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Competitive strategies in retailing
74
Long Range Planning, Vol. 22, No. 6, pp. 74 to 84, 1989 Printed in Great Britain
Competitive Retailing David
0024-6301/89 S3.00 + .OO Pergamon Press plc
Strategies in
Walters and Derek Knee
A strategy formulation procedure for retailers is described. The changing retail environment has brought problems for some traditional forms of retailing, and indeed failure for some stores, but it has also brought opportunities, particularly for the store management that has been prepared to consider different ways of selling.
Few other industrial sectors have experienced the rapid changes to which retailing has been subject in recent years. As an industry it has seen the growth of concentration in virtually all its major productmarkets. Specialization has been another major feature and this has been applied to both merchandise assortments and location developments. At the same time large retailers have followed a policy of diversification and have thus become conglomerates. Perhaps the most significant influence or agent of change has been the consumer. Social and economic changes have together created a totally different consumer in the 1980s from that of the 1950s. Technology has also played a part, not least in accelerating change. Social change has had a number of components. Demographic changes that are significant include the changes in population structure, generally favouring the elderly and the young, but with very little major change to the high-spending 25-44 age-more of which later. Family structural group changes are important. A greater number of households with fewer members is the result of an increase in divorce, earlier independence by the young and a general trend among some groups towards making their own way. Early retirement is introducing a new dimension-an economically active group of physically fit people with few financial responsibilities. David Walters is at the University of Stirling. Templeton College, Oxford.
Derek Knee is at
Socio-economic changes are equally important. The growing gulf between ‘haves’ and ‘have riots’’ is better considered as employed and unemployed. Unemployment is not a state in which no quality of life exists, rather it is restricted. However, it is the employed who offer most opportunity for the retailer and who appear to receive most attention. This clearly is because of the increasing size of the gulf between the two. Not only is their level of disposable income increasing but so too are ‘benefits’, thus adding to their spending power. Other significant features are the increasing amounts of ‘inherited wealth’, from the sale of parental homes, and steady progress of share-ownership. However, virtually all marketing efforts are directed towards the ‘haves’, although there remain considerable opportunities for profitable growth businesses among the unemployed groups who continue to buy across the range of consumer goods. For most retailers there is an implicit assumption that their offer will appeal. at least in part, to the ‘have-nots’ and no discernible efforts are made to appeal to them. This has meant, for example that Britain still lacks any big national chain of limitedassortment discount-price food stores, similar to Aldi in Germany. Similarly, few retailers seem prepared to appeal specifically to the ‘affluent over 55s’. apparently on the assumption that if they devote their attention to the 25-44 age-group, something is bound to spin off on to older people! Technology has made an impact. It has enabled affluent consumers to move time, to truncate time and to use time to make life more convenient. Through the medium of the VCR, the deep freeze and the microwave oven the consumer can budget time-use to maximize leisure and convenience. In the foreseeable future technology will very likely be able to relieve the consumer of many domestic tasks which are becoming increasingly odious in an
Competitive age dominated by leisure. Among these is no doubt shopping for everyday foods, regarded by many as a distasteful and time-waisting chore.
The increased affluence of the majority has led to new consumer buying behaviour habits and criteria. As the majority, the employed, enjoy increased spending power to their needs shift to desires. They move away from being price conscious buyers and seek other benefits such as choice, quality, exclusivity and service. Furthermore, socio-cultural issues become important as the affluent group use their purchases to express their views of themselves. The apparel retailers have capitalized on this emerging behavioural trend. Armed with sophisticated research methodology those companies (or their researchers and consultants) have identified new dimensions to markets, which hitherto were segmented by age and socio-economic grouping. Market segmentation has rapidly become market fragmentation. An indication of the implications of these events is shown by Figure 1 in which the Burton Group presented its view of its activities in the apparel market to the City, as a series of targeted businesses.
Strategies
in Retailing
75
The Retail Brand and the Need for Brand Positioning Against this background we have seen the development of retailers as brands. This does not imply a range of own label products, clearly an important component, but rather a complete strategic package comprising merchandise, trading environment, customer service and customer communications. Figure 2 suggests how these combine to support a specific market position. It is this approach that is likely to have prompted Altman (1) to summarize recent developments in food retailing: ‘There also appears to be a tacit agreement among market leaders that the days when competitiveness focussed on price along are gone. Future gains in market share depend largely on other factors reflecting changing consumer attitudes and preferences. Offering value for money is one thing. But price wars simply achieve higher market share for some and lead to greatly reduced margins, lower profitability and less investment in better stores. In the absence of price wars fierce competition has led to a considerable sharpening up of marketing structures and strategies.’
A number of research projects have resulted in findings which suggest that consumer requirements of shopping offers have moved away from a dominance of low prices towards quality, convenience, service, exclusivity and other factors. Price is always relevant but for the affluent it has declined in importance.
To be customer-led the retailer needs to offer more than lower prices, lower that is than his competitor. In that situation how is strategy developed and what are its components?
This has posed problems and in some cases has spelt failure for the traditional variety stores which have surrendered their strong price appeal without being able to replace or complement it convincingly with other factors.
Central to the continued success of any company is its competitive advantage. Competitive advantage is simply that feature (or features) or characteristic(s) that enhances the position of the company with consumers to develop a strong customer loyal base or franchise, meaning that customers visit it frequently, make high average transactions and spend across the assortment, resulting in a high return on investment.
While the changing retail environment has brought problems for some forms of retailing, it has also brought opportunities. The changing environment has required retailing managers to consider their business in quite different ways.
Competitive Advantage Distinctive Competence
and
Competitive advantage may be productivity-led or marketing-led and can comprise one or more compo-
DICKENS & JONES Dickens and Jones was, until 1984, a conventional department store. Its traditional strengths were in ladieswear and furnishing fabrics but it offered the traditional range of departments. However, it was not successful and producing poor sales and profit performance. Its ladieswear offer was targeted towards an ageing segment of the market, affluent but not volume purchasers, aged 55 and above. The company had a very limited offer in menswear which was a growth sector. Dickens and Jones became a fashion department store. The merchandise ranges were changed dramatically to give appeal to the fashion conscious ABC1 consumer. Many ranges were discontinued and the space made available used for an expansion of the core merchandise ranges in ladies and menswear. This is an example of a company identifying the need for change and the appeal for the consumer in specialist retailing by selecting a narrow market segment (niche marketing). It is also an example of edited retailing whereby a narrow range of merchandise is skilfully combined to appeal to customer demand characteristics such as type of fashion, range of choice, quality, price. Store environment is an essential ingredient together with customer services.
76
Long Range
Planning
The Young Market: Dorothy Perkins
Vol. 22
The Style Market: Principles
The Men’s Market: Burton
Figure
1. Burton
December
segmentation
of fashion
1989
The Teenage Market: Top Shop/Top Man
The Knightsbridge Harvey Nichols
markets
Market:
The Larger Market Evans
The Family Market: Debenhams
Competitive
Target Customer
Merchandise
Figure
2. The relationship
of market
positioning,
in Retailing
77
Group
Strategy
added value and strategic
nents (see Figure 3). The important point is that the company develops competitive advantage appropriate to servicing the identified needs and desires of a customer segment offering a profitable market potential. Clearly the two are linked. For example for Argos, a marketing-led competitive advantage may require that operations are maintained at a costeffective advantage may require that operations are maintained at a cost-effective optimum (i.e. productivity-led) in order that low-price offers may be made (and maintained) throughout the life of a catalogue. Alternatively, competitive advantage may be developed by identifying specific customer service needs or merchandise requirements (or both) and setting out to establish a reputation within the target customer group to achieve a ‘first choice’ position. There is much to be said for basing the development of competitive advantage on a distinctive com-
Strategies
decision
areas
petence. Often the two are seen as synonymous but a more acceptable view would see the latter as an industry-wide recognized corporate skill which can form the basis for developing competitive advantage appropriate to an identifiable marketing opportunity. Clearly both distinctive competence and competitive advantage are relative measures.
Researching
Market Opportunities
Identifying marketing opportunities starts with a review of market trends to identify market segments offering growth potential with, ideally, very little competitive activity. From the opportunities identified a profile of the customer group within it should be constructed. This should include both quantitative and qualitative information. Quantitative information on numbers and locations is essential if economic and financial viability are to be
78
Long Range
Planning
Vol. 22
December
1989
ment to ensure that this customer group feels relaxed and can move around comfortably. The fashion area offers a ‘wardrobe service’ which details customer requirements for apparel products well beyond size and styles and includes labels, colours, end-uses, together with lifestyle details. Direct customer communication is high.
assessed. The qualitative aspects concern data on attitudes, interests and behaviour in and towards shopping situations together with work and leisure activities. In this way a comprehensive picture is built up of customer group requirements for merchandise, trading format, customer service and customer communications. As Figure 4 suggests, it is the combination of these four functional strategies that actually comprises the ‘image’ or market positioning statement of the retail company. It is only when the customer identifies with this that the objectives of a strong customer franchise will be achieved.
This example may be contrasted with, say, Kwiksave whose offer or positioning is primarily pricebased with a minimum level of service. Assortment ranges are designed to offer sufficient choice but also they are restricted to enable the firm’s buyers to achieve the gross margins necessary to maintain the low-price offer. A closely controlled operation (and distribution) function ensures that contribution margins are optimized and therefore an acceptable net margin achieved.
There are numerous examples. Harrods makes an appeal to a customer group that is service-sensitive rather than price sensitive. A group that expects exclusive products, wide ranges to choose from with considerable depth within the assortment. Considerable attention is paid to the store environ-
These
I
Marketing
two
examples
Led Differentiation
Nearest Competitor
Productivity
Figure 3a. Differentiation
for competitive
advantage
Led Differentiation
indicate
the
link
between
Competitive
Strategies
in Retailing
79
Productivity Led Diierentiation l Effective Cost Management of Total Operation to Maximise Contribution by Using information Technology to Manage Operations and Tightly Controlled Budgets
l Designing Distribution Systems Which Offer Customers High Levels of Service (Product Availability, Quality etc.) by Operating at Optimal Levels of Performance.
* Well Developed Management.
Supplier/Retailer
Relationships
and Supply Chain
* Design of Optimal Stores
l
Use Economies of Scale
Marketing Led Differentiation l Using information Technology Purchasing Behaviour.
l
Product Range Characteristics
l
Pricing Policy.
l
Customer
to Refine Customer
Data Base and
Which Match Customer
Profile Requirements.
Services.
* Unique Market Positioning. l
Strong Customer
Franchise.
l
Location Advantage.
Cost Effective Customer Service Packages Which Add Value to the Overall Offer. l
l
Figure
3b. Characteristics
Market Share Volume That Discourages
Challenges.
of differentiation
positioning and competitive advantage. They represent the ‘matching’ process that is necessary between corporate abilities and resources and alternative marketing opportunities. By first of all identifying the nature of the competitive advantage requirement necessary for success and appraising this against existing distinctive competence(s) relative to competitors, a realistic view of the tasks necessary to achieve customer franchise objectives becomes available.
Segmentation
Competitive
and Profitability
Earlier we referred to market fragmentation as a development of market sementation. This suggests that Porter’s view of the relationship between market share and return on investment is appro-
priate to retailing strategy (2). The notion of a Ushaped curve rather than a linear relationship (see Figure 5) suggests that the retailer who segments (or fragments) a market (market segment) and ‘edits’ his offer to meet the specific needs if the target customer group is more likely to achieve his customer franchise objectives than a competitor who relaxes his functional strategy criteria. The difference illustrated by Figure 5 concerns one of philosophy more than it does anything else. It indicates the view the retailer holds of the market place and the role of the successful retailer within it. Essentially there are two approaches. Either the retailer considers himself to be a ‘mass merchandiser’ and to offer appeal to all or most of the market or
Figure 4. The concept
Strategy
Product Support Services.
Advertising Customer
The Location, Size (and Number)
of Outlets. In Store Ambiance
of ‘strategy
Classification
overlap’
Groups).
Direct Mail lnstore Displays Phone Orders
Corporate Philosophy. Integrated Campaigns:
Information to Target Offers).
Lifestylas
Contact (Direcflndirect Using Account
Rather Than Merchandise
Strategy (Media and Creative)
Display Themes (e.g. by Customer Use and
(Merchandise
Customer
Trading Format lEnvironme
Density).
Packages of Selective Services for Important Customers.
(Price, Product Range, Ambiance). Coordinated Merchandise
Communications
Merchandise.
- Discount Stance
Displays.
Regular Update on New
Area for Strategy Overlap
Service Products to Extend
‘Trading Style’:
Area for Strategy Overlap
Price Guarantees.
Upon Service,Sensitivity.
Based
Customer
Support Services.
Segmentation
Customer Services Strategy
Extensive
Selection.
Exclusive Ranges.
Merchandise
- Catalogue Selling
Area for Strategy Overlap
Capabilities and Capacities.
Review Supply Chain Members
Price Points. The Role of Own Labels and Concessions.
Key Assortment Groups. Assortment Width, Depth and Availability.
Merchandise
Co-ordinated Ranges.
Area for Strategy Ov&ap
Competitive
Strategies
in Retailing
81
NEXT An example of ‘strategy overlap’ developed as a retail company.
to develop
sustainable
competitive
advantage
can be seen in the way in which
Next has
Next has developed a multiple operation based upon a target segment of the market who share a particular view towards fashion, i.e. they prefer ‘classic’ fashion to ‘popular’ fashion. They also have views concerning product quality, probably because they were Marks and Spencer customers, and expect a number of seasons wear from a garment. Next also offers product co-ordination which as an aspect of service has customer appeal; not only does it suggest suitable clothes combinations it saves the customer time and effort in selecting (and finding) suitable complementary garments, but it increases customer transactions. This overlap between merchandise strategy and service strategy had immediate customer appeal. The acquisition/merger with Grattan has offered Next the ability rapidly to use information technology to build a data base from which both high street customers and mail order customers can be tracked and their buying behaviour (store visits and purchases) used to develop more cost-effective direct marketing initiatives. By strengthening their offer to the target customer group Next is adding value over and above its competitors’ offers. The Next Directory is one example. It offers existing (and potential) customers an expanded range of merchandise together with the facility of home shopping (an emerging ‘convenience’ requirement of some consumers). Clearly Next and other retailing innovators have difficulty in building sustainablecompetitiveadvantage in a business which has little protection from the imitators. We suggest that it is the reputation that the company builds with its core customer group for developing in those areas of merchandise, customer service and trading style that have specific appeal to them that is the basis for sustainable competitive advantage.
alternatively segments.
the retailer
can seek to service selected
Current U.K. developments offer good examples of this market situation. The apparel market has examples of both mass merchandiser and specialist The ladies and menswear or niche marketing. operations of Marks and Spencer are examples of a well-thought attempt at mass merchandising. They are improving product quality, range width (choice) and style. However this inevitably has an impact on price and eventually their strong price advantage is being eroded. More significant is the fact that the mass merchandise customer changes due to the influence of competitors and the market place. Eventually their buying criteria are best met by the specialist. The threat for the mass merchandiser is that both the market place and competition will influence the customer base towards favouring a specialist or niche approach with more specific appeal to groups of individuals. Burton is a good example (see Figure 1) of how a range of specialist offers can be assembled as a portfolio to compete in what was not very long ago a mass market dominated by Marks and Spencer but one which is changing rapidly. The dilemma of the mass merchandiser (as illustrated in Figure 5) is that in an attempt to offer a form of specialization, they lose the advantage they have with their offer of basic/commodity merchandise and have neither the skills or credibility with customers to reformulate their strategy towards a differentiated offer. This raises an interesting issue. Does such an approach become constraining? Does the market potential soon become saturated? Such problems seem to be those being addressed by Next. Having identified a segment of the apparel market which identifies closely with the Next offer or position-
1
ing-literally, what next? The company’s reaction thus far would appear to be not to segment (fragment) its fashion offer further but to enter those segments of other product-markets that Next-type customers clearly are active in. There is the danger here that the customer attitudes that make the Next apparel offer attractive may not extend into other product-markets. They may well have been conditioned in terms of attitudes and behaviour by major competitors in those product-markets and, therefore, may not react to a similar appeal in DIY and other areas. This is the classic department store syndrome. Established department stores have in recent years made efforts to disengage themselves from productmarkets having little appeal for their ‘strong’ customers; other retailers seeking for some reason to emulate the department stores by becoming generalists, instead of being content to remain specialists, may encounter the same pitfalls. Considerable attention is currently being given to the importance of added value in retailing, particularly in the context of developing competitive advantage. Returning to Figure 4 gives us an opportunity to consider where there are opportunities to create added value and enhance competitive advantage. The selected market positioning can be enhanced by closely considering the areas of overlap between the Within these areas is the functional strategies. opportunity more closely to support the market positioning stance of the company. The particular areas of interest are: Merchandise/Customer
Service.
Customer
Service/Customer
Customer
Communications/Trading
Trading
Format/Merchandise.
Communications. Format.
82
Long Range
Planning
Vol. 22
December
1989
Market Share
Figure
5. Segmentation
This is not combinations,
Segmentation by Attitudes Towards Service, Quality, Exclusivity Requires Creative Marketing Skills
Segmentation By Price Requires a Low Cost Position
DifferentationFashion Products
Basic/Commodity Products.
Marketing Led Differentiation
Productivity Led Differentiation
and market
share
to suggest that these are exclusive rather they are the more obvious.
The example given earlier of Harrod’s wardrobe service fits well between customer service strategy and customer communications strategy, in which added value is created for the target customer by informing selected customers of products identified as being of specific interest. The growth of visual merchandising is another example of strategy overlap between trading format and customer communications strategy (and could also be seen as an overlap between trading format and merchandise strategies). In this instance the overlap and added value benefit are concerned with presenting the customer with fashion co-ordination ideas or with product-use ideas, both added value factors. Numerous possibilities exist; the successful companies are those which identify the overlap areas relevant to the target customer group, and reflect the market positioning stance.
Strategic Risk
Options:
Opportunity
and
There are a number of questions that management must ask itself when deciding between the strategic options facing the company. The most effective strategy (in terms of maximizing business performance) may not necessarily be the most exciting. To this end the model we proposed in an earlier publication (3) offers a range of alternatives ranging from low risk ‘operations improvement’ based activities to high risk ‘diversification’ strategies. The choice is usually based upon how well current objectives are being met. Measuring
Performance
Typically objectives are framed in both marketing and financial terms. Marketing objectives, if they are to be more useful than mere bench marks used for PR purposes, should reflect the fundamental
Competitive
Strategies
in Retailing
83
purpose of the business. This is, they should express elements of the customer franchise objective that are important to the business.
provide margin, improvements.
For example:
Growth; expansion into related merchandise areas, customer service support, trading formats or possibly all of these.
*
Total number actions.
*
Number
of visits per customer.
*
Average
customer
If? Range *
of customer
of customer
visits
and
trans-
volume
and
asset utilization
Repositioning; to meet the changing existing customer segments.
needs
of
DiversiJiration; expansion into new retail situations (merchandise, customer service, trading format, communications).
transaction. purchases.
Proportion of customer purchases made company outlets out of total spending.
in
If these are lower than those calculated necessary for viability (and lower than those estimated for competitors), then it suggests that the business is not operating efficiently and that productivity should be improved. This clearly has links with financial performance in terms of ROI (or similar-based measures). An interesting example here is that of Argyll Stores who identified low achievement scores on these measures and undertook productivity improvement activities. These involved extensive use of information technology to bring about more effectve means of planning and controlling operations. (4) Other relevant marketing performance measures may relate to regional market share performance. Ansoff s product-market matrix identified market development as an option accompanied by relatively low risk. It follows that a low market share in a region within which the company has low outlet representation is worth investigation. Sainsbury have expanded their business northwards in the U.K., using their standard ‘package’ with considerable success. The productivity of fixed overhead items should also be planned and measured. Clearly more turnover amortized over fixed overhead items is desirable. However, there is often little scope for expansion of the existing business, and this suggests selling the excess capacity of expensive overhead operations to other companies. This can lead to a successful subsidiary operation, e.g. Welbeck Finance, and opens further opportunities. Clearly objectives must be set that not only measure the performance of the business but also can be used to identify opportunities. It is against this background that our original strategy model was developed (5).
Conglomerate activities and International retailing ventures in which other ‘base interests’ (but which follow an overall strategic direction) are developed, e.g. such as those currently pursued by Woolworth Holdings. The options selected may then be related to the functional strategy areas. Examples of functional strategy issues could be: Merchandise strategy Appraise suppliers, review ity, reliabiity. Rationalize
margins
their innovation,
qual-
product range, to achieve better buying (consolidation and productivity).
Increase range depth to offer wider choice (if identified as essential to increase customer transaction values). Price adjustments: reductions to increase volume and profitability; increases in non-price sensitive product/choice sensitive areas of the assortment. Improve product quality, exclusivity, etc. to match changing customer requirements of repositioning. Introduction of compatible ranges to meet repositioning requirements of the customer base. New assortment, sification.
new service products
for diver-
Customer service strategy Add service support facilities to the existing assortment to meet increasing service sensitivity (e.g. Wardrobe services, ‘gift’ reminders). Repositioning products.
with
increased
service
and service
Review basic service issues, credit, deliveries, rentals, customer information mailings and hours of business. Add service products in growth
situations.
Trading format strategy Essentially
it comprises
four strategic
options:
Consolidation and productivity; increasing performance from the existing resource base to
Consider relocation, tion of merchandise opportunities.
redesign of interiors, reducdensity to meet repositioning
84
Long Range
Planning
December
Vol. 22
1989
Risk
i
Figure 6. Developing
strategy
and positioning
Develop specialist outlets around areas for growth potential. New outlets: diversification
(size, location, opportunities.
key assortment
ambiance)
to meet
Establish property company or activity to exploit conglomerate retailing activities (Diversification). Cctstomer commtrnication strategy Adjust both creative ud media strategies to meet repositioning opportunities. Devise new campaigns to meet changing attitudes, expectations and perceptions of existing customers-repositioning. Increase use of customer dutu-buse to improve promotional effectiveness (i.e. specific targeting of merchandise and service offers).
The use of information information/transaction
technology processes.
in customer
Stufltruining progrummes to increase the effectiveness of customer service unacustomer relations.
Concluding
Remarks
We are not so presumptjous to suggest that this process is followed by all successful retailers. We are convinced that those that are successful follow similar approaches or perhaps use elements of the strategy formulation procedure discussed here. The process outlined in diagram form as Figure 6 represents the thinking of persistently high performing companies. Thereafter a number of examples of strategic and positioning development that can be used as examples. An interesting example concerns the development patterns of food retailers Sainsbury and Tesco.
Long Range Planning, Vol. 22, No. 6, pp. 74 to 84, 1989 Printed in Great Britain
Competitive Retailing David
0024-6301/89 S3.00 + .OO Pergamon Press plc
Strategies in
Walters and Derek Knee
A strategy formulation procedure for retailers is described. The changing retail environment has brought problems for some traditional forms of retailing, and indeed failure for some stores, but it has also brought opportunities, particularly for the store management that has been prepared to consider different ways of selling.
Few other industrial sectors have experienced the rapid changes to which retailing has been subject in recent years. As an industry it has seen the growth of concentration in virtually all its major productmarkets. Specialization has been another major feature and this has been applied to both merchandise assortments and location developments. At the same time large retailers have followed a policy of diversification and have thus become conglomerates. Perhaps the most significant influence or agent of change has been the consumer. Social and economic changes have together created a totally different consumer in the 1980s from that of the 1950s. Technology has also played a part, not least in accelerating change. Social change has had a number of components. Demographic changes that are significant include the changes in population structure, generally favouring the elderly and the young, but with very little major change to the high-spending 25-44 age-more of which later. Family structural group changes are important. A greater number of households with fewer members is the result of an increase in divorce, earlier independence by the young and a general trend among some groups towards making their own way. Early retirement is introducing a new dimension-an economically active group of physically fit people with few financial responsibilities. David Walters is at the University of Stirling. Templeton College, Oxford.
Derek Knee is at
Socio-economic changes are equally important. The growing gulf between ‘haves’ and ‘have riots’’ is better considered as employed and unemployed. Unemployment is not a state in which no quality of life exists, rather it is restricted. However, it is the employed who offer most opportunity for the retailer and who appear to receive most attention. This clearly is because of the increasing size of the gulf between the two. Not only is their level of disposable income increasing but so too are ‘benefits’, thus adding to their spending power. Other significant features are the increasing amounts of ‘inherited wealth’, from the sale of parental homes, and steady progress of share-ownership. However, virtually all marketing efforts are directed towards the ‘haves’, although there remain considerable opportunities for profitable growth businesses among the unemployed groups who continue to buy across the range of consumer goods. For most retailers there is an implicit assumption that their offer will appeal. at least in part, to the ‘have-nots’ and no discernible efforts are made to appeal to them. This has meant, for example that Britain still lacks any big national chain of limitedassortment discount-price food stores, similar to Aldi in Germany. Similarly, few retailers seem prepared to appeal specifically to the ‘affluent over 55s’. apparently on the assumption that if they devote their attention to the 25-44 age-group, something is bound to spin off on to older people! Technology has made an impact. It has enabled affluent consumers to move time, to truncate time and to use time to make life more convenient. Through the medium of the VCR, the deep freeze and the microwave oven the consumer can budget time-use to maximize leisure and convenience. In the foreseeable future technology will very likely be able to relieve the consumer of many domestic tasks which are becoming increasingly odious in an
Competitive age dominated by leisure. Among these is no doubt shopping for everyday foods, regarded by many as a distasteful and time-waisting chore.
The increased affluence of the majority has led to new consumer buying behaviour habits and criteria. As the majority, the employed, enjoy increased spending power to their needs shift to desires. They move away from being price conscious buyers and seek other benefits such as choice, quality, exclusivity and service. Furthermore, socio-cultural issues become important as the affluent group use their purchases to express their views of themselves. The apparel retailers have capitalized on this emerging behavioural trend. Armed with sophisticated research methodology those companies (or their researchers and consultants) have identified new dimensions to markets, which hitherto were segmented by age and socio-economic grouping. Market segmentation has rapidly become market fragmentation. An indication of the implications of these events is shown by Figure 1 in which the Burton Group presented its view of its activities in the apparel market to the City, as a series of targeted businesses.
Strategies
in Retailing
75
The Retail Brand and the Need for Brand Positioning Against this background we have seen the development of retailers as brands. This does not imply a range of own label products, clearly an important component, but rather a complete strategic package comprising merchandise, trading environment, customer service and customer communications. Figure 2 suggests how these combine to support a specific market position. It is this approach that is likely to have prompted Altman (1) to summarize recent developments in food retailing: ‘There also appears to be a tacit agreement among market leaders that the days when competitiveness focussed on price along are gone. Future gains in market share depend largely on other factors reflecting changing consumer attitudes and preferences. Offering value for money is one thing. But price wars simply achieve higher market share for some and lead to greatly reduced margins, lower profitability and less investment in better stores. In the absence of price wars fierce competition has led to a considerable sharpening up of marketing structures and strategies.’
A number of research projects have resulted in findings which suggest that consumer requirements of shopping offers have moved away from a dominance of low prices towards quality, convenience, service, exclusivity and other factors. Price is always relevant but for the affluent it has declined in importance.
To be customer-led the retailer needs to offer more than lower prices, lower that is than his competitor. In that situation how is strategy developed and what are its components?
This has posed problems and in some cases has spelt failure for the traditional variety stores which have surrendered their strong price appeal without being able to replace or complement it convincingly with other factors.
Central to the continued success of any company is its competitive advantage. Competitive advantage is simply that feature (or features) or characteristic(s) that enhances the position of the company with consumers to develop a strong customer loyal base or franchise, meaning that customers visit it frequently, make high average transactions and spend across the assortment, resulting in a high return on investment.
While the changing retail environment has brought problems for some forms of retailing, it has also brought opportunities. The changing environment has required retailing managers to consider their business in quite different ways.
Competitive Advantage Distinctive Competence
and
Competitive advantage may be productivity-led or marketing-led and can comprise one or more compo-
DICKENS & JONES Dickens and Jones was, until 1984, a conventional department store. Its traditional strengths were in ladieswear and furnishing fabrics but it offered the traditional range of departments. However, it was not successful and producing poor sales and profit performance. Its ladieswear offer was targeted towards an ageing segment of the market, affluent but not volume purchasers, aged 55 and above. The company had a very limited offer in menswear which was a growth sector. Dickens and Jones became a fashion department store. The merchandise ranges were changed dramatically to give appeal to the fashion conscious ABC1 consumer. Many ranges were discontinued and the space made available used for an expansion of the core merchandise ranges in ladies and menswear. This is an example of a company identifying the need for change and the appeal for the consumer in specialist retailing by selecting a narrow market segment (niche marketing). It is also an example of edited retailing whereby a narrow range of merchandise is skilfully combined to appeal to customer demand characteristics such as type of fashion, range of choice, quality, price. Store environment is an essential ingredient together with customer services.
76
Long Range
Planning
The Young Market: Dorothy Perkins
Vol. 22
The Style Market: Principles
The Men’s Market: Burton
Figure
1. Burton
December
segmentation
of fashion
1989
The Teenage Market: Top Shop/Top Man
The Knightsbridge Harvey Nichols
markets
Market:
The Larger Market Evans
The Family Market: Debenhams
Competitive
Target Customer
Merchandise
Figure
2. The relationship
of market
positioning,
in Retailing
77
Group
Strategy
added value and strategic
nents (see Figure 3). The important point is that the company develops competitive advantage appropriate to servicing the identified needs and desires of a customer segment offering a profitable market potential. Clearly the two are linked. For example for Argos, a marketing-led competitive advantage may require that operations are maintained at a costeffective advantage may require that operations are maintained at a cost-effective optimum (i.e. productivity-led) in order that low-price offers may be made (and maintained) throughout the life of a catalogue. Alternatively, competitive advantage may be developed by identifying specific customer service needs or merchandise requirements (or both) and setting out to establish a reputation within the target customer group to achieve a ‘first choice’ position. There is much to be said for basing the development of competitive advantage on a distinctive com-
Strategies
decision
areas
petence. Often the two are seen as synonymous but a more acceptable view would see the latter as an industry-wide recognized corporate skill which can form the basis for developing competitive advantage appropriate to an identifiable marketing opportunity. Clearly both distinctive competence and competitive advantage are relative measures.
Researching
Market Opportunities
Identifying marketing opportunities starts with a review of market trends to identify market segments offering growth potential with, ideally, very little competitive activity. From the opportunities identified a profile of the customer group within it should be constructed. This should include both quantitative and qualitative information. Quantitative information on numbers and locations is essential if economic and financial viability are to be
78
Long Range
Planning
Vol. 22
December
1989
ment to ensure that this customer group feels relaxed and can move around comfortably. The fashion area offers a ‘wardrobe service’ which details customer requirements for apparel products well beyond size and styles and includes labels, colours, end-uses, together with lifestyle details. Direct customer communication is high.
assessed. The qualitative aspects concern data on attitudes, interests and behaviour in and towards shopping situations together with work and leisure activities. In this way a comprehensive picture is built up of customer group requirements for merchandise, trading format, customer service and customer communications. As Figure 4 suggests, it is the combination of these four functional strategies that actually comprises the ‘image’ or market positioning statement of the retail company. It is only when the customer identifies with this that the objectives of a strong customer franchise will be achieved.
This example may be contrasted with, say, Kwiksave whose offer or positioning is primarily pricebased with a minimum level of service. Assortment ranges are designed to offer sufficient choice but also they are restricted to enable the firm’s buyers to achieve the gross margins necessary to maintain the low-price offer. A closely controlled operation (and distribution) function ensures that contribution margins are optimized and therefore an acceptable net margin achieved.
There are numerous examples. Harrods makes an appeal to a customer group that is service-sensitive rather than price sensitive. A group that expects exclusive products, wide ranges to choose from with considerable depth within the assortment. Considerable attention is paid to the store environ-
These
I
Marketing
two
examples
Led Differentiation
Nearest Competitor
Productivity
Figure 3a. Differentiation
for competitive
advantage
Led Differentiation
indicate
the
link
between
Competitive
Strategies
in Retailing
79
Productivity Led Diierentiation l Effective Cost Management of Total Operation to Maximise Contribution by Using information Technology to Manage Operations and Tightly Controlled Budgets
l Designing Distribution Systems Which Offer Customers High Levels of Service (Product Availability, Quality etc.) by Operating at Optimal Levels of Performance.
* Well Developed Management.
Supplier/Retailer
Relationships
and Supply Chain
* Design of Optimal Stores
l
Use Economies of Scale
Marketing Led Differentiation l Using information Technology Purchasing Behaviour.
l
Product Range Characteristics
l
Pricing Policy.
l
Customer
to Refine Customer
Data Base and
Which Match Customer
Profile Requirements.
Services.
* Unique Market Positioning. l
Strong Customer
Franchise.
l
Location Advantage.
Cost Effective Customer Service Packages Which Add Value to the Overall Offer. l
l
Figure
3b. Characteristics
Market Share Volume That Discourages
Challenges.
of differentiation
positioning and competitive advantage. They represent the ‘matching’ process that is necessary between corporate abilities and resources and alternative marketing opportunities. By first of all identifying the nature of the competitive advantage requirement necessary for success and appraising this against existing distinctive competence(s) relative to competitors, a realistic view of the tasks necessary to achieve customer franchise objectives becomes available.
Segmentation
Competitive
and Profitability
Earlier we referred to market fragmentation as a development of market sementation. This suggests that Porter’s view of the relationship between market share and return on investment is appro-
priate to retailing strategy (2). The notion of a Ushaped curve rather than a linear relationship (see Figure 5) suggests that the retailer who segments (or fragments) a market (market segment) and ‘edits’ his offer to meet the specific needs if the target customer group is more likely to achieve his customer franchise objectives than a competitor who relaxes his functional strategy criteria. The difference illustrated by Figure 5 concerns one of philosophy more than it does anything else. It indicates the view the retailer holds of the market place and the role of the successful retailer within it. Essentially there are two approaches. Either the retailer considers himself to be a ‘mass merchandiser’ and to offer appeal to all or most of the market or
Figure 4. The concept
Strategy
Product Support Services.
Advertising Customer
The Location, Size (and Number)
of Outlets. In Store Ambiance
of ‘strategy
Classification
overlap’
Groups).
Direct Mail lnstore Displays Phone Orders
Corporate Philosophy. Integrated Campaigns:
Information to Target Offers).
Lifestylas
Contact (Direcflndirect Using Account
Rather Than Merchandise
Strategy (Media and Creative)
Display Themes (e.g. by Customer Use and
(Merchandise
Customer
Trading Format lEnvironme
Density).
Packages of Selective Services for Important Customers.
(Price, Product Range, Ambiance). Coordinated Merchandise
Communications
Merchandise.
- Discount Stance
Displays.
Regular Update on New
Area for Strategy Overlap
Service Products to Extend
‘Trading Style’:
Area for Strategy Overlap
Price Guarantees.
Upon Service,Sensitivity.
Based
Customer
Support Services.
Segmentation
Customer Services Strategy
Extensive
Selection.
Exclusive Ranges.
Merchandise
- Catalogue Selling
Area for Strategy Overlap
Capabilities and Capacities.
Review Supply Chain Members
Price Points. The Role of Own Labels and Concessions.
Key Assortment Groups. Assortment Width, Depth and Availability.
Merchandise
Co-ordinated Ranges.
Area for Strategy Ov&ap
Competitive
Strategies
in Retailing
81
NEXT An example of ‘strategy overlap’ developed as a retail company.
to develop
sustainable
competitive
advantage
can be seen in the way in which
Next has
Next has developed a multiple operation based upon a target segment of the market who share a particular view towards fashion, i.e. they prefer ‘classic’ fashion to ‘popular’ fashion. They also have views concerning product quality, probably because they were Marks and Spencer customers, and expect a number of seasons wear from a garment. Next also offers product co-ordination which as an aspect of service has customer appeal; not only does it suggest suitable clothes combinations it saves the customer time and effort in selecting (and finding) suitable complementary garments, but it increases customer transactions. This overlap between merchandise strategy and service strategy had immediate customer appeal. The acquisition/merger with Grattan has offered Next the ability rapidly to use information technology to build a data base from which both high street customers and mail order customers can be tracked and their buying behaviour (store visits and purchases) used to develop more cost-effective direct marketing initiatives. By strengthening their offer to the target customer group Next is adding value over and above its competitors’ offers. The Next Directory is one example. It offers existing (and potential) customers an expanded range of merchandise together with the facility of home shopping (an emerging ‘convenience’ requirement of some consumers). Clearly Next and other retailing innovators have difficulty in building sustainablecompetitiveadvantage in a business which has little protection from the imitators. We suggest that it is the reputation that the company builds with its core customer group for developing in those areas of merchandise, customer service and trading style that have specific appeal to them that is the basis for sustainable competitive advantage.
alternatively segments.
the retailer
can seek to service selected
Current U.K. developments offer good examples of this market situation. The apparel market has examples of both mass merchandiser and specialist The ladies and menswear or niche marketing. operations of Marks and Spencer are examples of a well-thought attempt at mass merchandising. They are improving product quality, range width (choice) and style. However this inevitably has an impact on price and eventually their strong price advantage is being eroded. More significant is the fact that the mass merchandise customer changes due to the influence of competitors and the market place. Eventually their buying criteria are best met by the specialist. The threat for the mass merchandiser is that both the market place and competition will influence the customer base towards favouring a specialist or niche approach with more specific appeal to groups of individuals. Burton is a good example (see Figure 1) of how a range of specialist offers can be assembled as a portfolio to compete in what was not very long ago a mass market dominated by Marks and Spencer but one which is changing rapidly. The dilemma of the mass merchandiser (as illustrated in Figure 5) is that in an attempt to offer a form of specialization, they lose the advantage they have with their offer of basic/commodity merchandise and have neither the skills or credibility with customers to reformulate their strategy towards a differentiated offer. This raises an interesting issue. Does such an approach become constraining? Does the market potential soon become saturated? Such problems seem to be those being addressed by Next. Having identified a segment of the apparel market which identifies closely with the Next offer or position-
1
ing-literally, what next? The company’s reaction thus far would appear to be not to segment (fragment) its fashion offer further but to enter those segments of other product-markets that Next-type customers clearly are active in. There is the danger here that the customer attitudes that make the Next apparel offer attractive may not extend into other product-markets. They may well have been conditioned in terms of attitudes and behaviour by major competitors in those product-markets and, therefore, may not react to a similar appeal in DIY and other areas. This is the classic department store syndrome. Established department stores have in recent years made efforts to disengage themselves from productmarkets having little appeal for their ‘strong’ customers; other retailers seeking for some reason to emulate the department stores by becoming generalists, instead of being content to remain specialists, may encounter the same pitfalls. Considerable attention is currently being given to the importance of added value in retailing, particularly in the context of developing competitive advantage. Returning to Figure 4 gives us an opportunity to consider where there are opportunities to create added value and enhance competitive advantage. The selected market positioning can be enhanced by closely considering the areas of overlap between the Within these areas is the functional strategies. opportunity more closely to support the market positioning stance of the company. The particular areas of interest are: Merchandise/Customer
Service.
Customer
Service/Customer
Customer
Communications/Trading
Trading
Format/Merchandise.
Communications. Format.
82
Long Range
Planning
Vol. 22
December
1989
Market Share
Figure
5. Segmentation
This is not combinations,
Segmentation by Attitudes Towards Service, Quality, Exclusivity Requires Creative Marketing Skills
Segmentation By Price Requires a Low Cost Position
DifferentationFashion Products
Basic/Commodity Products.
Marketing Led Differentiation
Productivity Led Differentiation
and market
share
to suggest that these are exclusive rather they are the more obvious.
The example given earlier of Harrod’s wardrobe service fits well between customer service strategy and customer communications strategy, in which added value is created for the target customer by informing selected customers of products identified as being of specific interest. The growth of visual merchandising is another example of strategy overlap between trading format and customer communications strategy (and could also be seen as an overlap between trading format and merchandise strategies). In this instance the overlap and added value benefit are concerned with presenting the customer with fashion co-ordination ideas or with product-use ideas, both added value factors. Numerous possibilities exist; the successful companies are those which identify the overlap areas relevant to the target customer group, and reflect the market positioning stance.
Strategic Risk
Options:
Opportunity
and
There are a number of questions that management must ask itself when deciding between the strategic options facing the company. The most effective strategy (in terms of maximizing business performance) may not necessarily be the most exciting. To this end the model we proposed in an earlier publication (3) offers a range of alternatives ranging from low risk ‘operations improvement’ based activities to high risk ‘diversification’ strategies. The choice is usually based upon how well current objectives are being met. Measuring
Performance
Typically objectives are framed in both marketing and financial terms. Marketing objectives, if they are to be more useful than mere bench marks used for PR purposes, should reflect the fundamental
Competitive
Strategies
in Retailing
83
purpose of the business. This is, they should express elements of the customer franchise objective that are important to the business.
provide margin, improvements.
For example:
Growth; expansion into related merchandise areas, customer service support, trading formats or possibly all of these.
*
Total number actions.
*
Number
of visits per customer.
*
Average
customer
If? Range *
of customer
of customer
visits
and
trans-
volume
and
asset utilization
Repositioning; to meet the changing existing customer segments.
needs
of
DiversiJiration; expansion into new retail situations (merchandise, customer service, trading format, communications).
transaction. purchases.
Proportion of customer purchases made company outlets out of total spending.
in
If these are lower than those calculated necessary for viability (and lower than those estimated for competitors), then it suggests that the business is not operating efficiently and that productivity should be improved. This clearly has links with financial performance in terms of ROI (or similar-based measures). An interesting example here is that of Argyll Stores who identified low achievement scores on these measures and undertook productivity improvement activities. These involved extensive use of information technology to bring about more effectve means of planning and controlling operations. (4) Other relevant marketing performance measures may relate to regional market share performance. Ansoff s product-market matrix identified market development as an option accompanied by relatively low risk. It follows that a low market share in a region within which the company has low outlet representation is worth investigation. Sainsbury have expanded their business northwards in the U.K., using their standard ‘package’ with considerable success. The productivity of fixed overhead items should also be planned and measured. Clearly more turnover amortized over fixed overhead items is desirable. However, there is often little scope for expansion of the existing business, and this suggests selling the excess capacity of expensive overhead operations to other companies. This can lead to a successful subsidiary operation, e.g. Welbeck Finance, and opens further opportunities. Clearly objectives must be set that not only measure the performance of the business but also can be used to identify opportunities. It is against this background that our original strategy model was developed (5).
Conglomerate activities and International retailing ventures in which other ‘base interests’ (but which follow an overall strategic direction) are developed, e.g. such as those currently pursued by Woolworth Holdings. The options selected may then be related to the functional strategy areas. Examples of functional strategy issues could be: Merchandise strategy Appraise suppliers, review ity, reliabiity. Rationalize
margins
their innovation,
qual-
product range, to achieve better buying (consolidation and productivity).
Increase range depth to offer wider choice (if identified as essential to increase customer transaction values). Price adjustments: reductions to increase volume and profitability; increases in non-price sensitive product/choice sensitive areas of the assortment. Improve product quality, exclusivity, etc. to match changing customer requirements of repositioning. Introduction of compatible ranges to meet repositioning requirements of the customer base. New assortment, sification.
new service products
for diver-
Customer service strategy Add service support facilities to the existing assortment to meet increasing service sensitivity (e.g. Wardrobe services, ‘gift’ reminders). Repositioning products.
with
increased
service
and service
Review basic service issues, credit, deliveries, rentals, customer information mailings and hours of business. Add service products in growth
situations.
Trading format strategy Essentially
it comprises
four strategic
options:
Consolidation and productivity; increasing performance from the existing resource base to
Consider relocation, tion of merchandise opportunities.
redesign of interiors, reducdensity to meet repositioning
84
Long Range
Planning
December
Vol. 22
1989
Risk
i
Figure 6. Developing
strategy
and positioning
Develop specialist outlets around areas for growth potential. New outlets: diversification
(size, location, opportunities.
key assortment
ambiance)
to meet
Establish property company or activity to exploit conglomerate retailing activities (Diversification). Cctstomer commtrnication strategy Adjust both creative ud media strategies to meet repositioning opportunities. Devise new campaigns to meet changing attitudes, expectations and perceptions of existing customers-repositioning. Increase use of customer dutu-buse to improve promotional effectiveness (i.e. specific targeting of merchandise and service offers).
The use of information information/transaction
technology processes.
in customer
Stufltruining progrummes to increase the effectiveness of customer service unacustomer relations.
Concluding
Remarks
We are not so presumptjous to suggest that this process is followed by all successful retailers. We are convinced that those that are successful follow similar approaches or perhaps use elements of the strategy formulation procedure discussed here. The process outlined in diagram form as Figure 6 represents the thinking of persistently high performing companies. Thereafter a number of examples of strategic and positioning development that can be used as examples. An interesting example concerns the development patterns of food retailers Sainsbury and Tesco.