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International Summit  of Cooperatives   The retail coop’s guide   to industry trends   October 2012Any use of this materia...
Six key trends will redefine the retail sector over the next decade                               Retailers will provide a...
Five key questions arise for cooperative retailers 1 How can coops keep their physical store networks relevant? 2 How can ...
Contents           Overview of key trends           Detailed questions for coop retailers                                 ...
1 Customers will demand a seamless multichannel experience – the     “all-channel” experience                          Con...
1 The online channel is growing and becoming                                                                              ...
1 Consumers highly value the ability to use multiple                                            Not important      channel...
1 Retailers are adopting technologies ranging from in-store kiosks to       mobile devices and tablets for store associate...
1 Many product and service categories are moving more clearly into the          digital battleground, and online research ...
1     As a result, the boundary between brick-and-mortar and online stores       is blurring     Tesco’s virtual store in ...
2 Retailers will invest in advanced analytical capabilities to identify and     capture value                          Con...
2 During the next decade, businesses will leverage the explosive growth        of available data and of computational capa...
2 Consumers now seek specific, tailored items that online retailers have              the ability to deliver              ...
2 In the next few years, demand for deep analytical talent in the United        States could exceed supply by ~50%        ...
3 The retail sector is undergoing a consumer revolution that will move     power away from retailers                      ...
US EXAMPLE 3 Consumers are gaining in bargaining power as they       increasingly visit retailers’ websites before making ...
3 Today, consumers increasingly trust and use social media and       community input     Recommendations that consumers tr...
3 Because mobile research puts information on product features      and prices at consumers’ fingertips, even within store...
3 …consumers are leveraging the capabilities of their smartphones to       get product information and shopping aid on the...
4 Growth will be strong and sustained in emerging markets, which will     represent a much larger share of the world’s ret...
4 Emerging markets will continue to drive retail growth in the next       decade       Real retail revenue CAGR for 2011-2...
4 Emerging markets will grow more than twice as fast                                                        Emerging count...
4 As a result, more than half of the growth in global retail revenue will       come from emerging markets during the next...
5 Stagnant growth and a highly competitive environment will put        pressure on retailers’ margins and force them to cu...
Low5 To achieve significant cost savings, retailers are turning to                                          Medium  techno...
5 Retail operations are transformed through massive improvements in      the handling and tracking of goods by both retail...
5 Since the crisis, retailers are moving away from large                                                                  ...
5 Retailers are experimenting with new and innovative store formats and      concepts in test markets to address pressure ...
6 Retailers will face higher volatility from their input costs and from the     economic and political environments in whi...
6 Recent spikes in food prices reflect the volatility of costs that retailers       must faceFood price index2003-2004 = 1...
To mitigate risks associated with high volatility, retailers can use a varietyof levers beyond traditional financial instr...
Contents           Overview of key trends           Detailed questions for coop retailers                                 ...
1 How can coops keep their physical store networks relevant?Context                    Questions to ponder▪ The advent of ...
2 How can coops maintain an edge in customer satisfaction?Context                 Questions to ponder▪ Historically, coop ...
3 How can coops use the internet and social media to improve member  relations?Context                 Questions to ponder...
4 How will coops grow?Context                Questions to ponder▪ Growth plays a         How is growth essential to a coop...
5 Are there opportunities for alliances among non-competing  cooperatives?Context                  Questions to ponder▪ Re...
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  1. 1. International Summit of Cooperatives The retail coop’s guide to industry trends October 2012Any use of this material without specific permission of McKinsey & Company is strictly prohibitedCopyright © 2012. All rights reserved
  2. 2. Six key trends will redefine the retail sector over the next decade Retailers will provide a seamless multichannel customer The “all-channel” experience and differentiate themselves by having a clear value 1 experience proposition Strategies and Retailers will invest in advanced analytical capabilities to 2 operations driven by improve customer segmentation and strategic positioning big data The consumer revolution currently underway will move power 3 Power to the people away from retailers Growth will be strong and sustained in emerging markets, and Growth in emerging these markets will represent a much larger share of the world’s 4 markets retail revenue Pressure on margins Stagnant growth and a highly competitive environment will put and capital productivity pressure on retailers’ margins and force them to cut costs 5 in developed economies Retailers will face higher volatility of input costs and of the 6 Volatility in input costs economic and political environments in which they operate McKinsey & Company | 1 Copyright © 2012. All rights reserved
  3. 3. Five key questions arise for cooperative retailers 1 How can coops keep their physical store networks relevant? 2 How can coops maintain an edge in customer satisfaction? 3 How can coops use the internet and social media to improve member relations? 4 How will coops grow? 5 Are there opportunities for alliances among non-competing cooperatives? McKinsey & Company | 2 Copyright © 2012. All rights reserved
  4. 4. Contents Overview of key trends Detailed questions for coop retailers McKinsey & Company | 3 Copyright © 2012. All rights reserved
  5. 5. 1 Customers will demand a seamless multichannel experience – the “all-channel” experience Context Implications The “all-channel”1 ▪ The online channel is growing and ▪ The boundary between brick-and- experience becoming increasingly important in mortar and online stores is blurring driving offline sales – Multichannel integration has the Strategies and – In fact, consumers highly value the potential to bridge the growing gap2 operations driven by ability to use multiple channels between the physical and the big data throughout the shopping virtual world experience ▪ Physical stores must differentiate ▪ Retailers are adopting new themselves by offering distinctive technologies to support or work value to customers3 Power to the people alongside store associates ▪ Big-box stores, in particular, have – For example: in-store kiosks, an advantage in distribution mobile devices, and tablets compared to their smaller rivals, Growth in emerging ▪ Many product and service including coops4 markets categories are moving more clearly into the digital battleground, and online research is rapidly becoming a Pressure on margins key trigger in the customer journey and capital5 productivity in – For example: clothing, footwear, furniture, and home improvement developed economies are moving into the digital battleground Volatility in input6 costs McKinsey & Company | 4 Copyright © 2012. All rights reserved
  6. 6. 1 The online channel is growing and becoming Online sales increasingly important in driving offline sales Online-influenced sales Offline sales not influenced by online presence Total US retail sales CAGR 2006-2011 USD Billions, percentage of total Percent 3.053 +3 2.886 2.968 2.728 2.806 2.616 2.648 14 16 +15 2.500 11 13 2.370 2.407 8 9 10 6 7 6 16 20 25 33 33 36 40 45 50 56 +21 78 74 68 59 58 54 49 42 36 28 -5 2006 2007 2008 2009 2010 2011 20121 20131 20141 201511 Assumes that online sales and online-influenced sales will increase at the rate of 15% per year and that total sales will increase at their historical rate of 3% per year McKinsey & CompanySOURCE: Forrester; McKinsey analysis | 5 Copyright © 2012. All rights reserved
  7. 7. 1 Consumers highly value the ability to use multiple Not important channels throughout the shopping experience Somewhat important Important or extremely important Importance of multichannel functions among survey participants Percentage of respondents; N = 3,738 Percent using service Importance to those using service Check online to see if the store has 69 15 32 54 a certain item available Print coupons online, use them in a store 62 17 32 51 Buy online, but pick up in the store 43 23 36 41 Buy online and return the item to the store 29 14 24 62 Access enhanced online content for 28 23 35 41 product research, purchase in store Use an online website to customize 15 41 27 32 the products they buy Book in-store appointments online 11 38 33 29 100% McKinsey & CompanySOURCE: iConsumer 2011 - RT16bb | 6 Copyright © 2012. All rights reserved
  8. 8. 1 Retailers are adopting technologies ranging from in-store kiosks to mobile devices and tablets for store associates In-store kiosks for consumers to order Mobile devices and tablets for store associates to items or sizes online when not available access customer purchase history, create outfits, in the store checkout, etc. Quick Response code tags that consumers can scan to obtain more product information McKinsey & CompanySOURCE: CBRE Econometric Advisors; Internet Retailer | 7 Copyright © 2012. All rights reserved
  9. 9. 1 Many product and service categories are moving more clearly into the digital battleground, and online research is rapidly gaining in importance 2010 Research online 2009 Percentage of respondents 75 70 Moved 65 to digital Computer Electronics hardware/ 60 software 55 50 Videogames 45 Furniture 40 Home improvement 35 30 Still in Home Books stores decor 25 DVD/videos Footwear 20 Office supplies Clothing 15 HBA Household Digital 10 products battleground 5 Grocery 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 Purchased online11 As a percentage of those who bought a product in the respective category in the past 6 months Percentage of respondents McKinsey & CompanySOURCE: iConsumer | 8 Copyright © 2012. All rights reserved
  10. 10. 1 As a result, the boundary between brick-and-mortar and online stores is blurring Tesco’s virtual store in Korean subway Adidas’ virtual footwear wall ▪ In August 2011, Tesco started testing a virtual store in ▪ In collaboration with Intel, Adidas developed adiVerse, the subway in Seoul, South Korea. Commuters can a virtual footwear wall shop on the go using their smartphones – Customers can access expanded online inventory – Using Tesco’s local Homeplus banner app, – They can view each item in 3D and rotate it to any commuters can scan barcodes of 500+ popular angle, zoom it, get more product information (price, products, and the app will automatically order them customer reviews, etc.), and make a purchase – Orders placed before 1 pm are delivered to homes – Built-in anonymous video analytics provide metrics the same evening on shopper trends and shopping patterns, enabling Adidas to provide a more personalized experience McKinsey & CompanySOURCE: Press search | 9 Copyright © 2012. All rights reserved
  11. 11. 2 Retailers will invest in advanced analytical capabilities to identify and capture value Context Implications The “all-channel”1 ▪ During the next decade, businesses ▪ Consumers now seek specific, experience will leverage the growth of available tailored items that online retailers data and computational capacity to have the ability to deliver inform strategy and influence – Customers are increasingly Strategies and operations expecting such low-volume niche2 operations driven by – Data is available for analysis in all products big data key functions, such as – The long tail of the product mix is merchandising, marketing, supply becoming more accessible to chain, and human resources retailers3 Power to the people – Some retailers have already used ▪ Demand for deep analytical talent big data to create a significant in the United States could exceed competitive advantage for supply by ~50% in the next few themselves; for example, Tesco years Growth in emerging leverages shopper and loyalty4 data to better target, market, and – The market has a general markets price products shortage of qualified statisticians and data analysts Pressure on margins and capital5 productivity in developed economies Volatility in input6 costs McKinsey & Company | 10 Copyright © 2012. All rights reserved
  12. 12. 2 During the next decade, businesses will leverage the explosive growth of available data and of computational capacity Data generated worldwide Computational capacity of the world’s fastest computers Exabytes (= 1 billion gigabytes) FLOPS,1 2 log scale 35,000 16 All the information stored inside the US Library of Congress amounts to 1E+19 Today’s fastest computers are < 0.00025 exabytes 1E+17 more than 10 trillion times 1E+15 faster than those of 1960 1E+13 1E+11 7,900 1E+9 1,300 1E+7 50 110 1E+5 2000 2005 2010 2015 2020 1960 1970 1980 1990 2000 2010 Available data will be characterized by its scale, distribution, diversity, and timeliness ▪ Scale: data sets will be massive, > 1 multipetabyte (1 million gigabytes) in size, and built to be easily scaled up ▪ Distribution: data will come from and be distributed both within and outside the organization ▪ Diversity: data will be semi-structured, unstructured, or a combination of different types ▪ Timeliness: data will be captured and analyzed in real time, allowing for immediate response1 Floating-point operations per second2 Rmax FLOPSSOURCE: IDC Digital universe study 2011 and 2010; Hilbert and López, “The world’s technological capacity to store, communicate, McKinsey & Company and compute information,” Science, 2011; www.vetta.org; McKinsey analysis; McKinsey Global Institute | 11 Copyright © 2012. All rights reserved
  13. 13. 2 Consumers now seek specific, tailored items that online retailers have the ability to deliver Mass The long tail: low-volume The long tail of the product mix is products niche products becoming more accessible ▪ The long tail refers to the large portion of products that have little mass appeal ▪ The reduced overhead costs of online retailers allow them to carry more niche products than traditional stores Popularity – Amazon.com currently offers a selection of more than 35 million books, whereas brick- and-mortar stores are limited to ~100,000 books ▪ Consequently, customers are increasingly expecting that products on the long tail will be available and are demanding such products Products McKinsey & Company | 12 Copyright © 2012. All rights reserved
  14. 14. 2 In the next few years, demand for deep analytical talent in the United States could exceed supply by ~50% Supply and demand of deep analytical talent by 2018 Thousands of people 140-190 440-490 180 30 300 ~50% gap 150 relative to 2018 supply 2008 Graduates Other1 2018 Talent 2018 employment with deep supply gap projected analytical demand talent1 Other supply drivers include attrition (-), immigration (+), and reemploying previously unemployed deep analytical talent (+) McKinsey & CompanySOURCE: US Bureau of Labor Statistics; US Census; Dun & Bradstreet; interviews; McKinsey Global Institute analysis | 13 Copyright © 2012. All rights reserved
  15. 15. 3 The retail sector is undergoing a consumer revolution that will move power away from retailers Context Implications The “all-channel” 1 experience ▪ Consumers are gaining in ▪ Consumers are leveraging the bargaining power as they capabilities of their smartphones to increasingly visit retailers’ websites get product information and Strategies and before making purchases shopping aid on the go – for 2 operations driven by ▪ Consumers increasingly trust and example, using smartphones to scan big data use social media and community barcodes in brick-and-mortar stores, input such as other users on retail consumers instantly receive relevant websites, site-generated information recommendations, and user- ▪ Transparency of information 3 Power to the people generated product reviews creates purer competition, which ▪ Mobile research puts information means retailers must explore on product features capabilities to respond with more and prices at consumers’ agility and create distinctive Growth in emerging fingertips, even within stores offerings that competitors are unable 4 to match markets Pressure on margins and capital 5 productivity in developed economies Volatility in input 6 costs McKinsey & Company | 14 Copyright © 2012. All rights reserved
  16. 16. US EXAMPLE 3 Consumers are gaining in bargaining power as they increasingly visit retailers’ websites before making purchases Consumers visiting a retailer’s website before purchasing in its store Percent 2009 2010 Difference Electronics (e.g., TV, digital 49 67 18 camera, gaming console) Footwear 32 44 12 Office supplies 20 41 21 Books 19 58 39 Clothing (not 14 35 21 including footwear) Health and beauty products 9 38 29 Grocery (e.g., food) 6 34 27 McKinsey & CompanySOURCE: iConsumer retail survey, November 2010; US Internet users aged 13 years and older | 15 Copyright © 2012. All rights reserved
  17. 17. 3 Today, consumers increasingly trust and use social media and community input Recommendations that consumers trust Consumer recommendation rate Consumers that trust, or somewhat trust, reviews1 Consumers leaving comments or Percent, N = 3,738 recommendations1 Percent, N > 3,7382 Other users on 57 21 20 retail websites 18 Site-generated 47 recommendations User-generated 42 product reviews Recommendations 37 generated from SNS3 User-generated videos 31 2009 2010 20111 As a share of all respondents2 N = 3,738 (2011), 3,970 (2010), 4,168 (2009)3 Social networking service McKinsey & CompanySOURCE: iConsumer 2011 – RT9L, RT9K | 16 Copyright © 2012. All rights reserved
  18. 18. 3 Because mobile research puts information on product features and prices at consumers’ fingertips, even within stores… US EXAMPLE Place of mobile research Mobile activity penetration Percentage of respondents using Share of population in any category 2010 2011 mobile research, N = 853 (2011) N = 375 (2011) 28 Visited same store website 43 At home 78 32 Visited different store website 40 37 Used price comparison app 38 33 In store 44 Texted 26 17 Used mobile coupon 25 Increase 15 from 33% Scanned barcode 17 Other 26 in 2010 18 Took photo of product 16 McKinsey & CompanySOURCE: iConsumer 2011 | 17 Copyright © 2012. All rights reserved
  19. 19. 3 …consumers are leveraging the capabilities of their smartphones to get product information and shopping aid on the go Mobile devices are enabling consumers to Consumers are leveraging mobile tools to compare prices when they are in stores support offline shopping ▪ Apps such as GroceryIQ help consumers organize RedLaser shopping lists and ▪ Using smartphones to scan barcodes in prioritize needs brick-and-mortar stores, consumers ▪ Barcode scanning instantly receive relevant information allows users to quickly ▪ Consumers can compare online and offline add items they are inventory, pricing, and time-to-delivery/ running out of or distance remove items purchased from lists McKinsey & CompanySOURCE: Gartner; press searches; RedLaser; GroceryIQ | 18 Copyright © 2012. All rights reserved
  20. 20. 4 Growth will be strong and sustained in emerging markets, which will represent a much larger share of the world’s retail revenue Context Implications The “all-channel” 1 ▪ Emerging markets will continue to ▪ More than half of the growth in experience drive retail growth in the next global retail revenue will come decade from emerging markets during the – While retail markets are next decade Strategies and 2 operations driven by stagnating or growing very slowly – China and other emerging big data in most developed countries, markets will account for 31% of emerging markets are showing the world’s retail sales in 2020, up growth in excess of 5% per from 25% in 2010 annum – Emerging markets will account for 3 Power to the people – The fastest growth will be in more than half of the absolute Southeast Asia growth in retail sales worldwide in ▪ Emerging markets will add more the next decade than 160 million middle-class Growth in emerging households by 2020 4 markets – GDP growth will be twice as fast in emerging countries as in developed economies Pressure on margins and capital – The growing middle class will 5 productivity in rapidly drive up internal developed economies consumption Volatility in input 6 costs McKinsey & Company | 19 Copyright © 2012. All rights reserved
  21. 21. 4 Emerging markets will continue to drive retail growth in the next decade Real retail revenue CAGR for 2011-2020, by country, percent 0 3.5-4.0 > 5.0 0-3.5 4.0-5.0 No data ▪ All the fast- growing retail markets are in the emerging world ▪ In particular, most Southeast Asian countries will experience phenomenal growth of over 5% per year during the next decade ▪ Most developed markets will experience relatively sluggish growth McKinsey & CompanySOURCE: Global Insights World Industry Service | 20 Copyright © 2012. All rights reserved
  22. 22. 4 Emerging markets will grow more than twice as fast Emerging countries as developed economies and add more than Developed countries 160 million middle-class households by 2020 Equivalent annual real Evolution of world real GDP growth from Evolution of households income by region 2010 to 2020 distribution in emerging markets1 Real 2005 USD Trillions Percent Millions of households ▪ There will be more 19.3 70.5 1,206 than 160 million 11.1 1,085 new middle-class Household 306 households in 26.2 5.7% income 139 51.2 8.2 emerging ≥ USD 25,000 countries, which is 15.1 more than the current total number of house- Household holds in the US income 945 900 44.3 2.1% < USD 25,000 ▪ This rising middle 36.1 class will rapidly drive up internal consumption 2010 2010-2020 2020 2011 2020 growthNote: Numbers may not sum to total due to rounding1 Income categories defined per annual income in USD PPP McKinsey & CompanySOURCE: IHS Global Insight; Global Insight; McKinsey analysis | 21 Copyright © 2012. All rights reserved
  23. 23. 4 As a result, more than half of the growth in global retail revenue will come from emerging markets during the next decade Retail total sales Origin of the absolute change in retail sales USD Trillions, 2010-2020 Percent, 2010-2020 Percent 100% = 3.2 4.2 China China 3 5 US 12 Other emerging 22 23 26 Other developed1 16 15 Western Europe 31 Western 12 26 Europe 40 Other emerging 12 US 28 27 Other developed 2010 20201 Includes Australia, Canada, Japan, New Zealand, and South Korea McKinsey & CompanySOURCE: Global Insights World Industry Service | 22 Copyright © 2012. All rights reserved
  24. 24. 5 Stagnant growth and a highly competitive environment will put pressure on retailers’ margins and force them to cut costs Context Implications The “all-channel” 1 experience ▪ To achieve significant cost ▪ Since the crisis, retailers are savings, retailers are turning to moving toward smaller store technology such as mobile points of formats, with major retailers reducing Strategies and sale, electronic shelf labels, and their average store sizes by up to 2 operations driven by planograms, all of which can reduce 50% in some cases big data costs while improving the customer ▪ Some retailers are experimenting with experience or increasing flexibility for store formats retailers – Smallbox stores are used to ▪ Retail operations are transformed expand in urban areas where 3 Power to the people through massive improvements in larger footprints are difficult or the handling and tracking of goods expensive to install by both retailers and consumers – Online supporter locations and – Retailers can improve their pop-ups allow retailers to add Growth in emerging operational efficiency by using 4 capacity quickly while using markets RFID1 and similar signal alternative or temporary technologies distribution channels – Embedding signal technology for – Market research centres are Pressure on margins all items in a retail store will and capital used to test new formats and 5 improve the customer experience examine retail behaviours productivity in and avoid missed sales because developed economies items can’t be located within the store (e.g., misplaced clothing Volatility in input items at Bloomingdale’s) 6 costs McKinsey & Company1 Radio frequency identification | 23 Copyright © 2012. All rights reserved
  25. 25. Low5 To achieve significant cost savings, retailers are turning to Medium technology HighExamples of new technologies with cost-saving potential Cost-savingTechnology Description Benefits potentialMobile points of Handheld POS in the store Breaks bottleneck at checkout atsale to supplement checkout busiest times, in a cost-effective stations wayElectronic Programmable wireless No manual price changesshelf label devices on store shelves necessary, increased pricing flexibility Software for product Increased sales and profits, fewerPlanograms placement on store shelves stockouts, and decreased administrative and labour costs McKinsey & Company | 24 Copyright © 2012. All rights reserved
  26. 26. 5 Retail operations are transformed through massive improvements in the handling and tracking of goods by both retailers and consumers Using RFID and similar signal technologies, Embedding signal technology for all items in retailers can improve their operational a retail store will improve the customer efficiency experience ▪ Retailers can optimize inventory ▪ Apparel retailers, where goods are easily management and automate the purchasing misplaced, are using RFID to locate and count process using RFID to track all incoming and goods in stores outgoing stock ▪ Bloomingdale’s recently implemented RFID ▪ Walmart pioneered RFID in inventory, leading tags for individual items, improving stock to an estimated ~USD 290 million in savings accuracy and location for customers McKinsey & CompanySOURCE: PCWorld; RFID Journal | 25 Copyright © 2012. All rights reserved
  27. 27. 5 Since the crisis, retailers are moving away from large 2008 store formats 2011 Average new store size 2011 vs. 2008 Thousands of square feet Percent 49 -12 43 134 -3 130 162 -6 152 33 16 -51 168 131 -22 68 -17 56 166 111 -33 McKinsey & CompanySOURCE: CBRE Econometric Advisors; Internet Retailer | 26 Copyright © 2012. All rights reserved
  28. 28. 5 Retailers are experimenting with new and innovative store formats and concepts in test markets to address pressure on margins Emerging store Example format category companies Selected examples ▪ Tesco and Walmart use smaller formats to expand into more urban markets where real estate is limited or at a premium – Tesco launched Fresh & Easy Express in November 2011, with stores one third the size of normal formats Smallbox – Walmart Express stores, launched in 2011, are already profitable and are being deployed in dense, as well as in smaller, markets ▪ Walmart temporarily opened pop-up stores during the 2011 holiday season to direct consumer traffic to its website Online ▪ In-store goods used for display purposes for customers supporter to purchase items online ▪ Customers can access the website in the store through tablets and PCs to make purchases ▪ Nordstrom launched Treasure & Bond in August 2011 and currently has one location in Manhattan Market ▪ The store is much smaller than traditional Nordstrom stores research and offers different products centres ▪ The store is used to gain market insights on the shopping habits of the population. Profits from the store are donated to local charities McKinsey & CompanySOURCE: Reuters; Los Angeles Times; New York Times | 27 Copyright © 2012. All rights reserved
  29. 29. 6 Retailers will face higher volatility from their input costs and from the economic and political environments in which they operate Context Implications The “all-channel”1 experience ▪ Recent spikes in food prices reflect ▪ Retailers now must understand the the volatility of costs that retailers risks to which they are exposed face ▪ Cooperatives are equally exposed Strategies and – The food price spike and to many of these risks as their2 operations driven by economic downturn reversed a traditional competitors big data historical trend of decreasing poverty and hunger prior to 2008, ▪ Retailers must take action to mitigate with 925 million still hungry in these risks, including ensuring that 2010 they have suitable risk3 Power to the people measurement and management ▪ Some factors that contributed to the capabilities, especially in crises are still relevant, for example – Finance – Slowing growth in agricultural – Contracting production Growth in emerging – Operations4 – Population growth and rising meat markets – Strategy consumption – Mandates incentivizing biofuel Pressure on margins production and capital – Rising crude oil price5 productivity in – Adverse weather developed economies – Export restrictions – Civil strife Volatility in input6 costs McKinsey & Company | 28 Copyright © 2012. All rights reserved
  30. 30. 6 Recent spikes in food prices reflect the volatility of costs that retailers must faceFood price index2003-2004 = 100 240 The food price spike and Factors that economic downturn contributed to the reversed a historical trend crises and that are 200 of decreasing poverty and still relevant hunger prior to 2008, with ▪ Slowing growth in 925 million still hungry agricultural 160 by 2010 production ▪ Population growth and rising meat 120 consumption ▪ Mandates incentivizing 80 biofuel production 2nd peak in February 2011 pushed > 45 million ▪ Rising crude oil 40 price people into extreme poverty ▪ Adverse weather ▪ Export restrictions 0 90 95 00 05 10 ▪ Civil strifeSOURCE: Food and Agriculture Organization of the United Nations food-price index; Ronald Trostle, US Department McKinsey & Company of Agriculture; Peter Timmer, Agriculture and Pro-Poor Growth: An Asian Perspective, Centre for | 29 Global Development Working Paper No. 63, July 2005; World Bank Copyright © 2012. All rights reserved
  31. 31. To mitigate risks associated with high volatility, retailers can use a varietyof levers beyond traditional financial instruments Strategic ▪ Integrate vertically Operational/ to balance buy- merchandising side/sell-side ▪ Develop alternative ▪ Develop product partnerships Contracting (sales formulations/ and purchasing) ▪ Invest in pure wider specifications plays or counter- ▪ Align purchasing ▪ Redesign products cyclical and sales Financial ▪ Use substitutes businesses contracts in ▪ Leverage traditional timing/terms ▪ Optimize pack size/ financial price/quality across instruments ▪ Use escalator clauses and/or channels/ ▪ Seek structured formula pricing geography products ▪ Optimize go-to- market strategies ▪ Optimize trade spend/marketing dollars McKinsey & Company | 30 Copyright © 2012. All rights reserved
  32. 32. Contents Overview of key trends Detailed questions for coop retailers McKinsey & Company | 31 Copyright © 2012. All rights reserved
  33. 33. 1 How can coops keep their physical store networks relevant?Context Questions to ponder▪ The advent of How can the geographical proximity of your physical network still give you a e-commerce makes significant advantage as social and business interactions go virtual? How can you build consumers less A stronger relationships with your customers and the communities you serve to improve loyalty? likely to visit brick- How can the physical network differentiate your offer and better engage your members? and-mortar stores How can you provide a distinct and significant reason for the customer to enter your▪ Physical networks physical store (e.g., expertise or convenience)? How can you maximize your multichannel of stores have B strategy to provide interaction between online, mobile, and your physical network of retail become less stores? central to the customer relationship Should the role of the network evolve to preserve the traditional advantage of geographical proximity while remaining profitable? How can your network be made less C▪ Coops are dispro- costly? How can you leverage your network by adding new services needed by your portionately members? Which new member needs are you best able to serve? affected because of their unusually How can you use local knowledge and managers’ entrepreneurial nature to optimize large network store formats offered in different communities? How much flexibility should store D managers and local staff have to experiment with store formats based on their knowledge of▪ The links to the the local market? How can you effectively disseminate the information on optimal formats community on throughout your network? which coops have historically relied How can you make product offering a point of differentiation through physical stores? are disappearing How can you source more products locally, and will this please your customer base? How E can you use knowledge of local tastes and preferences to tailor offerings on a store-by-store basis? What advantages do you have to tailor product assortment to local preferences? McKinsey & Company | 32 Copyright © 2012. All rights reserved
  34. 34. 2 How can coops maintain an edge in customer satisfaction?Context Questions to ponder▪ Historically, coop What key elements do your customers truly care about and consider when deciding retailers tend to where to shop? How are you stronger or weaker than your competitors on these dimensions? A prioritize customer What elements would be easiest to improve upon in your cooperative – and would they make a service significant difference?▪ By leveraging What investments could ensure that customers feel that there is something distinctly technology, different about shopping in your cooperative? Do customers feel that their input is valued competition and that they help shape the direction of your cooperative? For consumer coops, how much do integrates a multi- B your members feel like owners? How can you create an atmosphere where consumers feel channel approach more important than in your competitors’ stores? How can you play a leading role in protecting to satisfy and promoting customer rights and interests (e.g., by ensuring the quality of all your products customers meets certain standards, by always being transparent and fair in your offering to members)? Where are competitors cutting or lacking in customer service? Where are there▪ Thus, coops need C opportunities for you to fill gaps your competitors leave and to attract consumers on that to redefine their platform, while at the same time fulfilling your cooperative mission? customer experience to What should be the general guiding strategy to improve customer satisfaction in an remain relevant environment in which costs need to be cut and operations need to be more efficient? and competitive in D To what extent can you improve customer service by harnessing technology, big data, and the the market transformation to multichannel, while also controlling costs? Will you require more labour and will the current workforce need more training, or will you need to have a leaner labour force? Given the resources available, what specific investments and initiatives should you prioritize to satisfy customer needs? How can you strike the appropriate balance between E dimensions of service that are most feasible and economical and those that customers appreciate the most, and between initiatives that will yield more tangible payoffs in the short term and those that offer more delayed benefits? McKinsey & Company | 33 Copyright © 2012. All rights reserved
  35. 35. 3 How can coops use the internet and social media to improve member relations?Context Questions to ponder▪ Coops traditionally How will the “virtualization” of business and social interactions affect cooperatives’ relied on physical traditional proximity advantage and how should your coop adjust? As customers spend presence to engage A more time online and as attachment with their local communities is weakening, how will you still with members be able to engage them via your branch network? What novel ways can you use to engage members?▪ Now, the internet and social media are connecting How can you harness the power of new online media and the internet to deepen communities of all B relationships with your customers and better understand their needs? How can you kinds engage customers online to know them better and to elicit their input?▪ Increasingly, How can you use new media and the internet to revitalize the democratic dimension of members are your governance structure? How can you allow members to vote and engage in the expecting their C democratic process over the internet? How can you leverage social media to energize an coop to connect already open communication channel with members (e.g., let a special committee interact via with them virtually social media)? Should you review and redesign your organizational structure to better adapt to the virtualization of interactions? Is your decentralized structure revolving around local branches D still optimal? Should you consider structures in which members interact directly with the broader cooperative and not via their branch? McKinsey & Company | 34 Copyright © 2012. All rights reserved
  36. 36. 4 How will coops grow?Context Questions to ponder▪ Growth plays a How is growth essential to a cooperative’s business model, or how can it be successful different role in without continued growth? How is continuous growth necessary (or not) for you to remain A coops than in relevant and to fulfill your mission to members? What are the implications of a no-growth traditional business for your members? corporations Should you look for growth opportunities outside your domestic market (e.g., emerging▪ Today, some markets)? How do your members stand to benefit from the growth in emerging markets? How markets are B could your cooperative suffer competitively in its home market in the future if it does not expand saturated and some abroad (e.g., through lack of scale)? How difficult would it be to seize growth opportunities in environments are emerging markets? recessionary How can you add new products or services to the retail offering? To what extent are there▪ What will be the growth opportunities through new products that would complement the current mix? How can C next development you add unrelated products in which your customers have gained an interest? How would such path for coops in a move affect your image and position in your traditional market? that context? How can your cooperative grow by filling some of the gaps left by the shrinking of the welfare state? How can you leverage your brand, your physical network, and your financial D resources to grow in some of the areas left unoccupied by the withdrawing welfare state? How can your cooperative build the credibility and the capabilities to fill some of the gaps? How would these new ventures benefit your members and affect your positioning? Why should you focus (or not) on taking market shares from competitors in the domestic market to fuel growth? How can you build a platform to gain market shares from E the competition (e.g., better customer service)? How competitive is the landscape – are your competitors likely to retaliate and attempt to attract your customer base, or is their attention focused elsewhere? McKinsey & Company | 35 Copyright © 2012. All rights reserved
  37. 37. 5 Are there opportunities for alliances among non-competing cooperatives?Context Questions to ponder▪ Retail cooperatives What are the most promising areas for collaboration with other non-competing face larger, more A cooperatives, both in retailing (in other regions) and in other sectors? How can you form powerful alliances to pool purchasing power or to develop private labels? How can you form a joint private competitors label that would be more cost-effective and create a stronger brand? How can synergies be exploited to optimize international supply chain logistics? How can you establish cooperative▪ Larger competitors academies to jointly train workers? How can you exploit M&A opportunities in core and adjacent enjoy economies businesses (e.g., discount, pharma, travel)? How can you undertake joint ventures with other co- of scale that are ops to tackle a new market or a new product? not attainable by coops B How can you create a forum with other cooperatives to discuss the challenges you face,▪ Alliances and joint identify best practices, and educate policymakers? How could you work together to help ventures offer the improve your public image and make policymakers more aware of the unique aspects of your potential to access model? How can you initiate a benchmarking effort across cooperatives to identify and share the benefits of size best practices? C What are the main obstacles to collaboration and how can they be overcome? What has prevented you from collaborating more with other cooperatives until now? What steps could you take to overcome these obstacles? How favourable are your members to the possibility of joining forces with other coops? D What strategic next steps should leaders take in the short term to help foster collaboration between cooperatives? Which non-competing cooperatives should you contact to jointly explore possible avenues for collaboration? McKinsey & Company | 36 Copyright © 2012. All rights reserved
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