BrainTrust Query: Localization and Limited Buys
Commentary
by Carol Spieckerman
Back in the
early ’80s, J.C. Penney was the only retailer of its size that maintained
a decentralized buying structure. Each J.C. Penney store had individual
buyers who could either go along with the corporate buyers’ recommendations,
or they could make individual choices that they believed were best for
that particular store (or, as was most often the case, they combined
both strategies). Penney’s reasoning was that the store buyers knew their
customers best.
They defended
this system even as J.C. Penney’s competitors subsequently moved away
from regional buying offices and toward completely centralized buying
structures. Their competitor’s philosophy was that good product was good
product and that any benefits from regionalizing assortments would be
trumped by the economies of scale achieved through chain-wide buying.
By 2000, Penney, teetering on the brink of bankruptcy, began moving toward
a centralized structure as well.
Since that
time, the pendulum has since swung away from generalization and back
toward localization and specificity. Fortunately,
retailers and brands are learning how to execute locally through their
existing centralized buying models.
Macy’s recently
launched its My Macy’s localization strategy, which leverages proprietary
software and newly created teams of district planners and merchants to
ensure that each Macy’s store is relevant to the community it serves.
Best Buy is
encouraging its store teams to go off-script by instituting everything
from community-specific store hours to merchandising variances that place
regionally relevant items front and center in certain stores. And, in
a radical departure from the previous corporate-knows-best information
flow, Best Buy is gathering insights from individual stores in order
to drive incremental opportunities that otherwise might escape notice.
Home Depot
began sorting its stores into “clusters” with similar attributes after
realizing that some stores were selling one riding mower per month while
others were running completely out of tools under its one-size-fits-all
purchasing structure. And Walmart, through its Store of the Community
program, intentionally distributes certain products and brands to limited
stores based on the attributes of particular communities, and even neighborhoods.
One of the
more common problems I’ve begun to encounter in my consulting practice
is retail suppliers misunderstanding, or not knowing at all, their retail
partners’ visions for their products, brands or services. When a supplier’s
efficiency-through-scale expectations are completely out of alignment
with a retailer’s more limited intentions, misunderstandings – and in
some cases, business failures – result. For example, a consumer electronics
client that I worked with recently was stunned when one mid-tier retailer
eliminated its brand entirely from one geographic region due to the growing
strength of its top competitor in that market. The client had always
been an “all-store” resource and assumed that wouldn’t change.
As localization
and specialization proliferate, it’s critical that suppliers
understand their
retailers’ visions for their brands
and products . . . and that supplier teams arm themselves
and their retail
partners with localized insights and exception reporting that may get
lost in a big data roll-up (and that may run counter to consumer data
). We actually
encourage our clients to bring dedicated and qualified analytical resources
into their organizations before they hire salespeople.
Not only does this
bolster internal
planning, it also provides
a direct line to retailers’
planning teams which further facilitates information-sharing.
Discussion Questions:
How should suppliers be adjusting to the shift toward localization
and limited buys by many larger retailers? What areas will this
impact in particular? Are retailers and suppliers making the most out
of localization and targeted distribution opportunities?
The old JCPenney model may have provided more market-sensitive assortments store by store, but it also created a cumbersome bureaucracy as well as tremendous inconsistencies in customer experience from store to store and from market to market. JCP was smart to discard this system despite all the cultural changes it brought to the company.
The pendulum may be swinging back toward more market-sensitive merchandise content today, but it would be a mistake in an era of slimmer margins and operating expenses to return to the JCP model of 20 years ago. In fact, stores like Macy’s continue to consolidate their regional buying offices to a one-headquarters function at the same time that the “My Macy’s” initiative takes hold. Other national retailers, like Target and Kohl’s, devoted effort to this challenge several years ago.
The key to successful market-specific merchandising is to have the information systems and headquarters culture in place to drive it. Retailers need a clear line of communication between their field managers and their merchants, in order to provide some market-appropriate content without crossing the line from autonomy to inconsistency. And retailers also need to take advantage of the massive database of regional preferences that their vendors can provide, in order to tailor assortments in the first place.
Carol raises an excellent point about the “tension” between economies of scale and being responsive to local market needs. The days of “you can have it in any color, as long as it is black” are over and neither the customer (retailer) nor the consumer/shopper will tolerate being treated in such an impersonal way.
The advent of store clustering, shopper segmentation, consumer purchase decision hierarchies, and differentiation strategies mandate that manufacturers work collaboratively to meet the unique needs of retailers and their shoppers.
In terms of areas that will be impacted–it runs through just about every area of the relationship from forecasting, manufacturing, shipping, warehousing, inventory control, space management, pricing, promotion, assortment, invoicing, etc.
In answer to the question about making the most out of opportunities, the best is yet to come and there is great upside potential.
First off, as a small point of order, Nordstrom was another chain of significant size that ran a decentralized buying organization in the early ’80s. They were a client at the time and I remember my company designing regional distribution centers to satisfy their somewhat unique needs.
The whole paradox of global supply and local demand is core to much of RSR’s research. Obviously, assortment and price localization can’t be done at any kind of scale without technology to support it. We also find Retail Winners in general are more prone to seek input from store managers on local events, trends and activities. This information may not be readily available using technology tools that analyze weather forecasting, demographics, psychographics, and market baskets.
I’m not sure the impact on suppliers will be as significant as it probably should be. If I had my ‘druthers, I’d like to see more sourcing close to the point of demand–to help general merchandise and apparel retailers respond to demand signals faster…but we still mostly seem trapped in an “all Asia all the time” sourcing strategy. That strategy may appear cheaper, but it really slows down industry reaction time.
Mega-retailers will expect suppliers of landed merchandise to hold product until demand signals are clearer, but they run the risk of bankrupting those suppliers if they do so.
And finally, on the subject of My Macy’s…I must confess to be missing its effect on store assortments (at least in improving them). Hopefully that impact will become more obvious down the road. Thus far, either I am an outlier demographically, or someone/somewhere is missing the mark. Nordstrom, on the other hand, without a lot of fanfare, has trimmed assortments while keeping them relevant.
There is no doubt that localization is the way to go. The traditional cookie-cutter approach to assortment often leads to mismanaged inventory and customer dissatisfaction. However, retailer’s business processes need to be mature to handle localization while enjoying economies of scale.
Best Buy has done it very effectively. They have reached the maturity wherein they can decide in which stores they should launch their latest plasma TV and where they should just focus on greater variety of laptops. But I guess it is comparatively easier for hardline stores to tailor their assortments to local needs with centralized procurement. With soft lines, the complexities of size, styles, fabric, quality, and fashion/trend makes it tougher–both for retailers and their suppliers. The key is to find similarities and consolidate.
Yes, every customer is different and customers in different communities are different. The key is to find similarities in this randomness and consolidate. This could be effectively done through clustering. Traditionally, clustering had been based on parameters like demographics and sales performance, but this barely captures what the customer wants. Retailers need to explore factors like trip segmentation–what kind of trip it is–“hanging out with friends and checking out clothes” or “I’ve got to get a nice dress for my party tonight” and so on. Additional factors like customer loyalty and customer segments could also be used. Clustering could help achieve localization and also reduce the complexities of customizations.
It is the huge push now in grocery and regionally based retailers. In this economic environment the ability to show that products are home grown is perceived to be important. All one has to do is look at the large “Lays” ads, where they proclaimed that the potatoes were grown in Iowa, Florida, Ohio, etc.
Yet this has yet to be shown to be good for business.
While retailers in general are “re-discovering” the power of localized assortments, there are some that have been using this approach brilliantly for a long time–Bed, Bath, & Beyond (BBB) for example. A stroll around the drive aisle in a Scottsdale, Arizona BBB would lead the shopper to believe that BBB’s Headquarters were in Scottsdale, with a prominent feel of American Indian and Southwestern motif merchandise along with distortions of color palettes to reflect local tastes. The same impression can be found in BBBs in Miami, Manhattan, and just about any other part of the country. In each case, closer examination and analysis reveals that over 95% of the assortments in each of these BBB stores is exactly the same. The key to creating this impression is that the 5% difference is given visual prominence in terms of end caps and feature areas. In other words, a small investment, properly presented, creates a powerful umbrella.
Becoming successful in localizing assortments is a major cultural shift for most large retailers, which involves diffusing authority out of the corporate office as well as actually listening to the field organization, which has been unusual to say the least. These kind of cultural shifts are complex and take a sustained commitment from top management over a long period of time until it becomes part of the company’s DNA. Announcing your intent to localize and actually succeeding at it are two completely different things. The payoff for success in a soft economy, however, is huge.
Suppliers should get in front of this curve by working closely with the retailers to understand and quantify the variances by region and major market. Much of the knowledge is already there. Look at and quantify relative item, color, fabric weight, and silhouette sales to local and regional retailers. Work with your regional sales forces to gain a better understanding of local and regional market preferences in much the same way that retailers are working with their regional stores organizations. Use this information to build partnerships with your retail accounts and help them create these market-specific assortments.
Retailers that are better able to customize their assortments will be rewarded with increased customer loyalty, which is critical to success in the current environment. Suppliers have a great opportunity to partner up with these retailers and gain the same competitive advantage.
The ability to analyze and manage large amounts of data has made it possible for retailers to understand differences in consumer purchases by store. So the traditional strategy of J.C. Penney can be implemented more effectively.
However, there is still the issue of figuring out how to manage acquiring, pricing, selling, and replenishing inventory on a store-by-store basis while continuing to be operationally efficient. Since consumers can purchase what they want where they want, retailers need to make the products they want to purchase available at a good price.
The environment is more complex, retailers are beginning to respond, and manufacturers must also change.
If retailers are smart, it’ll be a significant change. If not, they won’t be here in five years anyway.
I think the process shift will come more from how central offices buy for districts/regions than it will come from stores/regions buying for themselves, like the old Penney’s. So, that will mean there will need to be better communication, smaller and more interesting buys for manufacturers (in some instances) and more frequent store visits by buyers (imagine that!).
A great case study for this is Forever XXI’s technique. The stores aren’t really localized, but given the small quantities and quick turnover of the merchandise, it’s pretty hard to find anything in common in terms of product from store to store. It’s just the right merchandise going to the right place. Very smart (guess they’ll be around in five years).
Technology or information-driven localized assortment tailoring is a far cry from independent store buying. The best practices I see are those which leverage economies of effort created by technology. Clustering, store assortment tailoring, individualizing plan-o-grams…these are not new. The extent to which they are applied, and the rational basis for the deviations from the global template are much different than in the past. Within reason, local assortment tailoring is very much in the best interests of large chains. The key there is “within reason” because there are logical limits beyond which the effort required outweighs the margin gain, or the stress on the overall system (people + processes + technology) causes breakdowns or bad decision making. Limited overhead means limited human processing power. No BI I have ever seen can or should be operated without the oversight of trained and talented merchants. A swing too far in the direction of technology-driven localization will result in margin erosion.
On the vendor side, having lived there too in my past, the truth is that most manufacturing efficiencies have long since been achieved even with smaller per-customer quantities created by local assortment tailoring. Does it really cost more to sell less of a product that is generally manufactured to forecast and for which the costs have already been driven as deeply discounted as possible? Generally not. The real issue is the integration between retail demand planning and vendor supply planning, and the nature of supply chain flexibility.
Through the use of very little technology, retailers can and should know what the top items are by location. Using this information, even from a centralized view, can and should have great impact on appropriate merchandising to meet the demographic needs by location.
There isn’t a whole lot of rocket science required to do this today. If retailers aren’t smart enough to even do the basics in this regard, they are losing and will continue to lose to those who will.
Regional purchasing makes good press for large department stores. In reality, their buyers are protecting their silos; refusing to share “open to buy” or floor space. Local buying will be greatly limited due to resources, corporate politics and processes, and paranoia.
Perhaps there is an answer to this tension/dilemma of mega retailers realizing they need effective staffs and merchandise localization to contend with customer buying habits related to local weather and societal preferences. Is it heresy to admit that the answer is–fewer mega retailers and more focused regional and local ones?
It’s one of the great ironies of the retail industry that the scale of economies expected from consolidation and centralization over the past two decades have had scarce impact on the bottom line.
It would appear that every penny of benefit gained by buying and sourcing centrally is given back due to what I call “merchandising to the mean.”
This would seem paradoxical until we look closely at what happens when we optimize buying clout and supply chain efficiency without considering the unintended consequences on the rest of the business system. In particular, I mean on store-level merchandising and shopper experience. Average assortments yield average performance.
The mass merchandising mentality reflects old-school, analog thinking. In this digital age, mass methods are being replaced by what Toffler called “mass customization”–a proliferation of localized responses tuned to consumer needs.
Buying and planning to meet local opportunities can help pull large retail chains out of the well of mediocrity, but it also places a great burden on those organizations to bring store compliance methods into the digital age. Otherwise, how can you measure the benefits of all that extra work? In the absence of a solid ground game at the shelf, localized assortments are just so much wasted effort.
The bottom line: Localized merchandising is imperative. But not a throwback to old-school localized, analog buying. Retailers must establish business systems that support store-level variation driven by a true read of demand and local intelligence. The assortments must vary within parameters, but the method must be standardized, embedded, measurable and systematic.
I very much believe that the jury is still out on localization. The fact is that certain economies of scale are inevitably lost with localization, and the benefits are unclear across the full store base of almost every chain. It seems to be a qualitative objective whose financial impact has yet to be fully quantified. Given the competitive environment we’re likely to see for the foreseeable future, every economy will be essential to meet competitive price points, and that’s something that can be quantified.
I wholeheartedly AGREE with Mr. Seesel. Returning to the discordant and inefficient system of JCP of twenty years ago would be a mistake.
Having centralized POS information and being able to sort through and potentially tweak assortment by the information obtained may be helpful, less expensive, and less cumbersome.
I also fail to appreciate any real substantial difference in assortment or offerings with the “My Macy’s” initiative. Perhaps going forward we will see more impact by this initiative.