Facing up to the challenge of change

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Retailing has always been a dynamic industry but today’s changing consumers are causing many retailers to reassess fundamental strategy and approach. Penelope Ody examines the issues.

PennyOdyFew would disagree that retailing today is in a significant state of flux. Change and churn have, of course, been with us for decades: from independent butchers and fishmongers being killed off by out-of-town superstores in the 1980s to high street bookshops disappearing thanks to Amazon in the 2000s. Then we had the 2007 recession and a flurry of retail failures with growing numbers of boarded up empty shops in high streets across the country.
More recently has come news of the major DIY chains closing up to one in six of their stores and reports of the big four supermarkets planning closures and selling off their land banks. This time a lack of enthusiasm among younger generations for doing their own home repairs and a preference for local convenience shops (as well as for Lidl and Aldi) are blamed for the problems.
Perhaps it could be something more fundamental: a disconnect between what retailers sell and how they source their merchandise and what and how customers actually want to buy. In their seminal book “The New Science of Retailing”* – which examines why retail chains are losing profitability and how they can combat the trend – US academics Marshall Fisher and Ananth Raman make an interesting point, viz. that retail buyers typically earn significantly more than the customers that buy their choices. They cite one US food chain which makes its buyers live for one week each year on the average US household food budget, reminding them that “you buy things to sell not to use yourself”.
And those consumers “buying things” are changing very rapidly, not just because of the Internet and mobile but culturally as the demographics shift. As Waitrose md Mark Price, said recently: “I think we are at one of those inflection points where customers are acting differently and retailers are going to have to respond to it.”
Changing customer demand is only part of the problem. Retailers have developed massive store estates and complex supply chains that may no longer be quite what the shopper wants. “The New Science of Retailing”, for example, also lists poor forecasting leading to stock outs or excessive markdowns; long lead times; inflexible global supply chains; and poor inventory recording in-store among the factors that can reduce profits and cause customer disappointment. It also highlights the issue of “phantom stock outs” – where there is so much merchandise in the store that although the computer record may say the item is in stock no-one can actually find it. A state of affairs which is currently limiting many retailers’ ability to fulfil online orders from store or manage click and collect efficiently.
A rather different approach comes from Belgian-based shoe retailer Brantano which stocks only one pair or each style-colour-size shoe in each store and has no back rooms. The shelves have only space for one pair of each SKU so stock outs are obvious and replenishment takes place before the store opens each morning. The chain’s buying director, Jan Louagie, apparently claims that he can deliver product more quickly from the distribution centre than other retailers can find it in their back rooms, while the sales rate per SKU is sufficiently low to make lost sales negligible and money is saved by keeping store stock levels to an absolute minimum.
Obviously such low stock levels would not suite everyone, but where profitability is concerned there has to be a balancing act between maintaining high stock levels, to avoid lost sales, and losing margin through excessive markdowns – and that issue applies as much to the latest fashion apparel as it does to salads on a supermarket shelf. It might just be more profitable to sell out of a line and lose a few sales than to be left with excessive stocks and hefty markdowns. Thanks to modern analytical techniques such calculations are now easy – although judging by the mountains of reduced price products seen in store not many seem to be using the maths,
Improved profitability may include accepting more stock outs but it can also require rather more flexibility throughout the retail organisation, not just in the supply chain – as the tale of a shoe buyer who wanted to replenish a hot seller suggests. Told by the Far Eastern supplier that it would take four months and knowing that production would only take a week, she realised that other retailers were ahead of her in the queue so offered an extra $1 a pair and air freight instead of shipping by sea. The manufacturer agreed and she could have 5,000 pairs in-store in two weeks, although the margin on each pair would be reduced from $50 to $45. To her surprise the CFO refused to sanction the deal as the margin was sacrosanct. As Fisher and Raman add “..which is bigger $50 times zero of $45 times 5,000? But it’s too often how retailers think – obsessing over a few points of margin and refusing to pay for speed”. It’s a lesson which no doubt many logistics companies may wish UK retailers might also learn.
*The New Science of Retailing by Marshall Fisher and Ananth Raman pub. Harvard Business Review Press, ISBN 978-104221-1057-7

First published in Supply Chain Standard, December 2014

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