Best Buy, if you want to beat Guomei in China, what you need is…

In September 2005, Best Buy spent RMB 80 million (CAD11 million) in signing a leasing contract of a prime location in Beijing starting from late 2006. This must be one of the most stunning news in the China retail market in 2005. First, the leasing price is much higher than the regular price due to fierce bidding on that location. Second and more importantly, this is a sign of the formal entry into the China market by Best Buy. Although Best Buy opened its Representative Office in 2003, it claimed that the office was only serving to develop a sourcing platform. Not until it leased the location in Beijing did it start to open brick-and-mortar store in China.

Best Buy’s entry into China certainly signaled threats for the local dominating players in the electronics appliances industry, such as Guomei. With an annual sales revenue of CAD 3.5billion, Guomei is the largest chain electronics appliances store in China. It has 400 stores in 120 cities and still plans to expand at a CARG rate of 60%. Guomei’s strengths include an excellent supply chain management system which can help to provide really competitive prices to consumers and its knowledge of consumer behavior.

Guomei has been in the market for 20 years. To compete effectively with Guomei, Best Buy needs to know some unique Chinese consumer behavior before opening stores. First of all, currently, there are no big retail chain stores both selling computers and consumer electronic appliances in China. Chinese consumers usually buy their computers in various so-called “Computer cities”, which is composed of small stores specializing in selling desktops, laptops and accessories. Consumers usually spend long hours in making comparisons on prices, models and brands both online and checking the information in different stores in a certain “Computer City”. The biggest concern of buying in these small stores is its lack of after-sale services, such as extended warranty. If your computer is broke down, you have to deal with the manufacturer yourself. The retail stores do not take any responsibilities in facilitating the communication.

Since Guomei and other local stores are so dominating for the time being, Best Buy need to consider the following when competing with the local giant players:

·Store location
It is a known fact that sizable prime locations in China’s big and mid-size cities are almost occupied and locked by long-term contracts with big retailers, which becomes the biggest barrier of entry for new comers like Best Buy. In order to acquire suitable locations for Best Buy, it may consider cooperating with real estate developers and city planners to get information of the future prime locations. Best Buy should also keep an eye on the big retailers whose store performance is not good, such as the location it got from IKEA Beijing. Whatever strategy it is to use, Best Buy’s store location selection should be based on convenience, population density and disposable income of the community.

· Store format
Serving as a complement to the flagship stores, small stores were opened by Guomei in affluent residential communities. However, managing stores of such a small size is not the strength of Best Buy. In North America, Best Buy adopted a multi-channel strategy of having both brick-and-mortar store and online retailing. In China, Best buy should focus on its brick-and-mortar store, since bank credit system isn’t well developed and Chinese consumers are still worried by using their credit cards to pay online. Having said that, online shopping will be the future trend with the booming development of the IT structure of China. Another advice for Best Buy is that they may want to test kiosk in their stores and see the Chinese consumers’ reactions. Currently, no retailers are using it and it will arouse excitement.

· Store layout
Guomei’s layout is U-shaped with lots of counters facing the entrance. This is also recommended to Best Buy, as Chinese consumers like seeing and feeling the products in the center of the store and making final purchase in the counters. Feature items, especially TVs, can be put in the center to generate visual excitement.

· Product assortment
With more capital than the local players, Best Buy is capable of building both economies of scale and economies of scope. By providing products of greater variety and breath, Best Buy is able to provide one-stop shopping to Chinese consumers, who is still going back and forth between small stores to check the products. Secondly, Best Buy should focus on a combination of Computers and its Accessories and Electronic Appliances products. These two categories should be put as the core categories, since Chinese consumers buy their products of music, movies and games in small stores.

· Service
By providing extended warranty, Best Buy is definitely going to win the hearts of the Chinese consumers, who have to fight with the manufacturers themselves when products broke down. In terms of customer experience, Chinese consumers like personal assistance and discussing with store employees about the product details. Store employees should be trained to be warm and friendly but not too hard-sell. In addition, delivery fees should be marked up in the prices, as most Chinese consumers don’t own a car and expect the products to be delivered to their home for free.

· Other aspects of marketing
Chinese cities vary from city to city. Therefore, test marketing is important. Since Best Buy already had a first store location in Beijing, it is recommended to start test marketing from the big cities and leverage the big cities’ influence in second-tier cities in a later stage. Branding should be focused on communicating the facts and differences between Best Buy and the local stores (credibility, services, shopping experience). Best Buy should also develop good supply chain management system to keep its pricing system competitive. Although rebate is quite a common tool in North America, it is not attractive to Chinese consumers (at least for the time being), due to the weak banking system. IT system, such as CRM software, is important in getting the knowledge of consumer behaviors and fixing various aspects of marketing according to the knowledge.

· Management
People is always the most important aspect in management. As a new comer, Best Buy should hire people who have the business acumen, ample knowledge of the industry and the rules of the game. Localization of the team is the key.

China’s Local Retailers VS Global big giants [2]

What shall local retailers do to compete with international retail giants?

In last blog, I discussed the challenges China local retailers are facing and the gaps between them. Local retailers are at competitive disadvantages of scale, management, information technology, and marketing capability compared with international retailers. Capital is of course a top problem for local retailers to expand rapidly nation-wide. However, without corresponding management capability, aggressive expansion is even a big danger to local markers. Therefore, for local retailers, while proper expansion which could be aligned with their corporate strategy should be under consideration, improvement on retail management is the internal capability and the key foundation of competitive advantages to support their campaigns with international big giants.

I think local retailers may take the following aspects into considerations regarding retail management:

1. Formats of the stores

If you look at the formats of local retail market, you may find most of the retailers are pursuing ‘big one-stop’ shop. There are even 5-6 levels in one big retail store. Some so called ‘Department stores’ or ‘Special stores’ are actually supper stores carrying as many products as possible. Yes, of course, it is good for consumers because they have more selections. However, if every retailer is ‘big’ one, there will be no differentiation among them. Consumers will still lose in those big boxes because sometimes some people looking for real convenience will feel uncomfortable entering into a big store.

Considering their complexity of management and cost of capital, irrational big formats or one-stop stores are not always working for retailers. On the contrary, different formats aligned with needs of local consumers are more reasonable and effective because purchasing behavior of Chinese people is more community-centered and not every family has cars as in North America. Therefore, they do not want to go very far to do shopping. A flexible format strategy would be very workable in China.

2. Category management

For example, small value commodity in China is highly developed in terms of selections and costs. Meanwhile, competition in this category is very intensive. Even for WalMart, I do not think it has advantage on this category as it does in North America. Therefore, a careful customer behavior and target marketing analysis is important for local retailers before implementation.

Above is just a simple example of category carrying management. Based on my observation, local retailers tend to take follow strategy on category management. Sometimes, as long as their competitors carry, they will do the same thing in a rush without a marketing analysis.



3. Marketing management

Actually, in terms of the price of specific product, there is no big difference between local retailers and international retailers. But by leveraging their experiences in this industry, international big giants often appear to be ‘smart’ in marketing campaign. The methods or tools they use are more attractive, such as combined promotion strategy, dynamic promotion and established customer behavior analysis model.

Flexible pricing strategy based on revenue management is another important tool that may generate sales more effectively compared with simple discount sales and coupons which are often used by local retailers now. A good marketing strategy should be based on accurate data analysis, but many local retailers do not have consolidated data processing.

4. Private label

Compared with developed retailers, local retailers in China currently do not have strong private label, which is a very effective weapon to build loyalty and generate greater margin. Actually, there are some advantages for local retailers to create their own private label because manufacture costs in China are very low. Private label is also a good weapon for local retailers to defend the local market from international competitors.

5. Customer relationship management (CRM)

CRM in retail market is critical. It’s highly related to value proposition of retail market from customer perspective, which is the function of selection, convenience, experience and price. In local retail stores, staff is often not well-trained and CRM was defined after-sales service. Actually, CRM goes through the whole process of purchasing, including marketing, in-store service (helpful staff and good service of payment, selection and delivery), after sales follow up service, relationship maintenance and loyalty building. Therefore, for local retailers, they should leverage their local culture presence and image to lock in customers by offering consistent customer relationship management.


6. Information technology

Technology used in local retailers is at early stage compared to international retail giants, such as WalMart. The technology is an infrastructure of retail management today rather than a simple value added tool because it will impact on supply, logistics, distribution and customer relationship management, which are key components and competitive advantages of international retailers. Local retailers should change their views on technology and construct the technology infrastructure at a strategic level to build their own advantages at least not disadvantages when competing with big giants.

To sum up, international competitors are not monsters. They also have their disadvantages in China, such as rigid formats and location preference, culture difference and localization difficulty. Besides expansion to get larger scale, local retailers can also compete with big international retailers by improving their own management and leveraging their knowledge and awareness of local customers to offer better localized products and services.

First impression of Superstore

First impression of Superstore

I do remember a last year’s case what Loblaw’s strategy is to Wal-Mart’s coming in Canada, and some students said George Weston Ltd may build a kind of super market to defend Wal-Mart. Yesterday, I went to Superstore which actually I did not know it belongs to the Loblaw until I came in.
Compared with the London Wal-Mart, this superstore is bigger, and has more products, more services. Obviously, Superstore wants to provide really one-stop shopping to the local residents. My friend joked the only thing what superstore does not sell is vehicle (but it provides gasoline and car wash in parking area!).
I observed the following difference between Superstore and Wal-Mart:

1. Products: food and fruit, Superstore not only sells the common food and fruit which Loblaw has, but also sells the cooked food including western and oriental types. I did not see Wal-Mart sells the food in London. Superstore also sells flowers at the right corner of store’s gate which gives the customers a signal, warming welcome! But superstore doesn’t have auto parts which Wal-Mart has.

2. Service: There are 3 big characteristics in Superstore. One is the fitness center, which I did not see many people exercising there at noon. I am not sure whether Canadians like go to the gym in a super market. The 2nd is medical office. The local residents need not go to the clinic offices when they have light sickness. And it is helpful while emergency occurs in the store. The 3rd is self-billing system, which helps to reduce the waiting lines in the regular counters. But I also found it is not easy for the new users to find the items they bought in the computer systems. Moreover, this system has to be applied in the highly honest societies. In addition, there are other services such as dry washing, photolab, loan service and so on.

3. Layout: Superstore has 2 floors, actually the upper floor is semi-floor where the fitness center and cooking school are located. And Superstore puts the electronic products at the corner of right side. Compared with the Wal-Mart’s middle position, I prefer the Superstore since the electronic products are durable consumer products with much higher value than the food & house stuff. Another difference is there is no CSR at the high value cosmetics counter, where some staff will promote these cosmetics in Wal-Mart. In addition, the customer service is located in the 2nd floor compared with the Wal-Mart’s 1st floor. The benefit for customers is there will be no other customer watching while disputing, but on the other side, some customers would not like to go upstairs for small item.

4. Shopping experience: I bought some cooked food in the Superstore. To be honest, the shopping experience in the Superstore is not big different with that of Wal-Mart, just felt more space, brighter, and more choices. Probably part of reason is because of new store.

I think I will find more difference between Superstore and Wal-Mart if I can have more time to observe and shopping, for example, price and promotion. I felt Superstore is a strong competitor to Wal-Mart due to the size, location, variety, environment, service and price. I would like to see what Wal-Mart could do to expand its empire in Canada.

RFID in future store

We watched a video about future store in class last week. The future store manages its supply chain, assortment and display of merchandise at a fast, responsive and flexible way, bringing the end consumers widely different shopping experience. New technology, especially RFID plays an important role in future store to help it achieve efficiency and convenience.

Radio frequency identification, or RFID, is a generic term for technologies that use radio waves to automatically identify people or objects. There are several methods of identification, but the most common is to store a serial number that identifies a person or object, and perhaps other information, on a microchip that is attached to an antenna (the chip and the antenna together are called an RFID transponder or an RFID tag). The antenna enables the chip to transmit the identification information to a reader. The reader converts the radio waves reflected back from the RFID tag into digital information that can then be passed on to computers that can make use of it.

RFID will help retailers react faster to market demands and reduce out of stocks, boosting both sales and customer satisfaction. Furthermore, RFID will help retailers reduce storage costs, product shrinkage, and labour costs. In the future, retailers will use item-level tagging to develop tomorrow’s in-store sales, marketing, promotion and service strategies.
An increasing number of retailers– including WalMart, Target, Tesco and METRO Group are turning to RFID for help.

The METRO Extra Future Store opened in Rheinberg, Germany, in 2003, was considered the industry's showplace for RFID product tagging technology and a model for the future of global retailing.

The shopping carts in the store are attached a computerized "Personal Shopping Assistant". It works when a shopper identifies herself to the system by scanning the bar code on the back of her METRO Payback loyalty card. The cart's location is continually tracked to offer location-relevant information on the screen of "Personal Shopping Assistant". The cart knows where a shopper is at all times. It tracks consumers' movements in stores and later link that information to their individual purchases.

In the Extra Future Store, RFID is also tried out in the following areas: Merchandize exit from the central warehouse, delivery to the storage of the store, transport of the merchandize to the sales area, “intelligent Shelves” for several products, tags on CDs, videos and DVDs for listening and/or watching.

Technology is always a double-edged sword. When bringing benefits to the retailers and customers, the inappropriate use of RFID also made Metro in trouble. There are 22 million Germans owning a "Payback" loyalty card, which they scan at participating retailers to accumulate cash back rewards and qualify for discounts. 10,000 of these consumers picked up their cards at the Metro Future store and never told that there are hidden RFID remote tracking chips in their cards. The data on the card is not encrypted and operates on an open standard, anyone who knows the RFID tag exists can capture its numerical information (cardholder account number) -- all they would need is a reader which can be bought online for a few hundred dollars.

A German privacy group organized a protest of consumers and asked Metro to stop uncontrolled RFID implementation and customer card trials. Facing the pressure from consumers and media, METRO publicly announced that it would discontinue issuing its RFID-embedded loyalty cards and would replace any that had already been issued with RFID-free loyalty cards.

Lotus Supercenter in China

The Company
Lotus Super center generates USD 1.6billion sales in 2005. It keeps its sales growth around 20% to 30% every year since its foundation in 1997 in China and population over 50 million. Currently, Lotus sets up nearly 100 stores in major cities all around China.

It’s invested by CP Group (Charoen Pokphand group), one of the fortune 500 companies, and a multinational conglomerate founded by Thai Chinese. CP group has set up its business layout of agribusiness, aquaculture, seeds and retailing as core business. it has a complete modern agribusiness industrial chain composing of seeds innovation, planting, feeding, poultry，agri-production processing, food sales and import/export trading.

Unique Business Model and Retail Value Proposition
Lotus’ business model is in contrast with retail giant such as Walmart. For Walmart, distribution and technology are key success factors, while it normally doesn’t put much focus on manufacturing. While for Lotus, instead of sourcing from numerous vendors and pushing for margin by setting up tough terms with vendors, it actually owns the supply side of its retail business under food category and the whole supply chain is under their own management.

From one hand, it actually leverages its parent company’s core competency of operating at agri-industry for over 80 years, on the other side, it starts the quality control of its food assortments from the very beginning, resulting in an ensured stable quality, and thus the word of mouth is quickly built up among consumers. The reputation of offering the best quality food while with low price help Lotus to pioneer its retail expansion under fierce retail competition in China.

It’s also due to its parent company’s operation in agri-business, Lotus is able to control the supply side without occurring extra cost and the business model is not easy to copy.

Further looking at its selection, price, convenience and customer experience, Lotus also positions itself differently from its major competitors.

Selection
Lotus's aim is to become the favorite and "one stop shopping" place for all the family members. It offers a large assortment of quality merchandise at low price with over 30,000 items from fresh vegetable to snacks, from electronic to transportation, from apparel to furniture, from health and beauty aids to toys and many more.
Lotus uses dominant assortment and proprietary products as two powerful tools to compete with other big name retailers. From a market research study, consumers spend 70% of their money on purchasing food while visit retail stores. The dominant assortment at Lotus, thus stays focus on food products. Again, Lotus effectively utilizes its unique resources from its parents company.

Proprietary products are another power tool that Lotus is using to compete with others. Lotus’ Private Label occupies 20% of its food assortment product while the price normally is lower for 10% with comparable food products. Given the long established reputation on food products, consumers recognize Lotus private label as best guys and the Lotus private label accounts for 15% of its sales.

The variety, depth and breadth it achieved are so far the 2nd largest comparing with compatible super centers.

Price
Lotus will continually extend its every day low price principle. Lotus strictly follows its principle though it’s most challenging for a retailer.

Lotus achieves its every day low price through its disciplined ability to operate with lower cost, buy items less expensively than competitors, sell high volumes and maintain a high turnover rate.

Convenience
Unlike retail giant Wal-Mart, Lotus Supercenter normally locates at an optimal location with high population density and rate of visits. Compared with similarly scale retail chain, Lotus is at advantages of being at a metro location while still keeping its high square feet. The only trade off they made is the layout they use for each super center, it’s normally to be with several floors and consumers have to carry the cart up and down for shopping.

However, given China’s situation that most people live downtown and would not consider buying a car due to limited parking place, such location, regardless of its poor layout, still meets the key requirement from consumers, which is high accessibility.

Customer Experience
Lotus's objectives are to offer warm and friendly service to all customers. Overall, customer experience at Lotus is to offer large and nice shopping space while less personnel assistance. In general, the customer experience it offers is higher than average retailers.

In sum, Lotus is very unique case in terms of its business model and retail value proposition. Success of the business demonstrates that wherever the retailers could capture its own core competency and distinguish themselves from others, they win their own space in consumer’s mind.

The Home World Group

Company Background

The Home World Group (hereinafter "the Group") is a private retailer specialized in supermarket (the Hypermarket and Home Club) and home improvement market (the Home Way) in China. Aside from retail business, it also managed the Home World Real Estate Company, the Harbor View School and YoungLiuQing Golf Club. The company entered the retail market in 1996 and officially registered in Tianjin, China in 1999. Since then, The Home World Group has established 68 stores, including 43 Home Clubs, 11 Home Way stores and 14 Shopping Malls. The total sales revenue reached USD 892 million in 2004, a 670% increase compared with the revenue in 1999. The Group had become one of the largest retailers (ranked 22nd among the Chinese retail enterprises) in 2004.

Value Proposition and the "Concentrated Development Strategy"

1. The guaranteed lowest price: the Group guaranteed lowest price to its customer, without compromising the quality of its products and service. The lowest price was achieved by strategic purchase and centralized distribution.
2. The home-like stores: the goal of the Group was to make its customers feel like home by providing the comfortable shopping environment and customer-friendly service.

Since its registration in 1999, the Group developed the "concentrated" development strategy, which meant that the Group will focused all its resources to establish quickly the whole set of its retail businesses to achieve the highest market penetration in the destination cities and then expand to the surrounding areas.

And unlike other big retailers who chose to establish their presence in the large cities, such Beijing and Shanghai, the Home World Group decided to open its businesses in the second-tier cities that had less or no competition from those large international retailers. As the size the Home World Group is not comparable with those retailer giants, the Group needs to find new markets to achieve economy of scale. So far, the Group has established obvious business advantage in Tianjin and Xi'an, and is further expanding its Home Clubs and Home Way stores in other second-tier cities.

Key Successful Factors

1. The academic founder CEO and the international board.
The founder of the Home Way Group is Mr. Du Sha, who holds a Master of Quantitative Economics and used to be an associate professor of Economic Institute of NanKai University, one of the best universities in China. He designed the "concentrated" strategy and decided to roll up his stores in smaller cities rather than big cities. The reasons were obvious, first, there was less or no competition in smaller cities by the end of 1990's, so the Group could quickly build up its business kingdom and achieve economy of scale; second, though the market size was not comparable with large cities, the Group could maintain the same or even higher level of profit because the labor cost and real estate were cheaper in small cities.

Mr. Du believed that in order to compete with international competitors, the company must be international. So, he invited lots of experts from well-known multinational retailer as independent directors. Perhaps the most famous ones are Mr. James W. Inglis who used to be the Vice President of Home Depot, and Sir Geoffrey Mulcahy, former CEO of Fingfisher plc. With such a strong board, Mr. Du leveraged their international retailer expertise with the core competence of the firm to further grow Home World to compete with those international retailer giants.

2. The cost-sharing business model and highly centralized management
The Home World Group has different businesses: Hypermarket (furniture and electric appliance), Home Club (grocery) and Home Way (home improvement material), each has an operating area over 10000 square meters, thus the cluster of different operations reduced the overall cost to a minimum level. Different businesses could share the parking lot, electricity, advertisement, and property management. Besides, the combination would meet customers "one-stop shop" requirement, increase the possibility of cross-selling and lower the cost for each store.

Unlike lots of foreign invested supermarkets, The Home World Group has a highly centralized organization. In order to increase bargain power, the headquarter purchase department establishes alliance with suppliers to obtain the most favorable price for all the stores, therefore individual store only needs to place orders with suppliers directly. Centralized purchasing not only increases bargain power of the firm, but also reduces the responsiblity of individual stores, thus lower the requirement for high quality buyers which are difficult to find in the retail industry. Besides, the firm also consolidates its marketing and promotion activities and dispatch centers to reduce sales cost and other overhead.

3. The advanced IT infrastructure.
So far, Home World had spent over USD 10 million in building its IT infrastructures. Some industrial insiders questioned this significant amount of investment, however, the Group believed that when the number of stores increased to over 100, such investment in would be economic on a per store basis. Besides, the firm uses IBM platform and JDA software fully support the centralized organization. For example, the POS system in each individual store was linked with the headquarter system and report the sales, and inventory status and headquarters would analyze the data and get back to stores with instructions. With such advanced technology, the firm could increase data security, analyze the data more scientifically and optimize the business process to increase efficiency.

However, as China will open its retail market and distribution business after joining WTO, all the Chinese retailers are facing big challenges from international giants. In my next blog, I will illustrate my ideas about how the Home World Group could improve its performance and response to the challenges.

Targeting the Five Senses

I walked past a student in the hallway at Ivey last week who was wearing a perfume that my roommate in Japan used to wear. I was instantly swarmed with fond memories of living in Japan. This demonstrates the power of our sense of smell. Many retailers try to promote themselves to consumers primarily through visual stimuli: the aisles in the store are tidy; flashy signs indicate sales or new merchandise; plastic models are displayed wearing the store’s merchandise, and so on. Although these visual displays are important to drive consumers to the stores, if the retailer was to draw consumers with one of their other five senses (sight, sound, smell, feel, and taste), we can well imagine how successful they would be! I heard a story of a woman who went to a department store to purchase a purse and ended up in the bathing suit aisle instead. It was the middle of November and she had no intention of purchasing a bathing suit at that time; however, she was drawn to that section of the store. While talking with a sales representative she learned that there was a coconut scented air freshener in the section and the smell of coconuts had reminded her of the sunscreen she used in the summer, inspiring fond memories and the purchase.

In order to compete in the increasingly competitive retail environment, stores must use everything possible to differentiate themselves from their competitors, drawing in consumers. The more senses that they can please, the greater the chance of success they have of drawing consumers and therefore increasing sales. A restaurant could design their venue to allow a ventilation system that circulates the aromas from the kitchen onto the street. Furthermore, they could play calm music in the entry and have some freshly baked bread at the entrance for prospective customers to taste. The colouring of the table clothes could match the curtains and the rug could compliment them. This restaurant would likely attract a higher traffic flow than a similar quality one within the same vicinity. This being said, it is important for the retailer’s image to be consistent with its product offering and RVP (retail value proposition). A fast food restaurant may not want to play the same music or have the same colouring as a higher end one, but it could attract consumers’ senses through different means.

Similarly, a retailer could design and patent a scent. This scent would be worn by the sales staff, put in the bags, catalogues, flyers, etc. This would ensure that every time the consumer received information about the retailer past experiences and purchases would run through their mind.

The theory of attracting consumers by playing to their senses, may partly explain why online-grocers have not captured a larger share of the grocery market. Although many customers complain about the time that it takes to go grocery shopping and how inconvenient it is, many will choose driving to a physical grocery store rather than purchasing products online and having them delivered. This is because customers like to touch, smell, and often taste food before they purchase it. Similarly, I do not think that online clothing vendors will ever overtake physical retailers because people like to try on clothing and feel the material before they make a purchase. The internet is often used as a source of information pertaining to a brand or product, but consumers will purchase a product at a physical retailer rather than online. Online purchases are often products that customers are familiar with before purchase. For this reason, I think that online retailing, although it will grow as a retailing channel, will never overtake physical retaining.

In conclusion, in this increasingly competitive market place, it is imperative the retailers differentiate themselves and attract customers through new and innovative means. Although visual appeal, product assortment, quality, and customer service are still important to consumers, increased appeal is required to gain customers. If you would like to learn more about this theory please visit Martin Lindstrom’s website (http://www.martinlindstrom.com). Martin is an advertising guru who speaks around the world about his theories on advertising and building brands. He is the CEO and founder of BBDO Interactive Asia and co-author of numerous books including Brand Sense.

The Future of Retail -- Online Retailing?

In January 2006, the $26 billion retail giant, J.C. Penney Company, announced that its Web site, jcpenney.com, has reached a milestone of $1 billion in annual sales. More than 300,000 items are available on the site, launched in 1994. “As we acknowledge this achievement, we believe the Internet continues to provide a significant growth opportunity and look forward to maximizing jcpenney.com's full potential as an integral of our long-range plan.” said Myron (Mike) Ullman III, chairman and CEO, J.C. Penney Company.

The rapid growth of jcpenney.com into a billion-dollar business raised lots of discussion about online retailing, making the already hot topic even hotter. Prompted by the interesting discussion about online retailing in the class of Eddie Bauer, I did some research in this area, here are some of my thoughts regarding several aspects of Online retailing.

What's the long-term prospects of online retailing?
Online retailing is reportedly growing 26 times faster than the high street, as large numbers of consumers continue to switch to buying online, especially for high ticket discretionary purchases such as LCD TVs and digital cameras, motivated by convenience, huge choice, rich information and significant savings that the internet can offer. While scare stories predicting the death of the high street have as yet proved unfounded, e-commerce appears likely to take an increasing share of retail sales in the years to come, and the extent to which this will affect traditional “bricks and mortar” retailers in terms of sales.

As a matter of fact, online retailing is entering a new phase in its evolution. What was once an industry characterized by entrepreneurial dot.coms, targeting the discretionary spending of the Internet-savvy consumers, is fast becoming the domain of the traditional retailers, selling both necessities and discretionary items to the broader population.

The long-term prospects for online retailing are strong. Consumers are now migrating to the big brands with an online capability. While they want the convenience of “always available” shopping, they are also demanding higher levels of performance from retailers in all aspects of the online shopping experience. Demand for goods and services online will continue to grow as consumers become more and more accustomed to multichannel shoping.

Who will win in the online battle?
Is pure e-tailers, traditional retailers or mail order companies to be the winner? As we all know, they all have their own strengths and weakness in terms of experience, operation efficiency, economy of scales and cost structure, etc. According to a new report from Boston Consulting Group (BCG), The Next Chapter in Business-to-Consumer E-Commerce: Advantage Incumbent, bricks-and-mortar retailers have a golden opportunity to use their inherent advantages to grow customer share dramatically.

Traditional retailers are quickly becoming the dominant retailers online because they are the best positioned to master the economics of online retailing and capture growing consumer demand. The greatest opportunity belongs to these traditional retailers that can establish miltichannel relationships with their customers, blurring the distinction between channels and fundamentally altering the way people shop.

Besides the incumbents, there are two other types of retailers that will succeed in online retailing. One is the Attackers, pure e-tailers that have achieved the scale needed to reduce total systems cost and build competitive advantages in key areas such as brand awareness, procurement, fulfillment, customer acquisition, and service. Amazon is a prominent example here. Another potential winner is the Niche Players, small bricks-and-mortar retailers and pure e-tailers that have built a strong and loyal franchise with a limited target population. The loyal customer bases ensure a stream of future revenues and eliminate the need for continual spending to acquire new customers. Given the scope and the size of niche players, however, they will have only limited influence on the online field.

Above discussed just covers some aspects of the online retailing. Like many others, I believe that the Internet is the wave of the future. As more and more retailers are probing online, we believe the competition will become even fiercer. What should we do? Where shall we go? As with all things new and wonderful, there are bound to be some rough patches along the way. In the next posting, I would like to discuss the issues that need to be addressed in the online retailing to make it a "hit".

Apple of my “i”

Yesterday marked a special day for Apple with iTunes selling its 1 billionth song. Not too shabby considering this feat was achieved in a mere 34 months, which equates to just under 1 million songs downloaded per day. And to mark this milestone in style, Apple generously rewarded Alex Ostrovsky with a 20-inch iMac, 10 iPods and a $10,000 gift card. Indeed this is just one of many celebrations in the last few years for Apple as their stock price and popularity continue to soar. How much has Apple’s stock risen? Well, if you had invested a couple of thousand dollars in early 2004 and sold in January, you would have seen your shares inflate more than 700%, enough to pay down a hefty amount on that Ivey loan.

It was April Fool’s Day, 1976, when Apple I was released by Steve Wozniak and Steve Jobs. It was the first single circuit board computer with a video interface, 8k of RAM and a keyboard. Shortly after came Apple II, an instant success that really put Apple on the map in the tech world. Millions of users flocked to it, which in part allowed Apple to stay afloat during their rocky first years as they made attempts to develop new computer platforms. The next couple of decades saw some success and many failures, but fast forward to the early 2000’s and again we are seeing Apple revolutionize the technology world with the iPod. All technology and product innovation, or is there more to their success?

In October 2001, the iPod was launched as Apple’s solution to the digital music industry. The original iPod was impressive not only for its technology capabilities, but also because it set new standards for coolness with its sleek design and compact size. The MP3 players just could not keep up. Since then, Apple has released newer versions of the original iPod with upgrades and greater capacity each time, with the most recent addition to the family, the iPod nano, again making waves in the digital music world. As thin as a pencil and only 1.5 oz in weight, yet able to hold upwards of 1,000 songs and 25,000 pictures – it truly is unbelievable!

Some may have wondered, including me, would this version do as well as its predecessors? Well a few trips to the mall over the Christmas period was all that I needed to be convinced YES! Like the hoards of others, I searched frantically to find an iPod nano. It was amazing to watch as people clamored over each other to get their hands on one. The black version had already sold out and what remained of the white ones was rapidly running out. Needless to say, the iPod nano was the hottest selling Christmas product of 2005.

I have to ask myself, is this product truly so spectacular that everyone out there, from 6 to 60, simply must have it? Well, I believe the answer is yes, at least when compared to what else is available on the market. But I think that Apple’s ability to market the iPod has been equally important in creating their dominant position in the digital music industry. The iPod is simply a cool product that really draws in consumers because Apple has been able to make it easy to use yet highly advanced (technology wise). Even for those who are not up to date on the latest technologies, they know enough to know that if you want a music player, you buy an iPod. And it isn’t just Apple telling us that, it’s the millions of users, hip magazines and other forms of media that rave about this product and everything associated with it. I am equally impressed by the way Apple has accessorized the iPod, with everything from carrying cases, to FM tuner adapters, to speaker attachments. Even Audi and BMW have gotten on board by making their vehicles iPod compatible. As indicated in an earlier blog, SKU proliferation really is the way of retail.

Undoubtedly, the greatest accessory of all for the iPod has been the wonderfully successful iTunes online music store. Offering iPod users the ability to download high quality songs for 99 cents each, iTunes was launched during a controversial time when music piracy by the likes of Napster were under intense scrutiny. Looking back, Steve Jobs capitalized on this by timing the launch of iTunes perfectly, offering users a solution to an ever increasing problem of illegal file sharing. And what started as music has now expanded into the ability to download music videos and TV shows such as Saturday Night Live.

Another aspect of Apple’s marketing success has been their retail stores. Where better to find these cool products than the hip Apple stores that are a merchandising and architectural wonder? When Apple made the decision to open its own stores to promote its products and develop the brand, I was somewhat skeptical of their ability to pull it off. Why get into the highly competitive market of retailing when you could simply sell through the likes of Best Buy and others? What I didn’t understand was that the purpose of these stores was not just to make a buck, but rather to sell the experience of the Apple brand that we are all now so familiar with.

Stores have been strategically located in prime retail positions and offer a distinct experience of fun and coolness that attracts huge traffic. A specialty store and arguably a category destination, consumers have the ability to play with Apple gadgets and learn about products from friendly, low pressure sales staff. Indeed, a nice contrast from the stale and bleak atmosphere of your traditional computer company. While I am not sure how profitable the Apple stores have been from a profit and loss perspective, the advertising and brand experience of visiting an Apple store surely makes up for any profitability shortcomings. After all, it is the experience that Apple has been so good at creating that really contributes to their success in luring in the mass consumers.

Just when we start to wonder how Apple can innovate further, new products are released that further captivate us. Accordingly, one must ask what’s next for this innovating giant? As a not so creative person myself, I won’t hazard a guess, but I will bet that it will be great, and that again, we will flock on mass to stores to fill our hungry desires.

When too much data means too much trouble

In an age when data mining resources are plentiful and computers have been massively adopted by people in the workplace, never in retail history we had so much information about customers and the day-to-day operation. From inventory analysis to the average time spent in an aisle, retailers find endless options to collect data with the help of new methodologies, gadgets (like hidden cameras in the point of purchase) and soft wares. Specifically in the study of the shopper behavior, there are innumerable possible metrics to be used in the analysis of the interaction between people and commercial spaces:
- Average time spent in the store
- Average time spent in each section of the store
- Average time spent with sales associate
- Average traffic flow into the store
- Average number of sections visited
- Average number of products shopped
- Average number of products bought
- Average amount spent
- Percentage of passers-by noticing and entering
- Percent of shoppers who purchase
- Percent of shoppers assisted by region
- Percent of time each section is shopped first
- Percent of time each section is shopped (Hot Spots)
- Conversion ratio of Assisted shoppers
Just by taking a look at this sample that is advertised by a well-known research firm, one can infer retailers collect terabytes upon terabytes of information every day - anything from transactional data, to demographics, to product sales based on seasons. But what do they do with it? Do they even get the data neatly organized into an easy-to-retrieve database?
There are certainly companies which are successful in gaining value from analyzing their data, being one classical example, the gigantic Wal-Mart which uses its IT systems as a strategic operational strength. However, for every benchmark in the market there are many other retailers that must be totally lost.
My opinion is that a retailer should not attempt collecting data from shoppers unless it is used correctly. Mistakes can be made if the data is presented as a loose number or just a statistical pattern. Most often I’ve seen examples of companies that use information in the wrong context or without a real question to be answered. One example I came across in my research for this post is the case of a retailer that “discovered” that daytime temperatures peaked three days after a peak in tomato sales. This information is useless unless the retailer was intending to move into weather forecasting.
Data mining can identify valuable information about customers but the key issue here is that the retailer must be able to analyze the collected data and effectively put into effect the conclusions drawn from it. If not, getting back to basics like defining your retail value proposition to your target seems a better idea.

Tryvertising – the sampling “experience”

As competition increases providing more selections for consumers, retail businesses have to be more innovative in their marketing strategy when introducing a new product. A common marketing approach is sampling but the challenge has been a very low hit rate, only 1%-2%. Getting your brand into the consumer’s hand is a good thing but it is often not sufficient to capture a new customer or lure one away from the competitor.

Imagine getting potential consumers to interact with the product on their own turf, without pressure to buy, and increasing your chance to develop a relationship with them in the process – this process is known as “tryvertising.” This strategy certainly costs more and requires more effort, ranging from $30,000 for a one-day event in one city to several hundred thousand for a multiweek campaign. The benefits, however, can be tremendous, from getting potential customers closer to purchase to stealing loyal brand users away from the competition.

How is tryvertising implemented? BMW, for instance, would host annual Mini Test Fly event weekend in Toronto. About 1,700 people were invited to Downsview Park where they could “experience” the car over two days. Invitees were mainly potential customers who have visited a Mini store, expressed interest, but haven’t made a purchase. Attendees were broken into groups of 20 and given a run-down on the Mini. Participants were then allowed to drive through a course designed by professional drivers. Another example was Reebok’s “Try It On” campaign held at the Air Canada Centre last January. The effort was to promote the Pump shoe targeting 17-year-old males. A booth was set up during a Raptors game, and kids were invited to wear the Pumps and enter a jump contest. The winner in each age category was awarded a coupon for Footlocker and an autographed jersey from Raptors star Morris Petersen, who wore the same sneakers on the court. Another effective way to implement tryvertising is through partnering with established brands pursuing the same customer segment. Mercedes Benz in the States recently teamed up with the Ritz Carlton to promote the “key to luxury” package in which guests at the hotel also get a Mercedes CLS500 for use during their stay.

Does tryvertising work? Recent cases suggest so. Reebok’s Try It On campaign lead to a 45% sell-through at the Footlockers in the first few weeks (this had not happened in years). In the States, General Motors implemented a 24-hour Test Drive program which resulted in more than 110,000 sales within five months after the campaign. In addition, a research study conducted by IMI Canada yielded results suggesting there was a 50% increase in future intent to purchase among consumers exposed to tryvertising as compared to those exposed to all other forms of marketing.

I think the key success factor behind tryvertising is that there is no pressure to buy. Not having to deal with aggressive sales pitch allows the consumer to focus on enjoying the “experience” of trying the new product. Also when there is no sales pressure, the marketers would have a better chance of developing a significant relationship with the target. As we all know, establishing a relationship is the most powerful mean of attracting and retaining customers. Tryvertising is essentially a form of sampling but how the entire package is put together creates a whole new experience for the participants. It is much easier to throw away a shampoo sample or use it up and forget about it. It is much harder to forget about cruising in a brand new Mercedes for an entire weekend. Also, having enjoyed a good “experience”, consumers are more prone to want to make that purchase in order to own such “experience.” Consumers would also be more inclined to share their experience with others hence generating the powerful “word-of-mouth” marketing for the brand.

Tryvertising of course will not be effective for all products. Considering the costs and efforts involved, it would only make sense to implement this marketing tool for categories with higher priced items and where consumers tend to be loyal, such as cars, running shoes and technology.

CEM

Customer experience management
Customer experience management (CEM) is "the process of strategically managing
a customer's entire experience with a product or a company”
Marketing research has shown that about 70 to 80% of all products are perceived as
commodities, that is, seen as being more-or-less the same as competing products. This
makes marketing the product difficult. Marketers have taken various approaches to
this problem including: branding, product differentiation, market segmentation, and
relationship marketing.
Relationship marketing, (also called loyalty marketing) focuses on establishing and
building a long term relationship between a company and a customer. There are
several approaches that have been espoused including customer experience
management, customer relationship management, loyalty programs, and database
marketing.
CEM's critique of traditional marketing
The development of customer experience management originally started with a
critique of three existing marketing concepts. It concluded that the following three
concepts do not go far enough:
Marketing concept--Since the 1970s there has been a gradual shift from a product-.
technology-, and sales-focused orientation towards a customer- and market-oriented
approach by determining the wants and needs of customers and satisfying them more
efficiently or effectively as compared to competitors. However, the approach is still
mostly functional, with similarities and differences between competitors being
defined mostly by product features and customer benefits. In addition, the customer is
perceived as being rational, which is in most cases not the case, as e.g. Kahneman and
Tversky's Prospect theory has proven. Also, it is asserted that market research is
mostly analytical leaving little room for qualitative assessments of customer
relationhships towards products, services, or brands. It is claimed (by Shultz) that
traditional marketing, in practice, takes an inside-out approach (starting with internal
variables like production capabilities and available capital then moving to external
variables like customer needs), rather than taking an outside-in approach as marketing
theory requires.
Customer relationship management is claimed to be deficient because it primarily
consists of database and software programs used in call centers and thus, focuses too
much on quantitative data. By doing this, it is led by transactions rather than a desire
to build lasting relationships with customers.
Customer satisfaction is an outcome-oriented attitude deriving from customers who
compare the performance or value of the product with their expectations of it. It is
claimed that the customer satisfaction approach depends too heavily on outcome
oriented measures like satisfaction and too superficially on direct experiential
measures. A customer is said to be satisfied when a product's performance is above
the cutomer's expectations. Thus, traditional customer satisfaction techniques are
deficient if they don't help firms to understand and manage customers' experiences,
experiences that lead to the following equation: good experience = satisfaction.
CEM recognizes, as does all of marketing since the early 1970s, that customers are a
company’s most valuable asset. What makes CEM different from traditional
marketing is that it claims that marketing theory has seldom been implemented
adequately.
The CEM Framework
CEM is a methodology that tries to overcome the gap between theory and practice by
reformulating basic marketing principles. The result is that CEM stresses four aspects
of marketing management.
Although all marketing management and strategic management does all of these,
CEM supporters claim that they have a methodology that will yield better results.
Being convinced that the marketing concept is too product-centered, Customer
relationship management too focused on quantitative data, and customer satisfaction
too functional, CEM looks for another perspective on the relationship of a consumer
with a product or service. And what's key? The experience linked to it is the key.
This enables companies to strategically manage a customer's experience with a brand
and by doing so, achieve a truly customer focused management concept.
To accomplish this, a framework is required based on clearly defined company
objectives. Schmitt's book "Customer Experience Management" offers the following
five step framework that should help managers understand and manage the "customer
experience":
Step 1: Analyzing the Experiential world of the customer
- analyze sociocultural context of the customer (needs/wants/lifestyle)
- analyze business concept (requirements/solutions)
Step 2: Building the Experiential platform
- connection between strategy and implementation
- specifies the value that the customer can expect from the product (EVP = experiential value promise)
- Whereas steps 1 (Analysis) and 2 (Strategy) form the basis for CEM, steps 3, 4, and 5 are focusing on Implementation
Step 3: Designing the Brand experience
- experiential features, product aesthetics, “look and feel”, e.g. logos
Step 4: Structuring the Customer interface
- all sorts of dynamic exchanges and contract points with customers
- - intangible elements (i.e. value, attitude, behaviour)
Step 5: Engaging in Continuous Experiential innovation
- anything that improves end customers' personal lives and business customers' working lives
And finally, to bring all pieces together, a holistic approach is required that provides a linkage between the different steps and connects them with the organization.

Could the LCBO use some competition?

The LCBO has thrived on being an oligopoly for the last 79 years. With the retirement of long-time LCBO Chairman, Andy Brandt, fast approaching, the highly debate able question lingers on; should the Ontario government privatize liquor sales?

The privatization topic has been debated many times during Brandt’s leadership. His impressive skill at “schmoozing his political bosses,” along with the LCBO’s ability to meet customer demand and provide a wide variety of product, has been credited for successfully keeping the LCBO away from privatization.

During Brant’s 15 years as Chairman, he has made the LCBO more profitable than ever by changing the entire LCBO shopping experience (as we discussed in class). LCBO stores have been redesigned with all the “bells and whistles” including gift displays, tasting counters and offering up to 2400 brands of wine, beer and liquor. The staff have been better trained and the stores are larger “big box” type stores with a more modern overall appearance. Since 1991, sales have doubled to $3.6 billion, and the dividend to the Ontario government has also nearly doubled to $1.1 billion a year (Murray Campbell, The Globe & Mail, LCBO could use a splash of competition).

All these statistics are impressive; however, is the LCBO truly meeting the needs of the consumer? Some consumers feel the pricing and selection would be better under privatization, as is the case in Alberta, who privatized their liquor sales back in 1993. With the “big box” trend, there are also 28 fewer LCBO stores than there were in 1989, which mean fewer outlets for the ever growing population. Former Finance Minister, Greg Sorbara commissioned a panel to review the distribution and sale of alcohol in Ontario. The study, which was completed last summer, concluded that the LCBO was missing out on $200 million in untapped revenue annually and advised that stores be sold off, which was of course rejected. (http://www.theglobeandmail.com/servlet/story/LAC.20060209.CAMPBELL09/TPStory/?query)

Even though most of the evidence points toward privatization being more convenient for customers; offering more variety at cheaper prices, I’m still not convinced it’s the best thing for Ontario. After living in a border city for five years, I’m not so sure I would want Ontario to allow liquor sales at the corner variety store. I believe that the sale of alcohol needs to be controlled and monitored.

When traveling across the border into Detroit, you can pick up a case of beer or a bottle of liquor at almost any variety store. Sure, you can buy beer for $15.00 a case, but the selection is small and the atmosphere is less than desirable. You’re sure to find a drunk trying to purchase his “King Can” of beer from the 18 year old cashier, who’s had little to no training about selling alcohol to intoxicated customers. You are not very likely to find a liquor store offering anywhere near the service or selection of the LCBO.

I would not have a problem, however, with Ontario allowing added competition into the market with some regulation, just as they have done with the Beer Store. Ontario, especially the large urban centers like downtown Toronto, could use some premium vintage stores or higher end wine stores to tap into the $200 million market the LCBO is leaving untouched. I also feel that the LCBO is now in a better position to compete with privatized stores. They have designed premium big box stores with a warm, welcoming atmosphere. Ontarians have become accustom to this type of service and selection in a one-stop location. The privatized corner variety store would have a hard time competing with the selection offered by LCBO. If anything, allowing the corner store to sell beer and liquor would have more of an effect on the Beer Store sales, as it is these products that tend to sell better at corner store locations.

The LCBO is far too profitable for the Ontario government to sell off; however, the added competition might just give the LCBO that little extra push to make their stores even that much better. I do not want to see beer and liquor being sold on every corner, as that would only promote irresponsible drinking, but adding more upscale competition to the mix wouldn't be such a bad thing. Murray Campbell sums it up perfectly in his article stating, “If the LCBO is as efficient as Mr. Brandt says it is, it will have no trouble dealing with the competition.” With Mr. Brandt’s retirement just around the corner, it will be interesting to see if the new chairman of the LCBO can fight off privatization as successfully as Mr. Brandt was able to.

China’s Local Retailers VS Global big giants [1]

[Blog1]Problems China’s retailers are facing

In the past 10 years, China retail industry has gone through the procedure that took western countries about 150 years to develop. Almost all 20 kinds of retail operation model that were developed through 8 times of retail reform in developed countries appeared in China retail market. The number of big retail stores in a city has evolved from just few to more than tens, making competition intensive more and more.

In 2005, supper store format becomes the trend of China’s retail industry. To compete with international retail giants, local retailers begin to aggressively merge and consolidate, as well as develop merchandize. For example, Shanghai Lianhua, a top three local retailer in China, planed to expand from 1921 to 8,000 stores in the next five years. Another top retailer, Hualian, divided China market to six regions and established super retail stores groups to enhance the entry barrier and gain economy of scale.

However, expansion and consolidation are not always successful. There are few failure well-known cases of retailers in China about expanding too quickly. The failures are mostly attributed to lack of internal human resources, management experience, strong capital support and corporate infrastructure. Local retailers are facing very difficult situations if irrational expansion could not be stopped.

Specifically, there are some problems China retailers are facing now:

1. Scale
Compared to big international giants, the scale of local retailers in China is much smaller. Even though through few years of merger and consolidation, there come out few big nation-wide or region-wide local retailers, the size and sales are still not comparable to big global retailers. For example, in 2003, the sale of No 1 retailer in China in terms of sales, Shanghai Bailian, was US$6 billion while that of WalMart was US$260 billion.

2. Merchandize
Local players could not compete with global retailers in merchandize now. In US, sales of merchandize accounts for about 80% of the total retail market while just 20% in China. Meanwhile, the standardization level of most of the local retailers is low and the internal information systems and distribution centers have not been well established. Lack of management experience and low standardization become the big obstacles for local retailers to develop merchandize.

3. Speed of development
According to a research of more than 14000 stores of 400 retail chains in China, including Carrefour, WalMart, Metro and other 40 international retailers, conducted by China Business Information Center, the speed of expansion of local retailers was obviously fast than that of global players in China. In 2005, in terms of the number of stores, local retailers accounted for 87.3% and expansion growth is 32.35% while global retailers 12.7% and 21% respectively.

However, in terms of sales growth, global retailers in China developed faster than local retailers. According to the research, the sales growth of local retailers which accounted for 88.5% of the total samples was 29.6% compared to the last year while that of global retailers which accounted for 11.5% was 33%. Also, the share of the sales of global retailers also increased 1.1 percent compared to that of last year. Also, in terms of sales of per square, international retailers kept RMB 20,600 (around US$2,500) while local marketers RMB 14,000 (around US$1,750).

4. Financial performance
According to a research on the financial data of global retailers of WalMart, Carrefour, Metro and local big retailers of Lianhua, Hualian, Beijing Hualian (names are pretty close, be careful of being confusedJ), the debt/asset ratio of local retailers was 70% which was pretty much higher than that of global retailers. At the same time, the gross margin of top local retailers was around 12% while average gross margin of global giants was 21%. And, net earning of local retailers was just 2% of the sales while that of WalMart was 3.5%.

To sum up, obviously, local retailers in China were operating with a high debt/asset ratio while kept a low gross margin, which was the big barrier for them to expand due to lack of enough capital raised by them. On the other hand, there were still some constraints for local marketers to go to capital market to raise money. Therefore, capital became the biggest issue for local retailers to expand considering that one of the natures of retail business is economy of scale. Lack of management of operation, marketing, low productivity of sales, without efficient supply and distribution centers are top reasons that make local retailers very difficult to compete with global giants from management and operation perspective.

In next blog, I will put some of my thoughts on how do local retailers do with those problems.

Some thoughts about the strategies of Wal-Mart and Carrefour in China

China's retail market is a key market for the world's top retailers for its size and growth trajectory (US$730 billion with a double-digit growth rate). Until 2005, 70% of the world's Top 50 retailers have entered the China market. Wal-Mart and Carrefour are often compared, since they're the biggest foreign players.

Wal-Mart entered China market in 1996. With 35 stores in 2004, its revenue reached US$930million, which put it to the rank of 20. After the initial stage, Wal-Mart adopted go-it-alone strategy in most cities and its pace of opening new stores is slow. It focused on penetrating the affluent South China. Due to its tens of billions of purchasing in China, it maintained a good relationship with the government. Its stores were opened in relatively remote suburban areas. Unlike the industry norm, Wal-Mart is not requiring any listing fees from its suppliers. Instead, Wal-Mart helped the suppliers to improve their supply chain efficiency. Wal-Mart centralized its decisions in negotiating purchasing contracts. On the one hand, it helps the company to gain economy of scale, but on the other hand, it prohibits the flexibility to adapt the product assortment to local needs.

Although in the case of “Wal-Mart”, analysts claimed that Wal-Mart China began to gain profitability since 2002. According to statistics provided by China Retailers Association, Carrefour is the only foreign retail company whose bottom line is in black. Carrefour ranked No.5 retailer in China with a sales revenue of US$2 billion. Carrefour entered the market in 1995. Since then, number of its stores has reached 65, with 20 of them in Eastern China. Its focus used to be North China and Eastern China, but it announced its plan to penetrate the less wealthy West China market. In this way, it can avoid the cut-throat competition in the prosperous Eastern China and at the same time, leverage the favorable policies offered by local governments. It also planned to open 10-12 stores each year in China, with one third to be located in West China. Unlike Wal-Mart, Carrefour's stores are usually located in a relatively prime location. It charges huge amount of listing fees to its suppliers, which caused a lot of complaints from smaller suppliers. Its store managers have more decision power in product assortment.

Despite many differences, the two retailers also share some similarities in their strategies: both of them own the property instead of leasing. Both are using China as a sourcing platform for its global market.

I personally believe Carrefour is more successful than Wal-Mart in the China market. Its success is due to three reasons:

• Localization - For example, Carrefour chose locations near bus stops to open its stores, since just a small portion of Chinese people own cars and quite a lot of people take buses to Carrefour. (Some biggest local retail stores even provide free shuttle bus for its customers.)
• Good relationship with the local governments – Before opening a new store in a second-tier city, Carrefour promises to create 500 jobs in the city.
• Good partnership - Partnership with strong local retailers not only can enable Carrefour to customize its product assortment to the local customers' specific needs, but also gave it access to the strong distribution network of its local partners. Currently, Carrefour has 32 strategic partners and 31 joint ventures in China.

Other than Carrifore's strengths, there is one more reason to explain Wal-Mart's less brilliant scoreboard: One of Wal-Mart's greatest strength is its strong IT systems, such as EDI, Retail Link. In China, a lot of its suppliers are local companies, who may have little IT systems installed, and would deliver the products directly to the Wal-Mart stores. As a result, Wal-Mart's IT system became least powerful.

With the entry of Tesco, retail competition in China will be even more fierce.

What makes Tesco Tick?

"Tesco is the U.K’s largest and one of the top supermarket retailers in Europe, and Private Brand is a core piece in its strategy. Not only provides the company a wide variety of PB products to customers, Tesco also follows the customer into new areas of retailing services such as financial services (Tesco Personal Finance), internet shopping(Tesco.com) and telephony (Tesco telecom) under the company’s name. The following article was released in 2003, when Tesco announced its launching of Tesco telecom. Though the article is lengthy and somewhat old considering the dizzying pace of changes in retail business, it helps readers to understand how one of the PB leaders in supermarket retailing has been creating the company’s value proposition and expanding it to the technically-driven enterprises. "


It is the Tesco brand-whether that is a range of premium quality chocolates to baked beans in its Value economy label range to Tesco Clubcard, to Tesco.com to Tesco Personal Finance and now Tesco Mobile.

If proof was ever needed that a successful private label strategy can extend far beyond grocery and household lines then Tesco, the market-leading supermarket retailer in the UK and a leading global retailer, is a fair example if not an exemplar of the art.
For example, private label is extending its tentacles to the world of telephony at Tesco with the pre-Christmas 2003 launch of Tesco Mobile, a range of mobile phones [cellular phones] into an already crowded branded UK market.
In June 2003 Tesco and UK mobile phone provider O2 announced the creation of a new 50:50 joint venture, Tesco Mobile. The new company will sell exclusively Tesco branded mobile services in Tesco stores across the UK, using O2's technology, and is expected to grow towards two million customers.
Tesco Mobile aims to launch by the end of 2003 with the objective of having branded pre-paid phones on sale in stores and through its Internet shopping business tesco.com in time for Christmas this year. Tesco.com is working with Safeway in the United States but Tesco would not confirm whether privatelabel cellphones will be available in the United States market.
The next plan for the Tesco private label mobile phone business in the UK is to launch contract phones. These contract phones will be launched by tesco.com. Over the first two years of operation each company - Tesco and O2 - will invest £8 million in the joint venture.
The new service will give Tesco customers access to supermarket style offers and the chance to earn Clubcard points, Tesco's loyalty card, when buying handsets and airtime.

The Tesco Mystique

Sir Terry Leahy, chief executive of Tesco, said: "Customers tell us that they want simplicity and value from a name they can trust and that is what Tesco Mobile will offer. The service will be convenient. You'll be able to buy handsets in store or over the Internet, and charges will be simple and clear.
"Customers like our new retail services. Look at the success of Tesco Personal Finance and Tesco.com. They are keen for us to enter the telecoms market." Tesco has made huge in-roads into financial services through Tesco Personal Finance through services such as credit cards, loans, and car and home insurance.
It is a mistake to look at Tesco private label, or own label as it is better known in the UK, in isolation. It is an integral part of a far wider picture, namely Tesco the brand. Tesco is a brand whether that is a range of premium quality chocolates to baked beans in its Value economy label range to Tesco Clubcard, to Tesco.com to Tesco Personal Finance and now Tesco Mobile.
Private label is a core piece in the Tesco strategy jigsaw alongside other key pieces such as a strong management at board and executive levels, and a progressive supply chain, greatly helped by Tesco's long-standing and leading role in ECR Europe. Indeed Sir Terry Leahy is currently co-chair of ECR Europe and hosted the annual conference in Berlin in May this year.
Although ECR Europe is dominated by retailers and big brand manufacturers, private label has a crucial role to play in ECR European-style as it aims to reduce costs in the supply chain by working together more efficiently to the ultimate benefit of the customer-consumer. A point made to me by Sir Terry Leahy when interviewing him in Berlin.

Own Label Share

It is certainly the case at Tesco where own label penetration is around the 45 per cent mark as an average across the stores in the UK, which range from convenience stores to petrol forecourts to supermarkets to hypermarkets. Leahy, a former buyer at Tesco, also acknowledged that the working elationship between retailer and private label manufacturer is ECR in action. He cited fellow UK retailer Marks & Spencer, which is close to 100 per cent own label, as a traditional form of ECR, except of course it wasn't called by an acronym such as ECR before the 1990s.
Other core pieces in the jigsaw include Tesco Clubcard - a successful and well datamined loyalty scheme and not "electronic Green Shield stamps" as rival UK retailer Sainsbury's perhaps arrogantly calledClubcard when it was launched in 1995.
Turning to online, Tesco.com is acknowledged as one of the few dot-com shopping enterprises to actually declare a profit anywhere in the world. Significantly the Tesco.com model has been exported to Safeway in the United States as mentioned above.
Tesco Clubcard, Tesco.com, Tesco Personal Finance and now Tesco Mobile are Tesco brands and it could be argued that they are private labels because they promote the Tesco name, they are products, and they reflect the company's value proposition.
It may be an holistic approach to the private label world but it is 21st century thinking. In any case who cast the rules in stone to say that private labels cannot be extended to technically-driven enterprises such as loyalty cards, on-line shopping and services?
Pinning all the above pieces together is a focus on the consumer, which is actually a passion bordering on an obsessional focus on the customer. Tesco's television advertising campaigns in the UK, which bear the tagline "Every little helps," have featured Tesco private label ranges to persuade UK consumers that Tesco stands for quality and/or value.
The commercials feature actress Prunella Scales as a bit of a busybody but a nice old duck really as we English might say. Some may remember Scales as Sybil Fawlty in John Cleese's "Fawlty Towers" comedy series when she played a far more scabrous creature. "A Benzedrine puff adder" as John Cleese's character Basil Fawlty once called her - out of her earshot of course.

New PL Categories

The big move by supermarket retailers in the UK the past few years, especially market leader Tesco and number two player Asda Wal-Mart, has been into non-food. Particularly white goods such as televisions, DVD players and mobile phones.
Up and until Tesco's entry into the mobile phone market, supermarket retailers have concentrated their private label development and investment in non-food categories such as health and beauty care, household products, apparel and stationery.
However, now that Tesco has broken into brand-dominated white goods with Tesco Mobile, how far away is a Tesco TV or a DVD player? After all, who would have predicted ten years ago that Tesco would be a bank and a leading financial services player, or that it would introduce the world's most successful and profitable internet shopping company?
Tesco does not stand still and one thing is for sure, the UK is not the end of its ambitions for any private label development. It has operations in Europe and Asia. Since financial irregularities emerged at Ahold earlier this year, Tesco's position as a top five global retailer has continued to ascend. Even if the 'speculationistas' are mistaken about Tesco taking part of Ahold's global business, Tesco has a proven track record in global expansion.
It is a slowly but surely catchy country approach, as Sir Terry Leahy said at the ECR Europe Conference in Berlin. "We're focussed on a limited number of markets so that we really concentrate on building up a good network of stores. We spend more capital per country than others do and we get the reward of getting to market leadership first. And also we're able to behave in those markets like Tesco. In other words we focus on the customer, we build our good network of stores and try to go on a virtuous circle of big volume coming in, getting economy of scale from that, and investing that back into the customer offer."

Finest Premium Range

Tesco.com is now promoting online four new own label health and beuaty care ranges. Shown here is the Spa Range representing a new range of bathing, body and foot care products that take inspiration from countries with strong restorative bathing traditions such as Morocco, Bali and Iceland. Other new ranges include the Voyage Range representing products with natural ingredients from exotic destinations; Skin Wisdom Range for different skin types; and the Denise McAdam Range created by and named after this celebrity hairdress exclusively for Tesco.
The Tesco Finest premium range, which was launched in 1997, has over 800 products including chilled ready meals, bakery, sandwiches, freshly cut flowers and alcohol such as wine and Scotch whisky. The Finest brand was valued in 2002 by Tesco at over £400 million [US$550 million].
Tesco Finest is also sold internationally. For example in Taiwan Finest jams and sauces are retailed by Tesco.
A large chunk of the Tesco Finest range was relaunched in the UK this autumn. The new Tesco Finest range comprises hundreds of new dishes, inspired by classic menus from the finest restaurants.
There are over 350 new lines to choose from, including starters, main courses, vegetables and desserts - in addition to new specialty pizzas and breads.
Finest Slow Roast Pork, 700g - £5.99 [$9], for example, was inspired by the recent resurgence of this classic Chinese dish. The Finest version takes a whole belly of pork, hand-trimmed to remove excess fat. It is then marinated in an exotic mixture of five spices and honey. After slow roasting for two hours, until meltingly tender, it is then portioned into four pieces and laid on a bed of braised red cabbage. The sweet and sour flavours of the cabbage blend perfectly with the juicy and sweet roast pork belly.
Tesco said: "This attention to authenticity and detail enables the customer to enjoy a dish which would otherwise take them over four hours to replicate in the kitchen."

Tesco Value Range

At the other end of the price scale, the Tesco Value range celebrated its 10th birthday in June 2003.Tesco Value lines are found in all Tesco's European markets. Tesco Value vodka and cheese are sold in Tesco Hungary stores, Tesco Value dumplings in Tesco Poland. The Czech Republic has around 200 Value SKUs. In Asia Tesco Thailand retails over 500 Supersaver lines while in Taiwan Value lines include fresh fruit and vegetables.
Tesco Value's aim is to provide everyday basics at the lowest possible price. Since its UK launch in 1993 with 44 SKUs, the range has expanded to include almost 1200 SKUs - including non food items such as film, household goods and even clothing.
Tesco pointed out: "In developing the Value range, research was used to identify those lines that formed the core part of a shopping trip - everyday essentials. These shopping basket basics needed no enhancement from a brand name or image - they were bought purely and simply for what they were and what they delivered.
"Today's top fifty Value products are representative of those products which continue to form the core part of most customers' shopping trip. They provide a fascinating insight into what we buy most frequently - and what products we are happy to choose on the basis of price - without the enhancement of a brand image, glossy packaging or a premium promise. From Chicken Fillets to Chopped Tomatoes and Kitchen Foil to Fabric Conditioner, the Value range has universal appeal to a broad cross section of different customers."

Healthyliving Range

Another interesting private label sub brand is the Tesco healthyliving range. It includes more than 400 products that are aimed at making healthy eating "completely effortless," according to Tesco.
The range provides meal solutions for breakfast, lunch and dinner as well as filling snacks and desserts. The criteria for Tesco healthyliving products are strict. Fat content is less than 3% or half that of a standard product. Salt and sugar content are also strictly controlled.
For convenience sake, all healthyliving ready meals can be microwaved, and most are suitable for home freezing.
The extensive choice of dishes available includes dips, wraps, salads, snacks and a wide range of ready meals - from the traditional, to the exotic and the imaginative.
Newly launched this year, the healthyliving five-a-day range includes traditional favourites for mid week suppers, such as Cumberland Pie (430 cals, 6.8g saturated fat), Braised Steak and Vegetable Mash (360 cals, 7g saturated fat), or Beef and Chunky Vegetable Lasagne (354 cals, 4.4g saturated fat).
A new range of healthyliving Gourmet Ready Meals features a variety of dishes such as Balsamic Glazed Chicken (288 cals, 0.8g saturated fat), Chicken with Smoked Cherry Tomatoes and Mozzarella (209cals, 1.7g saturated fat), or Beef Bourgignon with Mustard Mash (441cals, 6.1g saturated fat).
For dessert the healthyliving range includes Cherry Cheesecake with a cheesecake, biscuit base and cherry compote topping (181 cals, 2.8g saturated fat), and a Strawberry Trifle with layers of light sponge, smooth custard and fresh cream (161 cals, 2.1g saturated fat).

The question is, will Tesco customers be making orders for their treats and sweets on their Tesco Mobiles?

World has a similar experience where you "see" ghosts riding along side of you, when they really aren't there. And, of course, Star Wars has shown us the use of holograms to instruct future generations.
Why not think about the application of the hologram principle to private label. It would make ordering over the computer much more interesting to be able to almost feel the product you were looking to buy, turn it around and examine it. It would open up doors to very different types of promotion as the customer walked through the store, like seeing and hearing product endorsements by interacting with people or associations that appeal specifically to the individual customer walking by.
Perhaps, customers will walk through a hologram of a store without having to actually walk or bump into customers or even interact if you didn't want to.
The future is there to talk about and dream about. Whatever the customer really wants and would react to usually ends up in the realm of reality.

Wal-Mart vs Carrefour in China

Why Wal-Mart lost to Carrefour in China

According to the statistics data from China Retail Association in 2005, Carrefour is the No.1 retailer in China which has 70 stores with 2 Billion US$ sales in China. Wal-Mart, the biggest retailer in the world, 3 times larger than Carrefour, opens 56 stores with 950 Million sales in China. Not only the number of the Wal-Mart stores, but also the quality of the stores, I mean the profitability, the single-store sales is lower than that of Carrefour. Wal-Mart entered in China Market in 1996, and Carrefour came just one year earlier.

Why the gap is so big now? I think there are several main reasons as following:
Localization: Carrefour divides China market into 4 regions, and each head of these regions can decide 80% of whole cases. Since China is so big that in each province the customers has different consumption pattern, the decision process is critical to adopt to the local market. And Carrefour also purchases 60% of goods from local suppliers since Chinese customers prefer fresh food rather than freeze food. But Wal-Mart is more centralized, the head office in Shenzhen makes the main decisions, and although it also buys part of goods from local suppliers, the percentage is much lower than that of Carrefour.
Supply chain: Wal-Mart is famous for its high-efficiency, high tech and global supply chain. But in China, Wal-Mart does not have this advantage because government limits the usage of the satellite, the transportation system is not as good as it in USA, and as I mentioned above, Chinese customers are so different in different places that Wal-Mart could not fully execute the advantage of global sourcing.
Location: Carrefour mainly focuses on the 1st tier cities such as Shanghai, Beijing and Guangzhou, where have the big purchasing power, and its stores usually locate in the downtown. But Wal-Mart uses the similar strategy as USA’s, opens the stores in 2nd tier cities firstly, and its stores locate in the edge of downtown. Since only less than 10% of Chinese has car, so it is not convenient for them to go to the suburb where Wal-Mart stores locate even Wal-Mart provides the buses to transport the customers.
Speed and flexibility: Carrefour takes a risky strategy in China, it builds up partnership with some local retailers or others to avoid the Chinese policies which restrict the foreign investment in retail market.(now is open after joining WTO). This is very important for Carrefour to expand rapidly, it often open some stores simultaneously. But Wal-Mart is more patient to wait the release of this policy, it opens store one by one.
Pricing: The best weapon of Wal-Mart is “lowest price every day” in the world, but it seems not so powerful in China. There are 3 reasons, one is price sensitivity. Carrefour stores are located in downtown where the customers have relatively strong purchasing power, they may not care about very small price difference. 2nd, is the price. As I mentioned in supply chain, Wal-Mart does not have big advantage in sourcing for the local market, so the price difference between Wal-Mart and Carrefour is very small. 3rd, Even some customers are price sensitive, but they do not want to spend long time on the bus to suburb for just some items.

Of course, Wal-Mart now is speeding up after 10 years preparation, and it also adjusts the strategy to Chinese market such as entering 1st tier cities, opening more stores, relaying out the display. So although the ranking gap between Carrefour and Wal-Mart in China retail chain is big (No.1 vs No. 17), but Wal-Mart is always the strongest competitor wherever.

Japanese GMSs' challenge

We discussed about the future of department stores in the class. In Japan, there is a similar survival issue for a unique store format that used to prevail Japanese retail industry; General Merchandize Store (GMS). GMS has wide range of merchandize which is comparable to Sears in North America, and also has grocery division under one roof, multi-story store.

GMS emerged during 1970s when Japan enjoyed high GDP growth and per-capita disposable income surpassed $15,000. During the period, GMS changed shopping life by offering wide range of products—from chopsticks to clothes, appliances, and furniture—at cheaper price, and “one-stop shopping” convenience. Conventional specialized stores and small grocery stores running on small family operation disappeared.

In the mass consumption society, GMS business model worked well despite of lower margin. However, GMS started losing its leadership position in retail industry in 1980s, and during the 10 years of recession began in early 1990s, most of local GMS consolidated with national GMSs.
There are several reasons for the downfall of GMS:
Matured Consumer
As GMS focused on per-tsubo (Japanese unit of area, equals to 3.3 square meters) sales, they lost breadth within a category and focused on basic, staple product in each category. They lost matured consumers seeking something different and fashionable.
Emergence of specialty chain stores
Not like pop-and-mom specialty stores, new specialty stores have more depth and breadth in the category, and more efficient management.
Aging and shrinking population
Japanese population finally started declining in 2005. However, working-age population which influences on overall consumption already started shrinking in 1996. Low margin, high-volume sales business model cannot grow in this environment.

Currently, there are three national GMSs – Jusco (Aeon group), Ito-Yokado (Seven & I Holdings), and Daiei (Daiei group). Daiei is under public restructuring scheme, leaving Jusco and Ito-Yokado as only actual survivor.
These two companies have different strategies to revive. Jusco is strengthening relationships with specialty store tenants. It seems like Jusco is transforming itself to more of a mall developer, denying GMS concept.
On the other hand, Ito-Yokado focuses on improvement, believing in GMS’s raison d’etre. It completely changed its attitude on merchandizing and understanding customers. It picked out a top clothing designer of a famous Japanese brand and restructured its PB clothes. It shares information with high-end department stores in the same group, and establishes much finer segmentation of customer. The launch of new PB clothes resulted in successful turnover of the division.

Initially I thought there would be no way for GMS to survive. However, Ito-Yokado’s approach gave me another perspective. There must always be someone to fulfill basic needs – but in a more matured consumer market, even the meaning of “basic” varies, and retailers must be capable of understanding it.

The Actions in Store

Increasing competition is now dramatically leading to in-store promotion and advertising, which as critical marketing tools to attract and impact consumers’ purchasing behavior. In order to drive the shoppers’ attention to a specific brand and generate sales, each merchandiser is emphasizing on maximizing the effectiveness of in-store promotion among products for shelf space. The major triggers of the increased application of this promotion are intensified competition and increased number of products available inside a store.


The “in-store media" covers everything from shelf-talkers, displays, smart shopping carts, store floor/windows. There are audio systems and giant TV screens broadcasting a blend of brand and promotion messages of shopping. Shopping coupons and live demo of new products are important parts of this mix. Given new technologies, well- positioned, customized message may be easily and quickly presented to the potential target audience by advertisers. AC Nielsen’s study shows that 80% shopping decisions are made inside store, at the point of sale/purchase, rather than before customer entry stores. That’s why more and more marketers are striving to put effective impact on consumers’ on-the-spot decision. We are not surprising to see P&G, Kellogg’s, have developed on-floor advertising programs; Hallmark created a complete card-and-gift display system to leverage its brand clout in superstores. In-store media is an increasing competitive arena for the majority retailers and in-store is the third-largest advertising channel in the U.S. following network TV and newspaper, at about US$19 billion in annual revenue. Even AC Nielsen U.S has introduced Promotion Tracker, an assessment service for consumer packaged goods industry.

As retail marketers, the following should be put at the top of their agenda:


· Understanding shoppers

A key factors lies on the identification of different shoppers’ preferences and purchasing behavior among different buying groups. For example, housewives are more focusing on “whole family benefit” and youngsters are more attracted by new launches and creative promotions. Retail marketers should design and implement specific targeting communication messages to different segmentations and groups and help their final decision making influence in-store.

· Direct benefit incentive

According to AC Nielsen research, the top three most effective and attractive promotion approaches for consumers are: Buy One Get One Free---38%; Price Discount----29%; and Bigger Volume at Same Price----12%.
Another type of popular benefit plan covers Lucky Draw and Points for Gifts. However, these kinds of benefit are among the second tire incentives for shopping due to the complicated procedures and delayed offer.
The consumer behavior study shows that the more direct monetary benefit /savings promotions in-store, the quicker reaction of the purchasing activities happens in-store. That’s why in-store posters or leaflet among the most effective vehicles for in-store promotions.

· Eye-catching displays and convenient locations

It is critical for marketers using various display and location leverage to facilitate the shoppers’ decisions making and lighten up their shopping experience within the store. The more convenient and frequent the shoppers’ eye catches the goods, the more easily they pick and scrutinize the products and accumulate buying interest. The study determined the best shelves were eye-level to about 35-degrees below. Anything above eye level is not effective, and shoppers do see and buy from the bottom shelf, as long as it is well stocked.

Retail can not live without detail. As for the in-store promotions, all these details covers not only designing and implementing discount level, attractive display and location, appropriete communication vihecles application but also analyzing and understanding the consumers purchasing behavior and insights essentials. In the customer experience, all these are the environmental branding and get down to one thing: differentation.

Multi-channel retailing ... some (more) examples

Almost all retailers are now multi-channel. The following are few examples worth checking out:

Victoria's Secret (definitely one of the best)
La Senza (Canada's version of VS)
The Shopping Channel ( 3 channels: TV, catalogue, internet)
Frontgate (good catalogue that excels online)
The Brick (The company Bruce Reid used to run)
Wal-Mart (the domininant multi-channel website -- only Amazon and eBay are bigger sites)
Sears (a great Canadian m-c retailer)
HBC (dealsoutlet is an especially good e-off-pricer)
Barnes and Noble (a solid second mover behind Amazon online and dominant offline)
Indigo (Canada's BN)
Birks (e-bling)
Lululemon (a niche m-c retailer)
The Gap (more than just a changing room)
Roots (now outfitting the American, but not Canadian, olympic team)
Nike (m-c retailer and manufacturer)
SportMart (sporting goods online)
MEC (outdoors online and catalogue)
REI (tough to match the store experience)
Best Buy and Future Shop (electronics online)
eBay (not really m-c, but there customers/users are on and offline selling stuff, so ...)
Sotheby's (m-c for the affluent)
RBC Financial (or any bank or retail financial firm)

For many catalogues see shopathome.com and/or google catalogs

Many many more could be added. Contemporary retailing is multi-channel!

Turning those socks from Grandma into digital pleasures

I know that it is supposed to be the thought that counts and as a more “mature’ adult I appreciate that old adage, NOW. But as a playful youth, I may have been a little bit less understanding. For as long as I can remember, there were always some members of my family that were not the best at selecting gifts for birthdays or Christmas. Every year, I would look forward to opening presents and waiting to see what Grandma bought. Over the years, my parents grew smarter and started giving me money, but I could see that it was difficult for them (as I know now) as gifts are a personal expression.

Enter gifts cards

A gift card gives both the recipient and the gift giver complete flexibility and convenience over what item they purchase. “Consumer Research” indicates that 80% of consumers today prefer gift cards to make all the usual special occasions. Some of these include birthdays, weddings, student allowances, corporate incentives and employee recognition.

The National Retail Federation stated that $18.5 billion worth of gift cards were sold during the recently completed holiday season, up 6.6 percent from the prior year. The various types of cards available have evolved considerably over time and can be purchased from any traditional retail store, malls and even VISA. Each of these cards differs in how they can be used. For example, the mall cards allow the user to make purchases at any of the retailers in the mall, providing more options for consumers.

Visa enters the game: Visa reduces the risk that parents picked last year’s cool retailer. The Visa Gift Card is accepted everywhere and the funds never expire (major two star asterisk here!) The advantage of this card is that if the card is lost or stolen, the unused balance can be refunded or replaced (for a fee of course) The cards have the appearance of a Gold Card and are customized with the recipients name (getting the kids hooked early on!) The cards are fully functional with the ability to review transaction.


Advantages for the Consumer

The gift card recipient can choose where they want to use their gift card. And the gift giver doesn’t have to go from store to store looking for just the right gift. There are no more gifts that are the wrong size or wrong color, or a style that not even my Dad would have born back in the 1960’s! Parents now know that the money is not going to waste and that they have some control over the gift. By picking out a card for a store, they feel as though they have at least been a part of the process instead of just cutting a cheque. Those socks I mentioned before can now be turned into a slick new iPod Nano.

Risks to the Consumer

Although everything appears to be peachy in retail land, there are some things to consider when purchasing or using a gift card. Be a good consumer and ask questions, as it may prevent problems down the road. Terms and conditions vary between retailers. All companies have strict usage, restriction and liability policies that most commonly state that they will not replace them if they are lost or stolen and that they are not exchangeable for cash.

Make sure that you read the fine print. I remember hearing about certain retailers that were not very forthcoming with information about the cards. For example, Barnes and Noble (first site that came up in my Google search for “gift card policies”) states that after 12 months of inactivity, a $1.50 per month dormant account fee will be charged, except for Gift Certificates sold in California or where prohibited by law. Many politicians in the US are pushing for stricter legislation with regards to fees cards on the cards.

I think that the mounting pressure will change the legislation Nationwide and benefit all consumers. For the retailers, it is in their best interest to provide the best customer experience as possible. The effect on consumers could result in a loss of long-term sales. Not having a certain colour of shirt in stock lessens the in store experience, but ‘stealing’ money off of gift cards destroys it.

A Good Retail Story. Circuit City, a major electronics store in the US (similar to Future Shop) has taken a different approach and will replace a lost or stolen card with an amount equal to the last balance. They have been phasing out “older’ gift cards and replacing them with new ones that include a Personal Identification Number (PIN) to combat theft. It is nice to hear that there is still hope.

Business School Lingo

There is one issue that has been raised with the gift cards and that is how retailers recognize the revenue. After the sale of the gift card, the retailer has the $100 in hand. You would think that they would be able to add that cash to the IS as revenue. In actuality, the retailer still owe the equivalent dollar value to their customers and can’t recognize revenue at the time of sale, so they must carry a liability on their balance sheets until the cards' status changes.

Companies are still trying to make some money off of the cards though. Most retailers are spending considerable time trying to document redemption rates for the last decade. Based on historical redemption rates, most companies can determine that some percentage of gift cards sold, for example 10%, go unredeemed. As a result, each time a gift card is sold, 10% of the value of the gift card is recorded as a credit to the income statement with the remaining 90% value being recorded as deferred revenue. A recent example: “The issue was highlighted last month by consumer electronics retailer Best Buy Co. Inc., which boosted third-quarter earnings by $29 million on a pre-tax basis, or 4 cents a share after taxes, by reducing its liability from gift cards purchased from 1995 through 2003"

Other Interesting Things

Tax exemption: Employers sometimes give gift cards and gift certificates as gifts, rewards or incentives to employees. Under U.S. tax law, gift cards, gift certificates, and other scrip of a certain value may not be taxable when given to an employee as a gift.

I guess that you still can’t make everyone happy. What happens if you get a gift card from a retailer that you don’t like? I found an unwanted/unused gift card trading market. This is an interesting site as it treats the gift cards as commodities, with a ticker showing the face value of the card and the current selling price. You can post your card with your desired price (usually 3-5% below actual value) and hope that someone wants your “Grandma’s Socks”.

Should Best Buy Expand into Furniture?

As I was preparing to write this blog, my mother called and, along with the usual banter, informed me that my aunt was considering buying one of those new large flat-panel tvs. However, one of the things holding her back from doing so was that the tv would not fit into her current entertainment center leading her to consider a change in furniture along with the tv purchase. I smiled at the coincidental timing of that discussion, which describes the same scenario as a recent article that inspired my blog.

The Super Bowl reminds us annually that a television is commonly the focal point of any room in which it is placed. The new flat screens in particular, with their premium price tags and high-tech artistry, command attention. An upgrade to the new tvs frequently involves more than just an entertainment center replacement. The upgrade can force a complete rethinking of a room. Furniture manufacturers have quickly realized the opportunity in replacement furniture to accommodate the new expressions implied in a flat-panel display. This furniture tends to also be premium-priced. Now electronic retailers are beginning to consider their unique place in this shift in consumer purchasing patterns.

Consider a Best Buy where you can shop for the appropriate furniture to complement your electronic purchases. This idea may not be so outlandish anymore. Electronics category killers such as Best Buy, Future Shop, and Circuit City already have the advantage that they are largely the only stores that carry a selection of the large flat-panel tvs, which are too high-end and specialized for most other retailers. Electronic retailers currently carry some basic furniture such as tv stands and a limited selection of entertainment centers; however, they are considering a move to broaden their furniture offerings to match the offerings of their tvs.

Customers would certainly appreciate the improved variety, breadth, and convenience in what they perceive as two sides of the same metaphoric purchasing decision coin. They can shop for these complementary items side-by-side with decisions on one item able to influence decisions on another, creating a “one-stop shopping” experience. In the end, the customer leaves more satisfied knowing that he or she was able to conveniently coordinate the room design. In exchange, the retailers would be able to charge a premium on both the television and the furniture as this market remains part of the luxury item segment. In addition, the electronics retailers can minimize their depth in the furniture due to low sales volumes.

Nevertheless, such a move will have to be made with caution. Furniture is bulky and would rob electronic retailers of valuable space for their core electronics and media SKUs. In this event, the differentiation between a store such as Best Buy and one such as Sears quickly begins to disappear, along with any advantages the electronic category killer has. Furthermore, previous attempts of furniture stores to expand into high-end televisions to capture the same market and shopping experience have been unsuccessful. Examples such as Roberds, BEST and Service Merchandise may be unfamiliar to Canadians but were stores I used to shop at in the southeastern US that are now defunct or struggling due to an assault on one end by Wal-Mart and on the other by the category killers.

The key to this decision for the electronics retailers is whether this is just a temporary opportunity or a more permanent strategic advantage. I would argue that it is just a temporary opportunity which supports a co-branding effort much like what the furniture retailer Ethan Allen is proposing. With prices on flat-panels dropping regularly, it is just a matter of time before they are sold at Wal-Mart, Target, and Sears which will give consumers a true range of options under one roof. Until then, people like my aunt would likely be thrilled if their decision could be made a bit easier at Best Buy.

Frequent Shopper Programs- Profitable or Passé

As we begin the twenty first century, more attention must now being focused on creating experiences and relationships with customers to ensure increased loyalty and patronage. This is in light of the many channel and retail choices that customers are now faced with. Retailers are also realizing that wooing new customers is relatively more expensive than maintaining the existing customer base.

Frequent Shopper programs award rewards to customers for their continued loyalty. These could be in the form of points, prizes or discounts. Examples in Canada include Air Miles, HBC Reward Points. Etc. The supporters of these programs site their many benefits such as retention of loyal customers, motivating customers to switch to your stores for the long term, making the customers feel that the retailer care and differentiating the store from other similar retailers.

However, frequent shopper programs are a pricy proposition. According to author of Fusion Branding, Nick Wreden, in industries such as the supermarket industry, where loyalty programs are relatively mature, loyalty programs cost about 1 to 1.5% of total revenue. In other industries they can cost up to 5%. Also, Wreden claims that an organization only begins to seen return on its loyalty programs eighteen months after program has been initiated.

Research by A.C. Nielsen indicates that about two-thirds of U.S. households now participate in one or more frequent shopper programs having loyalties divided between several retailers. As a result, the frequent shopper cards are more used as an added bonus rather than a ‘loyalty locker’. The Retail Strategy Center has also observed that the level of penetration, primarily in the supermarket retailing sector, has begun to level off, indicating saturation of this product. Since the supermarket industry was the first to initiate these programs, the same result may soon be seen in other retailing and service industries.

To counteract this, care must be taken to ensure that the rewards are catered to the specific customer base. Generic programs with unrelated rewards generally fail. The retailers also need to constantly innovate the program to ensure variety and excitement and therefore lock in customers.

Another important point to ensure is that once you begin a loyalty program, you do not stop it midway. This has been done by several retailers leading to high levels of annoyance in otherwise loyal customers. One of these examples that affected me personally is when Subway restaurants ceased to honour its stamp collection loyalty program. I still have unused stamps!

Evans and Berman in their article “The Value of Frequent Shopper Programs’ highlighted an additional list of what is necessary for an effective program. The program should be:
- understood by the customers
- easy to administer
- promoted in and out of the store
For more information, please check their article. http://retailindustry.about.com/od/loyaltycrm/a/uc_be_loyalty_3.htm

Ultimately however, it is important for the retailer to understand that it is not a frequent shopper program that ensures continued customer loyalty and patronage but rather a quality shopping experience and a sound retail value proposition. The most attention should be focused on this!

Multi-channel retailing...some thoughts

Over the past few classes we’ve had some very interesting discussion over multi-channel retailing. Successful cataloguers like Victoria Secrets know what makes a print layout work, and many others have also mastered the layout or navigation of a Website. However, we’ve also learned that laying out a brick-and-mortar store can be a challenging exercise for many multi-channel merchants, as we saw in the LCBO case. The creative and merchandising tactics that work so well in print or online are sometimes difficult to replicate in a retail-store setting.

Key to multi-retailing success:

When adapting to a different marketing and sales channel, it is interesting to note the power of consistency: retailers need to present a unified and clear picture of their brand that speaks with one voice — even though they are talking to different consumers with different needs. Eddie Bauer CEO Rick Fersch couldn’t be more correct when he realized the importance of having a “One Brand, One Voice, One Customer” policy. Consistency across channels is the best way for customers to learn where things are. Retailers must try to keep customers from having to guess. Williams-Sonoma, one of my favourite stores, serves as an excellent example: just as their print catalogues and website offer recipes and cross-selling suggestions, the stores often have product demonstrations and samplings. Customers are looking for the whole package when they go to stores like Williams-Sonoma -- they know that if they are looking for a certain piece of cookware, the store will provide ancillary items and suggestions to go along with the piece they are planning to buy.

Similarly, Williams-Sonoma's catalogues are designed to highly complement the retail channel. Items featured in catalogue hot spots such as the upper-right corner of an opening spread are also displayed in store windows and near cash registers. Some companies like to design catalogues randomly, but people are generally too busy to hunt around a retail store. By utilizing hot spots such as point-of-purchase areas and display windows in the store and prominent pages in the catalogue, Williams-Sonoma saves the customers’ time by telling them where to look.

It is interesting to note that most successful multi-channel operations start with a catalogue cover and a storefront that look essentially the same. For instance, while shopping in Buffalo last summer, I picked up the fall edition of apparel store Abercromie & Fitch which featured a back-to-school display on the front cover. And throughout August and September the principal display area of each store was a near-replica of the catalogue cover. Catalogue covers are generally the focus of store windows as well as retailers' advertising. Every catalogue retailer make an effort to ensure synergy of both the store and catalogue product. Items are segmented throughout the stores by lifestyle — i.e. all the dressy apparel is in one area, all the casual sportswear in another — and the catalogue design reflects this organization.

It is also interesting to note that most corporate offices do dictate the store layout decisions. Most companies generally try to take a cross-channel approach when they lay things out in the stores as compared to the catalogue or website. The goal is to want your customers to feel like you understand their general shopping habits, and they do come to expect some symmetry with certain items such as luggage or a specific outfit they may have spotted. But because these companies want their retail customers to feel catered to, each store manager has some degree of autonomy when it comes to the layout. Store managers, as in the case of Nine West, I believe, have specific information about their respective customers and can structure each store per those individual needs. They often can best determine what items can go on the front tables of the store based on customer trends and habits. The store managers also have quantitative data based on retail customer profiles on which to base store layout decisions.
I think while you should constantly analyze your store layout, retailers should think about what are the prime positions for each item and try to remain consistent. Time is the most valuable commodity to today's consumer. So keep the store as familiar and consistent as possible — especially for returning customers.

I find it interesting that some products sell better in stores than in catalogues. For instance, I need to see and feel jewellery before making a purchase. On the other hand, certain items are simply “nonphotogenic.” For instance, it can be tough to show the detail on drinking glasses in a catalogue environment. A photograph and brief copy may not be enough to get a sale of such an item — especially at higher price points. Some items just communicate better in person. Products that are highly tactile or have a lot of detail should be limited to the retail arm. You'll also be able to market them as “special” items not available online or by mail.

As we saw in the Eddie Bauer case, catalogue buyers are more price-sensitive than store shoppers. You can't sell too many items at very expensive rates in the direct channel. But while less expensive merchandise sells well via catalogue, the cost of fulfillment on lower-priced items generally isn't worth it. It's much easier to sell lower-priced items in a retail environment where you have salespeople. Companies such as Williams-Sonoma often bundle products to boost order values. It will also cross-merchandise products: The customer who's buying that crème brulee set may also want the crème brulee mix and the book.

In summary, I find multi-channel retailing a highly interesting topic in retail marketing. Kyle if you have more sites you can direct the class to, please do so!

Technology enhancing the shopping experience

When we hear Technology and Retail we immediately think of Walmart's inventory management systems, RFID tags, bar codes and logistics related applications. However some retailers are investing heavily in technology to manage the front end of their operations and the contact with their customers. The idea is to enhance the shopping experience and give their customers what they value most.

The new Giant Super Food Store in Camp Hill PA has installed a series of techonlogy aids through out the store to create greater convenience and enhanced service for its customers. With 13 self-service kiosks in which they can do diverse activities from palcing a deli order to refilling a prescription or even getting recipes. Customers can also pick up hand-held personal shopping devices with which they can scan all of their purchases when they pick them up, see the price total as they shop, see available promotions and then go to the self-check out units, pay and leave the store quickly. There are also devices available for self-weighting produce and bulk items as well as information screens with partnerships with other institutions like weight-watchers who provide information and content of interest for the consumers. (see Spicing Up Service)

But not all retail customers want speed; for FYE (For your entertainment) customers it is all about entertainment in the shopping experience. FYE is a store that sells CD's, DVDs, and video cassettes, and they have started tapping into their customers' bluetooth cellphones when they walk in the store, to transmit customized messages that will hopefully enhance their shopping experience. The phone owner can accept or reject the messages and will receive invitations to try products as well as special customized promotions. (See Hello, What's calling please?)

Finally other customers are looking for price. For Peter Jones a UK department store that has a "matching competitors prices" policy for their camera division, they have started testing the use of electronic signs to update the prices on their cameras. Although this initiative is still in trial they hope that the electronic signs will reduce labour costs and increase the accuracy of the information posted. Retailers inccur in deep expenses from maintaining, updating and replacing paper price signs. It is estimated that Sears will print about 250 million price signs a year and up to 18 million signs for a thanksgiving weekend sale. Electronic signs will allow retailers to display up to date information by linking shelf pricing directly to their databases and decrease costs which can then be passed on to the end consumer, helping enhance the shopping experience by providing customers with better value. (See Sings of progress)

It doesn't matter what their customers are looking for in their shopping experience, technology has stopped being only an enhancer of the back end operations of retail to come into the store and make the interaction with customers more effective. In a time where retail competition is intensified, technology is serving as a source of differentiation that will help retailers enhance their Retail Value Proposition.

Superbowl Ads

If you missed them, the Superbowl XL ads can be viewed at iFilm.

Personally, I liked the Hummer Commercial, FedEx Cave Man, and the Sprint Locker Room. With honourable mentions to Budweiser, Career Builder and Ameriquest mortgage.

Disappointments: Whopperettes (huh?), Go Daddy (didn't we already see this?), McDonalds Hamster (this looks like a collage of a bunch of commercials we have already seen).

Is your store “Shrinking”? Probably!

The most dreaded day for any retail store arrives: Inventory Count Day! The day where store employees, store management and head office people, gather in the stock room and on the retail floor to count product. Armed with computer print-outs of store-SKU inventories, pencils and highlighters, these employees will spend hours counting items, one unit at a time. Usually, this is done overnight and once or twice a year. It is a very tedious task that must be done – no question about it.

The end result of all this work is called “Inventory Shrink”. The store’s shrink is the difference between the total units on-hand that your system states you have compared to what can actually be counted in store. Shrink is practically unavoidable, and yet store management is often compensated on the amount of shrink in their stores. Since getting rid of shrink is nearly impossible, the goal is to reduce it as much as possible.

In 2002, a survey was conducted by Richard C. Hollinger, Ph.D. and Criminologist for the University of Florida, which showed that the top 118 U.S. retail chains combined for total shrink costs of $31.3 billion in 2001 (National Retail Security Survey, November 2002). This is equal to 1.7% of the $1.845 trillion transacted by these retailers in the same time period. Needless to say, shrink is a big problem for all retailers, as well as consumers who have to put up with higher prices because of these lost margins.

So what contributes to shrink? There are four main sources of shrink:

Source of Inventory Shrinkage ----- % of Loss* ----- $ Lost
Employee Theft ------------------------ 48.5% ----- $15.1 billion
Shoplifting ------------------------------ 31.7% ------ $9.7 billion
Administrative Error ------------------- 15.3% ------ $4.8 billion
Vendor Fraud -------------------------- 5.4% ------- $1.7 billion
Total Inventory Shrinkage -------------------------- $31.3 billion

*total not equal to 100% due to rounding Source: National Retail Security Survey, November 2002 (based on 2001 retail sales and inventory shrinkage)
http://retailindustry.about.com/od/statistics_loss_prevention/l/aa021126a.htm

As you can see, employee theft and administrative errors contribute to over 60% of shrink, both of which are internally generated, and overall theft accounted for over 80% of total shrink. Many large retailers, if not all, have a special department within their organizations that works on reducing shrink on a daily basis. It is the job of this Loss Prevention department (LP) to help stores reduce the amount of shrink it “produces” every year. In brief, here are some of the measures that LP puts in place to reduce shrink:

Employee training – Employees should be trained on detecting suspicious customer behavior;
Employee hiring practices – Hiring trustworthy employees who care about their work environment;
Inter-store communication – Providing means for stores to communicate information on potential thieves or suspicious customers;
Shoplifting policies – Having guidelines in terms of what to do with suspicious customers and employees;
Employee scheduling – Ensuring the appropriate number of employees to have on the floor for proper coverage;
Store layout & look – Keeping a tidy store with good lines of sight;
Technology – Using merchandize tags, video cameras, …

Overall, it is the store management’s job to ensure that employee satisfaction is high, a good level of customer service is provided and that the store environment is well organized. These loss prevention measures will go a long way at reducing shrink.

For more shoplifting prevention ideas, please follow this link: http://crimeprevention.rutgers.edu/crime/shoplifting/tactics.html