Archive for the ‘Retail Industry’ Category

4 rules for running a business

Many companies in mature sectors have been known to embrace the latest management thinking (or fad) to help cope with low market growth, margin compression and lack of differentiation. Examples of these “big ideas” include lean management, outsourcing, business process re-engineering, offshoring and, lately, social business and cloud computing. Despite considerable effort and investment, most of these firms have been unable to outperform their peers over the long term, often due to weak strategic fit, poor planning or flawed execution.

In fact, only 344 of 25,000 public companies analyzed in the Harvard Business Review by Michael Raynor and Mumtaz Ahmed of Deloitte consistently produced above average return on assets from 1966 to 2010.

What made these firms special? Two rules identified in the study — noteworthy for their simplicity, reliability and practicality — helped drive the extraordinary business performance. Below them, I’ve included two other rules for achieving exceptional performance well worthy of consideration.

Better before cheaper

Companies need to focus first on service, quality, design or distribution — not on being the lowest-price competitor. Non-price differentiated brands tend to command richer margins, which can support further product and marketing investments, which, over time, further sustain the firm’s competitive position and profitability.

Revenue growth before costs

Leaders should prioritize top-line revenue by driving volume gains, competing in growing categories and taking advantage of every opportunity to maximize pricing. Volume increases also bring other benefits, including scale economies and channel optimization, which help drive down operating costs and block out competition.

Brands matter

“Brand equity might be the only asset that consistently generates differentiation, higher margins and long-term revenue streams,” says Jerry Mancini, president, Dole Packaged Foods Company. “Dole’s focus on value, quality and brand-building has helped deliver almost 100% brand awareness in close to 100 countries. This allows us, for example, to provide transient consumers around the world with the same quality and unique products they are familiar with, wherever they go.” This strong brand equity has enabled Dole to more easily tap new markets and categories — and drive higher volumes.

Maximize human capital

“Competition, technology and customers are never static,” says Paul Bruner, a partner with McCracken Executive Search. “The key to long-term success is attracting and developing leaders of exceptional character, with the brains, passion and resourcefulness to adapt to and lead through changing circumstances.” Organizations need to focus on recruiting and training the right employees and reinforcing positive behaviours through innovative training and compensation programs.

To be clear, the above four rules suggest a direction, not specific strategies and tactics; it is up to management to make the tough strategic choices and back them up with good plans and sufficient investment. Leaders still need to understand where they should compete (i.e., which markets with which value proposition) and what they are especially good at (i.e., organizational and asset fit). They’ll also need to support their mission by assembling the right capabilities and cultivating them through a culture of continuous improvement and adaptability. Finally, the company and shareholders must recognize they are playing the long game — they will need patience and resilience as well as management systems that reinforce long-term thinking.

For more information on our services or work, please visit the Quanta Consulting Inc. web site.

3 ways to maximize sponsorship ROI

If you followed the World Cup, you would have noticed the many corporate sponsors of the event, the teams and players (i.e. the properties). Sponsoring the right property can give a brand a major boost in awareness and appeal. However, having the wrong approach or property could waste the investment and compromise the firm’s brand image. Fortunately, there are some best practices to follow to maximize a sponsorship’s potential.

Corporate sponsorship is big business. Annual global investment exceeds $25-billion, growing at almost 10% each year. Sports — teams, events and athletes — make up the majority of spend. Growth is being driven by an increase in the number of new properties like rock bands, festivals and charities, the rising value of some properties as well as the growing practice of tiering sponsorship support (think platinum, gold, silver levels).

Sponsorships are an important way for many companies to get their brands in front of elusive, skeptical and mobile consumers who are regularly bombarded by numerous marketing messages. Opportunities can range from naming rights on a stadium and client relationship events to limited edition products and custom advertising programs. Sponsorships can significantly build a business (think Michael Jordan and Nike) or hurt a brand image, as was the case when Kate Moss’ personal issues led to major problems for Chanel and H&M. How do you ensure you get the most value from this powerful but risky marketing tool?

The best programs get three things right:

1.  Align the opportunity to business objectives

Given the range of properties, you need to use a thorough process to filter and analyze the sponsorships to find strategic congruence between the property, brand and target audience. When affinities are lacking, the opportunity and investment could be wasted. In a high-profile program we studied, a mismatch between the firm’s customer base (women, 18-49) and the properties’ core audience (men 18-24) led to a lower than expected ROI.

2.  Promote the sponsorship

Companies often spend a lot of money acquiring sponsorship rights but very little on the promotional support that would magnify its impact. Various studies suggest that underperforming programs spend less than $1 on promotion for every $1 spent on sponsorship rights. The lack of marketing support may trace back to management neglect or the need to limit spending after paying for the rights. In one case, a client of ours believed that becoming a concert sponsor alone would drive their business. Though the sponsorship was deemed a success, management acknowledged that a lack of promotional support resulted in the firm missing out on millions of dollars in merchandise sales. Conversely, higher performing companies spend more than $1.50 in promotion for every $1 in sponsorship. Not only do these firms magnify their sponsorship investment but they also integrate their properties within their marketing mix.

3.  Evaluate performance

Despite the importance of sponsorships, many firms do not effectively quantify the impact of their expenditures. This is not surprising given the difficulty of linking sales directly to sponsorships. Successful companies use a variety of approaches. The simplest way is to survey customers, partners and employees on program impact and lessons learned. Firms can also tie total program spending to key metrics such as unaided awareness or purchase intent, and then link them to sales using regression analysis. The most sophisticated approach uses econometrics to ascertain links between programs, awareness and sales, and then isolate the impact of sponsorships from other marketing and sales activities.

Maximizing sponsorship value can be a challenge, especially when firms have multiple properties, customer segments and marketing tactics. BMO Financial Group is a major sponsor that has figured this out. The bank successfully operates a North American-wide program with dozens of properties and partners including: NBA Basketball (Toronto, Chicago), NHL Hockey (St. Louis, Chicago) Major League Soccer (Toronto, Montreal), amateur sports and the Calgary Stampede.

The Bank looks at sponsorships strategically, with a proven approach to identifying, evaluating and managing sponsorship deals. Each property — whether it is in sports, arts or regional events — aims to reach diverse customer segments within local communities as well as appeal to broader national audiences. The bank magnifies the impact of its sponsorships by integrating its elements with other marketing activities. For example, BMO was able to quickly maximize its sponsorship of the Toronto Raptors during their 2014 playoff run by increasing media advertising and launching a new Twitter campaign.

Finally, BMO sees a deal signing as the beginning of an iterative win-win relationship between the parties and not an end in itself. Justine Fedak, senior vice-president and head of brand, advertising and sponsorships for BMO, emphasizes the importance of long-term partnership. “Similar to marriage, a sponsorship begins with a mutual understanding of shared values and then evolves over time. Gone are the days when you slap a logo on something and walk away.”

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

4 dangers to be way of in 2014

The holiday season is a time for celebrating — and prognostications for the coming year. I’m typically an optimist, but not this time.  Though many factors point to a rosier 2014, every company faces some significant direct and indirect risks, many of which lurk below the surface. Fortunately, these dangers can be alleviated with good analytics and planning.

Recent positive economic news (e.g. the strength of equity markets, low interest rates and the abatement of EU and U.S. debt crises) have given corporate managers some cause for optimism. It would be understandable, but hazardous, for managers to let their guard down.  Many risks continue to menace organizations, four of which are:

Stagnating prices

Raising prices is a quick path to higher profits. To wit, a 1% increase in prices with a 30% margin can improve the bottom line by 20%.  Just try making it happen. Since the financial meltdown of 2008, it has been difficult to raise prices while maintaining market share. In Canada’s retail sector, for example, the arrival of Target and Marshalls plus recent grocery price wars, is expected to depress industry profitability for some time.  Many other sectors like services, manufacturing and communications are finding it difficult to sustain margins due to buyer pressure, global competition and steadily increasing costs.

Mitigating the risk

From a pricing perspective, firms need to more aggressively sell their products in markets that are less price sensitive or that are rapidly growing markets, both locally and in the developing world. Furthermore, those companies with differentiated value should look to take pricing up by better aligning price points to the unique benefits delivered.

Cost pressures

Global consultancy EY estimates that a 1% reduction in costs can produce the equivalent of a 10% increase in sales.  Achieving this is another story. In many firms, most of the easy supply chain and headcount rationalization savings have already been tapped. Moreover, the era of low raw material and wage inflation may be coming to an end, tracing to two key drivers —  the recent uptick in consumer demand and the possibility that China’s growth engine will reignite, driving up raw material costs. Adding fuel to the fire is continued exchange and interest rates volatility, which can play havoc with costs.

Mitigating the risk

Product and operational innovation is the key to driving margin improvement.  On the cost side, it is possible for organizations to further reduce cost without cutting key capabilities. For example, managers can reduce development costs and better target needs by co-creating products with their customers and leveraging rapid experimentation practices. Innovative operational strategies can drive higher efficiencies through the implementation of initiatives that reduce complexity, as well as crowdsourcing and gamificationpractices.

Supply chain disruptions

As has been shown many times, unforeseen events like natural disasters or political crises can seriously disrupt a firm’s operations, dramatically impacting product supply and revenue. Risks are magnified when a company’s supply chains are regionally concentrated and highly integrated.  For example, Japan’s Fukoshima nuclear disaster led to global shortages of spare parts  and shuttered assembly plants for Honda and Nissan. A recent report by Swiss Re, a reinsurance company, highlights the ongoing risk of major natural disasters such as flooding, earthquakes and storms.  The report identifies above-average risk for many global economic hubs including: Tokyo, Hong Kong-Guangzhou, New York, Los Angeles and Amsterdam-Rotterdam.

Mitigating the risk

Maintaining a low-cost supply chain must be balanced with the need for added production flexibility and agility.  Managers can minimize this operational risk by having: multiple supply-chain partners for critical and expensive inputs; close and symbiotic relationships with each vendor; and the internal capability (e.g., engineering, procurement) to quickly shift production if necessary.

Cyber attacks

Computer attacks and viruses represent a clear and present threat to every enterpriseand industry.  This year, the Securities Industry and Financial Markets Association released a report that showed  more than half of the world’s securities exchanges had experienced cyber attacks during the past 12 months. Janet Napolitano, the outgoing U.S. homeland security chief, recently said, “Our country will, at some point, face a major cyber event that will have a serious effect on our lives, our economy, and the everyday functioning of our society.” Importantly, these cyber attacks can appear out of the blue.  According to software provider Symantec, 40% of all the computers that were impacted by the Stuxnet virus, which allegedly targeted Iran’s nuclear infrastructure, were located outside of Iran.

Mitigating the risk

Reducing the impact of cyber attacks requires an acknowledgement of the threat, an understanding of internal vulnerabilities and the business continuity plans to deal with potential disruptions. Furthermore, IT managers should work together with their industry peers to explore industry early warning systems and safeguards.

For more information on our services or work, please visit the Quanta Consulting Inc. web site.

Gamification for Retailers

Gamfication — the use of gaming principles and technologies to drive customer engagement — is the most unique business development to emerge in the past couple of years.  Gamification is a triple-threat strategy.  Properly executed it can drive higher customer loyalty, increase marketing efficiencies and boost brand differentiation.   Of the many industries it is being implemented, retailing has produced some of the most interesting case studies. Below are two of the most noteworthy examples, as overviewed in Retail TouchPoints magazine:

Duane Reade

Duane Reade is a leading pharmacy chain with over 250 stores in the New York City metropolitan area.  Duane Reade has used Gamification in conjunction with a variety of social media platforms over the past 18 months to build sales, brand awareness, and customer engagement.  Its Gamification initiative features a location-based game using smartphones and a variety of social media sites like Facebook and Foursquare.   Users first have to download an app that contains a storyline.  This story features two factions, each battling to control a recently discovered resource called Exotic Matter. Players choose a faction to join and compete against one another in teams to “control” territory.  A sprinkling of logos found in 250 Duane Reade stores marks this territory.  Customers would go to one of the stores, scan the logos and download promotional offers, collect virtual resources or collaboratively solve puzzles.

The marketing results have been impressive. Duane Reade has seen a sharp increase in web and in-store presence as well as higher brand awareness and deeper customer engagement. As of March 2013, Duane Reade has been mentioned and/or shared more than 1,500 times.  The Company recognizes that getting their customers to play fun games is an effective and efficient way to drive business results and collect user data. According to Duane Reade spokesperson Calvin Peters: “Strategically engaging gamification experiences that utilize location-based gaming platforms, are becoming increasingly relevant as mobile concentration within the retail space continues to expand. It is important for us to be where our consumers are, including the virtual world.”

Whole Foods

This upscale grocery chain uses Gamification in a different way.  Instead of a stand-alone marketing program like Duane Reade, Whole Foods leverages game mechanics to enhance the social media and mobile components of existing marketing campaigns. In a recent promotion, Whole Foods rolled out the “14-Day Blast Off” campaign, which challenged consumers with a set of tasks that focus on making healthy life choices such as getting daily exercise or eating better. Throughout the course of two weeks, badges were given after participants completed one mission of healthy living per day. The missions were designed to ease the players into healthy living with small but important gains. Whole Foods understands that its consumers want to eat well and live a healthy lifestyle.  Instead of pushing out information, this campaign used fun and engaging missions (i.e. games) that promoted the desired behavioral change.  Interestingly, Whole Foods also uses Gamification to promote positive behavioral change among employees.  If the employee can achieve company goals like losing weight, they can get a discount on products.

Three elements made these programs successful.  Each integrates Gamification as part of its existing online and offline marketing campaigns and business strategies; the retailers linked game mechanics to their deep understanding of a user’s habits and practices; and; their executions were fun and engaging, tapping into a consumer’s intrinsic desires like competition and achievement.  As well, there are now enough successful Gamification examples across multiple sectors to generate best practices around program design and implementation.

For more information on our services and work, please visit us at Quanta Consulting Inc.

On location analytics

Imagine yourself a retailing executive. Most likely you want to improve your understanding of actual customer behavior so that you could develop better inventory, marketing, and merchandising programs. What if your firm had the ability to track real consumer behavior across multiple locations, ranging from where they come from, to their buying habits and through to why they made specific transactions.  That would be very powerful – and soon a common occurrence thanks to the emerging field of location analytics.

Simply put, LA collects, aggregates and analyzes a person’s credit card and GPS-device activity (e.g., interacting through social networking sites) to find relationships between place and action on their shopping and purchasing behavior.  LA’s uniqueness traces to its ability to mine insights between the interplay of unstructured data like physical location, geographic context, behavioral activities and social habits. The power of LA is further magnified when it can overlay these location-centered insights with structured data found in existing databases like the census, internal CRM information and traditional geospatial technology that collects static information on roads, homes etc.

A quintessential Big Data application, LA uses sophisticated algorithms, high performance computing, analytical capabilities and multiple data sources to identify hidden consumer and population patterns that can aid decision making and planning.  A number of industries like retailing, real estate development, retail banking, and service firms are beginning to use LA to significantly improve marketing program effectiveness, enhance customer satisfaction and right size operations. This compelling value proposition plus the intersection of business and technology developments is spawning a rapid growth in the market. According to ABI Research, the LA market is forecasted to be $9B by 2016.  No wonder, some of the world’s biggest IT firms including Microsoft, Apple, Facebook and Cisco have recently bought stakes in some leading LA providers.

There are many potential applications for LA services.  Within a large mall, retailers can understand what items were bought, where and when; why did the purchases happen in certain stores and; how were the transactions executed.  More importantly, firms can understand the relationship between these variables in order to get a complete picture of aggregated consumer behavior at the mall.  For example, where do shoppers and non-shoppers come from? Why do some consumers go to one store first? Or, why do people neglect to purchase from a particular store?

Consider another scenario. A restaurant chain wants to open a dozen more outlets across Canada. This strategy requires a significant amount of capital and effort while carrying substantial business risk.  Using LA services can help management understand the relationship between demographics, traffic flows, local eating habits, psychographics, costs and income levels on potential site revenue and build-out costs. As well, the insights generated by LA would help determine the optimal food mix, service levels and store size for each location.

Despite its Orwellian undertones, LA is about helping companies’ track aggregate patterns and predict trends so they could make better decisions; tracking individual behavior has little business value by itself.   Of course, firms will need to ensure there are adequate privacy safeguards and opt-out procedures to maintain consumer trust.

To fully exploit its potential, managers must ensure their LA technology and people investments are aligned to corporate goals and strategies.  As with other Big Data projects, implementing LA initiatives will come with IT and organizational challenges that should not be underestimated.  Before jumping in, companies will need to build out internal LA skills so that they can ask the right analytical questions, manage the data and capitalize on the learnings. Since organizations differ around their scale, IT and business needs, few enterprises (except large firms such as Walmart, McDonalds or Starbucks) would be advised to operate their own LA platforms.  As a result, the market is seeing the emergence of information aggregators or data brokers like IBM who can consolidate and filter data from disparate sources and geographies by sector.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Transformational analytics

Companies regularly collect reams of data from their customer interactions and operations. Increasingly, they are looking to build capabilities that can synthesize this raw asset into actionable insights (a competency known as Data Analytics), dramatically improving operational performance, enabling promotion & product ‘mass customization’ and spawning new business models. Leveraging data, however, is easier said than done.  Many companies do not have a data-analytics vision and, therefore, tend to underestimate its potential impact.  Before investing in capabilities (the combination of talent, technology and math), managers should first consider how analytics can transform their business.

For select firms, data and the capabilities that manage it is a competitive differentiator, on par with other valuable assets like a brand. Recent academic research shows that companies that use DA to guide decision making are more productive and experience higher returns on equity than competitors that don’t. However, not all industries offer the same opportunities.  Some sectors like entertainment, construction and services will have modest requirements for high performance analytics, given their market dynamics and structure,.  Based on our consulting experience, we believe that companies in retail, manufacturing, banking, telecom, wholesale, and healthcare industries are best positioned to exploit the breakthrough opportunities provided by data analytics.

Brian Ross, president of Precima, a part of the LoyaltyOne analytics solution is on the front lines of transformational DA.  “We believe that today’s advantage is quickly becoming tomorrow’s necessity.  The first step in this transformation starts at the top. The C-Suite has to establish the long-term vision and align the organization to build the capabilities, processes and tools.”  Strategy-minded leaders should consider the following four areas for breakthrough DA:

1. Optimizing operations

Powerful analytics can significantly improve operational performance, reduce cost and minimize risk.  For example, collating supply chain data onto one integrated platform will allow manufacturers to better collaborate with suppliers during product development, reducing cost, shrinking development time and minimizing the risk of costly errors. In other cases, analytics can enable the deployment of self-optimizing manufacturing systems. McKinsey has written about impact of data analytics on the oil industry.  Operational data from wells, pipelines, and mechanical systems can be collected and analyzed, feeding back real-time commands to control systems that adjust oil flows to optimize production and minimize downtimes. One major oil company has used this approach to cut operating and staffing costs by 10-25% while increasing production by 5%.

2. Transforming marketing & productsAdvertisement

Real time data analytics enables companies to quickly customize products and promotional offers on the fly for different customer segments.  As an example, retailers can track the behavior of individual customers through their usage patterns — both at their site, through social media and from location-specific smartphones — and predict their likely behavior in real time. Once they can predict behavior, retailers can better drive purchases by triggering customized offers, special discounts, or product bundles. In another example, McKinsey works with a personal-line insurer client who leverages DA to tailor insurance policies for each customer, using constantly updated profiles of customer risk, home asset value and changes in wealth.

According to Brian Ross, “Our most telling case studies today lie in enhanced one-to-one communications between vendor and customer. We have seen DA deliver impressive results of 90+% sales lifts, direct response rates as high as 87% and 4% retention gains.”

3. Enhancing decision making

The capability to quickly process and synthesize large amounts of data opens up the possibility of using controlled experiments to test different scenarios around important investment, marketing and operational decisions.  For example, Amazon assigns a number of their web page views to run experiments; they seek to understand which factors promote sales and drive higher user engagement.  McDonald’s has equipped some restaurants with sensors that gathers operational data through tracking store traffic and ordering patterns. The gleaned insights are used to model the impact of variations in menus, restaurant designs, and training on sales and operational productivity.

4. Enabling new business models

Firms with world class analytics competencies have the opportunity to germinate totally new business models and services.  McKinsey has worked with a global manufacturer that learned so much from analyzing its own data that it decided to create a new business doing similar work for other companies. This service business now outperforms the company’s manufacturing one. Information aggregation is another business model that can be spawned from analytics.  Consider this:  UPS regularly collects a mountain of data on shipment patterns, energy usage etc. on the estimated 3-5% of U.S. GDP they ship annually. This data could be mined, synthesized and then sold to organizations that provide economic forecasting services.

Within five years, analytics will be a game-changer for many companies.  However, building capabilities will not be easy or inexpensive. Developing a bold vision of analytics; transformational impact is a good first step.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

In retail, are you experienced?

Now more than ever, creating a rich shopping “experience” is de rigueur for retailers seeking to be a destination of choice.  Competing on the basis of the shopping experience – for example, delivering useful education, ‘best n class’ service, welcoming aesthetics and engaging entertainment – is not a novel idea.  Many world class firms like Walt Disney, Southwest Airlines and Hard Rock Hotels have built significant businesses by leveraging an experiential-based business and marketing model. Its now the retail sector’s turn.

The evolving landscape

Recent market, technological and consumer developments have put the shopping experience at the center stage of retail marketing and operations. Stores and chains are increasingly seen by buyers as undifferentiated and unexciting; consumer spending has stalled and; pure-play Web retailers and online shopping tools have come into their own.  At the same time, social networking’s popularity is exploding while bored, confused or fickle customers increasingly demand education, aesthetics and entertainment as part of their retail experience.  To stay relevant and competitive particularly in the mid-market and premium segments, merchants will need to regularly orchestrate and promote compelling on and offline shopping memories.  That memory itself will become the one of the products – i.e. the “experience.” 

Evolving consumer behavior is a major factor impacting the customer experience. For one thing, sales channels are changing.  Online sales, already 7% of all transactions, are forecasted to hit 15% by 2019 (source:  Google).  Although in its infancy, mobile commerce is expected to explode over the next few years.  Increasingly, buying decisions are being made before the consumer visits the web or traditional store.  Twenty years ago, 70-80% of all grocery purchasing decisions were made at a store.  Today, it is less than 50% according to Joel Rubinson, former chief research officer of the Advertising Research Foundation.  Typically, consumers will first research products online or canvas their friends and then decide what they will buy before going to a store.  Or, they may forego a trip to the store altogether and make purchases via the Internet. 

Moreover, social networking is enabling consumers to take control of how marketing messages are distributed and consumed – at the expense of company-sponsored sites.  Buyers now attach significant value to online reviews and often spend more money online after reading product recommendations by other consumers.  Facebook, for example, accounts for 38% of social media page referrals online (source: MDC Partners, a marketing firm).  According to pundits, reviews like these are trusted some 12 times more than advertising messages.

These changes have important consequences. When shoppers think about a brand, they now consider their entire buying and service experience.  To be successful, marketing campaigns will now have to encompass and integrate all of the touch points of a company’s relationship with a consumer, including the first moment of contact when a product search begins, through the sale and service, and eventual product disposal and replacement. Though consumers have far more control over marketing messages than they ever have, retailers still have plenty of scope to guide opinions. That’s where experiential marketing comes in.

Who is getting it

Recently, a number of retailers have pushed marketing boundaries to create innovative experiences that integrate entertainment, social media, information and traditional advertising. Two examples were highlighted in a recent issue of the Knowledge@Wharton newsletter:

Macy’s

In 2010, Macy’s hit the mark with a couple of highly successful marketing programs that integrated a number of different experiential elements.   During New York’s Fashion Week, the retailer provided customers with a “magic fitting booth,” which allowed them to “try on” virtual outfits and post images of themselves in their new clothes on Facebook. All year round, shoppers were able to use their phones to watch videos for fashion tips from designers and makeup artists. For the holiday season, Macy’s launched an animated website with an online tool enabling customers to send letters to Santa Claus. The site, which received more than 1M letters, was combined with a fundraising drive for a children’s charity and a mail order guide.

Bloomingdale’s

This merchant understands the critical role of human contact in delivering powerful retail experiences.  Bloomingdale’s 8,000 in-store “associates” play a key role in delivering and enabling experiences.  Their responsibilities include collecting customer information in databases.  This information is then used for marketing programs such as birthday alerts or shopping recommendations based on previous purchases. “What we don’t want to lose is the assurance and authenticity of human contact: the touch, the feel, the laugh, the personal knowledge” says Tony Spring, President and COO of Bloomingdale’s.

Making it real

Incorporating the above elements – plus emerging mobile and location-based services – into the marketing and operational model will lead to further evolution of the shopping experience. To remain competitive and efficient, retailers will need to develop a holistic “customer experience” vision and strategy that integrates both traditional and new media, while addressing every point of the purchase/service continuum.  Making this vision a reality will requires firms to revamp their organizational structure in order to bridge functional silos like digital marketing, public relations, store design, advertising and merchandising.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Retailing discovers science

More than at any other time, Canadian retailers face a myriad of business challenges, from a slowing economy to the entry of American giants like Target and Marshalls.  To drive sales, improve customer service and increase profitability, Canadian retailers should consider the insights of Professor Marshall Fisher, an operations professor at Wharton.  Fisher argues that operational “science” can help merchants better match product supply with customer demand. OS is already being practiced by some leading retailers including Zara, Walmart and World, a successful Japanese clothing manufacturer. 

In laymen’s terms, OS looks to ensure that customers can consistently and easily find the items they are looking for.  At the same time, OS emphasizes product supply management to minimize over-stocking,  a situation which leads to expensive discounting.  At the heart of OS is the use of advanced marketing and IT methodologies known as data analytics.

Marshall Fisher was recently interviewed in Knowledge@Wharton, a newsletter published by the Wharton School at the University of Pennsylvania.  Below are some of his key conclusions:    

Poor operational performance is costly

Over-stocks create inventory problems, leading to cash flow issues and expensive discounting.  For perspective, the average item now sells for 40% off its full price, up from 33% in the mid 1990s.  Furthermore, out-of-stocks and poor merchandising decisions are resulting in sizeable revenue losses.  According to Fisher,  up to one-third of potential sales are lost when customers walk into a store clearly intending to buy something and walk out empty-handed because they couldn’t find the item.

Small operational gains can drive big bottom line improvements in a high fixed cost business like retail.

Assuming a merchant has a gross margin of 50%, a small 5% increase in sales can generate a 2.5% increase in profit.  For those retailers who lose one-third of potential customer sales via out-of-stocks, modest operational improvements could lead to revenue increases that double their profits.

Retailers are not effectively using the data they have. 

Most firms are awash with point of sale, customer satisfaction and demographic data.  To fully leverage this data, managers should apply data analytics methodologies, such as: 1) determine what of the collected data (e.g. product sales by form by store) is relevant to its corporate strategy;  2)  ensure the collected data is granular enough to be actionable by store;  and; 3) understand what and how factors like weather, merchandising and promotion impact these numbers. 

There is a “science” to deciding which products to add. 

Deciding which products or stock keeping units to add is more difficult than figuring what to cull – that is, eliminating low performing SKUs by store etc.  One data analytics approach is to  compare sales results of different SKUs by their attributes like color and style.  New products that have attribute profiles that mirror the most successful SKUs or fill obvious gaps (e.g., needed for the local selling area) would be added to the merchandising mix.

In-store execution is crucial.   

OS strategies will flounder if the customer experience is poor, merchandising strategies are counter-productive or front-line staff are poorly trained or lacking sufficient numbers.

According to Fisher, most merchants are (on average) under-staffed, and they tend to under-invest in the people they have.  A human capital deficit arises from the fact that retailers typically view labor as an expense rather than an investment. This deficit creates an in-store execution gap that translates into poor customer service and lower revenues.  For perspective, Fisher’s research with customer satisfaction surveys suggest that for every extra $1 invested in adding employees, an incremental $10 will be generated in revenue.

Explore greater supply chain speed and agility

Inflexible or slow supply chains are often a root cause of the supply and demand mismatch.  Increasing speed can be accomplished in many ways, including:  producing more accurate demand forecasts, optimizing the product mix and enhancing supply chain management.  To accomplish the latter, managers could analyze the optimal (read:  fastest and cheapest) way of getting product from offshore to the store.  For example, will operational performance increase with faster but more expensive shipping as opposed to slower but cheaper shipping?  This analysis could prompt retailers to backshore production previously sourced in Asia or consider faster shipment strategies like air freight.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Successful online companies go narrow and local

It’s been over 15 years since the likes of Amazon, Expedia and eBay stormed the business world with their new ways of transacting business and startling growth.  Ever since then, conventional wisdom has said that online success was best achieved by reaching operational scale and mass market appeal as quickly as possible.  In other words, an “if you build it online, they will come from everywhere” approach. 

Yet, recent developments belie this approach.  Booz & Co., a consultancy, studied online successes and failures.  They found that firms such as Webvan, Pets.com and Value America that focused exclusively on scale and mass marketing were unable to convert this strategy into market leadership.  In fact, there are only 3 non-traditional retailers (Amazon, Newegg and Netflix) among the top 25 internet retailers, with Amazon coming in the highest at #4.  Furthermore, a scale based strategy has fared no better in the B2B space.  Specifically, Booz cites the failures of online auctions like FreeMarkets, Business.com and Covisint to transform B2B commerce. 

There is much to learn from the above failures as well as from the new internet stars such as Zappos and Groupon.  Two key success factors stand out.  Firstly, they build distinct yet market-beating capabilities that support their mission.  Secondly, they target these capabilities against local markets. Online winners achieve scale but realize it in different ways than their predecessors.  Simply put, scale follows focus and capabilities.

Narrow the focus

Given the challenges around satisfying fickle consumer needs and achieving technological integration, it is difficult for online firms to design and maintain a full spectrum of powerful operational capabilities. Like traditional businesses, online firms often struggle to be all things to all people.  The successful Internet firms are picking narrow business strategies and then developing supporting capabilities that provide a superior value proposition and service offering. 

Zappos, the leading online shoe retailer, was one of the first Internet firms to follow a focused strategic approach. Before being purchased by Amazon in 2009, Zappos had bested their online foe by achieving superior client service and call center productivity through targeting one crowded and unpredictable market, shoes.  Specifically, the company has been recognized as having the best trained and motivated customer service workforce. Interestingly, Zappos’s success came without enjoying Amazon’s mass scale advantages such as being a low-cost seller or having the largest selection of merchandise. 

Think mass-local

In its early days, the online mantra was to sell everywhere at any time.  While this still rings true in many instances, some of the latest internet success stories have pursued scale by deploying platform-level capabilities and expertise at a local level.

Groupon is an excellent example of this approach. The company – recently rebuffing a December 2010 $6B acquisition offer from Google – has gained scale by launching their “daily deals” coupon promotions in 500 global markets, tapping the marketing spend of local businesses.  Groupon’s key metric is not the number of subscribers (though they have over 50 million) but rather the number of local subscribers – the ones of greatest interest to the revenue-paying merchants.  In essence, Groupon is following the marketing truism of going where the money is.  To support their strategy, Groupon has developed significant capabilities for identifying and vetting local merchants and managing promotional programs around them. Finally, their mass-local approach also generates scale from its inherent network effects (more consumers entice more sellers which in turn attract more consumers). 

Of course, the narrowly focused and locally oriented online companies must continue to execute with excellence if they are  to ward off competitors with similar models and continue to serve fickle customers well.  Failure to do so will consign firms like Zappos and Groupon to the same fate as previous Internet stars Webvan, Pets.com, Friendster and Napster.

For more information on our services or work, please visit the Quanta Consulting Inc. web site.

Reduce product selection to increase sales

Many company’s under perform for a reason that appears counter-intuitive:  too much product selection.  Whether shopping in an online or physical environment, many well-intentioned consumers become befuddled from a plethora of products and configurations and end up purchasing less than was originally intended.  These missed buying opportunities can sink product plans, spoil capital investment decisions and hinder customer satisfaction scores.   Moreover, excessive product selection can spawn system complexity resulting in sub-optimal service and support, reduced scale economies and increased error rates.  Recent thought leadership by consulting firm, Booz & Co., explored this marketing challenge.

Consumers seem to want more choice but shop at their own peril.  In 1949 the typical US grocery store stocked 3,700 products.  Today, the average supermarket has 45,000 products with the typical Walmart stocking around  100,000 products.  For service businesses, the number of different product combinations can be mind-boggling.  Starbucks, not content to offer only 87,000 drink combinations, recently launched the However-You-Want-It Frappuccino, with “thousands of ways to customize your blended beverage.” Not to be out-done, Cold Stone Creamery provides customers with 11.5 million ways to customize their ice cream through a menu of mix-ins. 

Some psychological studies analyzed the negative impact of too much choice. One study looked at participation in defined pension plans.   When the plans offered only 2 funds, 75% of the relevant employees participated. When the plans offered 59 funds, the percentage of participants fell to 61%.  Similar finding around “choice overload” have been observed in other situations as varied as buying chocolate, applying for jobs, and making healthcare decisions. 

Why does a person’s behavior change when faced with an excessive number of options?  Cognitively, individuals find it very difficult to compare and contrast the features of more than about 7 different variables. There are neurological limits on a human’s ability to process information.  During choice overload, the task of having to choose will often generate frustration and suffering, not pleasure. Not surprisingly, buyers may skip the purchase altogether, reach for the most familiar item, or make a purchase decision that ultimately leaves them far less satisfied than what they had expected to be. 

In market research, consumers often say they want more selection.  Company’s willingly oblige by offering more products that target ever narrower needs and niches.  What marketers should do is give consumers what they really need: new ways of shopping and an optimized product mix that reduces the cognitive demands of choosing.

There are a number of ways to do improve the choosing experience:

  1. Cull the number of options. A combination of quantitative modeling, product rationalization and qualitative techniques such as ethnography can be used to design the right product mix.
  2. Foster confidence with expert or personalized recommendations.  In categories where variety matters like music, apparel and food, some companies such as Nordstrom and Amazon use recommendation engines  and product experts to help guide customers through the purchase cycle.
  3. Categorize the offering so that consumers better understand their options.  One useful approach is to group products according to certain characteristics or usage patterns.  This enables consumers to quickly eliminate unwanted options and get to a decision faster.
  4. Condition consumers by gradually introducing them to more-complex choices. Consumers will embrace more complex configurations after they have been warmed up on simpler offerings. Beginning with fewer options also helps consumers better understand their own preferences, which in turn, enhances their choosing experience.

Clever companies know that happy consumers purchase more and are more loyal when the product selection process is simple. When it comes to designing the product portfolio and process, less is usually more.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.