BrainTrust Query: Why In-Store Implementation Is the Next Frontier
Through a special arrangement, presented here for discussion is a summary of a current article from the Tenser’s Tirades blog.
I call it the Paradox of Scale: grocery chains keep getting bigger, but industry profit performance remains stagnant.
It’s been a doggedly persistent trend. Between 1992 and 2009, the top 20 U.S. grocery retailers increased their cumulative market share from 39 percent to 64 percent, according to the U.S. Economic Research Service. Meanwhile from 1996 to 2010, industry net profits have hovered consistently around one percent of sales, according to the Food Marketing Institute.
These facts seem to run counter to intuition. After all, bigger chains are supposed to have top-of-the-line executive talent, fine-tuned supply chains, advanced IT systems, greater buying clout and economies of scale. A deeper look reveals the paradox: bigger chains also suffer from intensified store operational complexity, larger assortments and poorer visibility from the home office.
Bottom line — as chains expand, store performance management gets much, much harder. This begins to explain why out-of-stocks continue to run at 8.2 percent, unchanged in 15 years, yet 78 percent of items sell fewer than three units per week. It begins to explain why as many as half of all authorized in-store display promotions are never erected or erected late. It begins to explain why most retailers have no effective process in place to ensure or even monitor everyday planogram compliance.
Where some may find darkness and frustration in these statistics, others identify a golden opportunity. The In-Store Implementation Sharegroup identified tens of billions of dollars at stake — a rich prize indeed. Bold retailers and marketers who commit to improve retail compliance practices in the next few years should gain a distinct performance advantage over their less nimble competitors.
With these issues in mind, a select group of industry thought leaders will participate in a pre-conference workshop at the LEAD Marketing Conference in Rosemont, IL, on Sept. 19.
In-store implementation is not an isolated solution; it’s a multi-threaded initiative that incorporates improved in-store sensing and measurement; better inputs into planning processes; a performance-oriented culture; and alignment of trading partner resources. Many of the enabling practices and tools already exist, ad hoc. Still needed is an organizing principle that can tie them together into an effective set of best practices for the industry.
- Workshops at LEAD Marketing Conference
[Note: For a 15% registration discount, enter code RETAILWIRE 2011] - Why In-Store Implementation Is the Next Frontier – Tenser’s Tirades
Discussion Questions
Discussion Questions: Why has the consolidation of grocery retail not led to productivity gains? How much do in-store implementation challenges have to do with it?
There are 2 possibilities. The easiest answer is not enough labor on the store front. Yes, it’s true. If you don’t have enough people or hours available, things will get left by the wayside. Now, this is not the answer most executives want to hear. The other possibility is lack of systems at the store level to make sure shelves are full. I found the simplest way to fix this is to implement a daily store walk through by management. This includes walking the stock room to see what can be put out. In this case, your only costs are a legal size yellow pad and a pen. Managers should walk through with associates at the beginning of their shift so everyone is on the same page. Something I used to do when receiving is making sure that promo displays are immediately carted or palleted on the floor so everyone knows that this stock is priority and must be put out that day.
First, Mr. Tenser’s assumptions, that “bigger chains are supposed to have top-of-the-line executive talent, fine-tuned supply chains, advanced IT systems, greater buying clout and economies of scale” are not assumptions we might all make. Bigger does not mean better — at some point you get diminishing incremental impact of size and that’s what we may be seeing. Bigger via acquisition also means higher than average charges for remodeling and retrofitting.
Second, I’m thinking bad management. If out-of-stocks are running too high (or consistently high), there’s a planogram that isn’t set correctly. If store compliance is poor, that’s a management issue, not a store implementation issue.
(Full Disclosure: I follow the In-Store Implementation Group’s work through Jamie’s regular email updates and blog.)
There is certainly money left on the table, floor, endcap and front-end merchandiser by U.S grocers every day. And improved in-store execution would be welcomed by every CPG manufacturer in America as a god-send to both their every day shelf business and their dearly bought promotional business. There’s no doubt about that, and the I-SIG group is working hard to capture some of that loose change rolling around all over the store.
But there is a more systemic issue in the profitability of food retailing. The “major players” still have not attained pricing flexibility at the local level. And the food game is still a relatively fragmented industry at the local level with relatively low barriers to entry.
Kroger, Safeway and even Walmart may have rolled up or created thousands of food stores across the country. But they still face the independent chain, the dollar stores, clubs, the drug chains, the hard discounters like Aldi and each other in practically every market where they do business. Unless they manage to obtain far greater market concentration in individual markets — food prices and food retailing profitability will continue to be limited to a razor thin margin over costs.
The costs of doing business have continued to increase, leaving little or no resources to put trained work boots on the floors of the stores and their distribution centers. It is therefore not surprising that 1% takes are still the norm. Executive management’s inability to respond to the man hour needs of the company clearly demonstrates a void in creativity. It is common practice to overlook the routine maintenance requirements of a sales or support facility in favor of promotional resets. This in turn creates a need to spend over budget for labor and thus erodes profits. Placing the focus on time and turns allowing little or no tolerance for poorly performing inventory is something to reconsider in the search for profitability I am of the opinion there is a need to develop a more effective means to find new winners and get rid of dust collectors in order to increase profits.
With all due respect to everyone who believes bigger is always better, I think evidence has shown that there is a point of diminishing returns…where theoretical improvements just can’t become real.
Looking at another industry, when I lived in Boston, there was an enormous consolidation in the hospital system, and what were once 5-6 great and profitable hospital systems were reduced to two. Yet at least one of those two was close to bankruptcy and patient care certainly did not improve. It appears as though performance has stabilized, but mostly on the backs of employees, who have had no raises for several years. So was there value to that consolidation? I don’t think so.
I also believe the “unchanging” out of stock ratio misses a lot of extraneous factors. If turn continues to increase but out of stocks remain constant, doesn’t that mean the retailer is actually doing BETTER? Out of stocks are the opportunity costs of faster turn. You can’t have it both ways.
The net? I certainly believe retailers can improve their performance with workforce management solutions like task management. But I believe that answers a totally different question. ALL chains can improve performance with workforce management solutions. But the notion that mergers and acquisitions can, on their own, result in performance and productivity improvements just doesn’t ring true.
Bigger is not always better. Larger chains often tend to increase complexity. More SKUs to carry; more customers to satisfy; more stockholders to placate.
Furthermore, the grocery industry no longer operates as a distinct entity where consolidation can provide market dominance. It is now composed of multiple channels that compete for the same dollars. Many of the non-grocery competitors have better scale and efficiency.
While in-store implementation is clearly an issue, it does not stand alone. Grocery stores must learn to use consolidation and technology to create a better customer experience, not just a more efficient poor experience.
The next article in today’s retail wire helps to explain this (Conquering Food Inflation). While restaurants can more easily fluctuate their prices, grocery stores are in a highly competitive environment and that keeps margins low. Customers heading out to eat know they’ll pay a premium to do so (and those doing so can afford the premium). Grocery shoppers are more price sensitive and can easily make comparisons between markets. They can leverage coupons and in-store deals (BOGO, etc) to gain value.
Restaurants don’t have to compete on price in the same ways. They do still offer deals, but a burger at one chain can be priced differently than one next door and the consumer typically lacks the motivation to comparison shop.
The nature of grocery shopping (large, family purchase creates a psychological barrier to freely increase spend coupled with a coupon-mentality) will make margins tough to grow. Savings from scaling the operation get eaten up in competitive pricing.
I can add only one thought to the excellent points made thus far. In the 40+ years of my career, every single time my employer was acquired by a larger company (about every 5 years on average), there were fewer Indians and more highly-paid chiefs who didn’t seem to do a whole lot. It was demoralizing, inefficient, and financially crippling. It also finally led me to go into business for myself. Thank God.
I think that the biggest challenge for the big chains is retaining and embracing local market knowledge and image. Even if they keep the storefront the same, when a local chain is absorbed into a national one, the folks who knew what they were doing are usually replaced by a more efficient centralized organization. When shoppers lose the “my store” connection, a market area is ripe for a new competitor to enter and fill that void. Tough to grow or even maintain sales in that environment.
Warren Thayer’s comments are to the point. Bigger does not mean better. If all these high level executives have now been gathered in the top board rooms of these top grocery retailers (as well as other more important Board rooms) why are we still having the same issues year over year? Hello Washington, are you listening to us yet?
In 2002 I led an in-store digital media pilot program for a grocery retailer. Individual product sales revenue and product movement lifts were ranging between 10% and 40% in all stores except for one. After further investigation it was discovered that the products on the ‘media enabled’ end-caps were not being stocked to match the media calendar, merchandising calendar and planogram designs.
From my perspective, this further validated the efficacy of the program but the President of the retailer saw it differently. He acknowledged the value of the in-store media but the technology had shed light on an operational deficiency that had a much broader financial consequence. How many end-caps, in how many stores across the entire chain were not compliant? This knowledge and the consequences to brand vendor relations- credibility and financial agreements were frightening.
Rather than address the problem, the in-store media and the insights and information it conveyed were seen as a threat to the retailer/brand vendor relationship that the project was quietly swept away.
Ten years have gone by and in-store implementation remains a challenge. The core of this challenge is the lack of an integrated closed-loop communication system. The more consumers and shoppers use digital applications — whether mobile, online or in-store — the more these operational deficiencies will come to light. This will in turn cost money and brand equity for all parties.
Grocers have become larger, more concentrated, and more dependent on technology. Have these much larger boxes with wider assortments seen a commensurate growth in the number of associates? Has there been growth in the depth of training programs to keep associates up to date with technology trends? Have the grocers understood the specific preferences of the markets they are taking over or are they fielding a standard assortment?
The Department Store Channel demonstrated that getting bigger through acquisition and consolidation has many pitfalls, foremost among them is the belief that leveraging store payroll is a sure-fire way to grow profit. This looks terrific on a Powerpoint slide, but in real life? Not so much. Ditto with the notion that standard assortments work everywhere. My sense is that the grocers are learning these lessons.
I haven’t seen anyone mention metrics yet, and I think this plays a significant role in some of the disconnects between corporate intent and in-store execution. I remember talking to a health & beauty CGP VP, who said that she once walked a store with a store manager, looking at one particularly well-selling item that had suddenly bottomed out in sales. They went to the shelf. No stock. They went to the computer. It said 50 on hand. The store manager said, this product gets stolen a lot, that’s why the inventory is off. The VP said, well, can’t you just adjust the inventory? At this point, LP doesn’t matter when there aren’t any to steal. Store manager: If I make a 50-unit adjustment, I’ll lose my bonus. But no one dings me for lost sales on one single item. We sell enough of everything else, this one doesn’t matter.
Ouch!
All the measures or goals that corporate puts in place individually might make sense. But when people talk about “structural” issues in in-store execution, the first place to look is always where the money comes from and where it goes to. If store managers and employees can’t make it make sense to their paychecks, then it ain’t gonna happen.
“… top-of-the-line executive talent, fine-tuned supply chains, advanced IT systems, greater buying clout and economies of scale.”
Hmmm! Nothing there about any understanding of shopping behavior, or how shoppers actually purchase things in their stores. But at least it is a realistic assessment. As long as retailers continue to limit their expertise to logistics, expect no significant improvements in store performance.
A few people have commented on the issue of “bigger is better” but hardly anything has been said about Mr. Tenser’s main assertion: in store implementation is lacking and not getting better! Half of all authorized in-store display promotions are never erected or erected late? Folks this is nuts! Now is not the time to have a blue-sky argument about the economics of scaling, we need to tackle the problem of foregone revenue and wasted expenditures with programs that were meant to be executed in full, but weren’t. Forget social media, forget e-commerce for just one second. You have seasonal and other programs *designed* to improve your margins (at great expenses I might add), whose benefits are being eroded by shoddy implementation.
I will never deny that in-store compliance can be a challenge, but I don’t think it can be blamed for mediocre profit improvements from consolidations. Retail is a people industry, whether you are talking about consumers or employees. Learning to motivate the desired behavior in both is the challenge of retailing. Getting the consumer to make that purchase or an employee to “care about” their store, are the keys to retail success. Stores reflect the attitude of the local management. Get a strong manager in place who knows how to motivate people and the store will be a success.
I think recent consolidations simply reflect the status of the industry. Retail automation has become a commodity at the central office and warehouse levels. There are not a whole lot of innovative cost saving technologies that are being introduced. When a consolidation occurs, there are a few middle management types and maybe the previous owner who leave the combined organization, but the stores continue operating on about the same amount of labor they had before. Few organizations are vertically integrated, so even classic areas like private label are already outsourced and cannot supply economies of scale.
Fabien Tiburce’s point is well taken, although I do think that “lack of time” or “lack of enough people in the trenches” is a problem when it comes to planning, executing and measuring. Absolutely none of this is rocket science, and the problem has been with us for ages. I expect poor execution is a problem in all industries. The nice thing for the niche players is that if the big boys keep screwing it up all the time, there’s opportunity to differentiate with excellence, and win. I also agree with Fabien that many companies tend to get caught up in minutiae and the trend du jour, rather than making sure that block and tackle is always done well, without fail.
Thank you, colleagues, for your contributions to this discussion. A couple of points are worth amplifying here:
Consolidation and flat earnings in the grocery trade are both partly explained by the influence of Walmart.
Bigger is certainly not better when it comes to retail chains, unless the entity invests its enhanced resources to address the missing metrics and methods that can make stores work better and shoppers more successful.
Those that do will enjoy a significant competitive advantage in the next 3-5 years.
I intend to reference several of your comments at our Workshop on Sept. 19, where more will be revealed.
Great piece, Jamie. I think bigger has been necessary because of the Walmart influence you describe. At a smaller scale, these players might not exist at all anymore (look at the department store business).
The problem with achieving scale is that it can create an easier way to increase profits — by squeezing costs instead of by driving sales gains (through in-store execution, innovative offerings, etc.). It isn’t a problem at first, so long as the bigger entities do actually drive out those costs, but ultimately there are only so many efficiencies one can gain. Then, one has to drive top line…and as Jamie points out, at a macro level, it hasn’t really happened through better in-store execution.
Just a couple of quick points that are mostly in agreement with what has already been said, but since I have taken part in this process, I thought it worth at least agreeing.
1) Just as it has been said “All politics is local,” this is also a large part of consolidation. Few of the ‘local’ leaders are taken forward and thus there becomes a leadership vacuum at the local level and the ‘replacements’ have trouble dealing with or changing the ‘local’ culture to that of the larger.
2) Just as above, this always holds true with merchandising. There is too often a failure of the view of “we know best” rather than learning the ‘local’ expectations from a product level.
3) As mentioned, the higher levels of management seem to have no limit to growth and as these organizations struggle, the lower levels or the actual executors are cut. As the number of layers of management grows so do the initiatives as each try to make their mark on the organization to change it and mold it to their own likes. As this happens, organizational efforts become fragmented due to the sheer quantity of initiatives, critical mass, and the ability to execute anything, let alone a lot of everything becomes crippled due to the daily shifts in the ‘hot item’ that must be done.
Bigger isn’t necessarily better. Bigger at the top isn’t necessarily better when it comes to the results of execution.
Those that find themselves bigger one day than they were the day before would do best to do less, and do it well. The problem becomes, however, that they worry too much about who’s watching and what they can say they are doing rather than what they can say that they got done and got done well.
Econ 101 teaches us that the larger a chain gets, the greater the economies of scale it should enjoy. However, without discipline, the complexity of scale can outweigh the benefits.
This complexity is especially evident in the promotional activity one sees in a typical supermarket. Walk down most grocery aisles in the US today, and you will face an ocean of colored shelf tags, coupon machines, shelf talkers, banners, floor stickers, islands, displays, shippers, etc. And the visual assault tends to be worse at chains with more stores, since they often have more capacity to sell these programs to the vendor community.
Instead of hand-wringing over the lapses in compliance caused by the “intensified store operational complexity, larger assortments and poorer visibility from the home office,” perhaps we should ask if the programs are all worth running in the first place. Retailers would be better served to focus their time and attention on running fewer, better, simpler promotions with broad-based appeal (and much better compliance), and by supplementing those programs with highly-targeted, personalized promotions that are tailored to each shoppers’ buying preferences.
The lesson here is not that promotional programs are bad, but that they can easily become so numerous and complex that they hurt the business they are trying to help. Goal number one should be deciding on the *right* in-store displays, planograms, etc. Goal number two should be eliminating all the other programs that complicate your store associates’, your managers’, and your shoppers’ lives. Then, and only then, will investing in retail compliance pay significant dividends.
This is one of the oldest issues in the industry. We’ve had out-of-stocks, planogram compliance and in-store display execution challenges since Day 1. It isn’t the quality of store labor. It’s the management follow through…or lack thereof. I worked for a large grocer for almost twenty years. When I was a store manager, my DM would have a printout of the latest planogram of a key category in his pocket–yes–in his pocket, to ensure compliance. Our company wanted to build its PL market share and demanded all stores to have one SKU–yes–one SKU on the first endcap/display that the shopper saw in each store. They did this for 13 weeks straight; had the same item on the first endcap. And within 13 weeks, we had the largest share of that item category in the city. Out-of-stocks. When was the last time your store had a real, LIVE training session for the Center Store Manager to generate a more accurate product order? With a North American average of 8-15% out-of-stocks over the past two decades, don’t you think it’s time for some concentrated education?
Bottom line, this is all fixable. Simple, low-tech solutions that require good, old fashioned leadership to execute. I’d guess THAT’S the biggest challenge.
Two minor amplifications:
1. As Nikki and Adrian mentioned. MEASURE. Closed loop system.
2. Find out who is responsible for compliance. By name. I have been interviewing companies for two years on this. Both trading partners. Answer thus far: Either “everyone” (meaning no-one) or “no one.”
Finally, a bit of a stat. In over 200 projects we have done, 35% of the reason shelves do not match plans is that the plan was wrong to begin with. It did not match the store.