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Managing retail service businesses for the 1990s: Marketing aspects
58
EMJ VOL. 8 NO. 1: March I .’ .a., .>.
.
3 __’
1990 /
‘;-‘t.
,.”
._
:-:, 3 ‘” ,.~ .’
_
I
i
Managing Retail Service Businesses for the 1990s: Marketing Aspects
Richard INSEAD,
Ford
Fontainebleau,
France
I
n this prize-winning essay in the 1989190 Minit Corporation/European Journal Best Management Essay of the Year Competition, Richard Ford chose marketing aspects of managing retail service businesses for the 1990s.
next few years, along with some possible success factors. As this essay tries to show, the future of retailing depends on the future of consumer tastes, which are by their nature impossible to forecast.
He argues that there is a continuity in retail trends, like the evolving trade-off between price and service, and such developments will continue into the 1990s. In this decade, the main catalyst for progress will be information technology.
Continuity
He then identifies the key issues of the 1990s as retailers retaining their traditional economic role in the distribution chain and retaining their market positions and earnings. The keys to success lie in information and licensing.
into the 1990s
There are a number of factors in retailing which are likely to be constant over the next decade. These include the economic role of the retailer, the evolving trade-off between price and service, and the need to target a particular segment of the overall market in order to enjoy above-average profits. I will expand on each of these at some length, since they involve concepts which are critical for the rest of the essay.
Economic Role Introduction In an essay whose title so explicitly calls for a forecast of trends over the next few years, there is an obvious danger of sounding futuristic, even apocalyptic! This essay, unfortunately, is more mundane. It looks at the next decade in the context of retailing’s historical development and sees considerable continuity in the retail environment of the 1990s. It then examines the changes that are likely to take place in retail marketing and the main reasons behind those changes. Finally, it diagnoses the key problems facing retailers in the
The economic role of the retailer has traditionally been that of a key intermediary between producers and consumers. Since the splitting of production and consumption which occurred with the Industrial Revolution, it has generally been inefficient for producers to supply consumers direct. The retailer was the last link in the chain of specialized distributors which developed to move goods between producers and consumers. As such, the retailer has always enjoyed special proximity to the end consumer. Thus, the history of retailing is inevitably linked to social and
FORD: MANAGING economic history. Each stage in retailing’s evolution can be traced to shifts in economic power across society. For example, the growth in the relative spending power of the middle class accounted for the rise of department stores in the late nineteenth century, while the increasing dispersion of wealth throughout society in the period after World War Two accounted for the onset of supermarkets. The apparent strength of retailers in the second half of the twentieth century can be largely attributed to improvements in social mobility and ‘democratic spending power’ during this period. Retailers have changed in the course of the twentieth century from places where producers show their products to places where consumers show their tastes. And many retailers have positioned themselves as the allies of consumers against producers. Some of the leading retailers have long pursued ‘consumerist’ policies. They have used their clout with consumers to force manufacturers to improve quality and reduce prices. They have played off one manufacturer against another, thereby boosting consumer surplus and compromising producer profit (while naturally taking part of the consumer surplus as their own profit!). This role has been most marked in the grocery and clothing industries (not surprising, it is non-existent in those retail outlets controlled by producers, such as footwear and cars. Retailing has become the sincerest (because the most lucrative) form of consumerism. In the 199Os, it will have to retain this consumerist edge. As we shall see, this will be challenging.
Price and Service The trade-off between price and service evolves as a result of retailer competition. Clearly, the higher the standards of service the higher the prices charged, so all retailers must make a choice about the precise levels of service and price to be offered. However, new efficiencies stemming from technological developments (like computerized stock-keeping) alter the current trade-off between service and price. When one retailer hits upon an idea to reduce prices without affecting service (or conversely to improve service without raising prices) then competitors try to respond in kind. So there is no steady state; and if the original idea is based on widely available technology, it is difficult to achieve any sort of sustainable competitive advantage, since competitors can copy it rapidly. innovations in price or service raise Moreover, customer expectations. In recent years, the rate of innovation of retail outlets has accelerated as retailers have sought to offer new combinations of price and service. These new types or outlet take retailing successively further up Maslow’s
RETAIL
SERVICE
BUSINESSES
59
‘hierarchy of needs’ in their appeals to customers: whereas earlier retailing formats like variety stores or supermarkets were concerned with meeting ‘low-level’ physiological, safety or social needs, later formats like superspeciality stores or fashion boutiques have been concerned with meeting ‘high-level’ esteem or selfactualisation needs. Since the low-level needs (and their corresponding retail outlets) still exist as the highlevel needs (and theirs) develop, there is now a complete spectrum of retail outlets. This retail spectrum runs from the lowest- to the highest-level needs; every retail outlet could be represented on it. Price is often the sole factor at the low-level end of the spectrum, whereas it is seldom the determining factor at the high-level end. The existence of this retail spectrum, and the evolving price service trade-off it implies, will continue into the 1990s.
Market Segments The importance of appealing specifically to a target customer segment has increased with the changes described in the preceding paragraph. As retailers have innovated and differentiated their offerings, they have found it less viable to go after the whole market. To attract all customers uniformly, an innovation would have to be momentous and therefore very expensive, or easily replicable by competitors, or both. The essence of segmentation is to identify a discrete group of customers whose characteristics make them particularly likely to accept a new offering. In other words, their price service trade-off differs sufficiently from that of the market as a whole to allow a retail outlet to increase value for them without increasing its costs proportionately. The upshot is above-average profits for the segmenting practice. ‘Discrete groups of customers’ are rarer than dragons’ teeth - if they were simple to identify, someone else would have already done so! Defining segment characteristics therefore demands ingenuity and flair; standard definitions will not yield a competitive edge. Retailers have been faced with the choice of using market research to forecast the tastes of target segments or of attempting to lead and shape those tastes, without research. Both courses of action involve risks: research is liable to point in familiar, unproductive directions; while pioneering without research may result in heavy losses. Many retailers, in particular those with corporate not entrepreneurial management styles, prefer to follow initiators rather than run the risks of initiating themselves. From this has arisen the ‘cult of design’ in retailing. The outward signs of a successful initiator’s strategy - window display, store layout, graphics etc - are cloned by its competitors. This has a number of repercussions: followers do not earn as much as the initiator, but they
60
EMJ VOL. 8 NO. 1: March 7990
at least diminish the initiator’s profits and forestall their own losses; design, unless outstanding, becomes less useful as a differentiating factor between retailers; and high streets and shopping malls grow more homogeneous as all stores in all locations come to resemble one another. These developments, and the attempts at segmentation which underlie them, will persist into the 1990s.
Changes in the 1990s Technology The next decade will see an intensification and acceleration of trends outlined in the first part of this essay. The main catalyst will be information technology, which allows constant improvements in efficiency which in turn affect the price service tradeoff. Already, EPOS has led to better monitoring of consumer purchases, lower inventory, quicker stockturns and a fuller assessment of direct product profitability. This holds the promise of ‘just-in-time’ retailing, resulting in reduced inventory costs and working capital requirements. Operating efficiency gains like these will gather pace in the 199Os, as better means of integrating and using data are developed. A problem for retailers, however, is the impossibility of creating a sustainable competitive advantage with technology. While the benefits of technology are real enough, competitors can always duplicate them. Hardware is generic. Moreover, external software consultancies can generally match the efficiencies achieved by internal departments, so the impact even of proprietary technological innovations is short-lived. Distribution companies are all to some extent in the business of efficiency (since their economic role is to and consumers as efficiently as link producers possible). For this reason, falling behind in technology will leave most retailers at a massive disadvantage. Thus retailers must invest in the latest technology just to stay in the game. Technology becomes necessary but not sufficient for success. In this way, automation raises the stakes of retailing and the benefits of technology are in the main passed on to customers in the form of lower prices or enhanced service. ‘commoditisation’ of retail offerings Furthermore, becomes more rapid with the uptake of technologv, so differentiation between retail outlets in the 1990s will have to be based on something less transitory than technological novelty. Segmentation will become even more critical, because only by meeting particular consumers’ price service trade-offs will retailers be able to charge a premium and achieve economic profits (that is, profits about the average level for the retailing industry). To appeal to
any one segment will often mean alienating and even deliberately excluding consumers outside that segment. In general, retailing will increasingly be characterised by transience, fashion, risk and cyclicality. All the way along the retail spectrum, the business environment will be more boom-and-bust than ever before. Stabilisa tion Retail companies will probably respond to these threats by trying to stabilise and secure their earnings. There are a number of ways of doing this: for example, by establishing a portfolio of complem’entary retail chains to diversify the risk of any single chain; or by diversifying into unrelated, non-retail businesses; or by integrating backwards and acquiring or taking partial equity stakes in manufacturers; or by forming alliances with other retailing, distribution or manufacturing companies. Such methods, however, may prove inimical to the interests of consumers and thus undermine the strong traditional relationship between retailers and consumers described in the first part of this essay. Consumer trends This is certainly the impression given by some commentators’ predictions about future consumer trends: the distinction between white- and blue-collar employees will disappear, as manufacturing and services become more similar; most skilled and semiskilled employees will be information-workers, and will be given more discretion to organise their working environment; as a result, employees will be more selfmotivated and self-reliant; their incomes will increase in real terms, but the less structured nature of their work will leave them with less pure ‘leisure-time’; they will therefore have little patience for mundane pursuits, but will be happy to pay lavishly for genuine entertainment; people will seek self-expression and will thirst for uniqueness; and finally, they will spend more time with their families so the home will become even more central. What these trends mean for retailing is that well-off people will grow less tolerant of shopping which they consider boring and mundane, but keener than ever on shopping which offers excitement, fun and joy. In effect, retailing will be competing with leisure pastimes like the TV, sports or funfairs. (Spacious modern shopping malls already seem like theme parks of desire!). But if the consumer trends point towards more thrilling and outrageous retail outlets, the uncertainty and risk associated with providing them may hurt retailers. Home shopping These consumer trends technological developments
may be abetted by in the field of home-
FORD: MANAGING shopping. The success of Minitels (computer terminals linked to standard telephones) in France suggests that the technical paraphernalia of home-shopping is not in itself inhibiting: people will use it so long as it is not complex and its benefits are clear. In fact, the average Parisian treats the Minitel not as a piece of sophisticated computer hardware, but as a handy addition to the telephone. This casualness somewhat makes a mockery of the idea that home-shopping, if it ever becomes popular, will have a profound and momentous effect on people’s lives. On the contrary, home-shopping will only become popular if it can fit in with the way people choose to live their lives. Some of the false starts hitherto encountered by the proponents of home-shopping can be attributed to their over-dramatic expectations for the new medium. The economic benefits of home-shopping are still not obvious enough to persuade private companies to make major investments in it (Minitels were installed under the aegis of the French PTT as an alternative to yellow pages). Until databases become more flexible, user-friendly, responsive and of course inexpensive, home-shopping is unlikely to have much impact on traditional retailing. When they do, however, homeshopping should make major inroads.
RETAIL
SERVICE
BUSINESSES
61
Retailers experienced in more rigorous forms of retailing will bring new methods to retail outlets like these. The transformation of bookshops in recent years from sleepy independent backwaters to feisty professional chains has shown this process at work. Similarly, the possible deregulation of retailing in the EEC during the next few years would unearth plenty of opportunities for established retailers to move into countries with comparatively unsophisticated retail industries. This essay is not going to dwell on opportunities like these for one-off boosts in efficiency, since one of its main premises is that such improvement are generic and therefore relatively easy to implement. On the contrary, this essay will conclude with some key issues of a longer-term nature.
Key Issues for the 1990s
Consumer proximity The first of these is whether retailers can retain their physical and emotional proximity to consumers and their traditional understanding of consumer needs. As suggested earlier, the historical link between consumers and retailers have given the latter the air of fervent consumerists and has made them the dominant force in the distribution chain. Information about what products and services consumers are interested in has been retailers’ key weapon in controlling physical distribution and achieving higher returns than wholesalers, transportation companies and (in the UK) most manufacturers. For much of the twentieth century, the value-added in the distribution chain has been concentrated at the retail end. Now certain phenomena may change this. The steady rise of direct marketing has given manufacturers an inside track to consumers. By adroit segmentation and consumer appeals, manufacturers are by-passing the retailer altogether. Manufacturers are also paying much more attention than hitherto to physical distribution. They understand their distribution costs better than before and are honing them accordingly. This has meant taking a much closer look at the relative contribution of different retailers and attempting to improve their terms. If a particular retailer is making a negative contribution to a manufacturer’s bottom line, the manufacturer’s best alternative is to discontinue business with that retailer. There is no point holding out for the future, because the future will be one of losses too! So the retailer will have to accommodate the manufacturer or give up the business.
Retailers in the 1990s will be able to obtain relatively easy efficiencies in certain areas. Right along the retail spectrum, there are particular types of retail outlet where retail principles like computerized stockkeeping, efficient warehousing, marketing segmentation and promotional synergies have hardly made any impression. Examples include car showrooms, hardware stores and computer shops.
But perhaps the most important factor for the balance of power in the distribution chain will be the impact and direction of home-shopping. If the right technology is developed (and at the moment that is a big ‘if’!) and if consumer uptake is as strong as this essay predicts, then consumer markets will become more perfect economically and the main part of the value-added in the distribution chain will shift from
There are two evident consumer benefits of home shopping: it might allow consumers to make routine, humdrum purchases (like groceries) without effort; it might also give them full information when making non-routine, important purchases (like white goods). For the first of these purposes, databases would need to contain key products, brands and prices; for the second, they would need to present much more data. In both cases, however, their effect would be the same - they would make the markets for the goods they portrayed more like an economist’s conception of the perfect market, where all consumers have complete information and inefficient producers are squeezed out. So while such databases (in fact, they would be more like information-carrying expert systems) are nowhere near operational at present, the promise they hold out is tantalising, because they would change the nature of retailing. Their providers, new-wave ‘electronic wholesalers’, would hold the balance of power in the distribution chain.
62
EMJ VOL. 8 NO. 1: March 7990
the retail end to the manufacturing end. In fact, consumer markets of the future would resemble industrial markets today, where buyers are wellinformed and most of the value-added is in manufacturing, with very little in marketing. It is thus in manufacturers’ interests to promote homeshopping. For retailers, the problems will be to retain their ‘consumerism’ and use their knowledge of target segments to dominate manufacturers through licensing and own-labelling. Market position
and earnings
This leads to the second key issue for the 1990s - how can large retailing companies maintain their positions and earnings? This essay has argued that appealing to a discrete target group will be essential in achieving above-average profits, and that consumers as a whole will become more dissatisfied with mundane attractions and will require more exuberant retail entertainment. How can the dominant retailers stay dominant under these pressures ? A pattern seems to be emerging whereby large retail groups cultivate a number of different retail formats, sometimes under a common name (Next Too, Next For Me, Next Jewellery, etc), sometimes under various ‘retail brand names’ (Burton, for example, has over twenty different retaiI brands in its stable, all aimed at particmar target segments). Retailers Iike these are operating almost as diversified merchandising conglomerates: they are seeking to combine a cult folIowing among target consumers with the synergies and economies of scale which accrue from centralisation. But is this possible? There are two dangers: first, that they fail to develop a strong enough consumer following; second, that the claimed synergies and economies prove to be illusory. Originality
and franchising
For the first of these dangers, if consumers do become more individualistic and more concerned with finding unique retail offerings, as this essay suggests, then the appeal of retail chains as a whole is liable to recede. Store-by-store originality and creativity will be much more motivating. Thus the staff in each store will be the crucial success factor, since it will be their presence and their in-store innovations that will distinguish one
retailer from another. This will require a reorientating of retail managers’ priorities. Instead of treating staff like pawns of efficiency, they will have to recognise staff as their key source of value. Wages and bonuses will have to be based as much on customer satisfaction as on sales (since customer satisfaction is a measure of future sales). Reskilling will replace deskilling. Franchising will grow more popular. All this is inconsistent with highly centralised organisations. Licensing
For the second, it is unclear whether corporate buying, merchandising and marketing will on balance produce superior performance. Quantitative economies of scale may be offset by qualitative diseconomies. Excessive centraIisation will certainly thwart the creativity required at the individual store level. Moreover, unless a retailer has a real competitive edge in warehousing and transportation, it should rent these services from specialists. All firms need to pare away operations that add no value - retailers are not immune. The retailer of the future will be sleek enough to move quickly with consumer trends. It will not be a leviathan. Its strength will be in controlling and using consumer information. It will licence out manufacturing, much of its warehousing and physical distribution, and even the operation of many of its retail outlets (through franchising). If this is correct, then the business of retailing in the 1990s will increasingly be one of information and licensing. Control of knowledge about customer requirements will allow retailers to hold on to a large part of the value in the distribution chain. But to maintain their profitability in the face of increasing cyclicality, uncertainty and risk, retailers will need to hive off their low value-added operations and improve their ability to monitor and satisfy consumer tastes. Physical distribution will therefore be dominated by specialists, the customer interface by highly independent store managers and franchisees working closely with mall-owners and civic officials. In conclusion, retailers in the 1990s will largely be orchestraters and facilitators, and will enhance their value to investors not by expanding into new areas to diversify their risk (investors can do that for themselves) but by staying in their area of expertise and getting slimmer and stronger.
EMJ VOL. 8 NO. 1: March I .’ .a., .>.
.
3 __’
1990 /
‘;-‘t.
,.”
._
:-:, 3 ‘” ,.~ .’
_
I
i
Managing Retail Service Businesses for the 1990s: Marketing Aspects
Richard INSEAD,
Ford
Fontainebleau,
France
I
n this prize-winning essay in the 1989190 Minit Corporation/European Journal Best Management Essay of the Year Competition, Richard Ford chose marketing aspects of managing retail service businesses for the 1990s.
next few years, along with some possible success factors. As this essay tries to show, the future of retailing depends on the future of consumer tastes, which are by their nature impossible to forecast.
He argues that there is a continuity in retail trends, like the evolving trade-off between price and service, and such developments will continue into the 1990s. In this decade, the main catalyst for progress will be information technology.
Continuity
He then identifies the key issues of the 1990s as retailers retaining their traditional economic role in the distribution chain and retaining their market positions and earnings. The keys to success lie in information and licensing.
into the 1990s
There are a number of factors in retailing which are likely to be constant over the next decade. These include the economic role of the retailer, the evolving trade-off between price and service, and the need to target a particular segment of the overall market in order to enjoy above-average profits. I will expand on each of these at some length, since they involve concepts which are critical for the rest of the essay.
Economic Role Introduction In an essay whose title so explicitly calls for a forecast of trends over the next few years, there is an obvious danger of sounding futuristic, even apocalyptic! This essay, unfortunately, is more mundane. It looks at the next decade in the context of retailing’s historical development and sees considerable continuity in the retail environment of the 1990s. It then examines the changes that are likely to take place in retail marketing and the main reasons behind those changes. Finally, it diagnoses the key problems facing retailers in the
The economic role of the retailer has traditionally been that of a key intermediary between producers and consumers. Since the splitting of production and consumption which occurred with the Industrial Revolution, it has generally been inefficient for producers to supply consumers direct. The retailer was the last link in the chain of specialized distributors which developed to move goods between producers and consumers. As such, the retailer has always enjoyed special proximity to the end consumer. Thus, the history of retailing is inevitably linked to social and
FORD: MANAGING economic history. Each stage in retailing’s evolution can be traced to shifts in economic power across society. For example, the growth in the relative spending power of the middle class accounted for the rise of department stores in the late nineteenth century, while the increasing dispersion of wealth throughout society in the period after World War Two accounted for the onset of supermarkets. The apparent strength of retailers in the second half of the twentieth century can be largely attributed to improvements in social mobility and ‘democratic spending power’ during this period. Retailers have changed in the course of the twentieth century from places where producers show their products to places where consumers show their tastes. And many retailers have positioned themselves as the allies of consumers against producers. Some of the leading retailers have long pursued ‘consumerist’ policies. They have used their clout with consumers to force manufacturers to improve quality and reduce prices. They have played off one manufacturer against another, thereby boosting consumer surplus and compromising producer profit (while naturally taking part of the consumer surplus as their own profit!). This role has been most marked in the grocery and clothing industries (not surprising, it is non-existent in those retail outlets controlled by producers, such as footwear and cars. Retailing has become the sincerest (because the most lucrative) form of consumerism. In the 199Os, it will have to retain this consumerist edge. As we shall see, this will be challenging.
Price and Service The trade-off between price and service evolves as a result of retailer competition. Clearly, the higher the standards of service the higher the prices charged, so all retailers must make a choice about the precise levels of service and price to be offered. However, new efficiencies stemming from technological developments (like computerized stock-keeping) alter the current trade-off between service and price. When one retailer hits upon an idea to reduce prices without affecting service (or conversely to improve service without raising prices) then competitors try to respond in kind. So there is no steady state; and if the original idea is based on widely available technology, it is difficult to achieve any sort of sustainable competitive advantage, since competitors can copy it rapidly. innovations in price or service raise Moreover, customer expectations. In recent years, the rate of innovation of retail outlets has accelerated as retailers have sought to offer new combinations of price and service. These new types or outlet take retailing successively further up Maslow’s
RETAIL
SERVICE
BUSINESSES
59
‘hierarchy of needs’ in their appeals to customers: whereas earlier retailing formats like variety stores or supermarkets were concerned with meeting ‘low-level’ physiological, safety or social needs, later formats like superspeciality stores or fashion boutiques have been concerned with meeting ‘high-level’ esteem or selfactualisation needs. Since the low-level needs (and their corresponding retail outlets) still exist as the highlevel needs (and theirs) develop, there is now a complete spectrum of retail outlets. This retail spectrum runs from the lowest- to the highest-level needs; every retail outlet could be represented on it. Price is often the sole factor at the low-level end of the spectrum, whereas it is seldom the determining factor at the high-level end. The existence of this retail spectrum, and the evolving price service trade-off it implies, will continue into the 1990s.
Market Segments The importance of appealing specifically to a target customer segment has increased with the changes described in the preceding paragraph. As retailers have innovated and differentiated their offerings, they have found it less viable to go after the whole market. To attract all customers uniformly, an innovation would have to be momentous and therefore very expensive, or easily replicable by competitors, or both. The essence of segmentation is to identify a discrete group of customers whose characteristics make them particularly likely to accept a new offering. In other words, their price service trade-off differs sufficiently from that of the market as a whole to allow a retail outlet to increase value for them without increasing its costs proportionately. The upshot is above-average profits for the segmenting practice. ‘Discrete groups of customers’ are rarer than dragons’ teeth - if they were simple to identify, someone else would have already done so! Defining segment characteristics therefore demands ingenuity and flair; standard definitions will not yield a competitive edge. Retailers have been faced with the choice of using market research to forecast the tastes of target segments or of attempting to lead and shape those tastes, without research. Both courses of action involve risks: research is liable to point in familiar, unproductive directions; while pioneering without research may result in heavy losses. Many retailers, in particular those with corporate not entrepreneurial management styles, prefer to follow initiators rather than run the risks of initiating themselves. From this has arisen the ‘cult of design’ in retailing. The outward signs of a successful initiator’s strategy - window display, store layout, graphics etc - are cloned by its competitors. This has a number of repercussions: followers do not earn as much as the initiator, but they
60
EMJ VOL. 8 NO. 1: March 7990
at least diminish the initiator’s profits and forestall their own losses; design, unless outstanding, becomes less useful as a differentiating factor between retailers; and high streets and shopping malls grow more homogeneous as all stores in all locations come to resemble one another. These developments, and the attempts at segmentation which underlie them, will persist into the 1990s.
Changes in the 1990s Technology The next decade will see an intensification and acceleration of trends outlined in the first part of this essay. The main catalyst will be information technology, which allows constant improvements in efficiency which in turn affect the price service tradeoff. Already, EPOS has led to better monitoring of consumer purchases, lower inventory, quicker stockturns and a fuller assessment of direct product profitability. This holds the promise of ‘just-in-time’ retailing, resulting in reduced inventory costs and working capital requirements. Operating efficiency gains like these will gather pace in the 199Os, as better means of integrating and using data are developed. A problem for retailers, however, is the impossibility of creating a sustainable competitive advantage with technology. While the benefits of technology are real enough, competitors can always duplicate them. Hardware is generic. Moreover, external software consultancies can generally match the efficiencies achieved by internal departments, so the impact even of proprietary technological innovations is short-lived. Distribution companies are all to some extent in the business of efficiency (since their economic role is to and consumers as efficiently as link producers possible). For this reason, falling behind in technology will leave most retailers at a massive disadvantage. Thus retailers must invest in the latest technology just to stay in the game. Technology becomes necessary but not sufficient for success. In this way, automation raises the stakes of retailing and the benefits of technology are in the main passed on to customers in the form of lower prices or enhanced service. ‘commoditisation’ of retail offerings Furthermore, becomes more rapid with the uptake of technologv, so differentiation between retail outlets in the 1990s will have to be based on something less transitory than technological novelty. Segmentation will become even more critical, because only by meeting particular consumers’ price service trade-offs will retailers be able to charge a premium and achieve economic profits (that is, profits about the average level for the retailing industry). To appeal to
any one segment will often mean alienating and even deliberately excluding consumers outside that segment. In general, retailing will increasingly be characterised by transience, fashion, risk and cyclicality. All the way along the retail spectrum, the business environment will be more boom-and-bust than ever before. Stabilisa tion Retail companies will probably respond to these threats by trying to stabilise and secure their earnings. There are a number of ways of doing this: for example, by establishing a portfolio of complem’entary retail chains to diversify the risk of any single chain; or by diversifying into unrelated, non-retail businesses; or by integrating backwards and acquiring or taking partial equity stakes in manufacturers; or by forming alliances with other retailing, distribution or manufacturing companies. Such methods, however, may prove inimical to the interests of consumers and thus undermine the strong traditional relationship between retailers and consumers described in the first part of this essay. Consumer trends This is certainly the impression given by some commentators’ predictions about future consumer trends: the distinction between white- and blue-collar employees will disappear, as manufacturing and services become more similar; most skilled and semiskilled employees will be information-workers, and will be given more discretion to organise their working environment; as a result, employees will be more selfmotivated and self-reliant; their incomes will increase in real terms, but the less structured nature of their work will leave them with less pure ‘leisure-time’; they will therefore have little patience for mundane pursuits, but will be happy to pay lavishly for genuine entertainment; people will seek self-expression and will thirst for uniqueness; and finally, they will spend more time with their families so the home will become even more central. What these trends mean for retailing is that well-off people will grow less tolerant of shopping which they consider boring and mundane, but keener than ever on shopping which offers excitement, fun and joy. In effect, retailing will be competing with leisure pastimes like the TV, sports or funfairs. (Spacious modern shopping malls already seem like theme parks of desire!). But if the consumer trends point towards more thrilling and outrageous retail outlets, the uncertainty and risk associated with providing them may hurt retailers. Home shopping These consumer trends technological developments
may be abetted by in the field of home-
FORD: MANAGING shopping. The success of Minitels (computer terminals linked to standard telephones) in France suggests that the technical paraphernalia of home-shopping is not in itself inhibiting: people will use it so long as it is not complex and its benefits are clear. In fact, the average Parisian treats the Minitel not as a piece of sophisticated computer hardware, but as a handy addition to the telephone. This casualness somewhat makes a mockery of the idea that home-shopping, if it ever becomes popular, will have a profound and momentous effect on people’s lives. On the contrary, home-shopping will only become popular if it can fit in with the way people choose to live their lives. Some of the false starts hitherto encountered by the proponents of home-shopping can be attributed to their over-dramatic expectations for the new medium. The economic benefits of home-shopping are still not obvious enough to persuade private companies to make major investments in it (Minitels were installed under the aegis of the French PTT as an alternative to yellow pages). Until databases become more flexible, user-friendly, responsive and of course inexpensive, home-shopping is unlikely to have much impact on traditional retailing. When they do, however, homeshopping should make major inroads.
RETAIL
SERVICE
BUSINESSES
61
Retailers experienced in more rigorous forms of retailing will bring new methods to retail outlets like these. The transformation of bookshops in recent years from sleepy independent backwaters to feisty professional chains has shown this process at work. Similarly, the possible deregulation of retailing in the EEC during the next few years would unearth plenty of opportunities for established retailers to move into countries with comparatively unsophisticated retail industries. This essay is not going to dwell on opportunities like these for one-off boosts in efficiency, since one of its main premises is that such improvement are generic and therefore relatively easy to implement. On the contrary, this essay will conclude with some key issues of a longer-term nature.
Key Issues for the 1990s
Consumer proximity The first of these is whether retailers can retain their physical and emotional proximity to consumers and their traditional understanding of consumer needs. As suggested earlier, the historical link between consumers and retailers have given the latter the air of fervent consumerists and has made them the dominant force in the distribution chain. Information about what products and services consumers are interested in has been retailers’ key weapon in controlling physical distribution and achieving higher returns than wholesalers, transportation companies and (in the UK) most manufacturers. For much of the twentieth century, the value-added in the distribution chain has been concentrated at the retail end. Now certain phenomena may change this. The steady rise of direct marketing has given manufacturers an inside track to consumers. By adroit segmentation and consumer appeals, manufacturers are by-passing the retailer altogether. Manufacturers are also paying much more attention than hitherto to physical distribution. They understand their distribution costs better than before and are honing them accordingly. This has meant taking a much closer look at the relative contribution of different retailers and attempting to improve their terms. If a particular retailer is making a negative contribution to a manufacturer’s bottom line, the manufacturer’s best alternative is to discontinue business with that retailer. There is no point holding out for the future, because the future will be one of losses too! So the retailer will have to accommodate the manufacturer or give up the business.
Retailers in the 1990s will be able to obtain relatively easy efficiencies in certain areas. Right along the retail spectrum, there are particular types of retail outlet where retail principles like computerized stockkeeping, efficient warehousing, marketing segmentation and promotional synergies have hardly made any impression. Examples include car showrooms, hardware stores and computer shops.
But perhaps the most important factor for the balance of power in the distribution chain will be the impact and direction of home-shopping. If the right technology is developed (and at the moment that is a big ‘if’!) and if consumer uptake is as strong as this essay predicts, then consumer markets will become more perfect economically and the main part of the value-added in the distribution chain will shift from
There are two evident consumer benefits of home shopping: it might allow consumers to make routine, humdrum purchases (like groceries) without effort; it might also give them full information when making non-routine, important purchases (like white goods). For the first of these purposes, databases would need to contain key products, brands and prices; for the second, they would need to present much more data. In both cases, however, their effect would be the same - they would make the markets for the goods they portrayed more like an economist’s conception of the perfect market, where all consumers have complete information and inefficient producers are squeezed out. So while such databases (in fact, they would be more like information-carrying expert systems) are nowhere near operational at present, the promise they hold out is tantalising, because they would change the nature of retailing. Their providers, new-wave ‘electronic wholesalers’, would hold the balance of power in the distribution chain.
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the retail end to the manufacturing end. In fact, consumer markets of the future would resemble industrial markets today, where buyers are wellinformed and most of the value-added is in manufacturing, with very little in marketing. It is thus in manufacturers’ interests to promote homeshopping. For retailers, the problems will be to retain their ‘consumerism’ and use their knowledge of target segments to dominate manufacturers through licensing and own-labelling. Market position
and earnings
This leads to the second key issue for the 1990s - how can large retailing companies maintain their positions and earnings? This essay has argued that appealing to a discrete target group will be essential in achieving above-average profits, and that consumers as a whole will become more dissatisfied with mundane attractions and will require more exuberant retail entertainment. How can the dominant retailers stay dominant under these pressures ? A pattern seems to be emerging whereby large retail groups cultivate a number of different retail formats, sometimes under a common name (Next Too, Next For Me, Next Jewellery, etc), sometimes under various ‘retail brand names’ (Burton, for example, has over twenty different retaiI brands in its stable, all aimed at particmar target segments). Retailers Iike these are operating almost as diversified merchandising conglomerates: they are seeking to combine a cult folIowing among target consumers with the synergies and economies of scale which accrue from centralisation. But is this possible? There are two dangers: first, that they fail to develop a strong enough consumer following; second, that the claimed synergies and economies prove to be illusory. Originality
and franchising
For the first of these dangers, if consumers do become more individualistic and more concerned with finding unique retail offerings, as this essay suggests, then the appeal of retail chains as a whole is liable to recede. Store-by-store originality and creativity will be much more motivating. Thus the staff in each store will be the crucial success factor, since it will be their presence and their in-store innovations that will distinguish one
retailer from another. This will require a reorientating of retail managers’ priorities. Instead of treating staff like pawns of efficiency, they will have to recognise staff as their key source of value. Wages and bonuses will have to be based as much on customer satisfaction as on sales (since customer satisfaction is a measure of future sales). Reskilling will replace deskilling. Franchising will grow more popular. All this is inconsistent with highly centralised organisations. Licensing
For the second, it is unclear whether corporate buying, merchandising and marketing will on balance produce superior performance. Quantitative economies of scale may be offset by qualitative diseconomies. Excessive centraIisation will certainly thwart the creativity required at the individual store level. Moreover, unless a retailer has a real competitive edge in warehousing and transportation, it should rent these services from specialists. All firms need to pare away operations that add no value - retailers are not immune. The retailer of the future will be sleek enough to move quickly with consumer trends. It will not be a leviathan. Its strength will be in controlling and using consumer information. It will licence out manufacturing, much of its warehousing and physical distribution, and even the operation of many of its retail outlets (through franchising). If this is correct, then the business of retailing in the 1990s will increasingly be one of information and licensing. Control of knowledge about customer requirements will allow retailers to hold on to a large part of the value in the distribution chain. But to maintain their profitability in the face of increasing cyclicality, uncertainty and risk, retailers will need to hive off their low value-added operations and improve their ability to monitor and satisfy consumer tastes. Physical distribution will therefore be dominated by specialists, the customer interface by highly independent store managers and franchisees working closely with mall-owners and civic officials. In conclusion, retailers in the 1990s will largely be orchestraters and facilitators, and will enhance their value to investors not by expanding into new areas to diversify their risk (investors can do that for themselves) but by staying in their area of expertise and getting slimmer and stronger.