Etude

Time for retailers to change strategy

Par Jean-Marie Pean and Cyrille Fabre

First published on novembre 16, 2009
min


For the first time in years, the Gulf's phenomenal growth engine is stalling out, leaving retailers with lacklustre sales and mounting pressure on cash and profitability. Year-to-year sales growth of listed GCC retailers has dropped from nearly 22 per cent at the end of 2008, to just four per cent by June—despite a 20 per cent increase in the number of stores. Among the hardest hit categories are durable and discretionary goods. Modern retailers need to shift their focus from managing aggressive growth to achieving moderate growth while monitoring operating costs and cash flow. Because of under-investment in operational efficiency, many modern GCC retailers find it difficult to effectively manage the downturn. Among the gaps: they lack timely data to support decisions as well as the necessary skills and processes in key areas such as category management and supply chain. If we learnt anything from the 2001 recession, it is that there is no one-size-fits-all approach. But, what winners have in common is clear priorities that are consistent with their strategic situation in terms of financial strength, competitive position and the markets' sensitivity to the downturn. Those who succeed in getting their priorities right will be tomorrow's leaders. The 2001 recession is dramatic proof. Bain & Company research on retailers worldwide found that a company's opportunity to improve its competitive position was twice as great during that crisis than in stable times. As they plot strategy for the downturn and beyond, GCC retailers can learn from their multinational counterparts. Here are five approaches that can help GCC retailers not only survive the turbulence but accelerate out of it as dark clouds lift. Clarify strategies and shift resources to core businesses. Scarce resources After years of rapid expansion into new countries, store formats and categories, GCC retailers now are faced with increasingly scarce resources. To survive and thrive over time, companies need to define their key battlefields and focus investments on areas with strong market opportunities and the highest potential of winning. Activities that are not part of these 'core' battlefields and that are bleeding cash should be exited. Activities in the core should be continuously enhanced. For example, Azizia Panda is continuously investing to strengthen its core retail business in Saudi Arabia either organically (new stores opening) or through merger and acquisition (such as merger with Giant Stores in 2008). Most retailers' organisations have not evolved fast enough to keep pace with the growth of their business. GCC retailers now need to boost managerial skills in key areas where they lag global competitors—such as supply chain, category management and e-commerce. For many GCC retailers, decisions regarding the product range, the allocation of shelf space or the execution in-store have traditionally been made based on the flair and experience of few key executives. As the size of the retailer and the competition increase, decisions need to be more data driven. Recently, US-based retailer Macy's decentralised the selection of the assortment for each store closer to the field. The change has improved Macy's ability to respond quickly to local market shifts, with locally managed pilot stores achieving 2.1 percentage point greater growth in the first quarter of 2009 than other Macy's stores. As market growth slows down, GCC retailers have to find new pockets of opportunity by identifying and retaining the most attractive shopper segments. They can pinpoint those pockets by segmenting shoppers into different groups and prioritising them based on customers' value and whether they can win the segment. UK-based Tesco is expert at using loyalty cards to capture shopper information. The data helps zero in on the most valuable segments and improve product offerings and store service based on customers' changing needs. In May 2009, despite the downturn, Tesco invested £150 million (Dh918.21m) in its highly successful clubcard programme, with the hope of adding one million new members. Catch the flight to value Although the Gulf region has traditionally been a 'branded' market, value offerings are growing fast. Traffic at a Dubai factory outlet mall grew 15 per cent in the first quarter of 2009, while most traditional malls experienced a decline in shoppers. To meet this growing trend, retailers need to add more value-oriented items and promote it through advertising. Panda has moved in this direction, expanding its private label offerings by 33 percent in 2008. As customers throughout the region change where and how they shop, retailers who win will be the most adept at changing, too—balancing short-term and long-term strategy in the process. They'll use the downturn as an opportunity to clarify their strategy, strengthen their organisation for faster and better decisions, improve category management and follow shoppers' flight to value. The prize for getting it right: not only surviving the downturn but accelerating when the storm clouds lift. Jean-Marie Pean and Cyrille Fabre are Bain & Company's partner and manager from the firm's retail practice. Views expressed are their own.

For the first time in years, the Gulf's phenomenal growth engine is stalling out, leaving retailers with lacklustre sales and mounting pressure on cash and profitability. Year-to-year sales growth of listed GCC retailers has dropped from nearly 22 per cent at the end of 2008, to just four per cent by June—despite a 20 per cent increase in the number of stores. Among the hardest hit categories are durable and discretionary goods.

Modern retailers need to shift their focus from managing aggressive growth to achieving moderate growth while monitoring operating costs and cash flow. Because of under-investment in operational efficiency, many modern GCC retailers find it difficult to effectively manage the downturn. Among the gaps: they lack timely data to support decisions as well as the necessary skills and processes in key areas such as category management and supply chain.

If we learnt anything from the 2001 recession, it is that there is no one-size-fits-all approach. But, what winners have in common is clear priorities that are consistent with their strategic situation in terms of financial strength, competitive position and the markets' sensitivity to the downturn. Those who succeed in getting their priorities right will be tomorrow's leaders. The 2001 recession is dramatic proof. Bain & Company research on retailers worldwide found that a company's opportunity to improve its competitive position was twice as great during that crisis than in stable times.

As they plot strategy for the downturn and beyond, GCC retailers can learn from their multinational counterparts. Here are five approaches that can help GCC retailers not only survive the turbulence but accelerate out of it as dark clouds lift. Clarify strategies and shift resources to core businesses.

Scarce resources

After years of rapid expansion into new countries, store formats and categories, GCC retailers now are faced with increasingly scarce resources. To survive and thrive over time, companies need to define their key battlefields and focus investments on areas with strong market opportunities and the highest potential of winning. Activities that are not part of these 'core' battlefields and that are bleeding cash should be exited. Activities in the core should be continuously enhanced. For example, Azizia Panda is continuously investing to strengthen its core retail business in Saudi Arabia either organically (new stores opening) or through merger and acquisition (such as merger with Giant Stores in 2008).

Most retailers' organisations have not evolved fast enough to keep pace with the growth of their business. GCC retailers now need to boost managerial skills in key areas where they lag global competitors—such as supply chain, category management and e-commerce.

For many GCC retailers, decisions regarding the product range, the allocation of shelf space or the execution in-store have traditionally been made based on the flair and experience of few key executives.

As the size of the retailer and the competition increase, decisions need to be more data driven. Recently, US-based retailer Macy's decentralised the selection of the assortment for each store closer to the field. The change has improved Macy's ability to respond quickly to local market shifts, with locally managed pilot stores achieving 2.1 percentage point greater growth in the first quarter of 2009 than other Macy's stores.

As market growth slows down, GCC retailers have to find new pockets of opportunity by identifying and retaining the most attractive shopper segments. They can pinpoint those pockets by segmenting shoppers into different groups and prioritising them based on customers' value and whether they can win the segment. UK-based Tesco is expert at using loyalty cards to capture shopper information. The data helps zero in on the most valuable segments and improve product offerings and store service based on customers' changing needs. In May 2009, despite the downturn, Tesco invested £150 million (Dh918.21m) in its highly successful clubcard programme, with the hope of adding one million new members.

Catch the flight to value

Although the Gulf region has traditionally been a 'branded' market, value offerings are growing fast. Traffic at a Dubai factory outlet mall grew 15 per cent in the first quarter of 2009, while most traditional malls experienced a decline in shoppers. To meet this growing trend, retailers need to add more value-oriented items and promote it through advertising. Panda has moved in this direction, expanding its private label offerings by 33 percent in 2008.

As customers throughout the region change where and how they shop, retailers who win will be the most adept at changing, too—balancing short-term and long-term strategy in the process. They'll use the downturn as an opportunity to clarify their strategy, strengthen their organisation for faster and better decisions, improve category management and follow shoppers' flight to value. The prize for getting it right: not only surviving the downturn but accelerating when the storm clouds lift.

Jean-Marie Pean and Cyrille Fabre are Bain & Company's partner and manager from the firm's retail practice. Views expressed are their own.