount of experimentation
with all of these models. It is easy to think that tomorrow everybody is going to
stop buying CDs or books but I do not believe that is the case.
The pressures in book retailing are in fact not as acute in music. Imagine that the
only way in which you were being able to experience the creativity of an author
was in what could be displayed on a screen. If I suddenly produced out of my
briefcase an aesthetically pleasing paper-based format with portability, resilience,
convenience, the ability to dip in and out – you would think it a great technological
breakthrough. So, having been in book selling for about 15 years, I am a great
believer of the enduring characteristics of the book as a form of communication.
There are going to be some areas in which technology can provide greater func-
tionality – reference works and some learning material – but that it is the exception
rather than the rule. What authors such as Stephen King have done is interesting
and there is a lot of experimentation going on. Reactionary as it might sound, I
would be surprised if that becomes a very significant channel to market for that
type of author.
The technological advance makes disintermediation a very real possibility, in
both markets. However, whilst there will be an inevitable period of challenge and
uncertainty, ultimately in the new channels to market it will all settle down with
a kind of grudging recognition of the role of the other protagonists in the supply
chain.

Supply chain management

The underlying IT systems play a huge part in modern retailing. However, human
expertise is an important factor. Anyone who is experienced in running a record
Music, movies, more: the specialist retailer 231

store will know that there are certain bands with a very strong, committed following
that will have huge week one sales and then sales will collapse to virtually nothing.
There will be other, more mainstream bands that appeal to less committed music
enthusiasts, where the shape of the demand curve is much broader and lasts for
much longer. Although it is not done quite as scientifically as selecting from a range
of mathematical models, intuitively that is how decisions in the stores are made.
When you then build more sophisticated central inventory management systems,
that is the type of methodology that has to apply. But there is huge complexity, and
books are more complex than music. Astonishingly, last year Waterstone’s dealt
with over 7,500 different publishers.
I read with amusement about food retailers wanting to reduce their number of
suppliers from 600 to 400. For book publishers, barriers to entry are very low and
the way in which print technology has evolved means that there is nothing to stop
anyone publishing a book in a back bedroom. That is valuable for society but it
does mean that there is complexity, cost and difficulty in automating the accounting
procedures. One of the opportunities is that the much lower cost and widespread
distribution possibilities of the Internet mean that we should be able to develop
much lower cost electronic invoicing systems, which in EDI were only realistic for
the large, more sophisticated suppliers.

New business models

What Amazon has done, has been done with enormous skill but also with an
extraordinary sense of timing. There was a brief period in which dot.com entrepre-
neurs were actively encouraged to develop any business at virtually any cost. That
has proved to be very short lived but there were a few businesses who secured their
capital while that window was open and who now have significant cash resources
to continue to develop the business.
For most of the others, the business model that has been used is just not sustain-
able. Indeed, I don’t think any of us can know for sure that it is possible to develop
a valid, sustainable business model for the sale of books and music online.
My guess is that it can be done but there will be prerequisites. One requirement is
for prices to the consumer to increase because there has been a rather reckless quest
for customer acquisition without any thought of profitability. Even now, some on-
line retailers are selling things below cost and, at the end of the day, retailing is
simple – you buy something at one price and you attempt to charge a higher price
when you sell it on to the next guy. So prices will have to go up and consumers
must lose the perception that the Internet is about getting products for nothing or
very cheap.
The second thing I would say is that you need to give the customer the assurance
of brand attributes. There are one or two people, including Amazon, who have
created a fantastic brand with fantastic attributes. However, in the vast majority
of cases the brand is going to be about leveraging off another brand, like our own.
232 Retail Strategy

And it is not only the brand that we can leverage. We have got a lot of buying
power, staff expertise and promotional power.
Our online presence is still relatively small. In books, Amazon is very large and
very powerful and it is a question of leveraging our assets to get ourselves properly
into that game. In terms of music, we are either the leader or close to being the leader
online, in most of the markets that we offer in – particularly in Japan where we are
the number 3 offline music retailer, we are the number 1 online player.

Property
The property plays a very important part in the proposition, in that ideally you
want the building itself to contribute something to the recreational experience. If
you have a restaurant, you want a building of character that makes a positive con-
tribution to the customer’s experience. That is most certainly true with bookshops
and to a lesser degree with music.
In the Waterstone’s portfolio there are buildings that were previously churches,
music halls or cinemas. A building that others would see as difficult and lacking in
clean regular spaces is actually an attraction for a bookshop. Both books and music,
however, also benefit from a large degree of impulse purchases. To benefit from
impulse sales, it is a good idea to be in a relatively high traffic location, so we do
tend to pick prime sites. Compared to other product categories however, multiple
retailing is easier for us because the goods are physically small and easily carried
up and downstairs. In addition, because customers are immersing themselves in
a browsing experience, they are less resistant to being led up or downstairs than
more purpose-driven types of retailing.
The flagship stores play a significant role. Customers would recognize that
Waterstone’s might have a flagship on Piccadilly but they don’t expect you to have
a flagship in Camden. People are rational about their expectations of the scale of the
offering that you make. It could be that the future entry model for new territories
is a flagship store in the major city centres and then an online presence to service
the rest of the country. For example, if we looked at Taiwan, we would probably
have a flagship in Taipei, plus a website.
In each business there is a centralized property division that identifies new sites
but not for the group as a whole, though they do talk to each other. We are just
changing a Waterstone’s in the city to create adjoining HMV and Waterstone’s
stores, so there is co-operation. However, there are no plans to bring books and
music under one roof. Consumer feedback suggests that if there is more space in
Waterstone’s customers would rather have more books, or something to add to the
experience, like a coffee shop.
Environmentally, the intention is to create a very different atmosphere for each
brand. Now, in some locations we have put them next door to each other but with
a physical dividing wall – and that works well. And because these two brands
have not been in the same ownership for very long it may be that we have not
Music, movies, more: the specialist retailer 233

done as much as we could in terms of shared back-of-house facilities. However,

the consumer environment we want to create is sufficiently distinct between the
two that separate stores work well.

Recruitment and training

For HMV Media, being a good employer is about giving people early responsib-
ility and trusting them. Traditionally, retailing in the UK has been seen as a low
paid, low skills environment. However, retailing can appeal to high quality young
people who want a career and more work needs to be done to change perceptions.
We are trying to give people good opportunities for advancement. Employees
need the opportunity to make decisions and to be held accountable. People like to
perform and for that performance to be measured. The collegiate atmosphere of
the stores helps, and that the employee base in both brands is usually young and
like-minded. Several people have commented that Waterstone’s is almost like an
extension of university life. If I go to somewhere like Waterstone’s in Durham, I
would imagine that 60–70 per cent of the employees in that store are recent Durham
graduates who didn’t want to leave the city.
Some go on to build a career in Waterstone’s and others move on. There is a
perfectly valid, unwritten agreement in Waterstone’s, that very few of those people
come in thinking that they want to retail books. In many cases, they leave us after
12, 18, 24 months and in a way that is fine. That has worked for us as well as for
them. There are a significant proportion who like Waterstone’s, and whilst the entry
level rewards are not good, able and committed employees reach store manager
quickly, and go on to have good, fulfilling careers.
One of the things we have found has grown over the last four or five years, is that
new employees look for training, as a close second to money. There is an appetite
for developing and broadening their skills. The training we can provide is not about
the products. Through self-selection, people who come to us are already well-read
or have listened to a lot of music. Being in the business enhances knowledge but
we do very little to promote product knowledge. However, what we can do is to
help develop their interpersonal and decision-making skills.
During the last five or six years, personal development has become increasingly
sophisticated. There is a growing demand for it and there is a real appetite for the
use of high quality, accredited, outside third parties, such as Templeton College,
to help deliver the programmes. Employees obviously feel the benefit of it enor-
mously. It provides a rare opportunity to escape the workplace and to build stronger
relationships with contemporaries and other business functions. It also provides
the stimulus of more theoretical, broader outlook and frameworks that help them
create more of a sense of meaning about what they have been doing.
Perhaps we should be doing more to hang onto the really good people we have.
We delegate a very high degree of decision making to the stores. If you were to draw
a graph of the acquisition of expertise, some through formal training but a lot of it
234 Retail Strategy

through doing the job, there is a fantastically steep learning curve. Someone who
has been a bookseller for 18 months is of infinitely greater value than somebody
who has been a bookseller for only 6 months. Something we have not done is
considered the true cost to the organization of losing people after 18 months. We
need to develop more appropriate policies to retain and motivate good people.

Globalization
We have to ensure that what happens globally is catering to local needs. There is an
underlying belief of delegating decision making to the lowest level. Decisions are
made in the local country, local region. The interesting thing about somewhere like
Canada, perhaps unsurprising given the geographic extent of the country, is that
there are probably more acute differences in culture and consumer taste between
the various provinces of Canada than there are between many of the countries in
which we operate. A highly decentralized model is needed to make that work.
Another thing that we regard as very important is employing a huge proportion
of locally based management. For example in Japan, where we employ over 1,000
people, only three of them are not Japanese. The effect of that is that over 40 per cent
of what we sell in Japan is Japanese music. The vast majority of Japanese customers
view HMV as being a Japanese business and that is the best possible result. They
are not buying into some notion that this is an outpost of western culture.
What we strive to do is to have the relevance and energy of the really good
independent bookstore or record store but to have the quality assurance and buying
power of a chain. I would hate it if our employees and customers consciously
thought ‘this is a store in a chain’. Most people who are really passionate about
books or music would choose an independent as their favourite store.
Brand positioning is certainly not as uniform as a retailer like Gap. Some of the
overseas territories are less effective at having broadened the base beyond music. In
the UK, HMV is very accomplished at selling DVDs, videos and games. Sometimes
for good reasons but sometimes for bad reasons we are less effective overseas. The
good reasons are because other types of retailer often use games as a loss leader
and therefore it is an unattractive market in overseas territories. But it is sometimes
because the management that we have are there because they love music and are
not very good at embracing new product categories.
Interestingly, the dog and trumpet logo is not an HMV trade mark in overseas
territories. In Japan it is used by JVC and in America it is used by RCA. Therefore
we cannot even use the same trademark world-wide, though the product is broadly
similar, the range authority position is broadly similar, as is the decentralization,
and the appeal to the more frequent customers.
So it is a brand that we have optimized by allowing it to adapt to the local
environment, the local competitive situation and the local culture. Somewhere
there is a balance between uniformity and customization. The question is, where
does that optimal trade-off lie?
Music, movies, more: the specialist retailer 235

We obviously have planning and performance monitoring processes and that is

inevitably about financial performance. However, there is also a battery of softer
characteristics that we consider. There have been territories where we have con-
cluded that, to achieve financial success, we would have to significantly change
the position of the brand and we have chosen not to go into those territories. We
are prepared to adapt our brand but only so far.
Chapter 16

Consumer
wellbeing:
wellbeing.com
Interview with John Hornby, managing director
of Digital Wellbeing
Digital Wellbeing Ltd, 1 Thane Road West, Nottingham, Nottinghamshire NG2 3AA

Richard Cuthbertson

The Wellbeing Network was jointly established by Boots and UK media company
Granada in October 2000, and sought to give customers access to a wide range
of Boots products, information and advice, as well as providing a digital TV chan-
nel. In December 2001 the wellbeing TV channel, partly as a result of a decline in
the advertising market, together with a delay in the rollout of broadband infrastruc-
ture, was closed. Digital Wellbeing, now solely comprising the e-commerce website,
made losses last year of £16.9 million. In 2002, Boots agreed to acquire Granada’s
40 per cent stake in the business for £1. Nevertheless, ‘customer satisfaction ratings
of wellbeing.com, are very high: 95 per cent say they will use the service again and
85 per cent rate the fulfilment process as above-average’, according to the com-
pany. It expects average order values to rise as it introduces a growing number of
premium fragrance and cosmetics brands. It is presently the only UK website author-
ized to sell Chanel products, and one of only two approved to sell Estée Lauder and
Clinique.
In this chapter, we interview John Hornby who became commercial director of
Digital Wellbeing Ltd when it was first created and took over from Richard Holmes
as managing director in February 2002.
Consumer wellbeing: wellbeing.com 237

Unique positioning
We do not consider ourselves as simply participating in the health and beauty mar-
ket. Wellbeing is where health, beauty and fitness converge and that is very much
reflected in the contribution that products make to the site. We are ‘Boots online’
as far as consumers are concerned and at its simplest, it is a place where people
can come and buy Boots products. However, in the UK, the e-commerce channel in
the health and beauty market has been one of the slower markets to take off, lag-
ging behind markets such as books, music and electricals. The underdevelopment
is positive for wellbeing.com because there is plenty of potential. Wellbeing.com
is firmly positioned as the only significant player with a dedicated offer online.
There are a number of other players who participate in elements of the product
set within wellbeing.com but we are the only website of significant size that has
a health and beauty focus. The unique positioning of wellbeing.com reflects the
unique positioning of Boots offline. A consistent theme when considering various
issues relating to the business is that many of the issues that apply to Boots offline
apply equally to wellbeing.com.

Online and offline strategies

Wellbeing.com has sought to recruit existing Boots customers and so we would not
expect to have huge numbers of customers that are new to Boots. Our customers
tend to come from the most valuable segments of the Boots customer base. By
definition the only people with whom we are interacting are those with Internet
access and there is a demographic skew, which is becoming less marked over time.
Women are rapidly matching men in terms of Internet access and online shopping,
thus developing an online environment that better reflects the offline situation.
This is positive for wellbeing.com and Boots because 90 per cent of our customers
are women.
Obviously there are very close links between the store-based business and
wellbeing.com, and in particular a two-way relationship between our customer
offer teams. However, there may be physical constraints that suggest that elements
of our product set will never work in stores. Wellbeing.com has fewer constraints
on space. Where consumers are buying relatively bulky items or ‘high’ ticket items,
the convenience of delivery to the door is very attractive. We may see some ‘show-
casing’ of higher ticket items in stores with wellbeing.com operating as a fulfilment
service. The consumer gets the best of both worlds by being able to physically see
and test the merchandise but not having to take away a heavy or bulky item. It
would be delivered at a time and place that is convenient for the customer. That is a
good example of where wellbeing.com can interact positively with stores, not just
to drive incremental sales but also to provide a much more rounded experience
for the consumer. As we develop there is likely to be more examples where we are
taking the Boots offer and extending for consumers online. However, that will be
238 Retail Strategy

very much driven by consumer needs rather than for the sake of creating a larger
range online.
There are a number of other ways that wellbeing.com supports the Boots
strategy. Customer communication is an important element of Boots strategy and
wellbeing.com provides some interesting new ways for Boots to communicate with
its customers. For example, wellbeing.com has a number of sub sites or micro
sites promoting various elements of the Boots product or service offer, and that
provides a more rounded means of communicating with Boots customers out of
store.

Trust in the brand leads to success online

There may be the potential for foreign operators to enter the UK health and beauty
online market but the more we operate within this territory, the more we believe
that ultimately, it is the trusted, well-established brands that will be successful
online. That is not to say that to be successful online you have to be an incumbent
retailer. Amazon, for example, has done a fantastic job of building a great brand
online with no physical presence. However, that is expensive and takes time, and in
areas where the consumer really needs to trust the retailer it is going to be difficult
for an unknown brand to make an impact in the UK. There are some interesting
parallel operations in the States, for example drugstore.com, which encompasses
beauty.com. We are not complacent about a threat from the US but my judgement
is that it would be difficult for someone like drugstore.com to transpose their US
operations to the UK.
Boots is such a great retail brand that it may seem odd that we chose not to
use the Boots brand online but developed a new brand in wellbeing. There are
some very practical reasons and the most significant is that when we launched a
year ago we were launching both an Internet site and a TV channel. The TV chan-
nel had an entertainment license and the regulations do not allow it to be called
‘Boots TV’. Given a strategy of greater convergence of the two platforms, we were
very keen to co-brand the TV channel and the Internet site. As TV and Internet
technologies converge, it is naturally important to be able to offer an integrated
proposition. The TV channel has since closed, largely due to the speed of conver-
gence (it seems to be some way off). Additionally, the advertising/sponsorship
market was, and remains to some extent, problematic. There was no real willing-
ness to shoulder the losses and to wait patiently for convergence. We are certainly
not ruling out TV participation in some form in the future but we will choose
the point at which it is appropriate commercially. Wellbeing.com has offered an
interesting opportunity to build a brand and we have a significant number of
people accessing the site. It is open to us at some point in the future to re-brand
as Boots.co.uk or Boots.com but for the moment we have elected to stay with
wellbeing.com.
Consumer wellbeing: wellbeing.com 239

We are very passionate about research and one of the things about being online
is that you do not see your customers, day-in and day-out. We know about custom-
ers purchasing behaviour but we are not meeting them and getting that intimate
feedback so we are very keen on getting feedback in other ways, either through
the contact centre who are talking to customers on a day-to-day basis or through
customer research. We have developed the site significantly since launch based
on customer feedback. For example, over time we have introduced a much closer
association with the Boots brand. The development of the wellbeing.com brand
is driven by what consumers say they want us to be in relation to Boots. There is
real merit in not introducing additional customer confusion by having a pricing
strategy or a promotional strategy different to Boots. We take Boots prices, so that
there is no confusion as to whether people have to price compare with Boots offline
in terms of our online prices.

Promotional activity
We have done a lot of work over the last year to expand the number of Boots
promotions online and we can now run almost all Boots offline promotions in an
online context. That is an amazing challenge from a technical perspective because
Boots has probably the most extensive promotional programme of any UK retailer.
Providing such a programme online has posed the technical team some incred-
ible challenges in terms of understanding how some of these promotions work
online and identifying how consumers will understand the promotions in an online
context.
Wellbeing.com also runs exclusive online promotions quite regularly. They
tend to be about the free delivery threshold. We sometimes expand some Boots
promotions. For example, when Boots runs a double Advantage points week-
end we often extend the promotional period because many online consumers are
shopping from work and may not be able to take advantage of a weekend promo-
tion. We are also running an increasing number of specific product promotions.
However, in terms of the week-to-week promotional programme, there is real
merit in avoiding customer confusion by broadly mirroring the offline programme,
online.

Card Advantage
We use the Advantage card in a number of ways. First, from a customer acqui-
sition point of view, there are various points of interaction that Boots has with its
Advantage cardholders, in particular a certain number of those Advantage card-
holders receive regular magazines. Wellbeing.com takes space in those magazines
for customer recruitment purposes and to encourage people to shop online for
240 Retail Strategy

the first time with Boots. Boots have 14 million Advantage cardholders, offering
wellbeing.com great opportunities in terms of customer acquisition.
The research we did before launch said that it was absolutely essential that we
offered Advantage card points online. Once again, it is not an insignificant technical
challenge but from the wellbeing.com launch, customers could earn Advantage
card points online, credited automatically to their card. If they shop online, the next
time they go into a store and put their card into a kiosk or a till point, the points
they earned online will be credited to their account.
At the moment we are not offering redemption online. It poses some very inter-
esting technical challenges, not least because the Advantage card is a ‘smart’ card
and therefore points are accumulated on the card itself. Clearly it is a real challenge
to offer online point redemption when a customer does not have a card-reader to
hand. It is something that we will continue to develop and collaborate with our
colleagues at Boots to understand the real benefit to the consumer of online point
redemption.

Halo effect
From the beginning, Boots decided not to worry about taking customers away
from the store and putting them online – so-called ‘cannibalization’. At its very
starkest, without wellbeing.com it would be open to someone else to ‘cannibal-
ize’ Boots sales. The issue simply does not arise because one of the advantages
of the card is that we can do some very extensive and quite sophisticated mining
of data, and in particular look at the behaviour of the people who surf or shop
online against their behaviour in store. Wellbeing.com was launched over a year
ago and we understand how wellbeing.com customers change their behaviour in
stores. The results are very positive and constitute exactly the opposite of can-
nibalization. We know that people who shop with us online shop more often
in store than those who do not shop at wellbeing.com. Even more importantly,
we know that people who use the site to browse but do not go on to make
online purchases also spend more in store. Our findings agree with much of
the research, particularly from the US, suggesting that offering multi-channels
allows customers to shop more across all channels rather than cannibalizing offline
sales.
There is a ‘halo’ effect in store both for our shoppers but also for people who
browse online. Browsing certainly makes sense because wellbeing.com, although
it is a shop with transactional capability, provides an excellent way for someone
to have a look at the breadth of Boots products in the comfort of their own home.
In that sense, we are providing a service to the Boots group as well as converting
a significant number of browsers to online purchasers. A further issue is that not
everyone has the same Boots store on their high street. Wellbeing.com offers con-
siderable advantages to people who regularly access small Boots stores and want
access to a much broader range of merchandise, particularly at Christmas. Boots
Consumer wellbeing: wellbeing.com 241

has a fantastic Christmas offer and small stores can only carry a small element of
that offer. We provide a way for those consumers to access a broad offer, perhaps
at Christmas but all the year round as well.

Sales and information

We see content as working on two levels. Direct content is that which drives
consumers ultimately directly into buying something. Since launch we have taken
account of customer research and customer feedback and increased the proportion
of direct content. Much is magazine-type content that is relevant at a particu-
lar point in the year. We now spend much more time producing magazine-type
content than we did at launch.
However, we still believe there is a place for more static content, particu-
larly in the health arena because people wanting to interact with Boots online
expect information on health issues. We are absolutely happy to provide that
information and we have teamed up with two of the most trusted partners,
the British Medical Association and Dorling Kindersley. Together, we provide
some absolutely fantastic health content online that does not have a direct link
to product sales. We see the advantage in the extent to which people do come
back and buy something. Indirect content users are often wellbeing.com custom-
ers as well. However, people looking for indirect content arrive at wellbeing.com
in a very different state of mind. If they want to do some research on a par-
ticular medical condition they are most unlikely to want to go and shop for
shampoo, fitness equipment or gifts. We acknowledge the difference and it
is reflected in the way we structure the site. We have a small proportion of
customers who use us for information only, and that is fine. What is more
important to me is that we have a lot of customers who may sometimes want
information and sometimes want to shop, or perhaps read the magazine con-
tent before shopping. We are comfortable operating with customers in different
modes.

Operational certainty
We see the customer experience as being from the point at which they enter
the site to the point at which the driver hands over the merchandise. We know,
because we have asked them, that people want an experience that is relatively
clean, simple and easy to use. Usability is something we take very seriously, and
we do a lot of work to make sure that our site is easy to understand and easy to
manoeuvre around. The site needs to be sufficiently fast and it is necessary to limit
the type and number of images carried. Much has been learnt over the year since
launch and, in particular, we are able to offer fantastic imagery without weighing
the pages down.
242 Retail Strategy

Once people get into shopping mode, we give them certainty. Right from the
beginning we aimed for transparency, so that if a product appears in stock on
the web front then we are in stock. Delivering that level of certainty sets some
significant challenges. However, we made the investment because we felt that it
was absolutely crucial to the customer experience. We provide a straightforward,
robust and secure shopping process. There is seamless fulfilment at the back-end
so the consumer can always see the stages of their order. We have an efficient
warehouse that gets the right product out, picked in good condition and into the
carrier network so that we can fulfil our delivery promise. This is something we
have spent a lot of time on and we believe that we have significant advantage over
some other e-commerce players in the UK.

Fulfilment
We have our own dedicated warehouse north of Nottingham, run by Boots logis-
tics using a collaborative approach. The warehouse is effectively a pick and pack
warehouse, developed from the warehouse previously used for catalogue opera-
tions at Boots. There was a limited amount of re-purposing to make sure that the
warehouse was appropriate for an Internet offer. We have a dedicated team who
pick and pack, and prepare the product for despatch.
We use four different carriers. We have a very intelligent system that works
out the optimal carrier to use in a particular circumstance. At its simplest, the
carrier depends on weight or product but our system is more sophisticated, for
example placing an individual package with an individual carrier based on their
performance in a particular part of the country.
About 85 per cent of the stock we take into the warehouse is through the Boots
supply chain, and that offers us enormous advantages. Wellbeing.com has all the
handling and buying efficiencies from Boots, and we also have the advantage of
daily replenishment so we can hold stock levels on the basis that we can pull stock
into our warehouse overnight or in extreme circumstances within a day. Again, the
close proximity of our warehouse to the main Boots warehouses in Nottingham
really helps.
Once the stock is taken into our warehouse (either from Boots stock or directly
from a third party) that stock is dedicated to wellbeing.com. This is because a ‘pick
and pack’ for a consumer operation is very different from an operation where stock
is being provided in larger quantities direct to store. They are radically different
operations requiring different physical configurations, systems and techniques.

Patterns of demand
As you would expect, our March 2001 launch means that we have a limited track
record, although we always knew that we would have a very heavy skew towards
Consumer wellbeing: wellbeing.com 243

Christmas because gifts are such an important part of our offer. In broad terms we
would expect around 50 per cent of our sales to be in the last quarter of the calendar
year. Christmas starts relatively early for us online because a significant number
of our shoppers are very organized and find the opportunity to do their holiday
season shopping, even as early as October, very attractive. For Christmas 2002 we
also offered the ability to shop early on site and to name the day of delivery up to
eight weeks later. We guaranteed that the items would be delivered on that date.
For consumers, to shop at wellbeing.com for a gift is attractive because the
full inventory is available. They can shop from home or work at times when
it is impossible or difficult to visit the high street. We can gift wrap items and
have presents delivered direct to the recipient. For any number of reasons we
are incredibly attractive to many customers at that point in the year. The most
important categories to us at the moment, without the pharmacy element to sustain
wellbeing.com throughout the year, are beauty and mother and baby.
Managing the peaks is not as difficult as it might be because the seasonal peak was
taken into account in the design of the operational configuration. In the warehouse
and the contact centre we are able to add variable resource at any time in the year
but particularly at Christmas. We do not have a very significant chunk of fixed cost
to carry throughout the year. Obviously, part of our challenge is to increase the
level of business throughout the year and we are having some success.
It is slower than the gift offer but each month our re-purchase rates for consumers
increase in terms of all year round business. Developments such as online prescrip-
tion and over-the-counter medicines will also help in driving business throughout
the year.

Support from IT
To a large extent the IT architecture for wellbeing.com stands alone, as do the IT
team. However, we are constantly talking to our colleagues in Boots to identify
areas where they can support us and vice versa. Many elements of the architecture
are specific to running an Internet channel and so we have to be self-supportive
in a number of areas. We run different core systems to Boots. For example, we
use SAP and at present Boots are not operating on a SAP platform. That presents
us with some challenges in terms of operating and supporting a core system that
is not supported in Boots but we have the ability. We have arrangements either
in-house or with third parties to provide effective support for those operations
where appropriate, 24 hours a day, 7 days a week.

Private-label and branded products

Boots has a large amount of private-label products and wellbeing.com can take
advantage of Boots integration. As far as Boots inventory is concerned, whether
244 Retail Strategy

private label or a proprietary brand, we simply place orders against the Boots
supply chains. However, we have to carefully consider ranging issues, and make
the decision based on what the consumers want online. Most of the ranges that
Boots carries we also carry and there are many examples of where Boots gives us
the advantage against any competition. For example, we are the only authorized
stockists on the Internet of Channel products in the UK and soon we will be the
only authorized stockists of Lancôme. With Estée Lauder and Clinique we are one
of only two authorized online stockists in the UK. Once again we provide security
for consumers who want to be sure they are not buying counterfeit products.
In terms of sales of the private-label versus proprietary brands, the overall profile
is a little skewed by the proportion of Boots sales that fall into the health category,
since overall sales at wellbeing.com in health are fewer than in store. However, in
individual categories such as beauty, the profile is very similar to Boots. In mother
and baby, we have a bit more of a skew towards proprietary merchandise, because
we do extend the range of mother and baby to certain third party brands such as
‘Mommas and Papas’, as demanded by the consumers.

Commercial implications
The decision was made for investment up front to provide the infrastructure and all
the systems and processes to support the website. It was intended to deliver a plat-
form that is robust, scaleable and flexible. Flexibility is very important because we
have learnt much over the last year or so about how consumers want to interact with
us. Flexibility of platform and infrastructure is crucial to be able to respond quickly
and also cost effectively. Having made that level of investment, we are trying to
move towards breakeven – in line with the original indications that were given at
launch. Success is ultimately about increasing top line sales and being more effi-
cient. That is not about making compromises in terms of our customer promise but
it is about running our contact centre and warehouse more efficiently, and it is about
running our systems more efficiently with less costly support. We are working very
hard and we are starting to make significant progress. A demonstration of that pro-
gress is that the breakeven point that we need to achieve in terms of e-commerce
sales is coming down literally by the month. We will move aggressively on the top
line, bringing in new customers and looking after our current customers. Our finan-
cial year ends on 31 March 2003 and we are anticipating reaching breakeven, based
purely on direct revenues, in the following financial year. Of course, as already dis-
cussed, we have probably also increased sales in stores and overall basket size. In
addition, there is a more modest revenue stream around advertising sponsorship
online. We are increasingly working in some quite novel ways with our suppli-
ers to produce interesting sponsorship and advertising packages for them, where
they can learn more about consumer behaviour online, and ultimately sell more
products. Our breakeven calculations take that into account but do not include any
Consumer wellbeing: wellbeing.com 245

halo effect for Boots, be it directly, in terms of product sales or more indirectly in
terms of marketing benefit.
We look at customer behaviour, in particular through the Advantage card data-
base. Because around 90 per cent of wellbeing.com visitors are buying online and
over 80 per cent of the people who are registered with us have an Advantage card,
we have the ability to compare their behaviour online with their behaviour offline.
There are some restrictions as to what we can and cannot do but we can identify
online buyers and surfers and watch their behaviour in store. This ability to moni-
tor customer behaviour illustrates the tremendous power of the Advantage card
in understanding both the economics of our business but also the consequences of
wellbeing.com in our business on the high street with Boots.

Outlook
Primarily we will consider wellbeing.com as a revenue stream. We will see con-
sumers with more means of accessing and transacting with us. At the moment we
are a PC/browser-driven business. I discussed iDTV earlier and there will be a
point at which purchasing using the TV will be a significant part of our business.
I am not quite sure how significant and when but we are monitoring the situation
closely to make sure that we are making investments in that area at an appropriate
point in time. I am less persuaded by the mobile technologies in the context of
our business, although the use of mobile telecommunications together with other
technologies may offer some interesting developments.
The advantage we have got, coming back to my earlier comments on scalability
and flexibility, is that we have an IT architecture that is platform neutral. This means
that for modest further investment it is possible to accommodate different modes
of access for consumers, and the flexibility makes the incremental investments to
allow for different consumer behaviour more palatable for our shareholders.
We have existing competitors, the supermarkets for example, and we would
expect some of those competitors to extend what they are doing. It is unlikely in
the short- to medium-term that we will have a ‘pure play’ start-up without an estab-
lished brand trying to replicate wellbeing.com. The main barrier to a new entrant
must be the breadth of merchandise, and in particular the premium fragrance and
cosmetics brands. However, we cannot be complacent because there is very cred-
ible competition cutting across certain elements of our product set already. The
supermarkets, for example, offer consumers a convenient way to add our product
areas to an online grocery shop. We see those players increasing their participation
potential, and maybe extending to other areas in which we are operating. For that
reason, the advantages of the Boots brand and the trust that consumers place in the
brand are very important. Equally we must look for relevant extensions to broaden
our base beyond product or service areas within which Boots either participate now
or will participate in the future.
246 Retail Strategy

If you asked ten people about the future of e-commerce you would probably
get ten different answers. I believe that e-tail through the various access points
will, over the medium- to long-term, represent in excess of 4–5 per cent of all retail
sales in many product areas. Trusted brands will dominate e-tail, whether it is an
existing retailer or pure play e-tailer.
From an industry perspective we will see an increased focus on operational
efficiency. Just as we are striving hard to drive down our breakeven point, so most
of the other players are doing the same to begin to realize the benefits of online
retailing.
The other significant areas where we will see most e-tailers devoting a lot of
time will be in customer relationship management (CRM). There are a number
of players who have achieved a reasonable level of sophistication but many are
really only ‘scratching the service’ of the potential of a very data rich environment.
Certainly, wellbeing.com is committed to CRM and we will become increasingly
sophisticated over the next few months and years in terms of the way we use data
to understand our consumers in order to offer them absolute relevance. We are in
some ways in a better position than many but I expect much attention to be devoted
by the whole industry, and further investment made, to really enable e-tailers to
grab the benefit from CRM.
Chapter 17

Freshen up:
differentiation
through fresh
foods
Interview with Antoni Gari, deputy general
manager of Supermercats Pujol SA
Supermercats Pujol SA, 307 Ind El Segre Cl Victoricano Munoz Parcela, 25191 Lleida, Spain
Tel.: +34 973 351818; Fax: +34 973 205262

Christine Cuthbertson

This small chain of Spanish supermarkets numbers some 59 outlets, half company-
owned and half as franchises. All of them are located in the provinces of Lleida,
Barcelona and Tarragona in northeast Spain. Pujol supermarkets have more than 50
years of experience in the distribution sector. At the moment the company employs
nearly 550 and in 2001 it had revenues of 11,330 million pesetas (d68.1 million), a 9.4
per cent increase on the previous year.
Spain is the second in Europe only to France in territory size and, in Madrid,
has the third largest urban population in Europe after London and Paris. Although
international retailers such as Ahold and Carrefour increasingly dominate Spain, as
in the rest of Europe, there is a dense network of local grocery stores and fresh
markets that continue to play an important role. Spanish food shoppers still prefer to
make frequent trips to local stores, with trips to the hypermarket for non-perishable
goods restricted to once or twice a month. The Spanish consumer is becoming more
248 Retail Strategy

health conscious and is seeking more information, improved customer service and
high quality produce.
In this interview with Antoni Gari, deputy general manager of Supermercats Pujol
SA, we explore the concerns of family-owned, national operators, and find some
surprising ways of growing.

In this environment, Supermercats Pujol presents itself as a Catalan, family-owned

business that includes the Plus Fresc chain of 59 neighbourhood shops. The chain
started more than 50 years ago, with a wholesale and retail outlet in Catalonian
Lleida. Innovation began in the 1960s with the introduction of self-service in three
new stores. It was the second generation of Pujol’s that reigned over a big expan-
sion in the 1970s. At that time, Plus Fresc were known as discounters. The end
of the 1980s saw a change of direction when Plus Fresc began to offer instead a
value proposition that increased the range and quality of the products on sale, and
emphasized fresh foods. The stores in the chain range from 200 m2 to 1,000 m2 .
The stores are located in small communities with a population typically of between
1,500 and 2,000 – and there are plans to introduce new shops into areas with even
smaller populations. Around half of the stores are under franchise. With sales in
2001 reaching just over 111.3 million pesetas (d68.1 million) and a workforce of
550, Supermercats Pujol is a small fish in a large sea, and swimming against the
swelling tide of global retailers.

Focus on fresh
Supermercats Pujol is too small to compete on volume and so we compete on fresh
products. The emphasis on high quality fresh foods – raw, ready-to-cook and ready-
to-eat products – brings Plus Fresc more customers, more frequently. One of our
extra guarantees to the customer is that if they find a product that is out-of-date,
we will give them a fresh item for no charge. This, together with a ‘no quibble’
returns policy, improves the confidence that customers have in the freshness of our
goods and our honest, open approach to retailing.

Food safety
Of course, we need to ensure food safety and this is a very big issue in Spain
today. Spanish consumers have always wanted quality, convenience, availability
and price and in the past this has been enough but now consumers also want a full
guarantee on safety. Interestingly, although consumers do associate organic foods
Freshen up: differentiation through fresh foods 249

with greater safety, they are not willing to pay extra. The challenge is to provide
conventional, safety-assured products at no extra cost.
Our safety objectives are reached in a number of ways. There are as yet no
standard forms of certification and regulations are different in each of the 16 regions
of Spain. However, all our fresh food is bought from suppliers that are certified in
some way, perhaps by larger retailers or trade associations. Although the medium-
term goal of Plus Fresc is to sell only products grown under the label ’integrated
production’, that is, grown using the minimum of chemicals and ensuring full
traceability, the concept is not as yet well understood by Spanish consumers. There
are moves to provide a European framework for food safety, and we welcome such
initiatives, as they may give greater confidence to consumers.

All-important partnership with producers

We have established and maintain a close partnership with the smaller producers
so that the needs of our customers are properly communicated and satisfied. For
example, for bread, we have an exclusive agreement with two traditional bakers.
Another example is in our fish, which arrives fresh daily from the Mediterranean
and we never sell thawed fish. Currently, there is no traceability on fish raised
in fish farms but there is a need to ensure traceability for the future. All our veal
comes from a single producer. When a close relationship develops, the supplier
better understands and is better able to provide for the Plus Fresc customer. We
take as much of the processing as possible in-house. We therefore have a butcher in
each store and prepare some pre-cooked meals in our own kitchens. As this facility
grows, so we must find more, equally reliable suppliers, and the relationship with
the supplier becomes a critical success factor.

Responding to health scares

Health scares can easily cause a crisis for retailers. For example, veal has been a
popular meat in Spain but the recent problems, while not apparently affecting the
health of Spanish citizens, have caused a huge drop in sales. Large retailers have
the power to make demands on suppliers. They have their own veterinary staff,
for example, and can have highly integrated production. However, measures are
still open to smaller retailers to ensure the quality of fresh foods. We now buy from
one local supplier and have full traceability so we are able to give the customer
full information about the rearing of the calf such as when the animal was born,
what it was fed on and when it was killed. This is such an important issue that,
even as quite a small retailer, we have our own meat processing plant conforming
to ISO9002, giving us better control ‘from farm to fork’.
250 Retail Strategy

Euromadi Iberica
For dry goods, Plus Fresc uses a buying group and selects high brand products that
complement our range of fresh goods. In fact, our customers tend to reject value
goods. Supermercats Pujol belongs to Spain’s first purchasing group, Euromadi
Iberica, part of the European Marketing Group (EMD). Euromadi Iberica has over
200 members and volume of sales of over d9,000 m, representing nearly a quarter
of the food retail market in the Spain. Belonging to the buying group gives tre-
mendous buying power and access to many suppliers throughout Europe. The
group makes a tremendous effort to continually grow, and all the partners benefit
from this continual expansion with a greater range of suppliers and products and
greater technological innovation to gain the advantages of business-to-business
operations.

Plus Fresc customer profile

Nearly 50 per cent of the population of Spain is under 45 and the number of young,
working women is growing. Consequently, 30 per cent of Plus Fresc customers are
busy working women and they account for 60 per cent of sales. Our commitment to
very fresh produce is in response to the type of customer that wants value, quality
and convenience from a retailer that they can trust. In adapting to the needs of this
busy, demanding group, we have made many changes. For example, Catalonian
law allows retailers to stay open no more 72 hours a week but to satisfy the needs of
our customers, in some shops we have abandoned traditional hours in favour of a
split day with a closing time of midnight, Monday to Saturday. This has proved very
popular. Further examples include the installation of automatic packing machines
at the checkout and a home delivery service where the customer shops and the
goods are delivered within a chosen two-hour time frame up until 23:00. Delivery
is free to customers who spend over 8,000 pesetas (d48).
We seek feedback from customers both informally and formally. We encourage
customers to first contact staff in the store. At the store, the customer can make a
suggestion or a complaint and have a problem solved immediately. They can leave
a message for head office and even send an e-mail to the chairman, all from their
usual store. We seek more formal feedback through a council of customers. The
chairman attends meetings of the council. He is very often able to answer queries
immediately or might set in motion some change on the basis of council discussion.
In this way we have been able to gradually draw closer to our customers so that
now we are better able to predict their requirements.
Customers have shown an interest in both the environment and the local com-
munity, and many, for example, donate their 1 per cent discount cheques to a charity
of their choice, through our own payment systems. As a local chain, we think it
important to do what we can for the community and environment. For example,
we use photodegradable bags and recycled paper. Our signage and advertising is
Freshen up: differentiation through fresh foods 251

in Catalan as well as Spanish. The changing requirements of our customers have

also initiated a recruitment policy change. Now our ideal employee is not neces-
sarily the one most concerned with high productivity but with more of a focus on
interaction and empathy with our customers.

Enabling technology
Information technology has been very important in providing speed, efficiency
and innovation. For example, our ability to trace a calf from beginning to end
is achieved with low-cost IT solutions, and we also use IT for customer profil-
ing and to customize our response to the customer at the point-of-sale with special
promotions and information.
From July 2001, at www.plusfresh.com we have been running a pilot scheme
for Internet ordering by picking from three of our larger stores and delivering to
the area covered by all our stores. Now, Spain in general might be seen as behind
the rest of Europe in terms of e-commerce and the e-commerce activity is usually
associated with only the largest players or specialist retailers but we have found
that innovation is one of the keys to our success and information technology has
enabled Plus Fresc, as quite a small operation, to constantly improve our offering
to the customer.
Our loyalty card, the Plusi card, is based on cards from the larger food retail-
ers with a 1 per cent discount given to the customer for previous purchases in
a cheque every four months, together with coupons for promoted items. How-
ever, costs of mailing are prohibitive and so we have had to be inventive. Every
point of sale has a mailbox. When the cardholder’s card is swiped, the customer
receives her or his quarterly cheque, and may have other messages highlight-
ing new products, special promotions or giving extra discounts on featured
products. The customer may also ask questions and receive answers via the in-store
kiosk.
The loyalty programme was initially developed entirely in-house with the help
of the Department of Computer Science at ESADE. It is unique in Spain, and won
us the 1998 Global Electronic Marketing Award for the best electronic marketing
programme from a non-US company (an award previously won by SuperQuinn
in Ireland). We have been running our loyalty scheme for four years and so
now perhaps the initial impact is spent. Some changes may be in order and
we are considering, for example, a catalogue of rewards rather than simply a
discount.

The future for Plus Fresc

In Catalonia, Plus Fresc has been the leader in food sales for many years. We are
known as the ‘local chain’ but being local is not enough. We are opening new
252 Retail Strategy

stores with a new format – a supermarket focused on pre-packaged foods and

pre-cooked products. Our current store design is eight years old and so a fresh
approach is needed. The new design is focused on convenience and will be refined
as new stores open and old stores are refitted. We will continue to look around the
world to bring best practice to Spain and not be afraid to innovate. Our customers
want and expect it.
Chapter 18

Integration,
challenge and
change
Interview with Roland Vaxelaire, president and
CEO of Carrefour Belgium
Carrefour Belgium, Avenue des Olympiades 20, 1140 Evere, Belgium
Tel.: +32 2 745 03 11; Fax: +32 2 729 29 87

Richard Bell

Belgian grocer GB has until recently held GIB Group’s interests in subsidiaries operat-
ing in the supermarkets and hypermarkets in Belgium. The French retailer Carrefour,
who already had a 27.5 per cent stake in GB as a result of the Promodès acquisition,
acquired the other 72.5 per cent from GIB Group in July 2000. GB currently consists
of 57 hypermarkets and 347 supermarkets and affiliates and 94 convenience stores,
with 16,000 employees and 2 million customers in Belgium. The company generated
over d5 billion in sales in 2001.
Roland Vaxelaire was appointed managing director of GB in January 1988, and
continued as managing director following the Carrefour acquisition. He has worked
within the food sector throughout his career. After a period with Nestlé Group
(in the USA and France), he moved to Danone where he occupied management
positions with Kronenbourg and then Evian before being appointed managing
director of Alken-Maes breweries in 1993. Roland Vaxelaire is vice-president of
FEDIS (Fédération des Entreprises de Distributeurs Belges) and ERRT (European
Retail Round Table) and he is an administrator of Eurocommerce.
254 Retail Strategy

In this frank interview, Vaxelaire provides a unique insight into the challenges facing
all major retailers in western Europe today, including issues of supply chain integration,
franchisees, private label, labour relations and e-commerce. Since this interview,
M. Vaxelaire has been appointed president and CEO of Carrefour Belgium.

Supply chain integration

We believe that the supply chain is not only the concern of the logistics department
but is all the way from the supplier to the store. The first step is from the supplier to
the buyer. In retailing you are transporting information before you are transporting
goods. Very often, the problems the store has in terms of replenishment or out-of-
stock items are not because of problems with goods transportation. It is much
more likely, perhaps 80 per cent of the time, that the problem is with the timeliness,
accuracy or relevance of the information.
To overcome the problem of poor information, we have combined the buying,
logistics and IT departments under one manager. That gives us the full line of
responsibility from the buyer to the stores, and questions of supplier relations,
transportation, warehousing and so on are the responsibility of one key per-
son in my organization, the supply chain manager. The supply chain manager’s
responsibility extends to delivery into the stores. Once it is in the stores it is the
responsibility of the store manager. If a product is in store but not available for the
consumer to purchase, that is the responsibility of the store manager.
I cannot say that we will have the integrated function in the future. Carrefour has
another vision of the business, another vision of the supply chain. At Carrefour, cur-
rently the buying department is really another business from the logistics, although
logistics and IT are together. However, at GB we had some problems with the
supply chain and it was very important for me during my two years with the
company to bring the people together and to stop departments playing ping-pong
with a problem. The problem could be passed from buyer to transportation to
warehouse, without being solved. Now we have one person accountable who can
quickly identify and solve the problem.
I put the integration of the buying, logistics and IT departments in place in
April 1999. It is important to be able to measure the benefits of the new organization.
The first thing we did was to determine the service level. We considerably increased
the service level to the store. We had to. When you have an integrated organization
and there are out-of-stock problems, even though this is a problem for the business,
the store managers will simply stop complaining if nothing changes. However, if
the franchisees or affiliates find that their business is at stake, then that becomes
a big problem for them and us. The fact that we have a lot of franchisees in GB
and the fact that there were problems in the supply chain really forced us to change
things.
Integration, challenge and change 255

What drives the system depends on the department in the stores. Some of the
departments work on orders from the stores, for example clothing. The manager
in the store sees the collection and decides how much to take. Other departments
work on paper, for example the grocery department. We do not yet have an auto-
matic delivery programme but we are moving towards an automatic ordering
system.
Of course, extending the supply chain to point-of-sale data may undermine the
authority of the store operations. That is a big question at the moment but I think
that the important thing is to give the opportunity for the store manager to work on
exceptions – to have a double check on what is automatically delivered. Most of the
product lines will be automatically replenished but sometimes the store manager
can make a better decision. I think it is a good thing for both the store and for the
store manager. In food, most of the stock is held in the store and so the people
responsible for the inventory levels are the store managers. We try, especially in
groceries, to have a flow from the supplier to the store. For the non-food it is
sometimes best to have a buffer.

Affiliates
Management information
The same supply chain that supplies the affiliates, supplies our own stores. The
affiliates are responsible for their own store stock levels. We do not measure them
on that. That is their responsibility. The information system for the running of
the stores includes a certain amount of management information. The store man-
ager automatically receives data relating to the manager’s own store but if the
store needs a benchmark, someone from head office will do the comparison. We
have the information store by store but the decision-maker is the store manager.
The supplier does not have the right to send the affiliate anything that he did not
request. In the integrated system, we can do that but it is important to know the store
very well.

Rebranding of Nopri and Unic

The process of rebranding Nopri and Unic to Super GB was completed in 2001. It
was a really tough operation. You had 10 days to transform each store. All the goods
were removed from the store, the store is transformed and the new goods brought
in. It was really a very heavy process. Since Carrefour’s acquisition, the company
has decided to keep the GB name on its supermarkets, because of strong brand
recognition in Belgium.
For the stores, it is really a change of attitude. In an integrated system it is possible
to some extent to impose changes but when you work with affiliates you can only
suggest and advise. This is really a change of mentality and change of culture.
256 Retail Strategy

Much more service-wise, much more looking at the client. The stores that have
been rebranded have had an average increase in turnover of 25 per cent. Some
have had a 60 per cent increase in sales. The affiliates are small family businesses
and a 25 per cent increase in sales is really another business for the affiliate. This
causes a lot of difficulties with the rebranding.
The major reason for bringing the affiliates under the GB banner was the
increased competition in Belgium. There is an increasing specialization in super-
markets and hypermarkets. We wanted to do that, and separate brands and goods
for Nopri, Unic and GB would be much more expensive than one brand, GB, for all
three. The market in Belgium is very competitive with Spar, Delhaize, Intermarché
and Colruyt. We need to concentrate our efforts on one brand. Unic was 150 stores,
Nopri was 200/250 stores but really decreasing very quickly. Without coming under
one brand we would have 100 stores with the brand Nopri, 100 with Unic and 100
with GB. Better to have a very large brand. It also provides the opportunity to have
a national campaign and to have local stores. Nopri and Unic were in very small
towns in local areas where GB had no presence.
We lost some stores. We lost in two ways. Some affiliates did not want to make the
investment and to continue to run the business. It provided an opportunity for them
to reconsider. We were asking the affiliates to change their brand and change their
way of doing business. For someone towards the end of his working life, and
perhaps without a successor or the financial basis to continue, it may not be an
attractive proposition. So we closed a lot of stores. In Belgium that is not a big
problem for the business because the density of stores is really too high compared
to other countries.
Second, we were giving the opportunity to the competitors to move in. The affili-
ate is in a position of having to undergo a change and so it offers the opportunity
to look at alternatives. We lost around 20 per cent of stores. A lot were the poorer
performing stores but we also lost some good stores. It offered a real opportunity to
change affiliation, and we had experienced a lot of problems with the supply chain.
The reaction of the affiliates to the acquisition of GB by Carrefour was a little bit
like the reaction of the union. Carrefour is the second largest group in the world and
the largest in Europe, so affiliates are keen to have the know-how and conditions
that go along with that. Obviously, they may also be concerned at being very small
compared to Carrefour but first reactions are positive. From 2001, 45 supermarkets
were further remodelled in line with group concepts (an emphasis on fresh products
and low price products, and a growth in promotional campaigns).

The Carrefour acquisition

One of the advantages for GB of the Carrefour acquisition is size but size is not
everything because the retailing business is very local. There is the know-how,
the competencies, the training from them, and the possibility that Carrefour
gives to GB in the supermarkets and hypermarkets. Carrefour has branded
Integration, challenge and change 257

the hypermarket Carrefour here and retained the GB brand for the supermar-
ket. It is easier when you exploit the synergies of the two métiers. We can
immediately go for the hypermarket with Carrefour and have the synergy with
Carrefour in France and elsewhere. The same is true for the supermarkets. With
information systems, we can immediately change the system and that is very
important.
Though there are synergies in bringing Unic and Nopri under the GB brand,
there are also advantages in having the two separate marketing strategies, GB
and Carrefour, in Belgium. I brought the Nopri and Unic under the GB brand
because GB is a supermarket brand. Hypermarkets and supermarkets are really
two different métiers. The supermarket is 90 per cent food and 10 per cent or less in
non-food business. The hypermarket is 70/30 or 40/60, mostly non-food. It’s really
another business. You only have to look at electrical goods, computers, clothing,
sport and leisure to see it really is a different kind of business and for that you have
to have two different brands.
The question of whether to have one or two supply chains in Belgium is difficult
to answer. The question is whether to work by the type of business or by region.
My feeling is that we will have two types of operation. One will exploit the size,
and there will be limited handling costs. The other supply chain will have large
handling costs because it is small packages, small units for the store and so forth.
I think that the likely outcome of the discussion is two separate supply chains but
it is undecided.

Consumer research
We will undertake very little consumer research to judge the Belgium consumers’
reaction to a Maxi becoming a Carrefour. We have to take a long-term view. It is
very difficult to make a decision based on consumer reaction to something that they
cannot really appreciate. I really think that the location is very important. When
you have a good location and you give a good service to the consumer, they don’t
really care what name is on the store. It may be that the offer of the GB Maxi to the
consumer will change when it is rebranded as Carrefour and that is an opportunity
to reposition them to make them more contemporary, more relevant and to provide
services that we do not provide today. Carrefour can offer more services than we
currently offer at GB. The 2001 year-end results from the modernized supermarkets
show a significant rise in the number of customers and a 5 per cent increase in
sales.

Private label
Private label is very big in continental Europe, and GB has been one of the major
drivers of private label. Recent analysis from ACNielsen showed that the disparity
between the value and volume share of private label was much greater in Belgium
258 Retail Strategy

than in other countries, which implies a discounting of private label in terms of

price. The strategy, certainly as far as GB is concerned, is really to have a very low
price in each of the categories of value, market leader and high image. Colruyt
work on a strategy of price and Delhaize on a strategy of quality. I have to work on
a strategy of choice. I have to have products in each category and each category is
very important.
The lowest price that we have in our stores is against the competition of the
discounter but we have to be very careful what we compare. When you look at
the German market, Aldi or Lidl, they have very high quality products that are
also a very low price. Choice does give us our strategy but it’s more difficult than
competing on price. You have to consider the image you give to the client.
The marketing strategy is to gradually uptrade customers from the low price
private label to the premium price private label. Obviously the rebranding with
Carrefour offers more opportunity, and also provides the opportunity to give more
choice because a larger choice is possible when you are Carrefour.

Labour relations and the power of the syndicates in

Belgium
I think that the big challenge for us in the following two or three years is to mange
the labour force. I would say it is the reason for GB’s lack of success in the past. We
were in a permanent conflict situation with the union. Much of the management
effort in the past has been concentrated on social issues rather than business issues.
Competitors, such as Delhaize, have similar issues with the syndicates. Delhaize
was perhaps more consistent in terms of social politics and, also, they were smaller
and because we were the leader and the workforce was large the workforce has
potentially more power to disrupt. More recently we have tried to speak more with
the union and to understand their complaints. We have tried to be more open. I’m
not saying we have solved the problem but that we are on the right track.
The strike that we experienced in May was, I think, very important because it
demonstrated to the labour force that you have to give something to get something
and if there is no benefit to the company you can’t have profit-sharing. There is a
greater mutual understanding. That’s very important.

E-commerce
We are exploring the implications of e-commerce with great interest. We can
imagine that some consumers will see great benefits from this channel of
distribution, which is why we launched www.Ready.be before the acquisition by
Carrefour. The big challenge with e-commerce is the development of the inter-
active software and the logistics associated with home delivery, such as the
speed of response and whether customer orders should be picked at the store
Integration, challenge and change 259

or in a specialized facility. Carrefour are addressing the same issues in France

and did not wish to be involved in a parallel experiment in Belgium. They
therefore saw no merit in acquiring the Ready store operation. GIB are continu-
ing with this in Belgium and we are assisting them by continuing to acquire
and supply the grocery items. This is, however, very much an arms’ length
relationship.
Chapter 19

A passionate
journey: creating
the right culture
in a food retail
organization
Fiona Bailey, director for culture, Safeway Stores,
Hayes, UK
Safeway Stores plc, 6 Millington Road, Hayes, Middlesex UB3 4AY
Tel.: +44 (0)1622 712987

This case study and the following one are unusual in that they are written by senior
managers within the organizations concerned, rather than by an ‘outsider’. It is no
coincidence that both these cases address issues of culture. Readers are invited to
reflect not only upon the content of the cases that follow, but also upon the style
of presentation. In early 2003, Safeway plc was the fourth largest grocery retailer
in the UK, with annual sales of £8.7 billion, over 92,000 employees and nearly 480
stores nationwide. As this book went to press, the company had become the tar-
get for a bidding war from five interested parties, including Tesco, Sainsbury’s and
Asda/Wal-Mart, following an initial recommended bid from Wm Morrison, the sixth
largest UK chain. Fiona Bailey has been with the Safeway group since 1997. Before
becoming director for culture she joined the operations board as trading director
fresh foods, having previously held the position of business unit director non-foods.
Fiona is also responsible for internal communications.
A passionate journey: creating the right culture in a food retail organization 261

If you’re not passionate about it, don’t even bother. . .

Changing the culture of any organization is a long and difficult journey. It involves
unearthing deep-seated values, changing attitudes and behaviours, ‘changing
hearts and minds’, which all depends on the working climate that people
experience every day. You therefore need to believe passionately in the worth
of what you are doing, if you are to survive the journey of (typically) several
years . . .

Why is a culture in which people enjoy work so important?

In food retailing there is an important and very visible link between the motivation
and satisfaction of our people – and the satisfaction of our customers. Our custom-
ers shop very frequently with us, and have a great many opportunities to judge
their shopping experiences and tell others about them.

‘What it’s like around here’

The culture within any retail outlet is heavily driven by leadership behaviours. It
drives employee attitude, which in turn drives retention, behaviours and advocacy.
This then drives the experience of our customers, which very directly drives their
future shopping behaviours and advocacy.
It is therefore important to know exactly what drives employee attitude in your
own company, so that you can address what’s important. For Safeway, confi-
dence in our strategy was important – over 70 per cent of our people believe
we have chosen the right strategy to succeed – this boosts both trust and com-
mitment. Other important drivers are trust and loyalty to management, and job
satisfaction.

The start of the journey – ambition

What drives the ambition to change culture? In Safeway it was the catalyst of a
new chief executive with a turnaround strategy for the company, which required
us to work together in a new way. We moved from short-term survival to a desire
for long-term excellence.
We developed a vision for how we wanted to work together, which was driven
by the behaviours that had successfully driven our turnaround, our competi-
tive position (weak) and our future (ambitious) aspirations. It was important
for the operations team to own the vision, and gain ownership and commit-
ment from our senior managers. They then had the difficult task of adapting
262 Retail Strategy

the vision to their own working environments – stores, depots and support
divisions.
We didn’t start with the launch of any ‘Big Initiative’ but used symbols, rituals
and stories to highlight required new behaviours – and, hard as it was for some,
we had to start ‘walking the talk’.
The first few months of my own appointment were spent talking to people in
every division at every level about what it was really like working for Safeway. This
enabled me to assess the gaps between where we were and where we wanted to
be, analyse the resistance to change and understand the different sub-cultures that
existed – for example every store had its own sub-culture, largely influenced by
the store manager’s personal management style.

Managing the perceived conflict between ‘hard’ and ‘soft’ objectives

The link between ‘people drivers’ and ‘business drivers’ can be a constant source
of conflict unless both are aligned. This is where belief in the service-profit chain is
tested. If both are intrinsically linked to business objectives and strategy, then that
tension remains healthy – the ‘what’ and ‘how’ are balanced, and you can both
deliver business results and make the company a better place to work in.

The ‘mess’ – achieving commitment in the middle phase

Changing the culture of an organization has been described as ‘messy’ – it is! As
the end of the old culture merges with the green shoots of the new, it can feel
uncertain and confusing. In any change process you have typically a small number
of champions, and then a larger group of people inclined to believe the change is
the right thing to do.
At the other extreme, this is repeated for the ‘negative opinion formers’, cynics
or culture terrorists. The higher up in the organization they are, the more they can
encourage resistance to change. But at least they have passion – I have seen some
cynics converted to the change and they immediately become champions. The trick
is to get that passion working for you and not against you!
But the easiest prize is the undecided majority – the 68 per cent – and that is
the biggest prize too. . . . These ‘spectators’ will respond to being challenged and
inspired by the change vision, and should be encouraged and supported.

Inspiring and effective leadership

In this middle phase those responsible for how to engage people, inspire them with
a cause, and work through them, need to be coached and trained in new beha-
viours, so that they, in turn, can develop and motivate others. This facilitates the
greater involvement of colleagues, as attitudes change, communication improves
and colleagues and managers meet to discuss performance and issues facing the
A passionate journey: creating the right culture in a food retail organization 263

teams. This promotes accountability and ownership for the business. The import-
ance of enjoying work shouldn’t be overlooked – in our stores the ‘retailtainment’
we provide is for the benefit of Safeway colleagues as well as customers.

Time to review, learn and measure

An essential part of the change journey is reviewing policies, procedures and pro-
cesses, to check that they are fully aligned to the new way of working. Best practice
also needs to be supported and promulgated – where is the new culture working,
and why?
Safeway took the step of measuring how we were doing on the journey of cultural
change by carrying out an employee survey – a very public way of demonstrat-
ing commitment to change and willingness to listen and improve things. This is
now a regular event in which every colleague is consulted and results for every
store/depot/division are published and acted upon. The survey is also used to
measure where we are against our corporate strategic milestones for our new
culture.

Reward, promote, encourage openness

Rewarding and recognizing exemplars of new behaviour is a powerful message to
others. We try and ensure that this is part of normal good management practice,
and that it is thoughtful, timely and appropriate.
The types of people who you promote will also give a powerful message to
others – are they just high performers whose management style may leave a trail
of high labour turnover and absence in their wake, or are they exemplars of the
management style you wish to create?
It is easy to talk about openness and accessibility but harder to live up to the
words. Here we found that symbolism and ritual (in the form of a bi-monthly
video conference involving up to 1,000 colleagues in a two-way business meeting
with the board) helped to model the change.

New beginnings – the latter phase

The speed of any change is heavily dependent on the commitment to change
of the leader in any team. Nevertheless, the speed of corporate change does
at some stage start to gather more momentum, when a critical mass of man-
agers and leaders commit to transforming culture. We saw the power base for
change expand as personal and emotional commitment spread, and as those
who were more cautious saw the personal and business success of those who
bought into the change at an earlier period. In this phase we have also raised
264 Retail Strategy

our expectations of our managers, embedding ‘people drivers’ into objectives and
targets.
The expectations for change are high, and we therefore continue to focus on
communication, measurement and feedback, and the development and training
of our leaders. We are also seeing the hard benefits of change, such as lower
labour turnover and reduced sickness and absence. The biggest reward is to see the
teamwork in our stores; the commitment, the spirit and the pride in what they do.

The final furlong

Our final furlong will take a further two and half years. Our ambition to become
first choice food retailer will only happen if we achieve it through our people – the
only long-term differentiation for any company. This is why cultural change will
remain high on the agenda of all our managers and leaders. I shall continue to act
as champion, catalyst and critic, uniting the company behind a common vision of
how we want to work together in order to drive our business success.
If I were asked to sum up what has really made a difference on the Safeway
journey, what has created the right conditions for the engagement of our people,
I would cite six key learnings:

Gain the emotional commitment of your people.

Develop inspiring and effective leaders to achieve commitment.
Release the potential of your people by getting them involved in and committed to
delivering business success – every role is important.
Show you value your people’s contribution and commitment.
Make work enjoyable.
Do it all . . . with passion.

It makes cultural change sound easy – it’s not – but it’s a tremendously exciting
and unforgettable journey to share with others.
Chapter 20

Wal-Mart’s entry
into the German
market: an
intercultural
perspective
Reinhart Berggoetz, HR, recruiting and developing,
and Martin Laue, senior HR manager for
operations personnel, Wal-Mart, Germany
Wal-Mart (Germany) GmbH & Co KG, Friedrich-Engels-Allee, 28, D-42103, Wuppertal, Germany
Tel.: +49 (0) 202 2829 1238; Fax: +49 (0) 202 2829 1421

This US retailer, which is based in Bentonville, Arkansas, is the largest retailer and
the largest business in the world. It operates 3,244 cash and carry (C&C) stores
(SAM’s Clubs) and retail stores (Wal-Mart stores, Supercenters and Neighborhood
Markets). Outside the US, Wal-Mart operates 1,170 stores in nine countries. The
company employs over 1,300,000 associates worldwide, more than 300,000 of these
outside the US. Sales volume for Wal-Mart Inc. at the end of January 2002 amounted
to US$217.8 billion (over d240 billion), up 13.8 per cent. This case study deals with
the cultural issues involved in Wal-Mart’s entry into the German market and, unusually
for this book, is written by two senior managers from the business.
266 Retail Strategy

German market entry: understanding different cultures

The financial significance of Wal-Mart’s entry into the German market at the end
of 1997 was based not only on Germany’s status as the third largest national
economy but also on Germany’s importance as a basis for expansion into Europe.
In December 1997, Wal-Mart entered the German market by acquiring Wertkauf
GmbH with its 21 hypermarkets. Only one year later, the 74 Interspar stores of
Spar AG followed.
In 1962 Sam Walton founded Wal-Mart and with it the Wal-Mart culture. It has
been the company’s ‘heart and soul’ for decades of continuous organic growth
and has allowed Wal-Mart’s tremendous economic success. With the takeover
of Wertkauf and Interspar, Wal-Mart met with two strongly established and very
different corporate cultures.
On the one hand, Hugo Mann, a charismatic entrepreneurial personality, had
exerted a strong influence on the formation of Wertkauf since its foundation in
the 1950s. The culture is best described as autocratic and conservative, leaving
little room for innovation. The company was known among its competitors for its
unbeatable proportion of non-food items in the assortment, its focus on internal
growth instead of uncontrolled expansion, and concentration on profit and prof-
itability expressed as a high productivity ratio. The workflow was structured by
standard operating procedures. This system very much limited the store man-
agers’ room for manoeuvre. The company’s below-average turnover stemmed
from Wertkauf’s ability to retain its employees by offering a clear, systematic and
transparent corporate culture despite its strict cost reduction policy.
On the other hand, the 74 Interspar stores did not share a common corporate his-
tory and were a true conglomerate of different corporate cultures. Despite working
at the same store, some associates had been employed by as many as six different
companies – a change every 2–3 years on average. Cultural influences ranged from
the union-affiliated Co-op to Plaza stores to the Pfannkuch group and its Kolossa stores
(which in turn had been acquired by Interspar only one year prior to the Wal-Mart
takeover). French influence over a period of approximately two years resulted in
a ‘cameo appearance’ from Continent, which withdrew from the German market
due to lack of success.
Thus, Wal-Mart had to cope with the heterogeneity of both companies’ corporate
cultures when it first entered the German market.

Wal-Mart culture
The entrepreneurial personality of Sam Walton shaped the Wal-Mart culture, and
continues to thrive beyond his death in 1992. The Wal-Mart culture is founded on
the Three Basic Beliefs: (1) Respect for the Individual, (2) Service to Our Customers
and (3) Strive for Excellence. Sam Walton’s anecdotes and adages quicken this
vibrant culture. Sam Walton worked closely with the associates in the stores – the
Wal-Mart’s entry into the German market: an intercultural perspective 267

essence of his success. It is the associates who have the best ideas and closest contact
to the customers, and are the key to the company’s success. With this conviction,
Sam Walton regularly held ‘grass roots’ meetings with the associates in the stores
where he personally asked them for their ideas for improvements. These meetings
often resulted in successful implementation of the associates’ ideas.
The ‘grass roots’ tradition is continued in annual associate surveys at all Wal-Mart
locations. Managers and associates discuss the results in order to jointly work on
improvements. This leads to the requirements of an ‘ideal’ store manager. He or
she is not an hierarchic and inaccessible leader but supports his or her associates
through ‘servant leadership’, acknowledges every associate’s efforts and their con-
tribution to the team’s success, coaches by walking around (CBWA) and fosters
entrepreneurial thinking (‘be a merchant’). This form of management requires
strong communication skills and openness towards the associates. Managers can-
not fall back on their position and status but must demonstrate and prove their
quality as leaders.
For outsiders, the Wal-Mart culture is frequently identified by artefacts such
as the ‘Wal-Mart cheer’ rather than by the clear entrepreneurial focus. Ultimately,
the Wal-Mart culture focuses on the customer, whose shopping habits determine
the company’s economic success. Any action or programme, be it the every day low
price (EDLP) policy, warranties, or the assortment, advertising support and so on,
has the objective of communicating to the customer Wal-Mart’s ‘best value’ policy.
Walton’s ‘commitments’ and their influence on current corporate culture support
customer orientation both directly in the form of customer service, and indirectly
in associate appreciation. For example, Wal-Mart celebrates success with its associ-
ates, and encourages everybody to find some humour in failure, too. The company
does not succeed by imitating the competition; its success is based on a unique
combination of services and products, which can only be achieved by ‘swimming
upstream’.
In summary, Wal-Mart’s culture is simple and relevant. It is transparent. It con-
centrates on the essential and is utterly pragmatic. The customer is number one
and each individual associate’s contribution to the company’s success is valued.

Intercultural encounters
The Wal-Mart culture is often thought synonymous with the American culture, but
in fact it is a set of globally applicable standards. The international implementa-
tion of the Wal-Mart culture needs to take regional differences into consideration.
The results of intercultural studies provide a better understanding of experiences
gained by US associates in the transfer of the Wal-Mart culture.
Compared internationally, in Germany relations focus on the task, in the US
relations focus on people. The Wal-Mart culture, too, is composed of associate and
customer relations, whereas the Wertkauf and Interspar culture focused on getting
the job done. This form of communication was supported by slogans such as: ’The
268 Retail Strategy

store has to be set’, ’We need more hands’, ’Associates are here to stock the shelves,
not to think’.
Germans’ tolerance of uncertainty is rather low, whereas US-Americans are pre-
pared to take risks. Wal-Mart’s motto is ’Let’s do it’. Implementation issues will not
throw them off the track for long. They often seem to accomplish the impossible.
The German tendency towards problem-oriented thinking hinders swift action.
For example, with instructions from an American advisor, an entire department
was reorganized without lengthy planning.
The German system is characterized by punctuality, linear performance, sticking
to the initial solution, and a long-term focus. At Wal-Mart, several different projects
are being worked on at the same time. Decisions are easily abandoned for new
ideas and the focus is on short-term objectives. After the acquisition of the Interspar
group in 1999, for instance, the head office was moved to Wuppertal, the American
merchandise information system was implemented in all stores, and the assortment
structure and logistics were reorganized at the same time. A German planning
process would have taken much longer.
An important difference is the German tendency towards consensus, whereas
Wal-Mart fosters an entrepreneurial attitude among its associates (‘swim
upstream’). In critical situations, for example in the case of an angry customer,
it is much better to apologize and contain any possible damage proactively than
to remain passive. In daily business, the tendency towards collectivist behaviour
in Germany manifests itself through employee co-determination (works agree-
ments), employee protection and labour safety laws as well as wage scales. These
facts stand in the way of an action-oriented and frequently spontaneous attitude.
Therefore, it is difficult, for example, to explain to Americans the reasons why
associate uniforms are subject to co-determination.
The biggest differences, however, are revealed in everyday communication.
While German associates prefer direct communication and frankness as well as pre-
cise instructions, US-Americans appreciate indirect communication and implicit
explanations as well as face-saving criticism. Frequent and individual praise is the
most common instrument of motivation at Wal-Mart; however, effusiveness may
cause scepticism among Germans. People can differentiate between an American
or German manager when something is referred to as ‘outstanding’.

Wal-Mart corporate culture, intercultural differences

and implications for human resources
This discussion leads to the following thoughts on global human resources. Cor-
porate culture and country culture are not the same (Wal-Mart culture is not US
culture). However, the influence of the country culture on corporate culture must
always be taken into account. Universal corporate beliefs have to be adapted to
country-specific cultural aspects without losing their corporate identity.
Wal-Mart’s entry into the German market: an intercultural perspective 269

Corporate culture not only requires supportive action (intercultural training,

coaching) but also time and patience in order to grow within an acquired company
with a cultural history of its own. There is no such thing as a pill for cultural
transformation.
Corporate culture depends on cultural carriers. Particularly during the first
phase after an acquisition, cultural promoters among the senior management are
very important (top-down process). The acquiring company should demonstrate
its sincerity and live up to its guidelines and culture.
With respect to the recruiting of external resources, the focus should be on quali-
fications and adaptability to the corporate culture (‘Get the right people on the
bus’).
Cultural standards should be integrated into all personnel development meas-
ures (e.g. management/leadership training). The approach should focus on
performance instead of education. With respect to internal succession planning,
cultural skills take a significant part in building cross-positional culture promoters.
Development of active ‘coaching for improvement’ processes is supported by
performance appraisals (also 360◦ feedback) and associate surveys on a regular
basis. The appraisal criteria are based on company principles.
Managers acting deliberately and persistently against corporate culture should
leave the company (‘Get the wrong people off the bus’) since they hinder consistent
culture transfer.
In view of the high number of contact points with different national cultures
within the Wal-Mart corporate culture transfer, the core competence of the human
resources department is to support adaptability of its staff to the corporate culture
and at the same time develop tolerance for the different national cultures within a
global company.
Chapter 21

Ready to scale
up: India’s
Shoppers’ Stop
Interview with B.S. Nagesh, customer care
associate, managing director and
CEO, Shoppers’ Stop
Shoppers’ Stop, Eureka Towers, 9th Floor, B Wing 504, Link Road, Malad (West), Mumbai 400 064
India
Tel.: +91 (0) 22 880 0808; Fax: +91 (0) 22 880 8877

Elizabeth Howard

Shoppers’ Stop is a pioneering chain of department stores in India. Thirteen stores

of around 5,000 square metres each focus on garments and accessories, plus home
furnishings, books and music, offering international domestic and own brands. Rev-
enue in 2001/2 was 2,486 million rupees (about d50 million). 2002/3 saw same-store
growth of 9% and company growth of 23%, moving from breakeven to around d2m.

When I first met BSN he gave me his business card. Customer care associate?
I thought he was CEO? He is of course, and explained the card as follows. He
said that everyone in his business is now called a customer care associate. ’This
is about employee self esteem.’ Retail salespeople should not be looked down
upon. The idea started when he heard a story about someone who disapproved
of his daughter marrying one of his ‘salesmen’. Does this remind you of Asda’s
‘colleagues’? This was just the first of several times when I was struck by Nagesh’s
determination to apply the best ideas he can find to a new, growing business – and of
the difficulties of persuading people that retailing can be a large scale, professional
Ready to scale up: India’s Shoppers’ Stop 271

business in India. I met him again later, and he talked about the challenges in
setting up and developing one of the very first modern retail chains in India.

Beginnings
I had been a postgraduate management student, then worked for three big
companies: in luggage, electronics and footwear. In the last one I was running
128 small shops in the south of India – average size about 50 square metres. I was
fed up with these small shops and dreamed that someone could open larger stores.
It was chance more than anything that I met our parent company, the K. Rajeha
Group, which is one of the largest real estate corporations in the country. They
had a four cinema multiplex which had been closed since 1988 and were looking
for something to do with it. I had never been in a store abroad at this point; I’d
never travelled abroad. But I was ready to do something big and I joined them.
I was the first employee of the new company, before even its brand name was
selected. Most of the retail initiatives in India were taken in 1995/96, but this
was back in 1991. Before we started there were some larger stores but these were
highly specialized family businesses selling saris or jewellery. Outside these two
categories there were no large stores. So when we started, nobody believed it
would work: the biggest store they had seen was 5,000 square foot (500 square
metres) and we were talking about 50,000 square foot. And retailing had never
been professional.
So we started with an experiment and by June 1993 had completed occupation
of that first property. We ran one store for two years then opened the second. It was
only when we opened the second store, in Bangalore, that people suddenly looked
at what we were doing. We were profitable in one store, and we were a profitable
two-store chain.
From 1991 to 1996 it was a struggle. It was a struggle to get anyone to look at
retail. I went to universities and took classes, I talked to people. I believe in openness
and sharing information, anyway, though we are a private company. Then in 1996
Littlewoods of the UK came into India and opened their first store in Bangalore.
After two years because of reorganization in the UK, and because they found it
difficult here – they had 10 expatriate managers and you can’t pay in pounds and
earn in rupees – they sold out to Lakme. The stores are now called Westside, owned
by Trent. So that was the second large corporate to get into retailing. The next was
RPG going into food retailing in association with Dairy Farm of Hong Kong.
At that point we took stock, and took a very long-term view. We decided that
there was something much larger to go for, and we developed three things: our
vision, our mission statement and gradually, our value statement. Our vision is to
be ‘India’s Number One Global Retailer’. That does not mean that we will open
stores in the rest of the world! There’s enough to do here. But we will bring the
best of global practices to this country. The mission statement is ‘nothing but the
best’. We will not compromise on anything. We have also developed 10 values,
272 Retail Strategy

which help and guide us. In 1996 I applied to IGDS (the International Group of
Department Stores) and they accepted us as a member alongside companies like
Selfridges.
During 1998–2000 we had the mission and vision and fire in the belly. With KSA’s
help we evaluated 10 software companies around the world, and shortlisted four.
They refused to come to India! I begged them – have you ever heard such a thing,
there’s a customer and they won’t talk to you. They said we were too small. Finally
we selected JDA and we implemented their software. We implemented the full
JDA software in 12 months when they wanted us to take two years. We were a
two-store company and we opened three more stores in one year. I moved to a
central distribution system. We took too many initiatives at once, so we had major
problems, and losses for two years.
We’ve been lucky in the way our promoters have looked at us and in the con-
fidence they have in us. After buying JDA we realized we had the track but we
didn’t know how to drive. We hired Keith Dunn (ex Littlewoods) to help us for
two years. It was tough to be the flagbearer for the industry. When we did well
everyone praised us, when we did not, people said it was the end of scale retailing
in this country. I have a wonderful team and within one year of making losses we
recovered fully. This year we are expecting fabulous results.
Now we have the software working: NMS for the backend and WMS for the
frontend. There’s automatic stock matching at the end of every day right across
the chain. We have a totally automated warehouse – not escalators and cranes, but
a total auto-replenishment system. Every night at 10.30 p.m. the signal is given
and replenishment begins. We don’t have even 100 square metres of backroom in
any store. We do not stock anything in the store. Last year we turned stock round
5.2 times and hope for the same this year.
We are the only retail company in the country with B2B working: 85 of our
suppliers are connected online. By next year I want all our 300 suppliers to be
connected online. I don’t think that retailers should try to exert power through
holding back information. We should share it with suppliers; we should all look at
the same screen. Last month we opened a totally wireless store. So the business is
fully integrated. The last piece that is left is the planning software. We were using
indigenously developed software, but intend to implement Arthur. My team is in
Australia at the moment to complete that.
Although we are not a public company we follow every corporate governance
rule. I am the only executive director on the board; there are three directors from the
promoters, three from other major Indian businesses, Nitin Sanghavi of Manchester
Business School, and also Vittorio Radice from Selfridges. We have an audit com-
mittee, a compensation committee and so on. We have introduced an employee
stock option plan for the top 16 people, and this March it will be extended to the
next level.
Our vision is always to be the global best. Every time we wanted to do something
we went outside the country and benchmarked. We bought the best technology. We
run customer and employee satisfaction surveys every six months. We are getting
Ready to scale up: India’s Shoppers’ Stop 273

to the stage when we can link them: if employee satisfaction goes down, so do
the customer scores. Store managers’ bonuses depend on store EBITDA (earnings
before interest, taxes, depreciation and amortization) but subject to achieving rising
customer and employee satisfaction scores. At the department level, the manager’s
job is to ensure that feedback occurs, and so on.
We are introducing a balanced score card system now to make sure that mangers
do not just look at the financials. Ideally I want the balanced scorecard to be the
way we measure the business.
We have the biggest loyalty scheme in the country, based on a Citibank credit
card. That gives us a huge amount of information about our customers. Three
cards, gold, silver and classic, provide reward points at various levels, which can
be used in gift vouchers.

No experience please
At sales level we take fresh undergraduates. We don’t take anyone with experience.
At managerial level we did not, until recently, take anyone from retail or textile
backgrounds. I did not want anyone who came with the belief that we could not
do it. Once we had five stores we started to look at how to improve merchandising
and then we started getting buyers from fashion and so on. But we still employ
very young people. The average age of the company is 28, and it is 23 at the
front end.
I am proud of our ‘kangaroo’ programme. These are training programmes based
on the idea that first people need to be in the pocket, and then they can leap forward.
Through these programmes customer care associates can become supervisors, then
there is another programme to help them become department managers and so on.
I am very pleased that our latest store managers are both ‘kangaroos’.
We have very good people here at headquarters too, but there is a very big gap
to fill as we grow. How will we do it? Look, we will double in size soon, and
that puts us in a good position to recruit the best. People will see us correctly as a
US$100 million company.

Ready to scale
We are ready to scale. We have 11 stores today, and are opening two more in the
next few weeks. We are already national, with stores in the eight major cities. In our
catchments, we calculate we have 8–12 per cent market shares. Within five years
we will have 35 stores.

Constraints
The biggest constraint on our development is suppliers’ ability to fulfil. The whole
supply chain is very weak. Secondly, the cost and time taken for distribution is
274 Retail Strategy

very large. Thirdly, stock is not floor ready when it arrives. We have to do a lot to
it. Next there is the fact that India operates a maximum retail price system. So the
price we get for a shirt in my store is equal to the price you see everywhere. The
result is that our margin is 28 or 29 per cent, when international companies might
have 35 per cent. The necessary real estate development has not happened yet.
We are just beginning to see malls of international standard. And finally: people.
Getting enough people of the right kind is a challenge.

Opportunities
The biggest retail opportunities in India are for food hypermarkets. But in our sector
there are also great opportunities. We could grow to be a d300 or d500 million
company before thinking about doing anything else. Our aim is to capture the
national urban market. Although 60 per cent of India is rural, it is the cities we
will focus on. We have three formats for different catchments but they do not differ
greatly.
My own role changes year after year. At first it was to build a business in an
unknown industry. For the last three years it was converting the business into an
organization. This year it is concentrating on growth. The next challenge is to triple
the size of the business.

Nagesh is a pioneer in India. Before I left I asked whether there were lessons for
retailers in other countries from his experience. He was clear there were. A weak-
ness of European retailers is that they are often stuck with old technology and
systems. They are often too inward looking. And finally, he says, don’t spend too
much time worrying about the detail of what the competition is doing: look at the
consumer instead.
Chapter 22

Creating a global
retail brand
Interview with Sir Geoffrey Mulcahy, former
group chief executive, Kingfisher plc
Kingfisher plc, 3 Sheldon Square, Paddington, London, W2 6PX
Tel.: +44 (0) 20 7372 8008; Fax: +44 (0) 20 7644 1001

Richard Bell

With some 2,500 stores spanning 13 countries by the end of the 1990s, Kingfisher
was being recognized – albeit not necessarily by consumers – as one of the world’s
leading retail brands. With proforma sales of £8.2 billion (d11.97 billion) in 1997/8,
it ranked as the world’s 36th largest retailer. In 2000, it became the leading European
DIY operator, following a complex alliance between B&Q and Castorama. It also
captured a larger share of the European electricals market with the acquisition of
But, France’s fourth largest electricals retailer, and a 60 per cent stake in German
retailer Wegert, which operates the Promarkt chain. The prime mover behind the
company’s composition, strategy and success was Sir Geoff Mulcahy. This interview,
conducted at a point at which the company reached the peak of its international
breadth and reach, across a broad range of home-focused categories, provides us
with a unique insight into its strategy for developing global retail brands. A postscript
provides an update on subsequent events.

Group brand strategy

We view Kingfisher as a family of retail brands concentrating on the home and
family at various stages of the lifecycle.
276 Retail Strategy

Table 22.1 Kingfisher plc five year history

Year ended 1998 1999 2000 2001 2002

Turnover 6,409.4 7,457.8 10,885.0 12,134.2 11,238.1

Home improvement 1,753.7 2,055.4 4,528.3 5,093.5 5,833.9
Electrical/furniture 1,937.9 2,458.1 3,188.0 3,564.9 3,784.8
General merchandise 2,618.0 2,840.9 3,065.5 3,358.4 1,498.6
Property 51.2 41.1 32.5 59.2 65.7
Financial services 48.6 62.3 70.7 58.2 55.1
Pre-tax profit 521.6 626.4 712.8 691.2 28.0

Source: Kingfisher plc

The three sectors on which we are now clearly focused are DIY, electricals and
general merchandise. We believe that DIY and electricals offer excellent inter-
national growth potential, particularly in Europe which, in the context of these
businesses, we view as a single market. Our decision to expand on an interna-
tional basis was taken not just for the sake of creating a bigger business, but
because we knew that in order to maintain unbeatable choice, price and ser-
vice we have to have the benefit of scale. In order to pursue this strategy on
an international front, we have to have a very strong home base. This is where
our general merchandise sector fits in, and we are committed to growing that
as well.
Our philosophy for both our UK and overseas brands is that they focus on the
mass market; they offer the best price, the best choice, and the best service; and
that they occupy the leading, or a good number two, position in their respective
markets. Markets are usually chosen because they offer relatively strong growth
potential.
Woolworths, for example, has prospered over the years because we have
concentrated on developing good market positions – it is the leading brand in
entertainment, confectionery and toys, and occupies a strong position in home
and childrenswear. Our aim to be the leading market brand in growth markets is
applied not only within the brand, but across the brand overall.
In terms of the group as a whole, Darty is the number one electricals retailer in
France, whilst Comet is the number two in the UK. In DIY retailing, Castorama
leads the French market, whilst B&Q is the leading UK operator. Woolworths holds
premier position in several of its sectors, and Superdrug is number two in health
and beauty.

Continuing to grow the brand

I do not believe that brands ever really run out of growth. The key to growing them
indefinitely is innovation. At Kingfisher, we are continually looking at new ways
Creating a global retail brand 277

to develop our businesses, moving in and out of markets and product areas where
appropriate, and developing new formats to take the brand forward. Provided you
look creatively at the business, you can continue to grow and develop the brand
far further and longer than most people would have thought possible. Our brands
strategy has always been to create market leading propositions which have clearly
defined roles in the customers’ mind about what they stand for. B&Q, Woolworths
and Superdrug provide good examples of the effectiveness of this strategy.
Initially, B&Q was a smaller player than Woolworths in the DIY market. Even in
terms of its superstores, it was number two or three. We realized that by taking DIY
products out of Woolworths and channelling them through larger, dedicated super-
stores we would create a more efficient, customer friendly vehicle for growth, with
the potential for being the market leader. We wanted to create a brand with absolute
authority, which would become the consumers’ first choice for DIY products.
At the time, this caused us some problems at Woolworths, as we had to look at
new ways of growing that business. Nevertheless, the results show that it was the
right strategy. B&Q offered a greater opportunity for us to grow and gain leadership
in the DIY sector, giving customers a wider choice, lower prices (through economies
of scale) and, by specializing in that sector, better service. Taking this strategy
one step further we developed B&Q Warehouse, massive stores of 150,000 sq ft,
selling some 40,000 product lines. They offer a greater range, price and service
than our smaller outlets, therefore satisfying customers’ needs more completely.
B&Q Warehouse not only reinforced our leadership, but enabled us to expand the
DIY market at the same time.
In the case of Woolworths, some 20 years ago it had lost its way and become a ‘jack
of all trades’. Consumers were shopping there as a last resort, rather than as their
store of choice. We had to recreate the brand, making it the first choice for customers
and a destination store. We decided to concentrate on product areas where we
could develop a market leading position – toys, entertainment, childrenswear and
household products. As a result, adultswear and food were dropped from the
range, as these were areas where we felt that as a general merchandise operator, we
would never have been able to establish a market leading position. Although this
meant eliminating £250 million (d350 million) worth of business, by reallocating
space taken up by food and clothing, we were able to trade a lot more effectively
in our chosen markets.
Another integral part of our strategy to grow our brands is innovation in mer-
chandise. At Woolworths this has involved developing leading private-label toy
and childrenswear labels – Chad Valley and Ladybird – as well as having exclusives
in confectionery. Furthermore, Woolworths was the first retailer to sell prerecorded,
low price videos creating a new market of which we still have a leading share.
Since acquiring Superdrug in 1986, we have repositioned the brand away from
its traditional position as a discount drugstore to a value health and beauty store
in the personal care sector. It now has a really competitive offer to challenge Boots.
The recent addition of pharmacies to 200 Superdrug stores has been an important
part of that process.
278 Retail Strategy

Maintaining the brand essence

Knowing and defining what the store brand means to the customer is one of the
most important things to consider when making changes to the product range or
store format. If you have retained the brand’s essence and attributes, customers
will continue to come back to the store after changes have been made. The essence
is much more than the particular products sold within the store.
Woolworths is a particularly interesting example. It is one of the few stores that
you can sell virtually anything in and the customer would not be surprised, it
has a sort of universal branding. The essence of the Woolworths’ brand is a warm,
friendly environment, family products, good value and hassle free shopping. These
values can be applied across a variety of product categories provided that you set
out and establish authority in these categories over a period of time. Woolworths
has some very strong brand attributes, not only in the UK, but also in the other coun-
tries in which it operates, such as the US and Germany. People’s understanding of
the store brand is exactly the same across all of these countries.
Failure to understand these brand values was one of the reasons why Woolworths
floundered during the 1970s, leading to the change of ownership in 1982 and the
creation of what is now known as Kingfisher. As is often the case in retail brands,
the brand image is created by the inventor of the brand – a person who has an
intrinsic understanding of what he is trying to offer the customer. When creator
Frank Winfield Woolworth died, the chain lost customers as the business did not
have any intrinsic understanding of what the brand values were and was therefore
unable to evolve and meet new customer demands. It got stuck in history, as it was
unable to adapt those intrinsic brand values to the new customer environment.
The B&Q brand conveys many of the same values as Woolworths, but it is
regarded as the place to go for home improvement. This gives you a broad canvas
on which to hang your merchandise selection.

Overseas expansion
In order to continue to grow our business, we must now think about the market in
terms of Europe, and indeed the world. Going back 10–15 years, retailers really only
competed within their home markets. This has now all changed and the industry
can no longer afford to think in these narrow terms.
Europe needs to be looked at as one market. As trade barriers come down,
there are some huge economies to be gained by organizing oneself on a European
basis. However, we cannot restrict ourselves to Europe, what we are seeing is the
emergence of global retailing.
By expanding into Europe, and indeed across the world, we will be able to
significantly enhance our buying power and therefore economies of scale. This
will place us on a more even playing field to our American counterparts, many
Creating a global retail brand 279

of whom have reaped the benefits of a huge domestic market to fund overseas
development.
Not only does it make financial sense to operate on a European basis, but also
it is important from our customers’ perspective. They are seeing and experien-
cing products from further afield by travelling, watching television and using the
Internet. Consequently, they demand the best that is available internationally. Add
suppliers to the equation, and we are all having to think globally.
Once you have to think about your market in these terms, you then have to ask
yourself how you are going to operate across Europe and the world. In the process
of internationalizing our business and acquiring new companies, we are trying to
create a company that has a common sense of customer values and management
attitudes. It is essential that we understand and are at ease with our partner’s brand
and business.
In the case of Castorama and Darty, we spent a lot of time trying to understand
the underlying business and management ethos of both companies. It is important
that we all have a similar perspective with regards to the customer, investment in
infrastructure and the supply chain, etc.

Local marketing and global supply

I think the key to being successful abroad is to understand how the local markets
operate and how you can get efficiencies out of the back of the shop – the supply
chain, infrastructure and relationships with suppliers, etc.
At the front end, the marketing end of the business, whilst it is true that you
require some different product specifications, you can still apply best practice
methods. Despite all the talk about globalization and Europeanization, you have
to recognize that customers are different in different countries.
Nevertheless, regardless of the type of washing machine a customer prefers (top-
loading in France; front-loading in the UK), the retailing principles are very much
the same. The customer wants to be satisfied that they are buying it at the best price,
that they have the best range of products to choose from, that they are getting the
best advice in terms of what machine will meet their requirements, and that they
are getting the best after sales service.
Furthermore, if you can offer a supplier the advantage of scale, then he can
generate efficiencies that are passed on to the retailer, and ultimately the customer.
The trick is local marketing and global supply.

Developing common brand values

Kingfisher is currently going through an evolution, a transition process. Our mar-
kets are rapidly moving from local markets to European and global markets. Each
country has different, well known brand names that are trusted by the customer.
280 Retail Strategy

The first stage to harmonizing these brands is to ensure that they are managed in
the same way, so that they truly mean the same thing to customers in different
countries. We aim to manage the brands so that they develop a common set of
values.
In 1993 (when Darty became part of the group) we established KERL (Kingfisher
Electrical Retailing Ltd) in order to maximize the benefits from having a European
network of electrical retail outlets. One of the objects of KERL is to make sure that
the brand harmonization process happens across these outlets. This process may
be at different speeds in different countries, reflecting the varying positions of each
country’s electrical brands.
Furthermore, KERL tries to ensure that we get some efficiencies out of the
back end of the business – supplier relationships, distribution infrastructure, sys-
tems, etc. I think it is unlikely in the foreseeable future that we will move to a
common electrical brand name across Europe, but I would not rule it out totally,
depending on how fast the industry evolves.
New technologies such as the Internet and satellite television, as well as con-
sumers travelling abroad more, are prompting us to continually review our
branding strategy. If a customer visits the web sites or retail stores of Comet, Darty,
Promarkt (Germany), BCC (the Netherlands) and New Vanden Borre (Belgium),
he may question why each one has a different offer, in terms of range, price and
service, when it is owned by the same company.

Private label
Developing a private label offer is a conscious part of our strategy, which is
applied in different ways in different markets. In electricals for example, the cus-
tomer is actually looking for branded products such as Sony, Philips, Toshiba and
Whirlpool. They want these brand names and therefore we market them. As a
result, the position of our private label in electricals is set in relation to those
branded products. In other markets, private label could be a higher proportion
of the mix.
In terms of developing a common private-label name across the various markets
in which we operate, we are already marketing the same name across several
countries in Europe. Obviously, the price levels in the various European markets
differ, not because the retailers impose different prices in different markets, but
because over the years suppliers have priced differently into each country.
The interesting thing about private label is that we are in control of the total sup-
ply chain, product specifications and the cost of the product. Therefore, when
pricing the product we are not carrying the baggage of different price levels
in different markets, enabling us to price at a level that is in tune with the
local market. This could possibly lead to the development of a Europe-wide
price.
Creating a global retail brand 281

Price differentials
The most well known example of different prices is the price of electricals in the
US and Europe. The differential is not retailer driven, but manufacturer driven.
Consumers are becoming more aware of these differentials as they see the price
of products on the Internet, etc. However, it is not simply a question of retailers
pricing products differently, it goes right down the supply chain. This may reflect
product specification – Europeans tend to demand a higher quality and are more
concerned about the environmental impact of particular designs. Furthermore,
the costs of supplying individual European countries are higher than the US, as
the market size is much smaller and less homogeneous.
Nevertheless, as Europe becomes a more truly single market, we are likely to see
greater economies operating. With 350 million people, a larger population than the
US, there is no reason why we cannot enjoy the same economies of scale provided
that manufacturers organize themselves properly. We should therefore be in a posi-
tion to be able to see why these price differences are really there. If price differences
are not driven by product specification, then there is likely to be more pressure from
consumers to equalize them.
Private label may be the route for us to develop price harmonization. Once we
start to expand this area of our business, we could generate enormous purchasing
power that could be levered across all of our European businesses and passed on
to the consumer.
Currently, we are not that big on a global scale, we rank 36th in the world.
However, we are aiming to compete with retailers such as Wal-Mart, Home Depot
and Metro, in order to gain greater buying power and scale economies. Last year, we
saw how Carrefour used its global scale to run an excellent promotion celebrating
its 30th anniversary. It was run across a number of different products across its
worldwide business. They were promoting it to their customers as the benefits of
Carrefour’s global scale.
However, buying power is not the only issue. If internationalization is going to
work well, you have to have an integrated supply chain. To get the benefits of scale
through to the customer, it is necessary to develop new ways of working so that
factories can be made more efficient and we can move to just-in-time manufacturing
practices. By doing so, we can give manufacturers the scale of orders on which to
get true economies of scale and to run their factories in a highly efficient way.
Therefore, it is not just a question of buying muscle but using that scale to improve
the efficiency of the total process. You have to be big to do this, as a manufacturer
cannot change his production methods for a lot of individual retailers, but he can
for a small number of large ones.
To a certain extent manufacturers face the same issues as retailers. One manu-
facturer recently told me that he was operating 25 different brands across Europe,
with 25 different sales forces often selling to the same retailers. This situation would
then put competing demands back on the same factories. The question is, do you
282 Retail Strategy

really need that number of brands? You might have one brand that works better in
France than the UK for example, but there is no reason why the underlying product
needs to be different. If you can achieve that, you can enjoy the efficiencies of scale.

Developing a multi-cultural organization

In the transition that we are making towards becoming an international company,
we have to assimilate not only different languages, but also cultures and working
practices. In order to achieve this there are three steps that we take.
The first thing that we do, is to spend quite a lot of time in preparation prior
to acquisition, or indeed setting up an operation in another country. We try to
understand the culture of the country that we are moving into, or the management
style of the company that we are acquiring. Although nationalities may be different,
we really try to understand the management of a company, so that we can satisfy
ourselves that we have a common set of cultural and ethical values.
The second step is to make sure that people understand that different nation-
alities have different cultures, it is not a fact that one is better than the other, just
different. A common mistake is to think that because we speak the same language
we share a common culture; for example, the Americans and the British.
Thirdly, we concentrate on bringing together the management team so that they
share a common vision and idea of the way forward. Once a clear vision is estab-
lished, we can concentrate on the business issues and then work through to a
common solution.
In terms of the organization structure, for certain functions I can see that in time as
we become more international we are likely to move towards a more decentralized,
multi-cultural team. This is particularly the case for front-end roles such as labour
relations and marketing, where it is very important to understand the local market
that you are operating in, rather than for distribution, logistics and sourcing for
example. In distribution it is possible to envisage Frenchmen working in Germany;
Germans in the UK and Britons in France. This will be much more difficult to
achieve in the front end roles. To a certain extent, I think that this is a generation
game, with younger people far more used to travelling and open to new cultures
than the older generation.

Postscript
Sir Geoff Mulcahy retired from the Kingfisher board in 2002. Having initiated and
led the expansion of the business, he spent 2000–02 rationalizing the business to
reflect the higher growth potential of the home improvement category. Kingfisher
sold its chain of about 700 Superdrug stores (even though it was the UK’s second
largest cosmetics/health and beauty chain, behind Boots) in early 2001, and it
disposed of its Woolworth and other general merchandise stores in a public offering
in August 2001.
Creating a global retail brand 283

The separation of Kingfisher’s electricals businesses in the form of a management

buy-out was due to be completed during the second quarter of 2003. The company
confirmed in February 2003 that, outside the UK and France, it would now focus
its international resources solely on growing market-leading businesses in Poland,
Italy and the Far East where it is already successfully established. On a smaller
scale, development work would continue in Spain, South Korea and Turkey. As a
result, it planned to withdraw from Castorama’s German business and exit from
its Canadian, Belgian and Brazilian operations together with its NOMI subsidiary
in Poland.
The new CEO, Gerry Murphy, commented in February 2003:

In home improvement – soon to be our sole focus – Kingfisher is

now well positioned, has clear momentum and strong operational
management teams throughout the business. Looking ahead, we
can concentrate on growing our business and delivering real value
for our shareholders. Our top priorities are to keep improving
our customer offer, grow our market share, continue to drive
profitability and improve shareholder returns. The current
environment is uncertain but we remain cautiously optimistic for
the year ahead.
Chapter 23

Consolidation in
the European mail
order market
Interview with Kurt Ebert, former marketing
director, Quelle Schickedanz AG & Co
KarstadtQuelle AG, Theodor-Althoff-Straße 2, D-45133 Essen, Germany
Tel.: +49 (0)2 01 7 27 9633; Fax: +49 (0)2 01 7 27 9853

Richard Bell

In October 1999, Germany’s second largest home shopping operator Quelle, merged
with Karstadt, owner of the country’s third largest mail order retailer and largest
department store chain. The enlarged company is now the biggest home shopping
operation in Germany, with total group sales in 2001 of d16.1 billion (of which mail
order contributed d7.81 billion (48.6 per cent)), d333 million pre-tax profit and
112,000 employees. Shortly after the merger, Dick Bell discussed the background
to it and the future plans of the company with Kurt Ebert, marketing director of
Quelle.
Since this interview took place, Herr Ebert has left the combined KarstadtQuelle
business to become Associate Director (Germany) of Javelin Group, a multi-channel
retail consultancy. The remarks attributed to him at the time of the interview may or
may not now correspond to the present strategy of the combined KarstadtQuelle
business. Some financial performance data has been separately updated and a
short postscript to the interview is designed to bring the reader up-to-date with
KarstadtQuelle’s strategy in relation to its mail order activities.
Consolidation in the European mail order market 285

Merger with Karstadt

In the early 1990s, Quelle’s owners, the Schickedanz family, decided to refocus their
business interests. They concentrated on retail and financial services, and sold their
industrial shareholdings. As part of this strategy, the family acquired a 48 per cent
stake in Karstadt. However, it was soon realized that in order to benefit from all of
the possible synergies between the two companies, a full merger was necessary. In
April 1999, this merger was announced.
One of the main opportunities presented by the merger was the ability to achieve
cost savings in back office functions, such as buying, logistics and IT. One of our
first priorities was to combine our buying offices around the world. Not only would
this make it easier to work in the Far Eastern markets, but it would also improve
our buying power with suppliers across the world. However, from the customers’
perspective it will be important that they continue to view us as two separate
companies, with individual identities and brands.
Karstadt, for example, is the outright owner of Neckermann, the third largest
mail order company in Germany. From the customers’ point of view, it would be
completely wrong to merge Neckermann with Quelle, as we would lose our profile
and sales. From the front end, the two must be seen to be independent. Therefore,
we will maintain our separate brands, deriving synergistic benefits in terms of
operational efficiency.
In order to manage this structure, we will be setting up a holding company with
three or four branches each with their own director – mail order, retail, travel and
perhaps services. Below this holding structure there will be four companies – Quelle
AG, Neckermann AG, Karstadt AG, and CNN AG (services). Services include for
example ServiceLogiQ, carrying out fulfilment for other companies (for example,
fan club articles for football teams). The services company would serve the house
brands as well as external brands.

Business strategy
Quelle’s long-term goals are twofold – to expand the Quelle brand internationally
and to develop in speciality markets. Over the next ten years, the split in terms of
growth is likely to be 50/50. With regards to our international growth strategy, we
plan to expand in those countries in which we already operate and move into new
ones. Currently, we are highly concentrated in Germany, although we do have a
presence across most of the countries in middle and middle eastern Europe.
Our largest foreign market is Austria where we have operated since 1958. Quelle
is the country’s leading mail order retailer. In France, we are also a fairly strong
player. We pulled out of Italy in 1993. Because of its fairly old fashioned retail
structure and inefficient postal service, Italy is the most difficult mail order market
in Europe.
286 Retail Strategy

Table 23.1 Internationalization of Quelle

Country Year of entry

Austria 1958
France 1966
Switzerland 1972
Belgium 1985
Croatia 1988
Spain 1989
Czech Republic 1993
Slovakia 1993
Hungary 1993
Poland 1993
Slovenia 1993
Portugal 1996
China 1997

Source: Quelle Schickedanz AG & Co

With regards to central Europe, we are currently active in Poland, the Czech
Republic, Slovakia, Hungary, Slovenia and Croatia. With the exception of Poland,
we are by far the biggest mail order company in each of these markets, with a
very well known brand name. We use the national postal services in each country,
which although expensive, is efficient. Similarly in Germany, we use the German
post which handles the total volume for the group, enabling us to obtain very
competitive rates. In each country we assess the competitiveness and efficiency
of the national postal service, and if we are unhappy with it then we use private
companies. We are not tied to any particular method.
Other interesting markets for further development are the UK and the US. The
UK represents one of the largest mail order markets in Europe, and with a stable eco-
nomy is attractive to overseas retailers. Similarly the US offers excellent potential
for growth with a very large customer base and a tremendous economy. However,
both of them are difficult to enter. In the UK, we are currently testing the market
for organic growth via our French subsidiary La Source.

Management
With regards to the management of our subsidiaries, our aim is to make them as
independent as possible. However, the degree of responsibility depends on the
size of the company and its experience in the market. Our Austrian and French
subsidiaries for example, have full responsibility for their business, from choosing
the range through to logistics and delivery options. This contrasts with the situation
in smaller, developing countries like Slovakia. We entered the market in 1993 and
Consolidation in the European mail order market 287

have found that it is more effective to manage the assortment, catalogue printing
and delivery from Germany, with only customer service, order taking and some
marketing taking place in the actual country.
Therefore, the range of responsibility varies from quite independent companies
with goals set centrally to a very rigidly managed company in new or smaller
countries. As each company grows and gains experience, it will be given more
independence. Mail order retailing is very much a local business and it is very
difficult to run it in another country. In the long term, if it is possible and profitable,
we like the subsidiaries to run independently.

Specialization
In addition to the Quelle ‘big book’ we also operate a series of specialogues mar-
keted as Madeleine, Elégance, Peter Hahn, Mercatura and AGS (recently acquired).
These niche catalogues are fairly independent, with most consumers not even real-
izing that they are part of the Quelle organization. Indeed, they virtually operate
as separate companies. Each of them develops products and new catalogues to
suit their local market as well as undertaking international expansion. Madeleine

Table 23.2 Quelle specialogues: international coverage

Specialogue Country
Gross Sales DMbn 1997/98

Peter Hahn Germany

DM397bn France
Switzerland
Austria
Madeleine Germany
DM207bn Switzerland
Austria
France
Elégance Germany
DM162bn France
Austria
Switzerland
UK
Mercatura Germany
DM178bn France

Source: Quelle Schickedanz AG & Co, 1999

288 Retail Strategy

for example recently expanded into France. Furthermore, an Alpine clothing cata-
logue was developed in Austria and then launched in Germany, and we have
introduced an underwear catalogue in France. They are specialogues marketed
under the Quelle brand.
Not only are we looking to expand the number of specialogues, but we would
also like to create new ones, as part of the trend towards consumer fragmentation.
However, although specialogues are becoming increasingly popular, we do not
believe that they spell the end for the ‘big book’, with both types of publication
having a role to play within the market.
All of the information on consumer lifestyle trends points towards the growing
need for retailers to cater for smaller, more discrete groups of consumers. Quelle
has recognized this need for specialization, and we believe that this gives us a
competitive advantage over generalists such as Marks & Spencer and C&A.
Ladies fashion is currently the most successful product for the specialogues.
However, in the long term, we are looking to develop a wider variety of mer-
chandise such as bicycles, shoes and home textiles, etc. This will be facilitated by
the introduction of the euro.

Competition
In terms of the European and international market, we face two main
competitors – Otto Versand and La Redoute. British companies tend to be more
concentrated on the British market, although GUS, for example, is the second
largest mail order retailer in Austria and therefore competes directly with us.

Impact of new technology

Although there is certainly a lot of potential in new modes of shopping such as
the Internet and interactive television, I am not convinced that in 3–5 years time it
will represent our total business. We have a 10 per cent stake in HoT (Home Order
Television), the biggest television selling channel in Germany (renamed Home
Shopping Europe). We are also active in Internet retailing, and last year we had the
highest sales of any Internet company. Although this has rapidly grown, it is still
a relatively low level of sales.
We have to be involved in these new forms of retailing, as it represents the future.
But, it is still difficult for most of our customers to use the Internet alone, so at the
moment it complements our book based business. However, in 10–20 years the
situation may have changed, with the next generation likely to use it far more.
I think the Internet will become as commonplace as the telephone with no bias
towards sex or age. At the moment, it is still a young media, but it is becoming
older and more normal in terms of demographics.
Consolidation in the European mail order market 289

One of the interesting issues that has arisen with regards to the Internet is whether
it will enable suppliers to go direct to the customer. In my experience, most of the
suppliers who talk about serving the customer directly have not fully thought
through the issues involved in terms of fulfilment, accounting, customer services,
payment terms, etc.

Synergies between mail order and retailing

I do not believe that many synergies exist between ‘big book’ mail order shopping
and retailing. If you look at the US for example, both Sears and Montgomery Ward
have abandoned their ‘big book’ business. Furthermore, Quelle used to have a
department store chain and closed it. However, in terms of specialogues it does
make more commercial sense. Elégance, for example, has a chain of shops across
the world which co-exist alongside its mail order business.

Own-brand development
In the 1960s, we launched our own range of electrical appliances in Germany,
marketed under the Privileg name. At this time, there were few well known brand
names and we were able to establish a position of superiority. Privileg is now
the German market leader in sewing machines, microwaves, fridges, dishwashers,
washing machines and freezers. However, extending the brand outside Germany is
very difficult. In new markets, where we are relatively unknown, it is very difficult
for us to communicate our brand values against major international names. We
have been relatively successful in Austria, but have had more problems elsewhere
in Europe.

Postscript
Since this interview took place, there has continued to be integrative devel-
opment in the mail order business. With its Quelle and Neckermann brands,
KarstadtQuelle is market leader in Germany (market share 30 per cent). It retains
strong positioning in 17 European countries through more than 120 subsidiaries.
Mail order operations are categorized as ‘universal’ or ‘special’. Universal mail
order brands (the ‘big book’ business) include Quelle and Neckermann – with
a familiarity rating of over 90 per cent and sales of d6.5 billion. The universal
business distributes 38 million catalogues and 68 million parcels per year. The
specialogue business includes brands such as Madeleine, Elégance, Mercatura,
Mode & Preis and Baby Walz – over 178 catalogues. Seventeen countries receive
KarstadtQuelle specialogues. Sales exceed d1.5 billion. ‘Strategic measures’ pro-
posed by the company in a presentation to analysts in December 2002 provide
290 Retail Strategy

for further differentiation of the Quelle and Neckermann brands and continued
organic growth and acquisitions within the specialogue division. In e-commerce,
on top of developments with Thomas Cook and its now 60 e-shops, KarstadtQuelle
purchased its own TV licence in July 2002 and started travel TV programming
(Neckermann UrlaubsWelt TV) in November 2002 on Home Shopping Europe
channel. In addition, a strategic alliance in the development of interactive television
was announced with Sony.
Chapter 24

Modernization
in Greek food
retailing
Interview with Konstantinos Macheras, general
manager, Alfa-Beta Vassilopoulos, SA
Alfa-Beta Vassilopoulos, 81 Spaton Avenue, PO Box 60011, 153-44 Gerekas, Attica, Greece
Tel.: +30 210 661 2501 9; Fax: +30 210 661 2675

Richard Bell

Alfa-Beta has become the second largest food retailer in Greece, since its acquisition
of Trofo (the sixth largest food retailer in Greece in 2001). In 1992, Delhaize Group
acquired control of Alfa-Beta Vassilopoulos. It currently owns 50.6 per cent of Alfa-
Beta. The Greek operating company of Delhaize Group had 6,248 employees as of
December 31, 2001, and was operating 104 stores. Alfa-Beta focuses on customers
looking for competitive pricing as well as high quality products and services. In com-
mon with many southern European retailers, it has a strong fresh food offer which
has implications for private-label penetration and supply chain management. In 2002,
sales in the southern and central European operations of Delhaize Group (Greece,
Czech Republic, Slovakia and Romania) grew by 6.9 per cent. In Greece, sales were
strongly affected by the integration of Trofo, which generated more than 20 per cent
comparable stores sales growth after their remodelling. The existing Alfa-Beta stores
also continued to perform well resulting in a gain of market share. In this exclusive
interview, Kostas Macheras discusses the ways in which the company has adapted
to its new owners and how he sees the Greek food industry evolving to meet the
demands of globalization.
292 Retail Strategy

The spur to internationalization

Restricted by physical distribution barriers and the need to maintain freshness,
food retailers have historically tended to consolidate within national boundaries,
with speed of expansion limited by the sophistication of the infrastructure. To
expand their businesses, and generate scale economies, some have diversified into
non-perishable food sectors, enabling them to increase their purchasing power
and make improvements to the supply chain. These factors have been the basis for
the creation of national chains. Each company has its own criteria and drivers for
success, with the most successful companies tending to be those that have expand-
ed outside their home market. In continental Europe, similarities in culture and
consumer behaviour have facilitated expansion into neighbouring countries, cre-
ating international players. As retailers were expanding internationally, producers
were organizing themselves globally via the development of global brands. Global
thinking was a product of global communications manifest today in the Internet.
As a result, retailers have been driven to develop global standards of performance,
which have been reinforced by the homogenization of global culture, through the
mass media.
Personally, I believe that the ground for global retailing in some countries is well
prepared. Most retailers like to think on a global scale, but very few have actually
been successful in pursuing globalization.
Globalization does not necessarily mean that every international retailer has to
be active in every country or on every continent, but that their ‘presence’ is felt. I
believe that around 10 retailers, depending on their channel, format and market,
will dominate the awareness, but not the majority of the retail market. Medium-
sized retailers will continue to play an important role in their local economy, the
best examples of which are the US operators, in particular those active in the food
market.

Costs and benefits of internationalization

Internationalization is likely to generate substantial savings – particularly in
purchasing, logistics and communication systems – whilst the ultimate goal
is to achieve process synergies that will result in greater employee motivation
and customer satisfaction. Globalization will accelerate the pace of change and
modernization of retailing in southeast Europe.
Wal-Mart is no different to many other retailers operating in Europe – it wants
to be a dominant player. All of us are trying to develop low cost operating models
that enable us to sell at relatively low prices. In Europe we have to improve our
efficiencies within the constraints of an environment that is more tightly regulated
than in the US.
Given the threat of Wal-Mart, I expect that European retailers will increase the
number of their acquisition targets in order to achieve scale efficiencies – although
Modernization in Greek food retailing 293

it is difficult to centralize some functions across Europe, which in principle would

generate both savings and greater purchasing strength. European retailers often
operate different formats and product ranges in different countries. However,
integration is within our grasp – a common European currency will create the
opportunity to unify retailing in a similar manner to that which exists in the US.
Operating on a global scale creates higher sales volumes, operating experience,
profits and shareholder value. Although this is good for the company as a whole,
it is at the point of sale where the battle is really waged. This is where we have to
fulfil shoppers’ expectations, by offering new services and products, guaranteeing
food safety and providing quality at every level of the organization.
It is far easier to have a global brand in a food product than in a retail concept,
where stores and operations have to adapt to local legal regulations. This affects
both the way in which decisions can be implemented and the speed at which they
are carried out. Within the Delhaize Group, we have a common organizational
framework that is adapted to the local environment.

Relationship with Delhaize ‘Le Lion’

Alfa-Beta has benefited considerably from its relationship with parent company
Delhaize Le Lion. In the first two years following the acquisition, the differences
between the two companies were quite evident with the relevant historical, cultural,
economic, social and political backgrounds.
The philosophy and strategy of the Delhaize management was, and still is, to
develop a common policy in each country that it operates. This is also the case with
Alfa-Beta. We determine the best practices and assemble multi-national teams to
accelerate communication. The projects that we are implementing must add value
throughout the group without jeopardising local relationships and local visibility
to consumers. We have enhanced our assortments and developed new concepts
that were previously unknown to our customers.
Through synergies, we have improved our efficiency and productivity and we
have learnt a lot. We constantly question our performance with internal bench-
marking. Delhaize has provided us with a technology platform that has enabled
us to improve communication and decrease our operational expenses.
With respect to the level of influence that Delhaize exerts over our operations, it
is important to bear in mind two key issues. As a quoted company on the Greek
stock exchange we have a responsibility to follow local regulations with regarding
the way we structure our finances. Secondly, we have to deliver a performance
that is acceptable to the Greek financial market. However, in terms of the broad
philosophy and general thinking of the company, we try to follow the objectives
of the head office.
In terms of philosophy and guidelines, we do not differentiate ourselves from the
parent company, because Delhaize, like us, thinks global and acts local. In this way,
we belong to an international group, but act as a Greek retailer with regards to our
294 Retail Strategy

clients and customers. Best practice is disseminated across the group via various
committees and co-ordinators. Meetings are held across the world in person or
are conducted via video conferencing with both the head office and our sister
companies.
Delhaize is, and will always primarily be, a supermarket operator, specializing
in food retailing. Centralized warehousing and delivery are key components of our
strategy, with 80 per cent of sales from products that are distributed through our
network of regional distribution centres.

Food retailing in Greece

Food retailing in Greece accounts for d17,800 million in value terms (food, drink
and tobacco sales in 2001), of which some d5,700 million is purchased through
supermarkets. The top five chains account for some d3,655 million in sales.
Greek shopping habits have changed little since the beginning of the 1990s, with
high levels of shopping frequency, particularly in city centres. Planned purchasing
(i.e. with a shopping list) is high amongst the younger generation, whilst ‘mom
and pop’ stores still account for two-thirds of food spending. This is helped by the
existence of 14,000 kiosks, 10,000 milk shops and 8,000 bakeries across the country
which have all somehow been transformed into mini supermarkets.
Due to the strength of small stores in Greece, wholesalers have traditionally
been key players in food distribution. However, more recently cash and carries
have become more important with many small retailers preferring to buy their
stock directly. The Greek Metro, Makro, and Trofou, now owned by Delhaize, are
the key cash and carry players in the Athens area.

Changes within the food market

The role of the supermarket sector is likely to change, and we are going to see
radical improvements driven by the growth of hypermarkets and discounters.
Since their initial development in Greece at the beginning of the 1990s, hyper-
markets have so far captured only a small proportion of the market, whilst the
discount sector has been shaken up with the entrance of Lidl in 1999. Previously,
Dia (Carrefour/Promodès) monopolized the market with 181 stores, however
Lidl entered in 1999 and opened 34 outlets. It now has 50 outlets. Alfa-Beta has
responded by stocking Netto brand discount products in its stores.

Competition
Our main competitor in the supermarket sector is Sklavenitis (no. 3) and
Marinopoulos (a joint venture with Carrefour/Promodès), which is the market
leader. In the next few years, we believe that the smaller food retailers will group
together to form new buying groups or will join forces with strategically well
Modernization in Greek food retailing 295

placed, foreign partners. Some of them see the Athens stock exchange as a panacea
to improve their cash flow. In other words we are likely to see further concentra-
tion in organized trade, with a resultant increase in the size of the total market. The
majority of Greek retailers aim to be not only national players but also key players
in the Balkans as a whole, with priority given to Bulgaria, Romania and FYROM.

Logistics and supply chain management

With regards to supply chain management, Greece remains very traditional. How-
ever, there are some changes afoot with modernization the key word for leading
operators. Our operations are already highly centralized with 80 per cent of sales
from products supplied by the central warehouse network. Although our competi-
tors are not as advanced as this, they are gradually moving towards this level with
EDI, PRICAT and WEBEDI becoming part of their everyday vocabulary.
However, we have a lot of ground to cover if we are to achieve the inventory
levels of the supply chain in the UK: 11.7 days at the supplier, 9.7 days at the central
warehouse and 7.2 days at the store (source: ECR Greece). In Greece, suppliers work
on 40 days plus, most of the retailers keep a stock of more than 30 days at their
warehouses, and about 20 days plus at their store level. Within Alfa-Beta we work
on much tighter schedules than these averages.
In terms of stock replenishment, we operate a 16-hour service, reduced from two
days initially. Fast turnaround is essential as the majority of our business is based on
food (80 per cent of sales), 50 per cent of which is perishable. We are trying to reduce
the turnaround time still further to 12 hours. Not only do shorter replenishment
times give us more flexibility at the store level to minimize stocks, they are also
more environmentally friendly. Previously, stores were receiving deliveries from
around 52 trucks a day from various suppliers. On a 16 hour cycle, only three
deliveries are needed per day.
As with other aspects of our operation, our warehouses are benchmarked to
ensure that certain standards are met. In most functions the first comparison is
Alfa-Beta to Alfa-Beta, and then we compare ourselves to Delhaize in various
countries. Therefore, we have internal benchmarking in two ways, locally but
also internationally in order to see where we are going.

Store development programme

There are no difficulties in developing on new sites in Greece, although land is very
expensive, especially in city centres. It is easier and cheaper to build in the suburbs,
although problems often arise with the municipality playing a protectionist role
towards the local retailers by restricting opening hours. In terms of store sizes, there
are no limits in municipalities with more than 100,000 people. In smaller towns and
cities, stores sizes are restricted according to the size of the population.
296 Retail Strategy

Marketing strategy
Since the acquisition of Alfa-Beta by Delhaize, we have come to realize that micro
marketing is of increasing effectiveness and mass marketing is of diminished effec-
tiveness. This was something that as a local company we did not understand
because we had no input from suppliers alerting us to this trend. Since every
retailer offers roughly the same product assortment and similar promotions, we
have had to differentiate our offer with a higher level of in-store service and a
customer loyalty scheme.

Loyalty scheme
Customers accumulate points based on the value of the transaction and the
products purchased. According to the number of points accumulated, they receive
a cheque that can either be cashed at one of our POS terminals or exchanged against
products of a higher value with a discount. We are trying to utilize the data collect-
ed from the loyalty card to help with marketing, however we have to act within
the constraints of existing legislation to protect both ourselves and the privacy of
our customers.
We are hoping to improve our marketing effectiveness by developing a category
management programme and integrating it with our loyalty scheme. In the long
term, we believe that micromarketing is going to bring us more revenue and be
more efficient.

Pricing strategy
We are gradually moving our pricing strategy towards an everyday low price
policy. However, there is currently a price war raging in Greece, started by
Promodès and the hypermarkets. Some of the local players such as Sklaventis and
Marinopoulos, who are part of the Carrefour-Promodès group, are also following
this strategy. These retailers are selling below the net cost.
Although this is not legal, it is possible. To compete, we are trying to keep our
prices competitive on at least 4,800 everyday products, out of a total of more than
16,000 products in our bigger stores. We are working with our suppliers to keep
prices in line with the market and to drive costs out of the system. Over the last
three years our operating expenses have reduced significantly.

Private label
Historically, private label was not an integral part of Alfa-Beta’s culture. It is only
since the acquisition by Delhaize that a new opportunity was opened up to us. We
were able to select from a much broader base of products and we have developed
a more aggressive pricing strategy which has been very successful. Sales of private
Modernization in Greek food retailing 297

label currently represent around 10 per cent of our turnover. This may sound rela-
tively small, but it is important to bear in mind that 50 per cent of our sales are
from perishables.
We have a differentiated private-label strategy with an economy range, marketed
as Netto, which is priced in line with Dia and Lidl, and branded private-label ranges
such as Loddi for snacks and Active for detergents, where the store name is the
secondary or signature name. Private label is strongly associated with the corporate
name, with the Delhaize logo (flame) used as well as the Alfa-Beta symbol.

Purchasing
The proximity of manufacture determines how we purchase any product. If it is
locally produced then we buy it locally and can supply good prices for the parent
company as well, such as for olive oil. However, if it is not produced locally we
may buy it centrally through Delhaize.

Human resources
With regards to staff recruitment, there is a large pool of people to choose from
although they are in need of intensive training. The concept of professional retailers
does not yet exist as the retail sector is still largely in the hands of charismatic
entrepreneurs.

Consumer behaviour
Consumer behaviour varies quite significantly between the more sophisticated,
urban Athenians and those from the provinces. With the development of shopping
centres in the provinces, we have seen a major change in consumers’ purchasing
habits and higher levels of demand for branded and international products espe-
cially in clothing and textiles. Women continue to be the key decision makers for
household related purchases. Over the last three decades, there has been a one-way
flow of Greeks towards Athens or abroad.
Chapter 25

Financial
management at
Sainsbury’s
J Sainsbury plc, 33 Holborn, London, EC1 N2HT
Tel: +44 (0) 20 7695 6000; Fax: +44 (0) 20 7695 7610

Dmitry Dragun

The UK’s second largest grocery retailer, Sainsbury’s is a company with 180,000
employees, 470 stores of various formats (supermarkets, hypermarkets, convenience)
and sales of £17.1 billion in the financial year 2001/2. The bulk of the company’s sales
(80 per cent) come from the home base in the UK (Sainsbury’s Supermarkets); the US
foodservice Shaw’s accounts for the remaining 20 per cent. As one of the leading gro-
cery providers in the UK, Sainsbury’s runs an extensive supply chain network across
the UK, as well as a number of supplementary operations such as the Internet-based
fulfilment service sainsburystoyou.com, Sainsbury’s Bank and the property develop-
ment arm JS Developments. Renowned for the unmatched combination of quality
and price, Sainsburys’ held the number one position in the UK until 1994, when the
price challenge by Tesco and Asda led to loss of the market share and severe erosion
of profitability. Having spent the late 1990s recovering from the setback, by 2003
Sainsbury’s has disposed of all peripheral businesses, scaled back non-core interna-
tional undertakings, started sweeping modernization of the IT systems and supply
chain infrastructure, streamlined organizational structure, instituted rigorous cost
controls, and established the financial function at the forefront of decision making.
This slightly longer case study mirrors the more extensive chapter on financial
management in Part II and similarly reflects the contemporary importance of this
retail business function. It explores the critical role of financial management at
Sainsbury’s.
Financial management at Sainsbury’s 299

Sainsbury’s Supermarkets
Financial management at Sainsbury’s Supermarkets – the largest operating unit of
the group – encompasses three major functions.

Financial operations
Financial operations (FO) is a back-office backbone of the company. FO deals with
financial processing of all transactions occurring on a daily basis at Sainsbury’s
including invoicing, trade payments, payroll and other related tasks. With approxi-
mately £14 billion of sales for Sainsbury’s Supermarkets alone, the FO group –
spread across three locations in the UK (Streatham, Bromley and Sidcup) – is one
of the largest transactional processing units for a single company in the UK. The
major tasks of the FO are timely processing of the business transactions and supply
of the high integrity information to the business.
The integrity of information is achieved via internal review processes whereby
the information moves from one controlling system to another (invoicing – goods
delivery – store transaction – cash receipt – payment to supplier) and is continually
verified at each stage. Such information filter is an effective tool in facilitating early
identification and timely elimination of gaps and inconsistencies in the flow of data.

Planning and budgeting

Planning and budgeting (P&B) is the second major function of financial man-
agement at Sainsbury’s. This function focuses on the provision of support to the
business through the formulation, discussion and communication of plans to the
operating units (stores). Here, a major duty is to integrate the operating perform-
ance with the financial metrics in a way that sets a clear set of objectives for the
operating units and facilitates achievement of the corporate financial targets.
One of the most interesting and challenging aspects of the P&B function is a
sequential integration of business plans. As different business units form the oper-
ating forecasts and communicate them to the finance department, the corporate
business plan evolves as an aggregate of projections for the business units. A
commonplace challenge encountered by the large companies is that plans on the
corporate level are by necessity more forward-looking (three years at Sainsbury’s)
than the activity plans of the business units which are often geared towards short-
term performance targets (up to 12 months). An important role of the finance
function is to overcome the mismatch between the long-term corporate aims and
the short-term business objectives. At Sainsbury’s, this is achieved by arranging
the planning process as a single planning ‘loop’.
Target setting is a task adjacent to P&B in that it utilizes inputs from the cor-
porate activity plan (CAP) and translates them into the divisional goals. The CAP
is collated and verified within the period of early January and mid-February of
the upcoming financial year. After having balanced the plan among the competing
300 Retail Strategy

requirements for growth, profitability and capital expenditure, the finance group
cascades the corresponding targets to the divisional and store levels, at which point
the CAP becomes the budget.

Investment budgeting and cost control

The third separate function of financial management at Sainsbury’s is investment
budgeting and cost control (IBCC). Retailing is a capital-intensive business. In order to
deliver value to customers and shareholders, to meet competitive challenges, and to
continue to innovate successfully, the retailers have to invest inordinate amounts
of capital in new building, store refurbishments, and support systems such as
supply chain and IT. In consequence, the capital expenditures (capex) of leading
retailers sometimes reach astonishing levels. Widely perceived as under-investing
in the main store formats, Sainsbury’s has been active in pursuing the ambitious
programme of the store development and enhancements from 2000 onwards. (The
scale of the capex requirement at Sainsbury’s is illustrated by Figure 25.1.)
Most recently (financial year 2001/2) Sainsbury’s gross capital expenditure
amounted to £1.1 billion, with the significant element of it going into renova-
tion of existing stores and expansion of the store network. Going forward, the
capex plan calls for spending of £1.5 billion over the next four years, including
the investments in the supply chain and support infrastructure. The magnitude of
the capex requirement necessitates ongoing communication and monitoring of the
capex delivery targets against the financial performance objectives. This is an area
where the major responsibility of the finance function lies.

1200
Gross capex in fixed assets, £m
Gross capex as % of sales
1000

800

600

400

200

0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Figure 25.1 Gross capital expenditure, 1993–02

Source: company reports
Financial management at Sainsbury’s 301

Dictated in part by the scale of the financial outlays, financial control at Sains-
bury’s Supermarkets is tightly linked to managing the financial and operating
performance. There is no split of the business goals between the financial and
the operating sides as it is accepted that operating and financial performance are
closely linked. This link results in a performance measurement framework (PMF)
that permeates the entire company and provides a set of performance indicators
for every business. The ‘operating’ performance is perceived as more customer-
driven whereas financial performance, especially on the store level, is viewed as
a natural outcome of operating decisions. In consequence, a lot of time and effort
at Sainsbury’s is put into measuring and examining the customer-related metrics
such as satisfaction, quality, choice and availability.
In effect, for every financial measure there are a number of underlying operating
metrics that are monitored and analysed on the continuous basis. For example,
staff turnover is customarily used as a proxy for colleague satisfaction (although
it could also reflect the location of the store). Changes in staff turnover have a
direct and immediate impact on customer service, which in turn has an effect upon
sales. Having to hire and to re-train personnel is an expensive proposition, hence
turnover-induced expenditure will ultimately affect the cost base and, by extension,
profitability. The PMF incorporates various factors of performance into a unified
system of performance attribution for each business division. Sequentially, the
PMF starts off with the economic profit for the entire business, by subtracting
the cost of capital from the operating profit. It then breaks operating profit into
components such as gross margin, operating costs, colleague commitment and
supply service levels. Likewise, the gross margin can be split into two components:
sales and cost of sales. The end result of such disaggregation is a set of fundamental,
store-floor level factors that drive the business: number of lines, stock availability,
product quality, stock loss and customer service. Importantly, all these ‘micro’-
factors have a direct relationship to – and are the drivers of – the crucial performance
metrics at the group level – like-for-like sales, cost of sales, profits. Eventually, it
is hoped that the PMF will link operating and financial performance to the share
price.
The sheer extent of the capex requirements is a reason for why the budgeting
and planning process at Sainsbury’s Supermarkets, as indeed in many other retail
companies, is mainly driven by the corporate centre. Such a ‘top-down’ approach
is in contrast to the ‘bottom-up’ method of starting from the business units and
going up to the corporate centre.
In order to achieve alignment of the business goals with the career aspirations of
the colleagues, the budgeting process is closely linked to the individual perform-
ance evaluation. The device used at Sainsbury’s for this purpose is a performance
evaluation matrix (Figure 25.2).
There are nine boxes in the matrix, each corresponding to individual per-
formance in accordance with a pre-specified set of criteria for a particular role.
Regions in the matrix reflect four broad types of individual performance. The
302 Retail Strategy

Rising
star

Performance
Solid
performer

Out Tested

Potential

Figure 25.2 Performance evaluation matrix

Source: J Sainsbury

upper-right corner of the matrix, marked ‘Rising star’, is a position for aspir-
ing, well-performing individuals on their way up in the organizational ladder.
The left-hand region positioned roughly in the middle of the matrix and marked
‘Solid performer’ is reserved for people with proven performance credentials
but limited (or doubtful) prospect of career progression. The right-hand lower
region – labelled ‘Tested’ – comprises individuals who are perceived to have
substantial performance potential but lag in actual performance. Finally, the
lower left-hand box, denoted ‘Out’, is the least tolerable position from the
company’s standpoint: the individuals assigned to this box neither perform
satisfactorily nor possess potential for improvement. Although by necessity a
simplification of reality and an inexact performance guide, the matrix is never-
theless recognized and used as a useful tool for assessment and communication
of individual performance. The finance function plays a central role in such
individual evaluation because the structure of the process, communication and
career-related decisions are always taken through the framework of financial
assessment.

The group finance function

The top-down approach to financial planning and budgeting practiced at
Sainsbury’s Supermarkets is replicated at the group level, where the finance
function is organized to deal with four main responsibilities:

Financing of the group as a whole.

Implementing the treasury and tax policies.
Developing new business.
Reporting and communication of financial performance.
Financial management at Sainsbury’s 303

600 591
Total new debt raised, £m
Total new equity issued, £m

400
343

252
200 182 188

97
86 21
41 38 24
22 16
0 19 11 14 15
1993 1994 1995 1996 1997 1998 1999 2000 2001

Figure 25.3 New debt and equity issues, 1993–02

Source: Datastream

Financing of the group as a whole

This task includes raising the long- and medium-term funds from the capital
markets on favourable terms, as well as supporting the high credit rating of
the company. Traditionally, Sainsbury’s has preferred debt financing, with equity
financing accounting for only a small proportion of the new funds (see Figure 25.3).
Although arguably the cheaper method of funding, debt issuance has nevertheless
led to a noticeable increase in the stock of accumulated debt and a subsequent rise
in leverage (reflected in the ‘Gross leverage’ component of the DuPont model, see
the following section).
Two interesting questions arise with respect to the company’s preferred funding
mode. The first is why, being a quoted company, does Sainsbury’s not make use of
the public equity markets? In part, the answer lies in the intention of the founding
family to protect its stake – 38 per cent at the time of writing – from dilution. The
other part of the answer is a relatively low valuation of the shares, traditionally
traded at around 12–14 times earnings. In order to raise a meaningful amount of
equity capital, the company would have to issue a significant number of new shares,
which may have an adverse impact on the share price and cause a substantial
change in equity structure.
The second question is what benefits does being a public company, as opposed to
a privately-held concern, confer to Sainsbury’s? The answer may be two-fold. First,
the public status ensures the continuous visibility of the company in debt markets.
Bonds issued by Sainsbury’s are publicly held and – due to the company’s size –
are of considerable interest to institutional shareholders who traditionally account
for the bulk of demand for the new issues. A high public profile helps raise finance
quickly and inexpensively. Secondly, public companies – as opposed to private
enterprises – are usually more forthcoming and efficient in disclosing the investor
information, in part for statutory reasons. Such enhanced disclosure is an additional
factor of comfort for investors, because it facilitates performance monitoring.
304 Retail Strategy

However, there is a price to pay for being a public company, for example strategic
flexibility and the ability to act quickly, irrespective of any outside views that may
be impaired. A private company can go ahead with what it believes is right in the
long term, without the additional overhead of communication restriction.

Implementing the treasury and tax policies

This corporate duty ensures that short-term liquidity (cash reserves and short-term
market instruments) is sufficient to meet the group’s needs at all times. It also aims
at optimizing the group’s tax position, within allowable limits of the tax laws and
regulations. Alongside the treasury and tax policy implementation – and a separate
brief of the treasury and tax team – is management of the financial risks, including
interest rate, currency, credit, and liquidity exposures. Although the treasury is
also aware of the non-financial risks such as food contamination and competitive
threats, they are mostly dealt with at the executive and board levels.

Developing new business

This area, although relatively small at present, has significant growth potential and
is likely to grow in importance. As Jonny Mason, Director of Corporate Finance at
J. Sainsbury’s PLC, puts it:

The corporate development area looks at what opportunities

there might be to invest in other companies. It is not an area that
Sainsbury’s has been very active in over recent years as the focus
has been on fixing the various businesses we own. But we look at
the opportunities all the time and we hope to be active before
too long. Most business development opportunities are managed
within the subsidiaries. For example, in the UK supermarket
business there are business development teams looking at ways of
generating new revenues, such as selling financial services, mobile
phone air-time, new concessions in our stores, new ranges of
non-food products. At group level we are interested in larger
transactions, typically anything involving publicly quoted
companies. We are constantly monitoring our competitors and
how we perform compared to them. We also look at the US and
European markets for further lessons on growth opportunities.

Reporting and communication of financial performance

This is the major area of work for the group financial function:

The area of most interest today is financial reporting. What

happens in the group is that we take the plans, budgets or actual
 Financial management at Sainsbury’s 305

results, and consolidate four operating companies into a Group

picture, adding corporate items like tax and finance and costs. We
report firstly to the Group executive committee and the Group
board, and then to the external audiences.
Jonny Mason

As the issues of transparency and responsibility have come to the fore amidst
a spate of recent corporate mishaps, particular attention is being paid to speedy
and informative communication with stakeholders. In addressing the issue, Sains-
bury’s finance function at the group level has a number of agreed policies for
managing the news flow from the company to interested parties. These policies
(and the corresponding operating procedures) serve as a reliable tool of profes-
sional communication with different audiences. Issues surrounding the area will
be further explored in the following section.

External communication
As a publicly quoted concern, Sainsbury’s maintains a multitude of external com-
munication links. As the focus of this case study is financial management, the
financial aspects of performance reporting and communication will mainly be
considered.
In recent years, Sainsbury’s has faced a number of challenges related to financial
performance. As Table 25.1 and Figure 25.4 show, the year 1994 marked the water-
shed in the company’s fortunes. In that year, the company lost the UK leading
market share position to Tesco, failed to deliver the projected profits, and fell short

Table 25.1 Components of the extended DuPont model, 1993–02

Component 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Operating 7.8% 3.7% 7.6% 6.2% 5.2% 5.7% 6.0% 3.8% 3.3% 4.1%
profit
Total asset 1.8 1.9 2.0 1.9 1.8 1.6 1.5 1.5 1.7 1.6
turnover
Interest 0.4% 0.4% 0.8% 1.0% 1.3% 1.1% 0.9% 1.0% 1.3% 1.2%
expense
rate
Gross 1.7 1.8 1.8 1.9 2.0 2.2 2.2 2.2 2.1 2.3
leverage
Tax retention 75.5% 40.4% 72.7% 61.9% 66.2% 75.4% 65.2% 57.2% 61.3% 70.1%
rate
ROE 18.3% 4.9% 17.9% 12.5% 11.0% 13.2% 11.6% 6.1% 5.4% 8.3%

Source: Datastream
306 Retail Strategy

(a) 20%
18.3% 17.9%

15%
ROE 13.2%
12.5%
11.0% 11.6%
10%
7.8% 7.6%
6.2% 6.1%
5% 4.9% 5.2% 5.7% 6.0%
3.7% 3.8%

0%
1993 1994 1995 1996 1997 1998 1999 2000

(b) 3

Gross Leverage

2.2 2.2 2.2

2 1.8 2.0 1.9 2.0
1.9
1.7 1.8 1.9 1.8
1.8 1.6
1.5 1.5

Total asset turnover

1
1993 1994 1995 1996 1997 1998 1999 2000

Figure 25.4 (a) Operating profit margin and ROE, 1993–2000. (b) Total asset turnover and gross
leverage, 1993–2000
Source: Datastream

of the profit margin targets. As a result, Sainsbury’s ROE in 1994 dropped precipi-
tously to 4.9 per cent from 18.3 per cent in the previous year. Although the returns
had recovered in the following year, the profitability decline had extended into
the late 1990s. The company’s dilemmas – price versus value positing, in-house
update of IT infrastructure versus external outsource, international expansion
versus domestic growth – were well documented at the time.
Strategic indecision has also contributed to the unfavourable analyst coverage
and explained much of the adverse media publicity that the company received.
Painful restructuring has been implemented in several waves, starting in 1996 and
proceeding in the subsequent years. One of the results was the sharpening of the
focus and reorganization of the group’s financial function, especially with regard to
external communication. In consequence, today’s Sainsbury’s is a retailer with an
effective external communication function and a well-developed mode of dealing
with the stockmarket community.
For example, it is now a matter of policy at Sainsbury’s that every message com-
ing out of the company to the external audiences must be coherent, consistent and
supportive of the company’s strategy. Such a communication task, never easy in the
Financial management at Sainsbury’s 307

best of times, is particularly challenging in the midst of the operating turnaround

engineered by the company. The overriding goal, therefore, is

. . . to ensure that we have total control over the processing of

information and reporting of performance, especially the integrity
bit of it. We have four main communication pieces. The statutory
annual report goes to people who want detailed information. The
operating and financial reviews, which highlight the sections of the
annual report, have a wider audience. There are also periodic
[annual and semi-annual] presentations. The whole release
process needs a high degree of integration to ensure that we have
total control over the information and reporting of
performance.
Jonny Mason

There are a number of performance parameters that are watched closely by

stockmarket analysts: like-for-like (LFL) sales, profits and profit margin, capital
expenditure and exceptional costs. Among these, LFL sales growth is the single
most important performance indicator. Monitored and reported on a quarterly
basis, LFL growth is viewed as a definitive signal as to whether the company is
meeting, exceeding or missing targets. The LFL sales dynamic also contains impor-
tant clues about the future direction of the entire retail sector, such as the seasonal
acceleration of spending or changes in levels of consumers’ confidence. In convey-
ing these clues to the investor community, Sainsbury’s faces the vexing dilemmas
of language and interpretation.

We try to anticipate the questions the market will have and

provide answers in advance. The messages behind the numbers
are as important as the numbers themselves. Markets hate
surprises. We are constantly managing the messages to provide a
clear idea of what is happening and where we are going.
Jonny Mason

The future role of the finance function

Traditionally, the finance function in the retailing business has been highly cen-
tralized. Back-office processing operations, planning and budgeting, performance
assessment, and reporting procedures are all conducted under the strict super-
vision of the corporate finance group. There is nothing particularly surprising or
controversial about the practice. The controversy begins where the finance function
starts interacting directly with the rest of the company. Operating divisions, in par-
ticular, have a vital stake in influencing the funding decisions taken at the corporate
level. Infusion of extra capital and bigger cost allowances are great incentives for
308 Retail Strategy

the operating divisions to treat the finance function as ‘dotted’, or subordinated to

the business units. This ‘dotted’ configuration, one argument goes, allows for tight
congruence of financial targets and operating objectives at the divisional level.
However, the hidden flaw of such a structure is that the financial function could
lose sight of corporate goals. This may happen if the operating divisions leverage
their influence to extract capital budgeting or cost concessions from the finance
department. The possibility of this occurring is perhaps less pronounced for retail-
ers exhibiting significant influence from the founding families such as Sainsbury’s
than it is for widely held public companies. In order to avert internal conflicts,
many retailers adopt a ‘solid’ dividing line for the finance function, whereby it
retains complete independence from the operating units and exercises substantial
procedural influence on the decision-making process.
In a business of such considerable operational complexity as retailing, it is finally
always important for the finance function to stay focused on the internal ‘value
added’ from its activities. Although value added continues to remain an elusive
concept to grasp, let alone to implement, there is a consensus at Sainsbury’s as to
what it means for the finance department.
The future role of the finance function is evolving along three key dimensions.
The operating and processing sides will become more effective and far more effi-
cient in conveying information as needed. In the future, the processing part will
function so smoothly that no one will realize it is there, and its presence will only be
noticed when there is a problem. The finance department is likely to progress fur-
ther in its role as an internal service provider, by filtering and collating information
and providing professional support to the businesses.
Progressively, the finance group will become responsible for integration of the
various business functions. The role of business integrator comes from the abil-
ity of finance to bring the disparate functional areas together. With the balanced
scorecard, internal performance evaluation and external financial reporting, all
businesses are already viewed as tightly integrated. Hence the finance division
will continue to evolve towards comprehensive evaluation of the financial contri-
bution from every business and individual, to ensure, ultimately, that the integrated
performance picture emerges.
Part IV

Putting it all
together
This Page Intentionally Left Blank
Chapter 26

An exercise in
successful retailing:
the case of Tesco
Tesco plc, Tesco House, Delamare Road, Cheshunt, Hertfordshire, EN8 9SL
Tel.: +44 (0)1992 632222; Fax: +44 (0)1992 644481

Jonathan Reynolds

The final part of this book begins with a set of integrative case studies based on
the experiences of Tesco, the UK’s leading grocery retailer and an increasingly signi-
ficant international retail business. Tesco operated over 2,000 stores (including the
recently acquired T&S convenience stores) within 10 markets in 2002, and employed
more than 296,000 people. Group sales in 2002/3 were £28.6 billion (d41.75 bil-
lion) and pre-tax profits were £1.2 billion (d1.76 billion). The company’s strategy is
fourfold, to:
deliver a strong UK core business – by continuing to grow and to build market
share;
develop non-food – with the goal to be as strong in non-food as food;
develop retailing services – following the customer into new areas such as personal
finance and on-line retailing;
develop internationally – through a long term organic growth programme which
has successfully aimed to account for 45 per cent of group space by 2002/3.
We bring three particular cases together in order to address three different aspects
of the Tesco business, with the aim of putting across to the reader the multi-
faceted and inter-related nature of retailing. The first two cases examine some of
the underlying mechanisms, on the demand side and the supply side, that work to
sustain Tesco’s continuing profitability. The first case reviews the phenomenal suc-
cess of Tesco’s Clubcard in the UK. Through an interview with Clubcard director
312 Retail Strategy

Crawford Davidson, we examine the way in which Clubcard seeks to provide the
tangible evidence of Tesco seeking its customers’ lifetime loyalty. The second case
explores the extent to which Tesco has been able to harness the developments in
business-to-business exchanges to enhance the efficiency and effectiveness of its sup-
ply chain. Barry Knichel, supply chain divisional director at Tesco, claims that the
company has achieved a fourfold return on its investment in exchanges so far, most
of which has been directly passed on to the consumer in lower prices. The third case
provides real insights into the final plank of Tesco’s overall strategy – its international
growth. The business is market leader in the first five markets which it has entered.
The adopted business model delivers increasing operating profits and is beginning
to more than cover the cost of funding new development (for example, businesses
in Hungary and Thailand will be covering their capital expenditure from internally
generated cash for the first time in 2003). In an interview with David Wild, European
corporate development director, we look in detail at the progress of the company in
its central European markets.

As with Part III, the cases here should be read in conjunction with the appropriate
chapters in Part II. At the end of the third case, we provide a short series of review
questions for the reader.

Chocolate on the cappuccino: the Tesco Clubcard

Interview with Crawford Davidson, director of Clubcard at
Tesco
Richard Cuthbertson

Introduction
Clubcard was launched in February 1995. It is a programme for all Tesco custom-
ers. Essentially, it is a magnetic strip card, free to all customers, and for every
£1 spent by the customer, we give one point, which is worth one penny. We
have around 10 million account households and about 13 million accounts, which
implies that some customers have more than one account. Clubcard covers about
80 per cent of Tesco sales. Customers earn points over 12 or 13 weeks, and we mail
the customers with vouchers to the value of points accumulated, and additional
coupons for redemption against specific products. We are thereby committed to
mail customers four times a year, which is a large part of the investment. In the
last 12 months, our customers have redeemed £200 million worth of Clubcard
vouchers.
An exercise in successful retailing: the case of Tesco 313

Funding
The programme is well funded. It is part of the absolute belief in creating value
for customers because it supports a fundamental Tesco belief that we have to earn
our customers’ lifetime loyalty. In the UK market, customers have a great deal of
choice. The typical customer has a choice of three supermarkets within a similar
drive time. The average supermarket chain gets about 40 per cent of a customer’s
grocery spend, and so the main issue is consolidation. We think of loyalty as a
blend of rational factors, as in share spend, and emotional factors, and we find that
our most loyal customers exhibit a mixture of rational and emotional loyalty.

Focus on retention
The scheme is focused very much on retention rather than acquisition. When you
consider the issue of acquisition versus retention, it is almost foolish to focus on
acquisition. A focus on acquisition rather than retention becomes more expensive
when you regain customers that you have lost, only to find that you have not fixed
the reasons that they left in the first place. Therefore, the emphasis is on retention.
Tesco has the highest share spend and our customers are loyal to Tesco. They do
not lapse, and that constitutes value.
Another way to look at it is that typically, in general retailing, the top 20–
25 per cent of customers will account for 50 per cent profit, and that is profit rather
than sales. The top 40 per cent of customers usually work out at 90 per cent of the
profit. Those customers at the bottom of the Pareto curve are not that loyal. In fact
they are doing most of their spending elsewhere. If you like, the customer from
whom Tesco gets about 10 per cent share of his or her spend may be a Sainsbury
customer or a Wal-Mart customer who pop in to Tesco occasionally and use their
Clubcard because they don’t want to lose out.

Loyalty drivers
We have asked customers what creates their loyalty and they agree that firstly, the
retailer needs to be efficient. If a customer cannot get into the car park or a shopping
cart has wobbly wheels, he or she does not enjoy the shopping experience, their
loyalty may disappear. If the retailer can satisfy those basic requirements and have
the products that customers want, then we can move on to things that add value or
provide a personal service. The retailer can offer to pack bags at the checkout but
only when everything that comes before is right. Getting the basics right allows
the retailer to add personal services and extra value. Tesco provides high quality,
a great range and great value. It is only then that the loyalty scheme can start to
amplify the benefits.
314 Retail Strategy

Using the analogy of a cappuccino, my role as Clubcard director is sprinkling

the chocolate on top of the cappuccino. Marketing provides the froth of the milk.
But both have to be based on the good, fresh, hot coffee below. ‘Good coffee’ is
created by my retail colleagues. We are passionate about it. Tesco has spent in the
region of £1.5 billion on cutting prices, and we have to create more value. Around
Christmas 2002, we recruited 10,000 extra staff because we recognized that we had
to give a better service. We halved the number of shop floor display stacks because
customers told us the experience was too congested. We reduced the opportunity
to sell by having less displays and we took higher costs by having more staff. This
may seem contrary to normal retail practices but we had a fantastic Christmas;
we grew well ahead of the market; customers voted Tesco across those six weeks
because we had done the things that they prize.

Every little helps

When Clubcard was launched it was pioneering. It was the first major loyalty
scheme in the UK. Famously, Lord Sainsbury compared the Clubcard to electronic
green shield stamps, but in Tesco, the Clubcard was to say thank you, we care, we
try harder, and to give you that little bit extra. The philosophy of ‘every little helps’
and ‘no one tries harder’ forms the basis from which we encourage loyalty. As we
build a picture of our customers we can see which customers are more loyal and
which are less loyal. This allows us to identify what we do well and what we have
to change.
Most annual accounts have a cash-flow analysis and we have an internal
customer flow analysis to monitor customer loyalty. It allows us to focus our invest-
ment. If a group of very loyal customers start to diminish, something is wrong. We
can do much by simply analysing the frequency and monetary value of transac-
tions before analysing the products bought by loyal customers. We can then move
on to who is buying what, and why.
In the early days, Boots, for example, would often carry out quantitative sur-
veys of customers. Most customers would claim they visited Boots weekly. The
reality was less than twice a month. They felt they visited Boots weekly because
they walked past it, and so the behaviour they reported was very different from
actual behaviour. When you get authentic data from a customer visit, then it can
be used to make effective changes. It allows the retailer to make huge leaps.
The most powerful examples may be seen when creating a new fresh range.
The whole dynamic of the range is about sustaining distribution and there is
a huge waste bill because customers do not buy initially. It is a huge risk but
if you can see which customers are buying in, you start to build a picture that
includes identifying the early adopters and the laggards. That allows us to tar-
get the bigger prize, to persist and be more confident than others who might be
brave enough to try. Even better, direct marketing can be used to attract customers
An exercise in successful retailing: the case of Tesco 315

to new products far quicker because those who would be interested have been
identified.

Customer power
Whether to focus on customers who are loyal or on those that are not loyal is a real
dilemma. Tesco is in no way like other retailers, who talk about ‘good customers’
and ‘bad customers’. We turn that view on its head. There are no good and bad
customers, just good and bad retailers. The customer has the power in this rela-
tionship. We believe in rewarding the behaviour we seek. We are proud that we
spend more time and money on the customers who are most loyal than trying to
win customers.
We really do worry about what we do, and we continue to reward loyalty in the
future. We have designed the Clubcard as a mechanism of reward. In the quarterly
statement, we send about £40 million in redemption value of coupons per year.
We select coupons based on what customers have bought in the last eight weeks,
and so we expect a very high redemption rate. In addition to the vouchers for
the points accumulated, there are four coupons for a specific product included
in each mailing. We track purchases and the more loyal a customer appears, the
more likely it is that they receive a coupon for something they have bought within
the last eight weeks. It is a deliberate attempt to thank the customer and reward
loyalty. The more loyal a customer becomes, the greater the share of that £40 million
investment. These customers clearly have the choice to redeem the coupons or not.
That way the scheme is permission based. A further four coupons, which are quite
clearly marked differently, are for products the customer might like to try. They
are for products that it seems logical the customer might be interested to try and
to inspire the customer to shop more broadly.

Emotion in the relationship

Thus the Clubcard programme provides a mixture of an unconditional gift for past
behaviour, reward for continued behaviour, and enticements for future behaviour.
In this way, Tesco is communicating an emotional commitment to the customer.
For some customers, it is a straightforward, rational decision – to save money on
the family shopping bill. That is great, perhaps especially for those on low incomes,
because being able to buy some clothes for the children or some extras at different
times of year is incredibly important and there is enough emotion in that very
straightforward relationship.
For customers who are more affluent, we can take it to another level. We invented
several programmes of interesting and fun ways to spend points. One of these
is ‘Tesco free time’. Tesco free time allows customers to convert their Clubcard
points into leisure days out or a holiday. The joy of getting a free holiday can last
316 Retail Strategy

forever. For a customer spending £25 a week, the Clubcard points are doubled
when they spend it through the scheme. If they are very loyal customers spending
on average £60 a week, the value is multiplied by four. Around 90 per cent of
the UK population can spend about £60 per week at Tesco, which means that the
scheme is relatively inclusive. However, we are continuing to challenge ourselves
by asking if it is inclusive enough. That is the way in which the Clubcard can
amplify emotion, by realizing far more value in a way that is important to the
individual customer.
We recently acquired Air Miles in the UK from one of our competitors, Sains-
bury’s. Air Miles is aimed at doing the same for a different group of customers.
Many Tesco customers, perhaps with two salaries and no children, get their joy
from independent travel. These customers are also likely to collect Air Miles with
other retailers and so the Air Miles offer has the same effect as Tesco free time.
Customers who participate in these redemption programmes spend more each
week than control groups in a way that justifies our investment. Tesco is a retailer.
We look at costs and sales in everything we do. Whatever we invest, we expect
increased sales that exceed our investment. However, we look at that in the short
term and then in the long term.
The results of the first programmes were so successful that we have recently
launched another called ‘Tesco Me Time’, which is aimed entirely at women.
Seventy per cent of our shoppers are female. They shop for the family and they
deserve a reward for themselves, so we have constructed an opportunity for these
women to take their points and convert them into premium beauty and premium
fashion, some of which are provided outside of Tesco. This is another example of the
value we can add, and the more value customers receive, the more loyal they are.

Customer question time

Tesco have a programme to obtain vital customer feedback. Customer question
time is ongoing and run through all our stores. Every time we make a change, a
group of perhaps 40 customers sit in a room with a group of directors. Feedback
suggests that customers typically want three things from a loyalty programme,
and customers can grade Tesco on how well they think their desires are currently
satisfied. First, they want more benefits. The most loyal will often want more
because of their loyalty. Secondly, customers want to be able to use their loyalty
points to do something special, to treat themselves or have something extra that
they might not otherwise have. Finally, they do want mailings but only those that
are relevant. Customers are aware that Tesco has all this knowledge and data about
them, and want to see it used to their advantage.
In a Clubcard statement we mail 13 million people, and last year we sent
out 9 million variations. We typically run five or six million variations. That
includes variations of coupons and flashboxes. We used to write long letters
but now we simply give people flash summary messages. Tesco customers
An exercise in successful retailing: the case of Tesco 317

are often people with little time. They do not want to take a great deal of
time to read everything, so we use these mailings effectively to add value.
We often find that our up-market customers will say they do not want mail-
ings but then will phone our call centre and ask why it has not arrived.
Although they might start with the prejudice that the mailings will be junk,
they see their friends or family receive them and can see the value in being
a participant. Relevance is best measured by customer behaviour. We mon-
itor the way in which customers choose to respond, and in reacting to that
response Tesco are satisfying more and more customers, more and more
often.
By working with other retail partners, customers can get even more value, and
that means they can reach their goal, for example, a holiday in Lanzarote, quicker.
So we can bring value to our retail partners because of our huge customer base,
and they can bring value because they can help the customer to get their dreams
quicker. Together we can give the customers more reason to consider our brand by
creating a retail village. Now, I think it’s something like 7,000 places in the UK you
can earn Clubcard points, and only 700 of those are Tesco.

Further segmentation
We have recognized that customers can have a greater say determining their own
participation. Tesco have approximately 1.5 million self-selected customers par-
ticipating in a number of different clubs focusing on different lifestyles, ranging
from a Baby & Toddler Club to the World of Wine. There is a Healthy Living Club
that is further segmented into, for example, eating healthily, giving up smoking
and alternative health. The customer chooses to join and then gets four mailings a
year containing information, entertainment and added value.
I am very proud of the Kids Club. We have just over 200,000 children as mem-
bers. The parent enrols the child, and the mailing is addressed to the child with a
pack inside for grown-ups. The Kids Club provides education and entertainment
for the child, and the parent discovers the new foods that children are interested
in and further information about what is happening in-store for kids. We find a
tremendous emotional involvement with families in this manner.
Using the Tesco club and Clubcard data, Tesco have very powerful segmenta-
tions. The main segmentation we use is based on ‘you are what you eat’. We give
each product different attributes and return to the customer database to build a
profile. There are approximately 15 segments, amalgamated to six high-level seg-
ments. That is great from a marketing standpoint, and a customer can be in a
segment and still be different. For example, in the case of the finer foods segment,
our customers tend to be quite wealthy. They buy more organic produce than any
other group. There is a healthy living segment within a sub-segment of customers
who buy large amounts of organic products but less of the finer foods. What they
have in common is an interest in healthy living, but they are different.
318 Retail Strategy

The club effectively allows the customer to vote and this is what I am passionate
about. Giving more information, more value and sharing our passion makes cus-
tomers feel more loyal to Tesco. We always return to our need to earn loyalty from
customers.

Lifetime loyalty
In Tesco, our whole organization is aligned around a different philosophy and
a different set of rules from most other organizations. I have worked in many
organizations and most would define their main objective to create shareholder
value – earn the bottom line. Tesco is different. Tesco’s core purpose is to earn
our customers’ lifetime loyalty. When you earn lifetime loyalty, the shareholder
value comes as a consequence. We earn lifetime loyalty through a whole set of val-
ues, underpinned by our ‘no one tries harder’ for customers’ philosophy, and that
becomes our edge. We believe in being innovative, energetic, first for customers.
We want to understand customers better than anyone else. We recognize that we
have to use our strengths to deliver unbeatable value for customers, and that we
have to look after our people so they can look after the customers, and that is
expressed in ‘every little helps’. ‘Every little helps’ is not only about prices or
quality or range. It is not only about service or the shopping experience. It is all
of these.
From a customer perspective, they have many requirements. A customer wants
to be able to get everything on his or her shopping list. They want the aisles clear.
They expect great value. They do not want to queue, and the staff need to be
great. Tesco knows that when we get the basics right we get the ‘wow factor’.
The basics are very simple and easy to implement, and so Clubcard becomes
a tool to amplify. It is even possible to identify when a store has become too
busy though Clubcard data because if customers who normally shop broadly
suddenly become quite narrow in their choices, it may be because they are try-
ing to get out quickly. They are no longer comfortable. Then we have to decide
a course of action. Perhaps it needs further investment in staff or property, or
perhaps it is possible to persuade customers to shop at different times, because
when customers start enjoying shopping less, pretty soon they will vote for
someone else.
Tesco chief executive Terry Leahy and marketing director Tim Mason started the
Tesco Clubcard, and so the commitment goes right to the top of the organization.
They were there at the time of Ian MacLaurin, and together they created a philo-
sophy that continues today. That created a culture that turns received wisdom on its
head. Now we have to ask customers if we deserve their loyalty and if the answer
is not yes, what do we have to do to earn your loyalty again? Most of our com-
petitors seem to expect something from their customers, rather than the customers
expecting something from them.
An exercise in successful retailing: the case of Tesco 319

Suppliers
A focus on the customer might seem to suggest that we ignore the supplier.
However, satisfying the customer requires good relationships with suppliers and
changes in the retailer–supplier relationship are about becoming more open with
suppliers at many levels. At the distribution level, Tesco is entirely transparent.
At a sales level, we are entirely transparent in terms of the products supplied so
that a supplier can see the level of sales at each store. In order to gain value from
customer data, we have to know how to use the data. We make a promise to our
customers that we will never pass on names and addresses to a third party. We
will never pass their personal information on to anyone, so our relationship with
our suppliers has been managed through dunnhumby, a data analysis bureau.
We liked them so much that we bought the company. Dunnhumby are in a pos-
ition to provide analysis to our suppliers. This can be of tremendous benefit to
the supplier. For example, a supplier of yoghurt was able to identify some areas
of under-distribution based on an analysis of repeat sales of similar products. We
were able to make the change based on their understanding of sales in Tesco stores.
In the cake market, our category champion has been in a position to suggest we
reduce the range. In narrowing the range, however, it is essential to ensure that
the candidates for reduction include those products that have the lowest customer
loyalty or are most frequently substituted, and not simply those products with
lowest sales and lowest profitability. Once again it is the customer data that allows
us to reduce the impact of the reduction to the consumer.

Natural tension
In practice, the range and distribution of products is decided by collaboration.
Sometimes the manufacturer, particularly a large manufacturer such as Procter &
Gamble, will instigate a change and at other times we will suggest something,
particularly to a smaller supplier. Tesco has a great belief that there will always be
a natural tension between suppliers and Tesco. In fact, a natural tension exists
within Tesco when we think of the tension between those who manage retail
formats, those who focus on categories, those who focus on the marketing levers of
price, quality, range and service. The balance is achieved with good insight, some
really good underpinning values and a customer perspective. Although aspects
of the business are in opposition, and although there will necessarily be conflict,
those who manage the customers have no agenda other than the wishes of the
customers.
It is the same in our relationship with suppliers. We allow the friction, allow
the tension and great results often emerge because friction can produce heat but it
can also produce light. That is often why we make great leaps and why we can be
faster than most other organizations. We will take a jump and leave our competitors
behind.
320 Retail Strategy

Performance measures
When you look at a loyalty programme, it is incredibly difficult to measure the
results after you have launched it, and you end up with no control. You cannot go
back to the start. Tesco has a passion and belief in Clubcard that is partly based
on the period in which the launch took place. Around that time, Tesco overtook
Sainsbury’s as the UK’s leading grocer. Tesco did not just overtake but lapped
Sainsbury’s; Tesco just rocketed ahead. Some of the real clarity of this success is
based on the concentration of the impact four times a year. When we mail the
£40 million worth of coupons, customers appear in store to redeem them, and that
is concentrated into a few weeks. Therefore, it is very, very obvious what effect
Clubcard has on the business. The ideal world is if you can breakeven from a cus-
tomer that responds within say 12 weeks and then you’ve got all the long-term
benefits for free. That’s the way we look at it – break even very quickly and then
measure the long-term loyalty by retention. If you can get that, you’ve given cus-
tomers something they want, they voted with you, that’s repaid you immediately,
and in effect is where the profit comes from in the future. Largely that’s how we
balance everything out.
Tesco operate a balanced scorecard. When you look at the customer quadrant, it
is about how many loyal customers do we have and how many are being retained.
We just look at growing that, and keep growing it. Customers really do just vote
with their feet and we define the loyalty for that measurement just simply based
on spending frequency. It is not real loyalty but we know that the emotion actually
almost mirrors the rational loyalty. For some customers, and I count my Mum as
one of those, they can’t spend enough to be described as a high spending customer,
but you can see their loyalty because they come to our stores every week.

Exchanging best practice with Tesco

Interview with Barry Knichel, WWRE representative and
supply chain divisional director, Tesco
Richard Cuthbertson

Introduction
There are a number of public and private Internet-based business-to-business
(B2B) electronic exchanges operating within the retail sector today. These include
the WorldWide Retail Exchange (WWRE), Transora (funded by 58 leading con-
sumer products manufacturers), the GlobalNetXchange (GNX) and Wal-Mart’s
own private hub using Atlas Commerce. WWRE includes Royal Ahold, Tesco,
Marks & Spencer, Kingfisher, Auchan, Casino, Albertson’s, CVC Corp, Kmart,
Safeway (US), Target, Walgreen’s, Delhaize, Jusco, Best Buy and JC Penney among
An exercise in successful retailing: the case of Tesco 321

its founder members. In total, WWRE currently comprises 58 retailers and one
supplier (SCA Hygiene); though it should be noted that membership has only
just been opened up to include manufacturers and suppliers. Indeed, the WWRE
aims to be a retail exchange, not a retailer exchange. According to the WWRE,
the exchange was created ‘with the fundamental purpose of reducing costs and
improving efficiencies throughout the supply chain’, and was designed to ‘simplify
trading between retailers, suppliers, partners and distributors’.1 The exchange
offers a range of value-adding or cost-saving, non-competitive, back-office services,
in purchasing and supply chain management.
Currently, the electronic auction process between retailer and supplier has attrac-
ted most participation, though new services are being introduced on an ongoing
basis, such as the WWRE Collaborative Planner. The WWRE Collaborative Planner
employs the VICS-CPFR© methodology and enables retailers and suppliers ‘to
share information on strategic plans, sales and order forecasting and replenish-
ment’. In many ways this represents the essence of B2B exchanges, providing
software tools that allow information to be exchanged in a structured and timely
manner.
According to Barry Knichel, Tesco supply chain divisional director, membership
of the WWRE increases Tesco’s ability to drive four key elements of successful
supply chain management: ‘scale, speed, cost and best practice’.

Scale
Much of the original thinking behind public retail exchanges focused on the
collaborative auctioning of contracts for the supply of goods not for resale, such
as office equipment, store fittings or stationery. The idea was that retailers would
group together their individual requirements for such products and so leverage
their combined scale to achieve greater value, such as lower prices or higher qual-
ity. However, this form of collaborative buying is only possible where everyone
agrees on the product specification. The principle of buying A4 paper collabor-
atively may seem simple to implement. In practice, there are many variables in
specification even with this basic product, such as the thickness of the paper or the
recycling qualities of the paper. Thus, these specifications have to be negotiated
and agreed before any collaborative auction can take place.
Greater benefits of WWRE may be delivered in the future through collabor-
ative services, rather than collaborative product purchasing. For example, there
may be scope for consolidating haulage or warehousing between members to
reduce wasted transport and space. This may prove particularly useful in smooth-
ing peaks or troughs in demand or supply. Similarly, there may be opportunities
for the collaborative purchasing of virtual services, such as licences for software
tools.
1 WWRE (2001) Press release: WWRE progress exceeds members’ expectations 23/10/01.
322 Retail Strategy

Thus, where appropriate, the WWRE may provide Tesco with increased scale,
and hence improved purchasing power.

Speed
While the collaborative purchasing of goods not for resale has been slow to develop
due to the difficulties in agreeing product specifications, the individual auctioning
of supply contracts for goods for resale has expanded rapidly, particularly for
staple private-label (own-brand) products. A retailer wishing to purchase a staple
private-label product for resale, such as mature cheddar cheese, will generally
purchase individually and not collaboratively for two major reasons. First, there
may be important competitive issues in terms of a unique product specification.
Secondly, collaborative purchasing of products for resale may infringe competi-
tion law where the collaborative market share is significant; this works against
collaborative purchasing of manufacturer-branded products. Moreover, such auc-
tions usually involve staple products due to the straightforward specifications. For
a more complex and dynamic product, such as a ready meal, an electronic auc-
tion would probably not be appropriate due to the very high level of face-to-face
retailer-supplier interaction required.
Where the electronic auction process provided by the WWRE is appropriate,
it is not only quicker than a manual auction process but also makes it almost as
quick and easy for a retailer to negotiate with 3 suppliers as 10 suppliers. Thus, the
WWRE auction process provides Tesco with quicker supplier negotiations, as well
as potentially providing a wider selection of suppliers than previously available
through a manual process.

Cost
The results of the WWRE appear impressive. Products worth over US$1 billion
(d1.1 billion) have been auctioned through the exchange providing substantial
savings for members – claimed to be around US$200 million (d224 million)
in total. Measurable results from the WWRE Collaborative Planner pilots are
claimed to include ‘reduced delivery time by 25%, a 33% decrease in safety stock,
improvements in in-stock supply by 20–25%, and increased forecast accuracy by
30–35%’.2
For many members, these results represent an attractive return on investment.
Reduced costs can then be invested elsewhere in the business or passed on to the
consumer in the form of price cuts. For example, Barry Knichel claims that Tesco

2 WWRE (2001) Press release: WWRE announces availability of CPRF solution to all members
10/04/01.
An exercise in successful retailing: the case of Tesco 323

have achieved a fourfold return on their WWRE investment so far, most of which
has been directly passed on to the consumer in lower prices.
Thus, the WWRE provides Tesco with the tools to potentially reduce costs, as
well as improve the overall functioning of the supply chain.

Best practice
The benefits of using an electronic exchange are not just based around clearly meas-
urable costs and benefits. For example, the auction process provided by WWRE
is primarily only an electronic version of the previous manual negotiations. How-
ever, because it is electronic, the auction process requires a disciplined approach
that is not always evident in manual negotiations. Thus, there is a clear process
for all participants to follow, resulting in clear requirements and responsibilities,
with the aim of achieving standards of best practice. The potential downside to this
approach is that it may not be flexible enough to be applicable in all circumstances;
hence its lack of use, for example, for ready meals.
One of the advantages of having a public electronic exchange is that opera-
tional and technical standards are agreed through negotiation. There is still much
debate as to who may ultimately decide on industry standards within the retail
sector. Some commentators, such as Rubin and Charron (2001), argue that ‘Wal-
Mart will establish standards faster than any consortium could agree [them]’,
and by implication the retail industry will follow Wal-Mart’s lead. The public
exchanges may argue in response that it is better for standards to be agreed rather
than imposed by a single retailer. In either case, there is general agreement that
operational and technical standards will lead to a much more efficient supply chain.
Thus, the WWRE provides Tesco with a forum to influence standards of best
practice and software tools to implement best practice, where appropriate.

Future developments
Internet-based electronic trading will continue to develop, both in technical terms
and operationally. The retail sector will move towards established standards and
common practice over time. There are clear benefits to be gained within the sec-
tor by sharing information in a structured and timely manner. What is not clear
is the extent to which all participants will benefit. Collaboration and competi-
tion make uneasy bedfellows. Standards need to encourage best practice through
collaboration while allowing for innovation through competition. A balance needs
to be sought that fulfils the needs of all parties within the supply chain, including
the consumer.
324 Retail Strategy

Gaining market leadership in central Europe

Interview with David Wild, European corporate development
director, Tesco
Richard Bell

Introduction
Tesco is not only the leading food retailer in the UK, but is also a significant
overseas player. In 1993 it started to develop abroad and now operates in nine over-
seas countries – Ireland, Hungary, Poland, Czech Republic, Slovakia, Thailand,
Korea, Malaysia and Taiwan. In the year to February 2002, total international sales
grew by 37 per cent to £3.9 billion (d5.69 billion) and contributed £119 million
(d173.74 million) to group profits. When investing abroad it aims to be a major
player in the market by pursuing growth through hypermarkets in emerging
markets or acquiring existing businesses in developed markets. Furthermore, by
competing with Europe’s leading international retailers, it aims to strengthen its
UK operation by bringing its learning experience back to its core UK business. In
this interview, David Wild, European corporate development director, discusses
the means by which Tesco is planning to be the market leader in central Europe.
This interview has been supplemented with data from a September 2002 analysts’
visit to Tesco’s central European operation.

Entering the market

Tesco has been operating in central Europe since 1994, when it opened its first store
in Hungary. What attracted the company to the region, and still holds true today,
was the combination of an emergent economy, with the prospect of high growth,
together with a very immature retail infrastructure.
Tesco penetrated the region by acquiring entry vehicle businesses – a conveni-
ence store chain in Hungary, a supermarket business in Poland and department
store chains in the Czech Republic and Slovakia. This method of entry enabled the
company to get its foot through the door and to understand the way that business
was done in these markets.
The company rapidly decided that its primary development format would be
hypermarkets. What it realized in central Europe, as in most emergent economies,
is that the hypermarket, with its combination of wide range and the opportunity
to sell at discount prices, is a very powerful and attractive vehicle for appealing
to customers. Compared with smaller stores, sales densities in hypermarkets are
comparable. Nevertheless, absolute sales are significantly higher and Tesco is in no
An exercise in successful retailing: the case of Tesco 325

doubt that the growth prospects of the hypermarket exceed the growth prospects
of smaller stores and are much more resilient to competitor openings.
In the longer term, David Wild believes that there is room for four key types of
food retailers in central Europe, similar to the situation in France – hypermarkets,
infill supermarkets, discounters and convenience stores. However, for Tesco the
priority is to get the hypermarkets up and running.

Pursuing a winning strategy

Although many retailers are entering the region, very few of them are building
as large a presence as is Tesco through a significant number of stores. Auchan for
example, opened its first hypermarket in Hungary about three years ago and now
has only four. In comparison, Tesco has opened 26 stores since 1996 and is now the
number one retailer in Hungary. David Wild explains:

We are pursuing a far more aggressive opening strategy, whereas

the competition is being much more pedestrian. Although there
are a lot of companies who are active in the region, it is not an

Table 26.1 Hypermarket growth

Country Number of hypermarkets 2002 Comments

Thailand 41
South Korea 20 6–10 stores p.a. planned
Taiwan 3 Lack of scale to date
Malaysia 2 2 confirmed for 2003, 15–20 planned
Hungary 26
Czech Republic 11
Slovak Republic 12
Poland 21

Source: Tesco, 2002

Table 26.2 Financial performance data (typical store). All figures %

Country Gross margin Payroll Retail/store Mall or other Store

expenses income contribution

Thailand 16 (3) (7) 3 9

South Korea 16.4 (3.5) (5) 1.2 9.1
Central Europe 18 (5) (4) – 9

Source: Tesco, 2002

326 Retail Strategy

easy market and we are winning. We’re determined to be number

one or two in every market in which we compete.

With regards to pricing, competition is fierce because of the number of interna-

tional entrants and that is why it is important to have the right operation, employ
the right people and look after your customers. The effect is increased efficiency,
lower costs and higher levels of customer loyalty.

Growing the business

Tesco is in the fortunate position of having a core business with a very healthy oper-
ating cash flow, so generally speaking the financial constraints in terms of capital
availability are less than they would be in other organizations. This is actually a
source of the company’s competitive advantage. In 2001/2, the company invested
some £325 million (d474.5 million) in continental Europe, which very few retailers
in the world could afford to spend on an organic growth programme. However,
Tesco’s ability to grow is constrained by two factors – people and the planning
environment.

People
There is no point opening stores if there aren’t the people to run them. This means
people with the right skills to look after customers in the right way. Tesco spends a
lot of time and money developing its people. Tesco is a great believer in using local
talent, so local managers generally manage the stores, and wherever possible local
nationals are used. In recruiting the right calibre managers, English language skills
are important but not essential. In Hungary, the business has 12,000 employees,
and the business team is 99.9 per cent Hungarian. Hungarian nationals direct the
business in:
finance,
marketing and PR,
personnel,
information technology,
site acquisition, and
company secretarial roles.
David Wild describes the situation:

In 2002, there were about 70 ex-pats in the region, which seems a

lot but spread across four countries and given the scale of our
growth, it is not that significant.

One of the fortunate things about acquiring local businesses when Tesco entered
the region was that it gave them some store management expertise. This expertise
An exercise in successful retailing: the case of Tesco 327

has been utilized with many of the existing managers now running the company’s
hypermarkets. They have been trained in Tesco skills and techniques by ex-patriot
regional management and have spent some time in the UK. In addition to people
acquired from the legacy businesses, however, Tesco has also needed to recruit new
people.
Some staff have been recruited from competitors and Tesco has also established a
graduate trainee programme to develop the skills of younger people in the region.
The programme has been running for six years with trainees spending some time
in the UK prior to running stores in central Europe. English is always spoken in
conjunction with the local language. As an international organization, graduates
are also able to work in Tesco’s other stores across the world. David Wild observes:

As our priority is looking after our customers, store managers

must be given the freedom to adjust their store to the needs of
their customers. Provided they understand what they have to do,
they will do the right thing. There is nothing wrong with store
managers being independent provided it is in line with looking
after customers and making money.

Planning environment
Across central Europe, Tesco has found many discrepancies in the planning
environment, as the discussion in Part II suggested. Regulations can vary city by
city and Wild feels that there is a slightly irrational approach to gaining devel-
opment consent. One of the problems is that there isn’t the same disciplined,
transparent approach that Tesco is accustomed to in the UK.
A combination of people is used to identify and develop sites. This includes
four or five ex-patriot site finders and site researchers, who utilize the skills and
processes that the company uses in the UK, in order to assess the turnover potential
of a particular location, negotiating permission to buy the land and converting the
land to a permitted site. Tesco also has a much larger team of local nationals who,
in addition to using the business’s core site location skills, also understand the local
environment, which is particularly important when applying to the local authority.
The third element is developers and advisors, who help the company in specialized
areas to ensure that the whole thing comes together.

Logistics and supply chain management

The vast majority of deliveries are direct to the store. Although Tesco chose not
to invest in the supply chain, it does have some depots and it has deliberately
developed retail systems that have the capability to operate on a centralized dis-
tribution basis. The company hasn’t invested heavily in distribution because it
wanted to invest most of its money in building stores and was uncertain as to what
328 Retail Strategy

was the best format, and therefore supply system, to develop. The hypermarket
is a new format and Tesco did not want to rush into developing a supply chain
infrastructure until it knew more about what it would actually need. The company
is now at this stage and undertook a major piece of work in Hungary, which is
our lead country, looking at what the supply chain should be in the future. Tesco’s
26 stores in Hungary in 2002 serve over 1 million customers per week and have
a 13 per cent market share. Up until recently, the company has relied to some
extent on suppliers’ ability to deliver regularly and frequently to store. This has
not until recently allowed Tesco to fully develop our private label business. Today,
a 21,000 m2 distribution centre at Herceghalom ships 700,000 cases per week and
a dedicated 8,000 m2 produce distribution centre ships 100,000 cases per week to
Hungarian stores.

Developing the Tesco brand

David Wild observes:

As we grow our presence in central Europe, I think we have a

great opportunity to develop a true retail brand and be a clear
brand leader. We are hoping to achieve this by investing heavily in
marketing and developing our private-label lines. We have taken
some initial steps in rolling out private label, with the Tesco Value
range appearing in every store, which is a good place to start in
an emerging market. We are also launching other Tesco brand
products. Private label is a key part of our global capability, and I
think Tesco is one of the best own-label developers of any retail
business in the world. It is a real skill that we have and something
we should use.

In Poland, Tesco has launched over 1200 private-label lines, comprising 600 Tesco
Value and 600 Tesco brand lines. In Hungary, over 750 lines are now private label.
As far as loyalty cards are concerned some of Tesco’s competitors have them,
although the company has not chosen to introduce one at this stage. It will monitor
the situation and bring one in if appropriate.

Consumer shopping habits

Central Europe is still very much a cash economy, with most customers preferring
this payment option. However, credit cards are becoming increasingly widespread,
whilst cheques are very rarely used. The frequency with which consumers shop
very much depends on the store location. In the more densely populated parts of cit-
ies, shopping frequencies are relatively high at around two to three times per week.
An exercise in successful retailing: the case of Tesco 329

However, Tesco have a growing number of stores on the edge of town, which is
a more conventional location for hypermarkets, where the shopping frequency is
once a week, or even once a month, if it serves a very wide catchment area.
Where necessary, Tesco provides public transport arrangements, but with an
increase in car ownership in the region, it has some very successful stores where
most of the customers travel by car.
Apart from an increase in car ownership, there have also been some changes
in consumption habits which have increased the popularity of the hypermarket
format. In the Czech Republic, for example, demand for microwaves is grow-
ing exceptionally fast. This requires Tesco to sell a range of foods suitable for the
microwave.

Growth strategies
First, Tesco will gain leadership in the region by looking after its customers. It aims
to win by better responding to its customers than its competitors, and by not looking
over its shoulder. Secondly, Tesco is in the fortunate position of having a very
focused international strategy. It claims not to be bothered about putting flags on
maps, its aim rather is to invest heavily in markets in which it seeks to be the number
one retailer, and this leads the company to a policy of depth within a market.
Some of Tesco’s competitors are very proud of the long list of countries in which
they are active, but they may only have three or four stores in each and are only
opening one or two a year. What Tesco is doing is focusing on a much smaller
number of markets and aiming to be number one or two in them. David Wild
concludes:
We are number one in the UK, Ireland, Northern Ireland, Poland
and Hungary. We are investing to be number one in all the four
markets of central Europe in which we trade, and we’re probably
number one, or close to it, in Thailand. We are investing heavily in
Korea, which is a very diverse and large market; Malaysia also
provides an exciting location for future growth. We are more
about saying let’s be the market leader by looking after customers
and investing heavily in our strategy, than trying to have a
presence in every country across the world.

Review questions
1 Do Tesco’s central European markets provide opportunities to develop Club-
card? If so, why? If not, why not? How might you overcome any barriers to
adoption? (See Part I, Chapter 2.)
330 Retail Strategy

2 Are Tesco’s experiences with B2B exchanges likely to permit the company
to ‘break the mould’ in a similar way to their experience in B2C electronic
commerce? (See Part I, Chapter 6.)
3 Does the business model within Tesco’s central European operations appear
to be significantly different from that in the UK? What do your conclu-
sions tell you about the challenges of retail internationalization in relation
to grocery retailing? (See Part I, Chapter 5.)

Reference
Rubin, R. and Charron, C. (2001) ‘Transora and WWRE: Unite and follow Wal-Mart’.
Forrester Research Brief 31/10/01.
Chapter 27

Portents: strategic
retail futures
Ten more years of change: looking back and
looking forward
Elizabeth Howard

Knowing the future is impossible. We cannot forecast the form that retailing will
take in another decade, nor what events and fashions will be shaping consumer
interests. But in this section of the book, we are attempting to look forward towards
the end of 2012. We do it not because we can see the future, but because the exercise
of forecasting is itself worthwhile. It forces us to try to identify the factors that
underlie the trends we can see and to make explicit our assumptions about the
nature and direction of change. Often we do not quite realize what our assumptions
are, and what they imply we should worry about in business planning, until we
write them down or discuss them with others.
Each of the six contributions that makes up this final chapter of the book is
different in character. Some are deliberately provocative. Some are from academics,
some from retail chief executives.

Back to the future

Looking forward usually demands that we do a little looking backwards first, to
find some perspective and to see the trends. So where were we in 1992, and what
were the forecasts then for the next decade? The year 1992 was not just a date in
Europe: it was a programme and perhaps an ideal. It represented the European
Community’s plan to complete the single market. The programme achieved huge
amounts of de-regulation and harmonization, and in 1991 and 1992 there was
much discussion of what change retailers could expect to flow from it. There was
speculation that levels of concentration across Europe might be as high as they
were in individual countries by the end of the century. Today, several major grocery
retailers have gained top 5 ranking in more than one country, and six of them in
332 Retail Strategy

three or more countries. None has, however, any very great share of the market at
the European level. Looking around in 2002, we can see that the European Union,
now of 15 rather than 12 countries, is far from a single retail market. Indeed Alan
Giles, CEO of HMV Media, comments in his contribution that consumers may be
becoming more, not less, distinct in different countries. Consumer interests, but
also planning and development regulations, food standards and many other issues
keep the markets somewhat separate.

New and expanding markets

Alongside the discussion about the EU in 1992, was the excitement about the open-
ing up of eastern Europe. The Berlin Wall fell in 1989; by 1992 several companies
were expanding fast towards the east. More was forecast. Expectations in this direc-
tion have, I suggest, been met. Retail re-structuring and growth in the former East
Germany, Hungary, Poland and the Czech Republic have been striking. Hopes for
substantial development in Russia have, however, not so far been realized. Interest
today in international development focuses on eastern Europe and Asian emerging
markets. John Dawson, professor of marketing at Edinburgh, in his contribution
asks if Russia (or India, or Africa) might be on the agenda for the next decade.

Integration and concentration

Retail integration and concentration have progressed more slowly than perhaps
most were forecasting within the EU; eastern Europe has opened more or less in the
way anticipated. What has moved faster than we expected? E-commerce perhaps?
In 1992 as I look back, there was little enthusiasm for it, and, though there was
much discussion about communication between suppliers and retailers, we did
not foresee the web-based B2B exchanges that are a reality today. We were hearing
relatively little about B2C e-commerce either in 1992 (and of course we did not use
the word: it was home shopping or tele-shopping then). The flurry of experiments
and excitement of the 1980s had died away and the potential of the worldwide web
had not dawned. Yet Jonathan Reynolds’ story about future shopping is actually
not so new – similar discussions appeared in the 1980s, though referring to different
technologies. So what is the lesson here? First, I think that speed and timing are
very difficult to predict, even if trends are not. Secondly, we need to focus on real
consumer benefits, and real business models and opportunities, not technology, in
forecasting change in e-commerce.

Transforming technology
Technology has transformed retailing in the past decade, but not through home
shopping. In the last decade, the retail industry as a whole has become a
technologically based, information-driven sector. That is something that was
Portents: strategic retail futures 333

foreseen: the forecasts I have been re-reading look remarkably prescient. Informa-
tion technology, starting with EPOS systems, has come to drive the supply chain,
internal forecasting, ordering and logistics. Geodemographics was invented earlier,
but in the 1990s planning and analysis packages were developed so that more sci-
entific location and network planning has swept through the industry. Distributed
computer power within organizations has given managers at all levels powerful
information to use in controlling their businesses. We can see how far the industry
has moved just by looking at the relatively low figures for the proportion of grocery
turnover that was scanned through the checkout in 1992. In Germany it was still
under 25 per cent, in Belgium 53 per cent, France 62 per cent and Great Britain
66 per cent (source: ACNielsen). Today, it is over 90 per cent in France, Britain and
Belgium and over 75 per cent in Germany. Non-food retailers are moving in the
same direction. The 1990s overall was the decade when control of very large retail
organizations became possible. Going forward to 2012, we will see what size of
organization might be possible.

Green gold
What else was forecast in 1992? Many things by many people, of course. I was
struck by discussions of new formats, and the expectation of growth in Europe
of discount formats, and in America of warehouse clubs – and the then new Wal-
Mart Supercentres. We have seen each of these trends, but not quite so much of the
related suggestion of the expansion of American companies in European countries.
‘Green’ was in the forecasting headlines too in 1992. Environmental concerns had
risen dramatically in public opinion polls at the end of the 1980s, and by 1991
FMI’s poll of European top executives’ concerns also had the environment rising
from bottom to fourth place. Green will be gold: consumers will drive retailers
towards environmentally friendly products and practices, we were told. Indeed,
today most big firms have a raft of environmental policies that did not exist a decade
ago. But products promoted on environmental grounds? There are not so many.
And overall, it is interesting that it has not been consumers who have directly led
the change, but rather it has been regulation of one kind or another. Beyond that,
there is a growing sense among retailers now of the need to think about ethical
sourcing and fair-trading issues.

Corporate governance and national business regimes

Finally I want to return to the question of international expansion and concentra-
tion, and raise an issue that has not been much discussed in retail studies, so far.
That is the question of corporate governance and national business regimes. One
of the main shifts of the past decade has been for European retailing to become an
activity of large, public corporations and modern co-operatives, replacing family
334 Retail Strategy

firms, small firms and traditionally organized co-operatives. There were no retail
companies in the Fortune 500 list of the largest firms at the beginning of the 1990s.
The 2002 list will probably be headed by a retailer, Wal-Mart, and include more
than 50 others. Public companies in particular are leading the drive for international
scale. Shareholders are increasingly demanding growth from these companies and
punishing those who do not expand.
One of the reasons pan-European retailing does not really exist yet is the difficulty
of corporate merger and takeover in especially, but not only, Germany. The complex
ownership of some firms with the lack of transparency in corporate and banking
relationships, combined with financial regulation, make it difficult to use shares
as currency for acquisitions, and make it difficult for others to acquire or merge
with them. An organization like Metro AG, for instance, has found it necessary
to change its corporate structure in order to better compete, to raise the capital it
needs and so on. The European Commission has proposed harmonizing financial
regulation, especially of take-over codes. So far the proposals are stalled. Surely
they will progress: how can a European Union go forward with (at least) two
different models of corporate governance? And if they progress, then I forecast we
will at last see pan-European retailers.

The retail industry over the next ten years

Dr Hans-Joachim Körber, CEO, Metro AG, Germany

Dr Hans-Joachim Körber has been chairman of the management board of Metro AG

since June 2001 and is responsible for investor relations, corporate communications,
corporate development, management development, law, associations, environment
and internal audit.

What will happen to the retail industry over the course of the next 10 years? It is
always difficult to make predictions. With regard to the retail industry, one can
observe current trends and anticipate where they will lead over the course of the
coming years. The future of retailing in the industrialized countries will be affected
by several key trends.

Changing consumers
The ageing populations will lead to an increase in the demand for services, although
consumers in general will spend even less of their income in retailing compared to
travel or entertainment.
Portents: strategic retail futures 335

At same time, consumers will become even more educated, which will lead
to a rising group of ‘smart shoppers’. Their behaviour will greatly differ from
price-consciousness to a strong orientation towards lifestyle, a fact that retail com-
panies will have to observe and analyse closely in order to better understand
customers’ needs.

Knowledge
The key to successful retailing in saturated markets truly lies in understanding
what the customer really wants – data-based retailing will give retailers the
information they need to have to provide for adequate customer orientation. It
is knowledge about the customer that cannot be copied easily by competitors,
whereas product assortments and the layout of stores can be duplicated within a
few months.

E-commerce
What will happen with regard to e-commerce? Evaluations about the perspectives
of e-commerce have become more realistic. Within the next 10 years, only a small
number of online-retailers will prove that their business model does earn profits
and they will gain a limited market share in the distribution of selected non-food
products. Overall, retailing will remain a clearly ‘bricks and mortar’-dominated
business, with only niches left to be taken over by B2C-e-commerce. The big play-
ers from the ‘old economy’, with their long-standing expertise in logistics and
with a solid financial backing, are in the best position to become the key players in
e-commerce in the future.

Economies of scale
The necessity to achieve economies of scale together with a higher transparency
due to the introduction of the euro will accelerate the ongoing consolidation in
European retail. Thus, in a highly competitive environment we will see an increase
of mergers and acquisitions, but no significant decline in selling space over the
next few years.

Internationalization
It is also safe to say that the global trend to internationalization will continue. What
makes me confident about this preposition? First, the past has proven and the
present is showing again and again, that the home markets of established retailers
in western Europe, the US and in Japan (Triade) are more or less saturated. In these
336 Retail Strategy

regions, the global players have their operations running, using modern formats.
At the same time, a varying percentage of traditional retailing, the ‘mom and pop’
stores, have weathered competition by occupying specific market niches.
Additional growth for modern formats can thus only be generated through pred-
atory competition. As a consequence, the leading retail companies must expand
into emerging markets, notably in eastern Europe and east Asia. We will see
tough competition there, because each player will want to exploit windows of
opportunity. However, internationalization in retailing will not lead to an end of
local or traditional formats in the emerging countries. At the end of this decade, the
top 10 retailers will have approximately 20 per cent market share, with sufficient
potential for others to fill the gap.
Among the emerging countries, China will be the single most attractive market
for retailing. With a population of more than 1.3 billion, an annual growth estimate
of 7 per cent for the next few years and a national culture in which commerce
and trading are in-born, China is positioned to play a major role in international
retailing. The WTO entry in 2001, a high computer literacy and a prudent political
leadership will add to China’s importance, which in turn could trigger a long-
awaited economic rise throughout east Asia, of which the retail industry should
take advantage.

Thoughts on the future of grocery retailing

Richard Bell
Changes in the structure and nature of grocery retailing should be seen in the
context of likely changes in food processing technology and in consumer lifestyles
as well as anticipated developments in the efficiency of food distribution. In recent
years the role of the distributor has expanded into areas of food production, and
in turn has influenced patterns of consumption. The growth of private label, the
shift to increased sales of fresh and chilled foods, and the reaction of the farming
community are all a reflection of the retailers’ expanded role. Retailers have made
a new range of foods available to consumers. Marks & Spencer has developed into
food retailing largely on the back of chilled, ready-to-eat meals.
The fundamental drivers of change in any society are demographics, technology
and income levels (wealth). The fusion of these trends will shape consumer life-
styles. There are three specific trends that will shape the future of food retailing;
time-poor consumers, mobile consumers, and the emergence of new technologies
in food production.

Time-rationed society
More working women and the pursuit of leisure are among the causes of the move
towards a time-rationed society. The consequence is to increase the responsibility
Portents: strategic retail futures 337

of the food retailer for food preparation and processing. In the United States the
average time spent cooking per day during the week had fallen to 20 minutes by the
mid-1990s compared to three hours in the 1940s. The case of a US retailer, Ukrops,
provides an interesting perspective. Ukrops seeks to provide meals that can be
speedily completed at home. All the ingredients for a selected menu are prepared
and sold together: preparation and assembly takes place in a centralized kitchen
supplying all of Ukrop’s stores. Ukrop’s has, in effect, moved the domestic kitchen
from downstream of the retail store to upstream. All that is required is a domestic
re-heating facility, the microwave oven.

Increased mobility
The second trend is in the increased mobility of the population so that more feeding
occasions occur away from home. It is not simply an access to transportation, but a
social phenomenon. Today more people are going to more places, more often than
ever before. This gives rise to additional – and more diverse – eating occasions.
Event catering, for example, has become a major opportunity to feed consumers at
events such as sporting occasions and exhibitions. The effect of this is to increase
the market for the food service industry and reduce the potential market for food
retailers.

Application of technology
The third trend is the application of technology to food processing which allows
the location of food preparation to be separated from food consumption. The
application of sous vide (under vacuum) now enables food to be prepared in
a central kitchen, transported to the restaurant and re-heated. The skill of
the restaurant is now in the presentation and garnishing of the food. Impor-
tantly, sous vide technology has been developed to improve both the quality
and the range of the food available to restaurants. The technology allows many
more restaurants to be created, increasing the opportunity for out-of-home
consumption.
The growth in opportunity for preparers of food contrasts sharply with the reduc-
tion in the number of retail food outlets. Most significantly, a distinction is emerging
between the location of food preparation and food consumption. No longer is the
choice simply at-home or out-of-home: it now includes food eaten at home but
prepared out-of-home. Two telling statistics emerge from the United States. By
1997 over half the food consumed was prepared out of home. The supermarkets
were now supplying less than half of total food consumption. Second, of the food
prepared out of home, a half was consumed at home. The take-away restaurant
business was now as big as the in-house business. In Europe we can expect that
338 Retail Strategy

food retailing will face increasing competition from restaurants to supply prepared
meals to consumers for in-home consumption.

Conclusion
In summary, the shape of food retailing will be as much influenced by external
forces as internal change. In this context, debates about store size and loca-
tion, home delivery via the web, and retailer own brands will be as relevant as
rearranging the deck chairs on the Titanic.

Speciality retailing over the next decade

Alan Giles, chief executive, HMV Media, UK

Alan Giles was appointed to the board as joint chief executive of HMV Media in March
1998 and became sole chief executive in March 1999. He was managing director
of Waterstone’s from February 1993 to May 1999. He is a non-executive director
of Somerfield plc and was a director of the board of WHSmith Group plc from
November 1995 to March 1998.

Specialist retailers have been under sustained attack. Sentiment towards the sec-
tor was, until very recently, blighted by the short-lived belief that real-world
shopping would succumb to perceived convenience and cost structure advant-
ages of online retailers. A more enduring concern has been the ‘Wal-Mart effect’ –
the potential for specialist retailers with high operational gearing to come under
pressure from the scale advantages of mass-merchandisers who ‘cream’ their
ranges.

Resilience of the specialists

However, as a breed, specialist retailers have proved remarkably resilient. Con-
sumers worldwide enjoy shopping as a leisure activity. That emotional need is hard
for Wal-Mart et al. to fulfil. Good specialists have exploited this with a whole array of
innovations – coffee shops, interactive facilities, more comfortable quasi-domestic
surroundings, interesting architecture and more. The best have realized that pas-
sionate enthusiasm for their product is a necessary but not sufficient condition for
success. With some painful cultural change, and expensive systems investment,
they have learned to be good retailers too.
Portents: strategic retail futures 339

Current trends
So what lies ahead? It’s tempting, if somewhat unimaginative, to simply extrapo-
late the current trends:

creation of ‘flagship’ stores that define the brand and complement a multi-channel
offer;
escalating investment in a relaxing yet stimulating store environment – ‘retail as
theatre’;
development of ever more sophisticated inventory and customer information manage-
ment systems;
globalization – the tenants on Chicago’s North Michigan Avenue, London’s Oxford
Street, and Singapore’s Orchard Road look pretty much the same.

Warning signs
However, there are warning signs that some of these concepts must be implemented
with great care and sensitivity:

The economics of retailing in a low-inflation competitive environment are harsh. Capital

expenditure cannot be allowed to spiral upwards, so to achieve long-term success
the relentless upgrading of the customer experience must be balanced by radical and
imaginative cost engineering programmes.
The standard UK institutional lease is hopelessly incompatible with the accelerating
store format cycles prevalent in much of the specialist sector. Clearly the landlord’s
low-risk security that derives from 15, 20 and even 25 year leases with upward only
reviews is ‘priced in’ to the rent. However, most specialist retailers find it difficult to
predict the shape, size and location of their stores even five years out. Something has
to change here to improve goal congruence and more equitably share the risks and
rewards.
Despite the homogenizing effect of pan-continental communication, there is some evi-
dence that consumers in individual countries are becoming more, not less, distinct. For
example, in most music markets worldwide the share of local artists is increasing at the
expense of the huge international names.

Furthermore, there are new trends that are only in their embryonic stages. As
it becomes tougher to differentiate their business on the obvious dimensions of
brand, merchandise ranges and customer service, specialist retailers will need to
reach for tools that are harder to use. For example, supply chain management is
much less developed in this sector than, say, food retailing.
340 Retail Strategy

Complementary competitors
Despite the challenges, the prospects for specialist retailing are excellent. Pro-
ponents of one-stop shopping have consistently underestimated consumers’
appetite for the authenticity, expertise and excitement of shopkeepers who show
single-minded focus on a narrow category of product in which they can truly excel.
Mail-order catalogues, department stores, supermarkets and e-tailers have all been
heralded as the evolutionary threat to the specialist retailer. History proves that
those business concepts have been viable, but complementary, competitors.

Consumers are in control

Peter Williams, chief executive, Selfridges, UK

Peter Williams has been CEO of Selfridges since December 2002. He had been
Finance Director of Selfridges since 1991 and of the Company since March 1998.
He qualified as a chartered accountant with Arthur Andersen and has worked for
Andersen Consulting, Aiwa (a division of Sony) and Freemans PLC. He is chairman
of the British Retail Consortium’s working party reviewing the practical implications
of the euro and is a member of its economics and research panel.

Meeting the challenge

Do we as retailers really meet the challenge of meeting future consumers’ needs?
There has never been so much merchandise available, so easily, to so many people.
Those who have the money are prepared to pay £500 for the ‘to die for’ Louis
Vuitton handbag rather than a cheaper alternative, and for some handbags there
is even a waiting list. The consumer continues to raise the bar in the demands
they place on retailers in terms of environment, the merchandise presentation and
customer service. In fact, consumers are in control.
As retailers, we concentrate on merchandise. We go through periodic re-branding
exercises because someone decides that the existing shopfit is now old hat. But is
this enough? In Selfridges, we would like to do away with the name ‘department
store’ because we no longer have departments dedicated to product categories such
as coats and separates. We are deliberately diminishing space dedicated to tradi-
tional china and glass and oriental rugs, and we removed haberdashery and sewing
machines several years ago. Well-being is now more important to the consumer
than oriental rugs.
Flagship department stores, urban monuments in all major cities, with their
grand scale of architecture and space, have the unparalleled opportunity to capture
the senses, attention and imagination of the consumer.
Portents: strategic retail futures 341

Why do so many retailers provide a boring environment? Retailers concentrate

on the product, with some cursory attention to the design of the store and possibly
the music. At Selfridges we are looking to stimulate and arouse the senses that
other retailers do not reach. The smell of the food hall and the coffee shop. The
music that makes your hips sway or your feet tap because it is relevant to you and
stirs a memory. The soft carpet that conveys luxury and seduction and the lighting
that accentuates all the fantastic colours in the merchandise. Sales associates at
Selfridges wear the product they sell, or dress in their own clothes to express
individuality and style.
In our world of department stores, most of our competitors have removed their
food halls. The accountants have taken over and said the contribution per square
metre is not as good as the other product areas so we must stop selling food and
provide yet more space for clothing and washing machines. But food is an everyday
purchase and provides the reason for the consumer to make a visit to your store
every day. She or he may not buy anything else on that particular day, but it doesn’t
matter. Food is the only product that unites all people, of all ages – it is a ‘need’
rather than a ‘want’.
And product, generally, is oversupplied. Do I need another shirt? Do I need
another tie? No. My wardrobe is full. So why do I buy another shirt and tie?
Because I can afford to, because I see a colour combination that I like and because
it gives me pleasure.

Learning from the big brands

The brands, of course, have recognized this for many years. The cosmetics and
perfumery industry, amongst the most focused and successful companies in the
consumer goods sector, has succeeded for years in promoting a product that
nobody really needs, but everyone wants. For years they have projected a strong
lifestyle image and created a desire. Now with the globalization of many fashion
brands, this is also happening in apparel. Some want to be a member of the Prada
or Versace tribes. Not me personally, but then I do like Boss Sport, Zegna, Oswald
Boeteng and Richard James. Everyone is looking to create an image and their own
sense of style.

The Selfridges experience

So how will Selfridges differentiate itself? We will do it by concentrating on the
architecture externally and internally; building large space stores – size really does
matter; having a range of brands and products that is accessible to all, whether it be
Gucci or Levi’s; creating atmosphere in the store through events such as Bollywood
in May 2002 with film, fashion and glamour; using music, with gospel singers at
342 Retail Strategy

Christmas; and providing space for cafés, where people can watch other people,
the sport most enjoyed and most played by everyone!

2012: a retail nightmare?

John Dawson, professor of marketing, University of Edinburgh

John Dawson has taught and researched retailing and marketing in universities in
the UK, USA, Japan and Australia and has worked on projects with major retail and
information technology companies in several countries. John Dawson holds the Chair
of Marketing at Edinburgh and is a visiting professor at ESADE, Barcelona. He has
spent periods as visiting professor at EUI Florence, UNISA Pretoria, UMDS Kobe
and Boconni Milan. Current research is in five main areas: the nature of change
and innovation in European retailing; international activity of retailers; e-retailing and
information management in retailing; the measurement of performance in retailing
and distribution; inter-relationships between European and Asian approaches to retail
management. In the early 1970s whilst working in the University of Wales he was the
founding editor of Cambria and in 1984 founded the International Journal of Retailing,
which he edited until its merger with Retail and Distribution Management. He then
established the International Review of Retail, Distribution and Consumer Research, which
he now co-edits. He is the author of over 20 books and major government reports
and around 200 papers in academic and professional journals.

Crystal ball gazing

In 1992 finding sushi in British supermarkets was difficult. Now it is easy. Will we
find locust brochette and fried ants in the chill cabinet in 2012? In 1992 the banks
and building societies provided our various bank accounts. Now large retailers do
this. By 2012 what will retailers be providing that is presently provided by other
sectors? Might they be providing healthcare, pre-school education, accounting
services or hotel accommodation? In 1992 the privatization of central Europe and
the launch of the European single market encouraged retailers to look at expansion
opportunities in Europe. At the end of 2002 east Asia was the cynosure of retailers
‘sparkling eyes’. In 2012 where will it be – India, Africa, Russia?
What is certain is that retailing will change more before 2012 than it has since
1992. Reaction time is getting faster. Retail processes throughout the value chain
are operating at an ever-faster rate. Store development, buying, marketing, mer-
chandising, logistics, staff training, product development, investment payback, all
have to operate on ever faster schedules. This quickening trend even affects con-
sumers with demands for shorter fashion cycles and more new products, customer
Portents: strategic retail futures 343

demands for faster service, and consumers applying a fashion mentality to staple
products.
To get a glimpse, perhaps, of what might be happening in 10 years we can look
into the three crystal balls of strategy, structure and performance.

The crystal ball of strategy

Ten years is a long time in retailing strategy, particularly in the hyper-competitive
oligopolistic retail markets of today, characterized by rapidly operating processes.
But the essence of strategy is to have a vision. Over the next ten years:
Scripted strategy will give way to a more creative and innovative approach. Presently the
view is that strategy is designed, developed and implemented in a linear and sequen-
tial way – the so-called scripted approach. This will be too slow a process by 2012.
Strategy will merge with innovation and become more immediate, but within the broad
parameters of the company vision and culture.
Porterian views of strategy through managing ‘five forces’ and trying to be lowest cost, or
focused firms will become interesting but historic concepts – perhaps this has happened
already. The retailers’ value chains will change dramatically as the boundaries of retailing
are expanded into new arenas of providing for consumer wants. A new body of strategic
concepts will be used.
The links amongst firms in the demand (not supply) chain of retailing will exhibit greater
variety with firms existing in complex networks, not as discrete firms as at present. The
increasing speed of processes will mean that firms contract-out more functions but also
become service providers for other firms.
Bigger will continue to be better. Scale economies at organizational level (not necessarily
shop or delivery unit level) will continue to become more powerful as innovation and
technology enable costs to be removed from the demand chain in scale related ways.

The crystal ball of structure

Retailers’ attempts to create monopoly markets are not new. What has changed is
the definition of relevant market. Having moved from a regional view in the 1970s
to a national and continental view in the 1990s it is likely that a multi-continental
view will have emerged by 2012. However, while we will measure Wal-Mart, Tesco,
Ahold, Home Dept and others as operating within a global market, at the same
time the need to dominate local markets will remain the essence of retail structure.
Thus these same firms will seek local spatial monopolies – in exactly the same way
as the Hudson Bay Company did 300 years ago. Therefore, within Europe smaller
and smaller communities will become the focus of attention of the large firms.
Asecond big change in structure will be the multi-channel dimensions of retailers,
both big and small – if any small firms survive that long. Yes, there will be micro-
firms in retailing but fewer will grow into small and medium sized firms simply
because they will not be able to accommodate the new speed of the processes
344 Retail Strategy

in retailing. Retailers will be deliver retailing through multiple channels – fixed

store, Internet, automated sales units, catalogues, maybe even interactive TV, and
possibly others.

The crystal ball of performance

From a consumer perspective, retailer performance will improve dramatically
before 2012 with low prices and high service being the standard positioning.
In achieving this we are likely to see some or all of the following, and more:
frantic attempts by retailers to halt the decreases in productivity of space;
the death of ECR as it becomes defined as collusive activity by fair trade authorities;
loyalty schemes that focus on retailer loyalty to customer rather than, as now, customer
loyalty to retailer;
automated space planning by store;
widespread customer self-scanning;
even more investment in retailer brand building;
‘time of day’-driven merchandising and marketing;
a major conversion, within the firm, of tacit knowledge to explicit knowledge.

Conclusion
The world’s largest retailer presently has sales of about the size of all retail sales in
Spain. By 2012 we can expect at least 20 retailers of this size with the largest retailer
with sales of well over d500 billion, at current price levels, and with over two
million employees. For these large firms the investment in technology at 1 per cent
of sales will facilitate radical new forms of innovation. But, from recent evidence,
at least 5 of the top 20 retailers will not exist – having been merged or acquired.
Much of retailing in 2012 will still be the same simple business as now – buying
goods from manufacturers, adding a margin and selling them to customers. Look-
ing into the crystal balls, by 2012 the only things to have changed will be the
strategy, structure and performance of the sector and its firms – and maybe some
of the products that are sold. The nightmare is not the vision of 2012 but the traumas
of getting there!

Shopping 2012?
Jonathan Reynolds
Alex could see the red light blinking at him as he rolled Leo’s pushchair up the
hill. The village’s Automated Service Dispenser was playing up again. As he got
nearer, he could see the vivid display flashing ‘Corrupt substring: Retry, Cancel,
Portents: strategic retail futures 345

Ignore’ and playing the theme tune from an old ’90s soap opera. He muttered
under his breath – another virus had clearly got past the system and this was
another of today’s errands to be foiled by technology. Alex of course didn’t really
need to use the box – thanks to their combined incomes, from various sources, they
were comfortably off and had most of the gadgets they needed with them or at
home to ensure that they stayed pretty well connected to the net. But the ASM (or
‘shop-in-a-box’, as some villagers called it) had been installed five years ago with
the closure of the village stores and post office. It had been originally designed to
give those people without at-home access to online services a way of providing for
themselves. Not everyone could afford one of the fully-fledged ambient packages
around – and some didn’t want them anyway. But Alex felt that he had to use the
box occasionally, or it might go the same way as the shop – and in any case he
had needed the exercise. But these publicly funded terminals were becoming less
and less reliable as more people carried the net with them in their pockets or on
their wrists. Some, like Alex’s brother Elton, were even using wireless implants,
although there’d been some recent health scares about metal fatigue. He carried on
past the machine to the Millennium Village Hall and called in at the weekly fruit
and vegetable market. Allotments were becoming very fashionable again – not
least because of the continuing preoccupation with organic food and widespread
resistance to commercially grown GMO crops – and a lot of the excess produce
from weekends of hard work was redistributed amongst the locals. And anyway, it
was a lot more fun than looking at pictures of carrots on the online grocer’s service,
if you had the time.
His partner Sophie was away on one of her short business trips, looking at new
hard landscaping ideas in France for her garden design business. He had charge of
Leo for the next couple of days and was also acting as Sophie’s human PA (rather
an antique concept, but quite fun to fool people) for the duration. His next tranche
of fitness consultancy, which he ran from the home videosuite, wasn’t due to kick
in until the following week.
Getting back to the house, he lifted Leo back into his playpen and looked at the
living room screen, which, as always, was left on permanently. After all, it didn’t
cost anything: in fact, some people made money out of watching professionally –
they were paid for watching and responding to advertising. In the corner of the
plasma display, a convincing imitation of Britney Spears murmured ‘four messages
for us, Alex’. The screen had come with Spears pre-programmed as a personal
assistant and Alex had never got around to changing the settings – not least because
the online manual was pretty incomprehensible. His wife wasn’t too concerned –
she had a younger version of Pierce Brosnan all to herself, whilst Leo, when he grew
a bit older, would be able to choose from several well-known cartoon characters,
some of whom were already being pressed into service by Alex to read Leo bedtime
stories.
Alex checked the household messages. The first was the regular weekly vmail for
Sophie from maybebaby.com, with its advice on the early stages of pregnancy and
a downloadable holovideo of energetic antenatal exercises. Alex hurriedly moved
346 Retail Strategy

on – Sophie could pick up the message herself from her pocket assistant later in
the day. The second was an update from Britney herself. She’d been busy. She’d
been bidding on Alex’s behalf for one of the capsules from the London Eye on
offer through bidsrus.com. The big wheel was being dismantled and Alex thought
that a capsule would look great in the back garden. Britney was negotiating on
his behalf and the latest was that she had beaten British Airways down to d9500
including delivery. She looked very pleased with herself – as far as an avatar ever
could. The third message was from a well-known general merchandiser offering
15 per cent off gazebos this week. ‘It hazda be Supa’, read the message. A pop-
up window hoved into view as a sales executive from the company sought to
add some personal persuasion to the advertising. Alex looked outside as the rain
began to fall and shouted ‘Sin Bin, Britney’, adding the retailer to his ‘junk vmail’
list. Some companies never learned. Finally, he turned to the last message. It was
from Greenfields, the UK’s biggest regional shopping centre, outside Bristol. They
were having an Italian theme day on Saturday, with wine tasting, a fashion show
from Versace, a performance by the two tenors (the third having sadly died the
previous year) and (Alex noted with especial interest) free crèche time for under
5s for any parent wanting to test drive a Lamborghini. That might be worth a trip,
he thought.
You had to go a long way these days to find a big collection of good quality
shops. With the growth of online trading – even to only around 15 per cent of
business – most bricks-and-mortar retailers tended to cluster together for warmth
near the largest towns. The costs of doing something really spectacular to attract
customers away from their screens meant that upscale retailers could only afford
to do it in a few places and anyway, investors and developers were still very wary
of putting money into marginal retail property. This was especially so, given the
introduction of road-pricing the previous summer. The only exceptions were the
big general merchandisers who were using cheap warehousing space on the edge of
town, sharing the space with their online distribution and fulfilment centres. Retail
parks, which had largely been offering bulky commodities, had been reinvented
as sharespace enterprise parks for business start-ups. Smaller towns, which had
something to offer in the way of historic attractions, were doing well; but other
places had lots of shop-in-the-boxes, collection points, markets and temporary lets
to discounters. If you weren’t plugged-in in some way, thought Alex, you really
lost out these days.
Alex heard the purr of an electric motor outside the house. It was the regular
Value Alliance Network (VAN) delivery. They’d signed up for the service when
Leo was born, because of the sheer difficulty in getting out of the house and it had
become hard to do without. Run by a consortium of retailers, VAN charged d100 a
week for a complete fulfilment service. Regular orders (beer, nappies, toilet tissue,
milk, cereal) were dealt with automatically and adjusted in line with demand; other
goods accumulated through scanning of used product barcodes and shopping lists
which they dictated to Britney or Pierce during the day. But VAN also provided
services – dry cleaning, prescription fulfilment and the like. The driver keyed the
Portents: strategic retail futures 347

code to get access to the family’s secure storage unit and fridge/freezer – provided
by the Network. It was like having a regular housekeeper – but considerably
cheaper, given today’s hourly rates. It was unusual for Alex to be around when
the order came through – VAN didn’t of course require the householder to be
in to make the delivery. Alex enjoyed going to nearby Felpersham to Enrico’s
Emporium to pick up (and sample) the odd deli item – the service was wonder-
fully old-fashioned – but had given up long ago on the regular weekly shop. He
was in no hurry to go back to the old ways.
With Sophie back at the weekend, the family decided to make the trip to the
mall. It was another opportunity for Alex to try out his new fifth generation pocket
assistant, which had been a freebie as a result of taking out a subscription to the
Bloomberg Personal News Jockey. The News Jockey was a neat hologram, which
popped up to keep him up-to-date with his personal business news agenda. 5G-PAs
were otherwise prohibitively expensive, since they involved portable holographic
imaging, still at the trial stage. He’d heard about Greenfields’ new Golden Touch
service, which tempted consumers by calling in exclusive offers and showing a
short holo or video of the product on offer. The mall server identified him as his
PA Bluetooth module switched in. Thanks to the integral global positioning chip,
the mall knew exactly where Alex was until he left the car park. The server also
had access to all of the family’s previous shopping experiences at Greenfields,
his credit rating, psychographic profile and his current interests. (Although it has
had to pay him for the privilege: the days of consumers providing free marketing
information were long over.) Even as they moved towards the atrium with its
fountains and mock-Tuscan architecture, vendors were vying for Alex’s disposable
income. Sitting with Sophie at the fashion show, his PA vibrated gently. Through
his earpiece he heard a cultured Italian voice offering him a personal discount of
15 per cent on the price of a delicately crafted Gucci leather briefcase. The briefcase
appeared in miniature, but solidly and expensively above the holoscreen, being
carried nonchalantly by a tiny, dapper figure that bore a suspicious resemblance to
Alex. ‘Transmit your sig now to reserve this item for two hours at this price. Come
and see us soon, Mr Bond.’ Alex sneaked a look at Sophie; she was engrossed in
the commentary to the fashion show being played through her tiny headset; on her
flat screen PA, options and prices for the items being displayed were flashing up.
She hesitated and pounced on one particularly fetching evening gown. The item
would be made within three days to her stored measurements and delivered with
the next VAN consignment. Sophie sighed: ‘not quite the same as picking it off the
rail, but they probably wouldn’t have had my size in stock anyway . . .’
Peter and Louise, Alex’s parents, lived in Felpersham. Although Peter had been
a software engineer in the ’80s, since his retirement he had increasingly lost touch
with technology. Indeed, if he was honest, what was happening to the net had
left him behind (along with the company that used to employ him) quite a while
ago. Like everyone else, he had dutifully replaced his old analogue TV with an
integrated digital model and subscribed to a reasonable range of services. But he’d
348 Retail Strategy

baulked at Alex’s suggestion that they get themselves a wall-sized screen and per-
sonal assistant a few years ago. Peter and Louise were comfortable with their
‘walled garden’, seen through a modestly sized screen. Not for them the jungle of
the unregulated nets. In an era of uncertainty, they desperately needed the security
of trustworthy brands and the comfort of the everyday rituals of buying. Louise
thumbed the remote control and accessed Supa’s food store. They only needed
a few more points to get favoured customer status and she was determined that
today was the day. FCS would allow her to use the store at any time during the
day or night and have the services of a personal shopper. She saw that there was
a gazebo on offer with a 5 per cent discount for Golden Gardeners. (She and Peter
had joined the Golden Gardeners scheme a few months ago and they had picked
up quite a few bargains.) The gazebo attracted 2500 points. She aimed her ‘magic
mouse’ (as she like to call it) at the screen and just managed to hit the flashing ‘Buy
Me!’ logo with the infrared. She’d tried using the voice-operated screen at Alex
and Sophie’s, but she was frightened of being embarrassed by the thing misunder-
standing her. Anyway, she’d never liked Pierce Brosnan. At least you knew where
you were when you pressed a button.
Only in one area had they really moved with the times. Both Peter and Louise
enjoyed their food and Alex, Sophie and Leo were coming to dinner that evening.
Slipping into the kitchen, Louise consulted the fridge. It was suggesting an Italian
meal – something to do with Euro 2010. It had most of what it needed already.
It was proposing to order some oregano and dried porcini mushrooms. It was also
recommending what it described as ‘a rather saucy valpolicella’ to accompany the
meal. Louise touched the screen and the fridge transmitted the order to Enrico’s
Same Day Direct. It also played a short review by Oz Clarke of her wine choice.
Enrico’s van would be up that afternoon to drop it off at the local box and Peter
would pop up to collect it. Things That Think (TTTs) had been a feature of the
early part of the decade; just about everything that could be had been linked to the
net. But some TTTs were more useful than others. She noticed that the fridge had
changed the upcoming order for butter to low fat spread; and it had deleted the
streaky bacon – Peter’s automatic cholesterol monitor in the bathroom had clearly
been telling tales again.
An earlier version of this scenario appeared in Retailing 2010, published by the National
Foresight Programme.
Index
Acquisition, 12, 256–7 Benetton, 15, 16
as an internationalization strategy, 112–13 Berggoetz, Reinhart, 265–9
Adaptation, Metro, 219–20 BestBookBuys.com, 28
Ahold, 5, 10, 65, 181–9 BIDs, see Business improvement districts
acquisitions, 112 Blockbuster, internationalization, 111–12
internationalization, 115 Bluewater, 27
organizational learning, 115 BoConcept, 16, 17
Aikenhead, 89 Books, 225–35
Albert Heijn, 43, 181–9 Boots, 10, 31, 52
Aldi, 14, 29, 30, 42 internationalization, 110–11
Alfa-Beta Vassilopoulos, 291–8 online, 236–46
Allan, John, 196–201 Borders, 10
Amazon, 15, 16, 126 Brand, 15–8, 38–9, 45
Ambient products, 69–70 evolution:
Ansoff, product–mission matrix, 8 HMV and Waterstones, 227–8
Apparel, see Fashion Kingfisher, 276–8
Argos, 16 extension, Legoland, 194–5
Armani, 15 global, 225–8
Artificial loyalty, 27 internationalization, 103
Asda, 14 loyalty, options, 42
Asia Pacific, 5 marketing, 45
Asia, as an internationalization destination, 104, online, 121
108–9 producer, 40, 74–5
Assortment, 45 strategy, Kingfisher, 275–6
Attitude-based shopper, 26 substituting, 38–9
Attribute-based shopper, 26 trust, 32
Auchan, 5, 15, 16, 202–8 value, 40, 279–80
Austria, 80 Brand equity, Auchan, 205–6
Authority, competition, 11, 27, 78–9, 94 Brand names:
Authority, planning, 11, 78–9, 94 HMV Media, 275–83
Automotive, 27 Legoland, 191–2
Metro, 223–4
Tesco, 328
B&Q, 10, 209–17
Branding, 15–18, 40, 45
internationalization, 97
emotional, 16
Turkey, 104–5
retail, 15–18, 40
B2B, see Business-to-business
Brazil, planning policy, 93
Bailey, Fiona, 260–4
Browsing, website, 34
Balance sheet, 141–3
Business improvement districts (BIDS), 83
Bay 2, 27
Business-to-business, 196–201
Belgium, 16, 80, 253–9
Tesco, 320–3
Benchmarking, Metro, 222
350 Index

Business-to-consumer, 27, 28, 45, 119–36, 196–201 CPFR, see Collaborative planning, forecasting and
Buyer power, 7 replenishment
Buying, 96–7 Creative positioning, 12
Buying power, 7 CRM, see Customer relationship management
Culture:
C&A, 18 Kingfisher, 282
Canada, planning policy, 87–8 Metro, 221
Carrefour, 5, 10, 11, 28, 43, 65, 93 Safeway Stores (UK), 260–4
Belgium, 253–9 Screwfix.com, 199
cash conversion cycle, 140–1 Wal-Mart, 266–9
finance, 153–7 Customer feedback, 250
internationalization, 98 Tesco, 316–17
Latin America, 104 Customer groups, 42
Cash conversion cycle, 140–1 budget, 42
Cash flow statement, 145–7 price and quality, 43
Cash-and-carry, 67–8, 218–24 quality and luxury, 43
Castorama, 14, 209–10, 214 value, 42–3
Catalan, 247–52 Customer loyalty, 25–51
Catalonia, 247–52 definition, 25–6
Category killer, 97, 98, 114 Customer relationship management (CRM), 34,
CentrO, 27 246
Channel: Tesco, 312–20
digital, 33–5, 45 Customer segment, 9–10, 11, 13, 26
mix, 9–10 Tesco, 317–18
multi, 33–5 Customers, attracting, 25–51
China, 5 Customize, website, 34
B&Q, 210–17 Czech Republic, 91
Metro, 218–24
planning policy, 86–7 Data, point-of-sale, 57–9
City centres, 79, 83 Data-gathering, 3
Clothing, see Fashion Davidson, Crawford, 312–20
Coca-Cola, 18, 40, 58, 65 Dawson, John, 342–4
Collaboration, 52–77 Decathlon, 30
Tesco, 320–3 Delhaize ’le Lion’, 16, 291–7
Collaborative planning, forecasting and Delisting products, 40–1
replenishment (CPFR), 64, 65, 321 Delivery, see Fulfilment
Competition and planning authority, 11, 27 Denmark, 16, 190–5
Competition policy, 28 Department stores, 270–4
Competitive advantage, 5 Selfridges, 340–2
Competitive information, 28 Development strategy, 10
Concentration, 6–7, 27, 65–6, 332 Diamond, opportunity, 9
Consolidation, 5, 164–5 Differentiation, 17, 38
Consumer choice, 5 Differentiators, 13
Consumer panel, 59 Digital channel(s), 33–5, 45, 119–36, 245–6
Consumer pull, 54–7 Digital television, 120–1, 122, 245–6
requirements, 57–61 Digital Wellbeing, 236–46
data synchronization, 60–1 Dijkstra, Dick, 181–9
information technology integration, 59–60 Discounters, 69, 265–9
point-of-sale data, 57–9 Discounting, hard, 29, 265–9
store control, 60 Display, 45
visibility, 61 Distribution, online, 131–2
Consumer segment, 9–10, 11, 13 Diversification, 10
Convenience stores, 10, 270–4 Diversify, 10
Core competence, 31 Dividend yield, 160
Corporate governance, 333–4 DIY, B&Q, 209–17, 275–83
Cost control, Sainsbury’s, 300–2 Domestic market, 65
Courts, 141 Dooyoo.co.uk, 28
Index 351

Drivers, of retail change, 8 Financial cycle, 138–9

DuPont model, 148–57 Financial leverage ratio, 151–2
extended, 154–7 Financial management, Sainsbury’s, 298–308
Financial model for retail, 138–41
Earnings coverage ratio, 152 Financial operations, Sainsbury’s, 299
Eastern Europe: Financial performance, 137–69
as an internationalization destination, 98, 104 evaluation, 148–57
planning policy, 91 earnings coverage ratios, 152
Eatons, 89 financial leverage ratios, 151–2
eBay, 126 internal liquidity ratios, 149–50
Ebert, Kurt, 284–90 profitability ratios, 150–1
E-business, Ahold, 189 statements, 141–7
E-Commerce, 27, 28, 45, 119–36, 196–200 balance sheet, 141–3
brand building, 121, 238–9 cash flow statement, 145–7
Carrefour, 258–9 income statement, 143–5
choices, 132–3 profit and loss statement, 143–5
definitions, 121 stockmarket, 157–65
e-loyalty, 1, 33–5, 236–46 metrics, 159–64
future of, 335, 344–8 valuation factors, 157–9
key issues, 126–32 Financial services, 31
consumer acceptance, 128–30 Financial strategy, 137–69
distribution and fulfillment, 131–2 First movers, 27
online pricing, 130–1 Flexibility, in the supply chain, 176–7
threat to traditional retailing, 120–1 FMCG, see Fast moving consumer goods
US versus Europe, 121–6 Food retailing, see Grocery
ECR Europe, 63–4 Food safety, 248, 249
EDLP, 14–15, 40 Ford, Henry, 53
Efficiency, 10 Fortune 500, 5
Efficient Consumer Response, 63–4, 66 Framework, opportunities, 11
Electricals, 74, 275–83, 289 Frameworks, strategic, 8
Electronic point-of-sale, 57–9 France, 5, 7, 14, 27, 30
E-loyalty, 33–5 Auchan, 202–8
Emotional branding, 16 planning policy, 80
Environment, store, 45 French Connection, 38, 41
Environmental issues, 333 Fresh foods, 218–24, 248–9
EPOS, 57–9 Fulfilment, 34
EU, 5 online, 131–2, 242
Europe, 5, 7 Full service, 13
as an internationalization destination, 107–8
online retailing, 122–4 Gap, 14, 15, 38
European Commission, 28 Gari, Antoni, 247–52
Evaluation, financial performance, 148–57 GB, Belgium, 253–9
Every day low price, 14–15, 40, 57 GCI, see Global commerce initiative
Exchanges, electronic, 320–3 General merchandise, 275–83
Experience, product, 43 Geographical market, 9–10, 11
Experience, retail, 43 Germany, 27–8, 40–2
External communication, Sainsbury’s, 305–7 Aldi, 14
External opportunities, 8 planning policy, 79, 80
Metro, 218–24, 334–6
Factors, human, 17 KarstadtQuelle, 284–90
Factors, non-price, 13 Tchibo, 35
Fashion, 5, 14, 17, 32, 57, 70–2 Wal-Mart, 265–9
internationalization, 103 Giles, Alan, 225–35
Fast moving consumer goods, 55 Gilman, Steve, 209–17
Finance, 137–69 Global brand, 17–18
Finance function organization, Sainsbury’s, 302–5 Kingfisher, 275–83
Financial challenges, Legoland, 192–3 Global commerce initiative (GCI), 64–5, 66
352 Index

Globalization, see Internationalization Internal capability, 18

Government intervention, 79 Internal liquidity ratio, 149–50
Greece, 5, 80, 291–8 Internal resources, 8
Grocery: Internationalization, 5, 96–118
A-B Vassilopoulos, 291–7 buying, 96–7
Ahold, 181–9 future of, 332, 335–6
Auchan, 202–8 growth strategies, 109–16
Carrefour, 253–9 acquisition, 112–13
concentration, 6–7 adaptation, 113–15
future of, 336–8 culture, 116
internationalization, 103–4 learning, 115
Metro, 218–24, 334–6 mode of entry, 110–11
Migros, 173–80 partners, 111–12
positioning, 14–15 knowledge, 97
Safeway Stores (UK), 260–4 measurement of, 100
Sainsbury’s, 298–308 risk, 110
Supermercats Pujol, 247–52 store operations, 97–9
Tesco, 311–30 strategic choices, 102–9
Growth, 8, 11 choice of direction, 104–5
organic, 12 market gaps, 105–8
prospects for, 5 market selection and timing, 108–9
Gucci, 15 types of retail business, 103–4
strategic reasons for, 100–2
Hard discounting, 9, 265–9 growth, 101–2
Harrods, 44 pull, 101
Health and beauty, 236–46 push, 100–1
Hennes & Mauritz (H&M), 16, 17, 18 Internationalization examples:
Herfindahl–Herschman index (HHI), 6 A-B Vassilopoulos, 292–3
High street, see Town centers B&Q, 209–17
HILO, 14–15 Blockbuster, 111–12
HMV Media, 225–35, 338–40 HMV Media, 234–5
Home Depot, 10, 11, 89 Kingfisher, 278–9
cash conversion cycle, 140–1 Metro, 218–24
Home shopping, 72–4, 284–90 Tenglemann, 98
Hornby, John, 236–46 Tesco, 324–30
Human resources, 17 Toys ’R’ Us, 98
A-B Vassilopoulos, 297 Vendex, 98
Carrefour, 258 Wal-Mart, 97
HMV Media, 233–4 Inventory replenishment, 54
Metro, 220–1 Investment budgeting, Sainsbury’s, 300–2
Safeway Stores (UK), 260–4 Ireland, 11
Tesco, 326–7 IT integration, 59
Wal-Mart (Germany), 265–9 IT project and programme management, 187–9
Hungary, 91 Italy, 5
Hypermarkets, 5, 15, 80
internationalization, 105
Japan:
B&Q, 215–16
Ikea, 10, 15, 17
planning policy, 83–85
internationalization, 98
John Lewis Partnership, 14
IMG, see Integrative measure of globalization
Joint ventures, 12, 111–12
India, 270–4
Information technology, 181–9, 243, 251
integration, 59 KaDeWe, 44
Innovation, Auchan, 202–8 KarstadtQuelle, 84–90
Integration, information technology, 59 Kelkoo.com, 126
Integrative measure of globalization (IMG), 100 Killer application, 128
Intermediary, 18 Kingfisher, 209–17, 275–83
Index 353

Knichel, Barry, 320–3 Marketing, Auchan, 202–8

Know-how, 97, 111, 115 Marketing, loyalty, 25–51
Knowledge, 97, 335 differences between e-commerce and
Körber, Hans-Joachim, 218–24, 334–36 store-based, 33–4
Korea: Marketing manager role, Auchan, 207
B&Q, 215–16 Marketing mix, 27, 33–5, 45
planning policy, 85–6 Marks & Spencer, 16, 18, 30, 33
internationalization, 110
Labour relations, 258 Mars, 29, 38
Large surface outlets, 67–8 Matalan, 14
Latin America, 5 Matrix, purchaser–purveyor, 35–7
Laue, Martin, 265–9 Maturing markets, 5
Lead time, 13 McDonald’s, 10, 17, 18
Leahy, Sir Terry, 13 Meier, Armin, 173–80
Legoland, 190–5 Merger, 12
Leisure retailing, Legoland, 190–5 Metro, 11, 65, 67, 218–24, 334–6
Lidl, 42 Middle East, planning policy, 91–3
entry into Finland, 105–6 Migros, 173–80
Local differentiation, Legoland, 193–4 Miss Selfridge, 14
Local monopolies, 28 Mix:
Location, 13, 37, 45 channel, 9–10, 11
Logistics: loyalty marketing, 27
costs, 131–2 marketing, 27, 33–5, 45
reverse, 179 product/service, 9–10, 11
Louis Vuitton, 15 Mobile technologies, 120–1, 122, 124
Lowe’s Hardware, 10, 141 Mobility, 337
Loyalty, 25–51 Monopolies, local, 28
artificial, 27 Monsoon, 14
card-based, 35–7 Morrison, Sir Ken, 3
e-loyalty, 33–5 Mulcahy, Sir Geoffrey, 275–83
increasing, 35 Multi-channel, 33–5
marketing, 25–51 Multi-facings, 39
marketing, mix, 27 Music, 225–35, 338–40
segmentation, 26
strategy implementation, 45–8
Nagesh, B.S., 270–4
trends, 27
Nestlé, 65
Loyalty programmes, 35–7, 251
Netherlands, the, 41–2, 181–9
A-B Vassilopoulos, 296
Netto, 42
Boots online, 239–40
New markets, 332
Supermercats Pujol, 250–1
for B&Q, 215
Tesco, 312–20
for Metro, 221–2
Loyalty, schemes, 35–7
for Tesco, 324–5
pull, 36
New opportunities, 10
purchase, 36
Next, 14
pure, 35–6
Non-price factors, 13
purge, 36
North America, 65
push, 36
see also Loyalty programmes
Luxury goods, 15, 43, 46 One-stop positioning, 13, 27
internationalization, 98, 103 One-stop shopping, 27–8
Online, 119–36
Macheras, Konstantinos, 291–8 distribution, 131–2
Mail order, 284–90 price comparisons, 128–30
Manufacturers, 52–77 Operations, retail, 39, 45–6
Market: Opportunities framework, 11
domestic, 65 Opportunity criteria, 9
geographical, 9–10, 11 Opportunity diamond, 9
354 Index

Order-qualifying criteria, 12 Proctor & Gamble, 65

Order-winning criteria, 12 Producer push, 53–4, 61–2
Organic growth, 12 Product, 69–72
Organizational learning, 115 ambient, 69–70
Out-of-stocks, 42 availability, 54
Out-of-town retailing, 13, 37, 79, 80 brands, 40
Outlets, large surface, 67–8 down the supply chain, 53
Own-brand, see Private label perishable, 70
Own-label, see Private label range, 45
Product/service mix, 9–10, 11
Production, 53–4
Panel, consumer, 59 efficiency, 53, 56
Partners, in internationalization, 111–12 frequency, 56
Penetration strategy, 10, 11 quantity, 56
Perishable products, 70 Product–mission matrix, Ansoff, 8
Personalize, website, 34 Profit and loss statement, 143–5
Planning authority, 11 Profitability ratio, 150–1
Planning policy, 78–95 Promodès, 6
advisory notes, 78 Promotional pricing, 14
Brazil, 93 Promotions, 34–5, 39, 45
Canada, 87–9 price-focused, 39
China, 86–7 non-priced-focused, 39
definitions, 78–9 Property, HMV Media, 232–3
eastern Europe, 91 Pull, consumer, see Consumer pull
Japan, 83–5 Purchaser–purveyor matrix, 35–7
Korea, 85–6 Pure-play, e-tailing, 34
Middle East, 91–3 Push, producer, 53–4, 61–2
regulations, 78
UK, 81–3
USA, 89–90 Quality, 46
western Europe, 79–81
Point-of-sale, data, 57–9
Poland, 17, 91 Radio frequency identification, 65
B&Q, 212, 216 Radio frequency tags, 65
Portugal, 80 Range, product, 45
POS, 57–9 Ratio analysis, 148–57
Positioning: earnings coverage, 152
creative, 12 financial leverage, 151–2
offer, 12, 13 integration, 153–7
one-stop, 13, 27 internal liquidity, 149–50
PPG6, 81 limitations, 152–3
Price comparisons, 28 margin, 150–1
online, 128–30 price earnings, 159–60
Price maintenance agreements, 79 profitability, 150–1
Price-to-book, 160 return, 151
Pricing, 43, 45, 53 RDC, see Regional distribution centre
online, 130–1 Rebranding, 255–6
Pricing strategy, A-B Vassilopoulos, 296 Recycling, 179
Private label, 16, 17, 27, 38–9, 243–4 Regional distribution centre (RDC), 55–6
A-B Vassilopoulos, 296–7 Replenishment, 54
Auchan, 204–5 Retail branding, 15–18
Carrefour, 257–8 HMV and Waterstones, 225–8
evolution, 19 Metro, 223–4
KarstadtQuelle, 289 Retail:
Kingfisher, 280 change, drivers, 8
strategic alignment, 29–33 collaboration, 52–77
Tesco, 328 concentration, 7
Index 355

consolidation, 5 Stockmarket, 157–65

experience, 43 metrics, 159–64
futures, 331–48 valuation factors, 157–9
operations, 39, 45–6 Stockmarket communication, Sainsbury’s, 305–7
Retailer types: Store:
budget, 46 convenience, 270–4
luxury, 46 environment, 45
quality, 46 location, 45
value, 47 size, 67–9
Reverse logistics, 179 switching, 37–9
Rewe, 28 Store choice, determinants, 13
RFI, 65 Store development, Greece, 295
RFT, 65 Strategic frameworks, 8–20
Rite Aid, 40 Strategy:
River Island, 14 consistency of, 29
Ryder, Mads, 190–5 development, 10
effectiveness, 8
Safeway Stores (UK), 260–4 finance, 137–69
Sainsbury’s supermarkets, 298–308 inconsistent, 29
Sales data, 57–9 loyalty, 45–8
Scandinavia, 16, 17, 80, 190–5 multiple format, 222–3
Scanning, 58–9 penetration, 10, 11
Screwfix Direct, 132–3, 196–201 Substitutability, 38–9
Segment, customer, 9–10, 11, 13 versus switchability, 40–2
Segmentation, loyalty, 26 factors affecting, 43
Selfridges, 16, 340–2 Supermarkets, 68–9, 247–52
Sephora, 16–7, 43 Sainsbury’s, 298–308
Shopper’s Stop, 270–4 Supermercats Pujol, 247–52
Shopping centres, 27 Supply chain, 52–77
planning, 78–95 consumer pull, 54–7
Showroom effect, 128 Greece, 295
Size: integration, 254–5
retailer, 5 performance measurement, 178–9
store, 67–9 planning, 177–8
SKU, see Stock keeping unit producer push, 53–4
Snickers, 38 reconstruction, 61–2
Somerfield, financial decisions, 140 structure, 67
South America, as an international Tesco, 320–3, 327–8
destination, 104 vertical integration, 74–5
South east Asia, 11 visibility in, 55
Southern Europe, 7 Supply chain collaboration, 52–77
as an internationalization ECR Europe, 63–4, 66
destination, 104 Global Commerce Initiative, 64–5, 66
Spain, 6, 7, 80, 247–52 industry programmes, 62–5
as an internationalization Tesco, 320–3
destination, 98 Supply chains, in practice, 67–72, 173–80
Specialist retailing, 5, 225–35 Sweden, 16, 17
future of, 338–40 Switchability, 37–8
Sports Authority, 114 factors affecting, 43
Staples, 10, 11 versus substitutability, 40–2
Stock: Switzerland, 80, 173–80
adjustment, 55
availability, 53 T&S Convenience stores, 11
buffer, 57 Tchibo, 35
fluctuations, 54 Technology, 8
levels, 53 book and music retailing, 229–31
Stock keeping unit, 57–9, 67–74 future, 332–3, 337–8, 344–8
356 Index

Tenglemann, internationalization, 98 Unilever, 65

Tesco, 311–30 USA:
adaptation, 17, 114–15 as an internationalization destination, 106–7
eastern Europe, 91 online retailing, 122–4
finance, 148–53
growth strategies, 11–12, 16
Value, 47
home delivery, 73
metrics, 161–4
internationalization, 97, 324–9
Vaxelaire, Roland, 253–9
loyalty, 312–20
Vendex, internationalization, 98
organizational learning, 115
Visibility, in the supply chain, 55
positioning, 13, 17, 43
private label packaging, 30–1
supply chain collaboration, 65, 320–23 Waitrose, 43
Tesco Clubcard, 312–20 Wal-Mart, 3, 5, 10, 14, 43, 65, 89, 90, 93
loyalty drivers, 313–14 acquisitions, 112
retention, 313 culture, 265–9
Tesco Express, 11 finance, 141–7
Tesco Extra, 11 Germany, 224, 265–9
Tesco.com, 16, 35, 133 internationalization, 97
Thailand, 17 Walton, Sam, 3
Time, lead, 13 Warehousing, order-picking, 73–4, 131
Time-rationed society, 336–7 Waterstones, 225–35
Top Shop, 14 Weather, 55, 57
Tordjman, André, 202–8 Wellbeing.com, 236–46
Town centres, 13, 79, 81, 83 Wertkauf, 14
Toys ’R’ Us, 10 Western Europe, planning policy, 79–81
internationalization, 98 Wild, David, 324–30
Trading hours, 79 Williams, Peter, 340–2
Trust, brand, 32–3, 34 WWRE, 320–3

UK:
online retailing, 122–4 Zara, 10, 16, 18
planning policy, 81–3 Zoning, 80