Giant mergers, global expansion, competitive upheaval. These are the realities for retailers today, according to Jeff Smith, global managing partner for Accenture’s $1 billion retail and consumer products practice.
Smith spoke recently on the overall state of retail, major information technology and supply-chain initiatives such as RFID and remix, and the impact of Wal-Mart and other global leaders on the industry.
WWD: One of the major trends in retail is looking at merchandise optimization. What does that mean in practice and who is employing these systems?
Smith: Consumers want selection, but they do not want excessive variety. When you talk about assortment proliferation, you need to realize the average household has 150 items in the pantry — and the UPC [Universal Product Code] database has well over 2 million [items.] That’s a big disconnect between the number of things one can possibly buy and the number of things a given household is interested in. We’ve done work with ready-to-eat cereals, where a [big-box] retailer was holding five different sizes of Raisin Bran. We took out the second-to-smallest and the second-to-largest packages and sales went up. And we saved 40 percent of the costs of distribution. What happened was we reduced the confusion about buying the product. There were too many choices. We’ve done a lot of work in this area with Meijer, which is a [Grand Rapids, Mich.-based] supercenter operator. In 2000, they engaged us to help with their SMART initiative. That’s an internal acronym for smarter merchandising and retailing. We helped the company transform its merchandising, supply chain and distribution [processes]. The benefit they have talked about is a nine-figure increase in a 12-month period. They had both working capital productivity improvement and sales increases at the same time.
WWD: Who else has done this? Anyone else in apparel?
Smith: Our early work at Gap was all around that topic, which led to current work on a large-scale IT upgrade. That [upgrade] is largely due to the fact that once you get to a certain point of performance, the thing constraining people’s ability to do even better is an inability to get timely and accurate information. Generally, [in assortment optimization] apparel is little bit of a different animal because you’ve got the style-size-color pack issue, which complicates life more than if you are just selling toothpaste. You don’t always get quite the same dramatic improvements. But there are gains to be made. We did work with Nordstrom and shoes. If you have the reputation of carrying three million pairs of shoes — if that’s part of your secret sauce — you don’t want to sacrifice that market message by being too efficient. You can’t go through and just whack 10 percent of the assortment based on some sort of formula. We ended up fine-tuning their assortment so it would have the spirit of a deep and broad assortment. Our approach was to understand the diversity and segmentation of stores, do a twiddling of the dials to get the precise right mix of products in the right place so that the target shopper in each department found what she needed and was not confused by a lot of stuff that was not relevant. Many retailers have used systems of the previous generation that support the “model of the average store on a chain-wide basis.” The minute you use that term, “average,” red warning signals should go off.
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WWD: I know Accenture has been active in helping retailers shift their accounting methods. What’s the change and what are the ramifications on doing business?
Smith: When you use [traditional] retail methods of accounting for inventory, you make money putting product in a store before you even sell it. Retailers book revenue when they load inventory on a shelf. Under that method, you never want to close a store and eliminate that inventory even though you would raise cash. The books don’t recognize that cash, and that leads to a strong disincentive to close stores, even if they are underperformers, and a massive incentive to keep opening stores. We know where that gets some companies. What we’re now seeing is a move toward cost-basis accounting. That’s where revenue is booked when goods get sold to consumers. I sat with an [executive vice president] of store operations and merchandising at a large, big-box retailer through discussions on converting to a cost method of accounting. And it dawned on him in the meeting that he could no longer use store openings to grow the business — he had to actually sell stuff to people. Out of that came the realization that there wasn’t a single person in the organization with the word “sales” in their title. As a result of that meeting, they named a senior vice president of sales and they identified people in each of the stores who had sales responsibility.
WWD: Are most retailers these days going toward cost-method of accounting?
Smith: No, many are still on the retail method. The conversion is a big deal because the data touches all key information people used to make decisions. When Wal-Mart made the transition some years ago, I believe in early 2000, Linda Dillman took it on as her big project. She did well with it, and I think that’s a big reason why she got the cio [chief information officer] position. A client I worked with, a big-box retailer, pioneered the transition back in 1990. They finished [implementing it] in 1994. They’ve said it added one point of sales to the bottom line the minute they turned it on. The progressive retailers are going that way. Ahold ICA, a [supermarket] chain that has 35 percent market share in Norway and is in Sweden, Finland and moving into Denmark, went to this method in 1995 or 1996. [British food retailer and hypermarket operator] Tesco is onto it. [U.K. supermarket chain] Sainsbury is going to be converting in late 2005. The trend continues slowly because of the order of magnitude of the challenge.
WWD: What are some other major trends in retailing? Where else are retailers looking to improve?
Smith: There’s a strong globalization dimension. The sourcing and supply community is moving all over the map. There’s a natural economics of supply showing up rather than artificially motivated decisions reacting to tariffs and trades. In terms of market entry, the strong trend is interest in China, India and Russia. They are on everybody’s radar screen because of the size of consumer population that’s affluent enough to buy Western goods. But no one has yet cracked the code on those three markets. The likelihood is there’s a pretty significant group of indigenous retailers that will be competitive as well. The other common denominator among chains like Target, Tesco, Boots in the U.K. or Metro in Germany is the feeling that my competition doesn’t just come from my nation.
WWD: The industry is watching how Wal-Mart is using its international talent pool. What do you make of their appointment of Walmex chief executive officer Eduardo Castro-Wright to chief operating officer of Wal-Mart’s U.S. store base?
Smith: He’s a wonderful executive, very bright and engaging. He’s a buddy of [Mexican President] Vincente Fox, an ex-Coca-Cola guy. I also think you’re going to see a lot of cross-pollination between the U.K. and Bentonville, even to the point of spreading top Brits around the organization. They gained a significant talent pool when they [acquired] Asda. I know they already have the cio’s of all the company’s operations come together for knowledge sharing. So I think the Arkansas connection will probably become more diversified over time, which will be a healthy thing for them.
WWD: Are other companies looking outside the U.S. for talent? Is that going to be an important competitive strategy?
Smith: We did an instant-poll survey at the RILA forum [Retail Industry Leaders Association annual Leadership Forum] asking what was the number-one priority for companies this year. Talent acquisition and retention was the number-one answer. Hans Korber, who is in charge of [German discounter] Metro AG’s international growth said that the key to Metro’s strategy is to get local leadership to run a country, but hire a Western European finance director where you have confidence in the training and culture of business practices.
WWD: Discuss “remix.”
Smith: In a nutshell, remix is the fast-flow distribution model Wal-Mart is implementing in the Southeastern U.S. It’s a strategy using cross-dock facilities and traditional distribution methods with a very intentional strategy around product movement and aligning products into the correct handling patterns. Remix anticipates all 23 ways goods can get from the source to the shelf. The physical network is designed to handle all goods as normal processes. That is radically different from what most retailers do, which is to have a system designed to handle large volume buys. That doesn’t accommodate product that’s very perishable, or a product that’s on promotion, or things with a specific release date like new fashion items or new books or movies. When those situations are represented as abnormal in a distribution center, it takes more people to touch and handle the product, which ends up costing more. Wal-Mart is moving a little late to the game compared to some other companies, particularly in food, who’ve been more progressive.
WWD: What else is Wal-Mart up to?
Smith: Wal-Mart has selected Microsoft’s .Net as their next-generation store systems. Most retailers think of it just to run desktops. Many IT departments have some skepticism about using it in retailing processes. But I think because Wal-Mart has chosen it a lot of others will be taking another look.
WWD: Update us on the RFID pilots at Wal-Mart and Target.
Smith: My observation is that Wal-Mart chose this as a bit of an iconic topic for driving change in the industry. I think right now they are running an operational pilot to get people to have a basic operational capability. Then, they’ll take the next step and get category-focused or format-focused. I think its no accident they have remix going on in the Southeast U.S. and RFID in the Southwest. I don’t think they want to mix in too many changes to their operations.
WWD: What about Target?
Smith: Target, to my understanding, is being less aggressive than Wal-Mart. I think they’ve been a lot less vocal by design and my sense is they are going to study it in their own way, without a lot of people looking over their shoulder. They began a pilot tagging the apparel area, which has been running for almost a year. I think Target began shipping goods in the second quarter of ’04, which makes sense when you look at the importance of softlines to Target versus food and hardlines to Wal-Mart. [Target has] a different set of issues and suppliers that are important to them.
WWD: Can you give any more details about Target’s apparel pilot?
Smith: I know they are working with a large apparel manufacturer — they are not saying who — on tagging a container of goods made in a plant in the Caribbean. The palletized container has 200 packs of garments. It’s imported goods because a container with electronic seals can be validated faster by Customs. The Port of Singapore will RFID tag containers to expedite clearing Customs at the [inbound] port. It’s a government-sponsored initiative to take business away from Hong Kong.
WWD: Any dynamic new formats out there?
Smith: I had a chance to go to Austin [Texas] and see the new HEB-Plus store. It a very cool store, a new format they’re beginning to ramp up. It has a large organics section, an expanded healthcare and wellness department, including upscale cosmetics. There was a very cool baby solutions department integrated with infant apparel, formula, food, strollers, cribs and playpens all tied together in a very attractive visual merchandise package, an expanded toy department that they kicked butt with last Christmas, a music section, a limited electronics section. It’s like they cherry-picked the supercenter for all the departments that would be shopped by a time-starved mom. There is a party center, which has everything from the cakes to the goodie bags the moms give out. They put it all into a 110,000-square-foot footprint.
WWD: Wal-Mart has made news recently with its struggles to improve its image with the public. Have you seen other retailers begin to think about their own reputations and potential liabilities?
Smith: It’s clearly a topic of concern and I think in many retailers’ minds Wal-Mart is the bell cow. If they are getting shot at today, expect the rest of us to get shots pretty soon. I think Wal-Mart’s approach that ‘if you’ve got nothing to hide, then don’t hide’ is pretty sensible.