Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail-18 FEB 2013
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Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail-18 FEB 2013

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The bricks and mortar retailer is being squeezed. Growth is slowing and margin is under pressure. With the rise of e-commerce, the role of the store is being redefined. It is about service and the......

The bricks and mortar retailer is being squeezed. Growth is slowing and margin is under pressure. With the rise of e-commerce, the role of the store is being redefined. It is about service and the customer experience. As a result, it is time to rethink the metrics that matter and focus outside-in on the shopper experience.
In this report, we share insights on the current state of bricks and mortar retail and offer our suggestions.

Brick & mortar retailers have weathered an intense decade with the persistent rise of e-commerce. The shopper has changed and recovery from the Great Recession is ongoing, but slow. Our previous Supply Chain Metrics That Matter: A Focus on Retail report focused on the broader industry trends affecting five different divisions of retailers and the challenges of multi-channel retail. This report narrows the focus to three segments of brick & mortar retailers struggling to adapt to the new world.
A retailer is not a retailer. We believe that retailers should be compared by business model. We do not believe that one can throw all retailers together and identify the “most improved” or “best” supply chain. There are too many variables and circumstances affecting the retail landscape to make valid comparisons. In our research, we find that small and well-defined peer groups offer the best way forward for understanding both segment and industry specific trends.
The industry segments analyzed in this report are grocery, mass and specialty. Grocery retailers are involved in the sale of perishable and non-perishable food stuffs. Mass retailers are larger companies focused on providing a comprehensive retail experience to their customers. Finally, specialty retailers are dedicated to specific customers, activities and goods. The companies in this analysis represent both American and global retailers.
Our grocery peer group consists of Carrefour, Delhaize Group, Safeway and The Kroger Co. The mass retailer peer group includes Costco, Metro, Target and Walmart. The choice of specialty retailers was by far the most difficult because there are so many dedicated stores in this category. For this publication, our peer group includes Bed Bath & Beyond, Dick’s Sporting Goods, Foot Locker and Ross Stores. Additional information about all of these companies is presented in the Appendix.

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  • 1. Supply Chain Metrics That Matter: A Focus on Brick & Mortar RetailUsing Financial Data from Corporate Annual Reports to Better Understand Brick & Mortar Retail 2/18/2013 By Abby Mayer Research Associate Supply Chain Insights LLC
  • 2. ContentsResearch ................................................................................................................................... 2Disclosure .................................................................................................................................. 2Research Methodology .............................................................................................................. 2Executive Overview ................................................................................................................... 3Understanding the Brick & Mortar Space ................................................................................... 4Growth: Will it Recover?............................................................................................................. 6Cycle: The Truth on Inventory .................................................................................................... 8Profitability: Low Margins ........................................................................................................... 9 Case Study ............................................................................................................................10Complexity: Past Excellence Leads To… .................................................................................. 11Evolving to Compete .................................................................................................................12Recommendations ....................................................................................................................13Conclusion ................................................................................................................................14Appendix ...................................................................................................................................15 Company Profiles ..................................................................................................................15 Other Reports in this Series:..................................................................................................16About Supply Chain Insights LLC ..............................................................................................17About Abby Mayer .....................................................................................................................17Copyright © 2013 Supply Chain Insights LLC Page 1
  • 3. ResearchSupply Chain Metrics That Matter is a series of reports published throughout the year by SupplyChain Insights LLC. They are a deep focus on a specific industry.These reports are based on data collected from financial balance sheets and incomestatements over the period of 2000-2011. In these reports, we analyze supply chaineffectiveness to balance profitability, growth, complexity and cycles through the comparison ofsupply chain ratios by peer group.Within the world of Supply Chain Management (SCM), each industry is unique. We believe thatit is dangerous to list all industries in a spreadsheet and declare a supply chain leader. Instead,we believe that we have to evaluate change over time by peer group. In this series of reports,we analyze the potential of each supply chain peer group, share insights from industry leadersfrom each industry, and give recommendations based on general market trends.DisclosureYour trust is important to us. As a research analyst firm, we are open and transparent about ourfinancial relationships and our research processes. This independent research is 100% fundedby Supply Chain Insights.These reports are intended for you to read, share and use to improve your supply chaindecisions. Please share this data freely within your company and across your industry. As youdo this, all we ask for in return is attribution when you use the materials in this report. Wepublish under the Creative Commons License Attribution-Noncommercial-Share Alike 3.0 UnitedStates and you will find our citation policy here.Research MethodologyThe source of information for this report is publicly available from corporate annual reports ofbrick & mortar retailers from the period of 2000-2011. At Supply Chain Insights, we haveinvested in building a database of 21 financial ratios that we mine as part of our researchprocess.In this report, we take a closer look at retailers including those operating in the grocery, massand specialty industry segments. We do not believe that all retail companies can be groupedCopyright © 2013 Supply Chain Insights LLC Page 2
  • 4. together for comparison, but we do believe that the comparison of general trends across theindustry is useful.In picking companies for the Supply Chain Metrics That Matter reports, we identify twocompanies ranked on the 2011 Global 500 operating within the industry or industry segment offocus. We augment these companies with hand-selected companies that we believe providemeaningful comparison. Each analysis in this report is based on four companies operatingwithin each industry segment. Specific information for each company profiled is presented in theAppendix.To help the reader, we include metrics representing complexity, cycle, growth and profitability.We believe that metrics should be evaluated as a holistic system. We use the financial data tohelp readers learn from past trends, better understand current operating environments, andprovide recommendations for the future. We augment the financial data analysis withinformation from our quantitative and qualitative research studies as well as our work withclients operating within the industries.Executive OverviewThe bricks and mortar retailer is being squeezed. Growth is slowing and margin is underpressure. With the rise of e-commerce, the role of the store is being redefined. It is aboutservice and the customer experience. As a result, it is time to rethink the metrics that matterand focus outside-in on the shopper experience.In this report, we share insights on the current state of bricks and mortar retail and offer oursuggestions.Copyright © 2013 Supply Chain Insights LLC Page 3
  • 5. Understanding the Brick & Mortar Space "Online-only retailers have, by and large, been the winners to date in the ongoing retail revolution that continues to see the volume of goods bought online grow and grow, however traditional bricks-and-mortar retailers are starting to fight back by investing in services and technologies that will help them remain both profitable and relevant." • Craig Sears-Black, UK Managing Director, Manhattan Associates 1 1Brick & mortar retailers have weathered an intense decade with the persistent rise of e-commerce. The shopper has changed and recovery from the Great Recession is ongoing, butslow. Our previous Supply Chain Metrics That Matter: A Focus on Retail report focused on thebroader industry trends affecting five different divisions of retailers and the challenges of multi-channel retail. This report narrows the focus to three segments of brick & mortar retailersstruggling to adapt to the new world.A retailer is not a retailer. We believe that retailers should be compared by business model. Wedo not believe that one can throw all retailers together and identify the “most improved” or “best”supply chain. There are too many variables and circumstances affecting the retail landscape tomake valid comparisons. In our research, we find that small and well-defined peer groups offerthe best way forward for understanding both segment and industry specific trends.The industry segments analyzed in this report are grocery, mass and specialty. Grocery retailersare involved in the sale of perishable and non-perishable food stuffs. Mass retailers are largercompanies focused on providing a comprehensive retail experience to their customers. Finally,specialty retailers are dedicated to specific customers, activities and goods. The companies inthis analysis represent both American and global retailers.Our grocery peer group consists of Carrefour, Delhaize Group, Safeway and The Kroger Co.The mass retailer peer group includes Costco, Metro, Target and Walmart. The choice ofspecialty retailers was by far the most difficult because there are so many dedicated stores inthis category. For this publication, our peer group includes Bed Bath & Beyond, Dick’sSporting Goods, Foot Locker and Ross Stores. Additional information about all of thesecompanies is presented in the Appendix.Table 1 illustrates the state of the industry and three key metrics that help to explain thechanging face of retail from 2000 to 2011. These metrics are days of inventory (DOI), operatingmargin and revenue per employee.1 Supply Chain Standard. “Tougher competition for online retail.”http://www.supplychainstandard.com/Articles/4332/Tougher+competition+for+online+retail.htmlCopyright © 2013 Supply Chain Insights LLC Page 4
  • 6. Table 1. Retail Segments Financial Metrics (2000-2011)Change has occurred rapidly in the retail arena over the past decade. Average operating marginfor retailers is very low, in the single digits. Today, retailers are squeezed betweenmanufacturers’ rising costs and consumers’ demand for the lowest prices. They are beingattacked in center store. Showrooming, comparative price shopping and cross-channel buyingare all transforming the retail business for brick & mortar.In table 1, we note three trends. There is a pressure on margins. Productivity is increasing, butnot at the rate of the manufacturing supplier, and Days of Inventory is improving.Surprisingly, we find that most supply chain leaders have not looked at financial supply chainmetrics in aggregate and that many are surprised by these results. A project-based mentalityhas limited our ability to track long-term trends in inventory management and other metrics andthe gains from projects have often been exaggerated and oversold.Operating margin shows both negative and positive movement among the industry segmentsprofiled above. While two of the three industries have seen increased margin, operating marginremains in single digits for the majority of brick & mortar retailers.Finally, all segments indicate large gains in revenue per employee. Revenue per employee is ameasure of business complexity as well as a proxy measure for successful implementation ofEnterprise Resource Planning (ERP), Advanced Planning Systems (APS) and other IT systemsimplemented over the preceding decade. Moving forward, these systems will become morenecessity than luxury and we expect to see less consistent growth in revenue per employee.Most importantly, table 1 illustrates large fluctuations and the high level of instability within thebrick & mortar space. Online retail is here to stay, but that does not sentence brick & mortarCopyright © 2013 Supply Chain Insights LLC Page 5
  • 7. retailers to a long, slow decline. We believe that new innovative techniques from variouscompanies, industries and even e-commerce companies themselves, offer a strong prescriptionfor brick & mortar to move forward with newfound strength. Here we present the financialmetrics that tell that story and the role supply chain can play in that transformation.Growth: Will It Recover?Brick & mortar retailers have been squeezed from all sides over the past decade. There ispressure from upstream manufacturers as well as downstream customers. In addition, the mostdangerous force has come in the rise of e-commerce sites, such as Amazon.com, eBay, and amultitude of others offering shopping in pajamas and home delivery with a simple click of amouse. Figure 1 illustrates the trend in year-over-year sales growth for the three segments ofretail profiled in this report.Figure 1. Year-over-Year Sales Growth (2000-2011)The overall trend is both rocky and downwards. The Great Recession dealt a serious blow tobrick & mortar retailers as consumers adapted to a new normal with lower discretionaryspending. Interestingly, grocery retailers started and ended the decade with the lowestcomparable sales values, compared to specialty which retained top billing, but dropped from14% in 2002 to 9% in 2011.Copyright © 2013 Supply Chain Insights LLC Page 6
  • 8. It is time to redefine the store for service. While we believe the most recent recession is firmlybehind us and spending patterns should increase in the near future, there will not be a return tothe age in which brick & mortar reigned supreme. It is time to deliver on the cross-channelexperience. Amazon.com and other retailers have a strong foothold in the market and willcontinue to expand their business. Even now, consumer products companies are seeing up to2% market share through Amazon.com. This was unheard of as recently as five years ago.Even in an environment of low growth and increased competition, we believe a variety ofopportunities exist for grocery, mass and specialty retailers. Accepting online competition ashere to stay is the first step in understanding the new landscape. Quite simply, what works foronline-only retailers is also a valid approach for brick & mortar retailers. With the blurring of ourdigital and physical lives, it is imperative that brick & mortar retailers adopt some tactics ofonline retailers, including home delivery, personalization of service and a focus on convenience.Furthermore, the value network needs to be redesigned outside-in to deliver the cross-channelexperience. Figure 2 illustrates the separate channel orientation that has historically dominatedthe retail space. While this has worked in the past, it is no longer a viable format for retailorganizations moving towards Supply Chain 2020.Figure 2. Traditional Retail FormatThe new retail orientation will stretch from customer’s customer to supplier’s supplier. Not onlyis the retail value chain expanding both up- and down-stream, but the opportunities from multi-channel selling and fulfillment present an additional opportunity for companies willing to take theplunge. Refer to figure 3 to understand the changes successful brick & mortar retailers willtackle now to prepare for the future.Copyright © 2013 Supply Chain Insights LLC Page 7
  • 9. Figure 3. Rethinking the Retail FormatCycle: The Truth on InventoryAs referenced earlier, inventory statistics have been too often oversold and exaggerated. Manysupply chain leaders believe that we have reduced inventory by half or more over the pastdecade. However, analysis of financial balance sheets and income statements tells a much lessrosy story. Days of inventory are down slightly. Much of the inventory reduction has beenaccomplished by shifting it backwards in the channel.For most retailers, inventory management remains an area with a lot of room for improvement.Grocers have demonstrated the greatest improvement in retail with a 21%decline in DOI.However, this is well below the level most supply chain leaders believe we have achieved.Table 2. Days of Inventory (2000-2011)Copyright © 2013 Supply Chain Insights LLC Page 8
  • 10. True inventory management for many retailers remains a low-hanging fruit. While technology isan important enabler for improving inventory management, it is not enough. Opencommunication throughout the enterprise and the external value chain in the form of S&OP,Collaborate Planning, Forecasting & Replenishment (CPFR) and other techniques hold potentialfor freeing cash flow from back room inventory stores. This is an opportunity that must becapitalized upon.Profitability: Low MarginsThe margins for brick & mortar retailers have been and will continue to be low. Table 3 illustratesthe changing values for operating margin over the preceding decade.Table 3. Operating Margin (2000-2011)For the three segments profiled in this report, operating margin is low, but not dramaticallydecreasing. Industries with low margins operate with less wiggle room than other industries andretail is no exception. Supply chain management has historically played an important role in theprofitability of retail enterprises. This fact is not changing.Copyright © 2013 Supply Chain Insights LLC Page 9
  • 11. Case StudyThe following case study examines the relationship between operating margin and store countfor the grocery retail peer group. While these are common metrics on their own, we believe thiscomparison offers a new perspective on the different factors affecting operating margin in theretail space.Figure 4. Operating Margin/ Store Count (2000-2011)In the figure above, we see a slow but consistent decline in the ratio of operating margin to storecount. When we dig deeper into the numbers, we see two trends that help to explain this.Operating margin for grocery retailers is declining and store count is increasing. The result isthat these four grocery companies have all seen steady decreases in their operating margin ascompared to the number of stores they operate on a global level.This is not to say that expanding global reach is a bad strategy for retailers. In fact, it is tried-and-true. However, it is a worthy relationship to consider that increasing store count usuallyoccurs in tandem with decreasing operating margin. Business success through improved supplychain processes is a game of tradeoffs and this is simply a more unique look at the tradeoffsbusiness leaders struggle with every day.Copyright © 2013 Supply Chain Insights LLC Page 10
  • 12. Complexity: Past Excellence Leads To…One of the most common and universally applicable metrics across peer groups, regardless ofindustry, is revenue per employee. This metric illustrates what a given company or industrysegment is able to achieve with their manpower. Through our analysis of financial history overthe preceding two decades, we have found that revenue per employee is often a good proxymeasure for ERP and APS systems. This holds true for brick & mortar retailers, as well.Figure 5. Revenue per Employee (2002-2011)The past decade has seen a steadily climbing value for revenue per employee across theindustry segments. However, we do not expect this trend to continue indefinitely and we may bereaching our limit even now.The IT systems that have made this improvement possible are still necessary, but no longersufficient to drive greater gains. New technologies and analytics encompassing big data,demand and supply sensing, and increased visibility into customer sentiment are the next stepnecessary to continue to drive increased revenue per employee performance. We wouldencourage retailers to step beyond the buzzwords and begin understanding the new offerings inthe market place. They may seem futuristic, but the future is now.Copyright © 2013 Supply Chain Insights LLC Page 11
  • 13. Evolving to CompeteWhile the challenges are many, so are the opportunities. Brick & mortar retailers can adapt tothis new retail landscape by mixing a bit of the old with a bit of the new.Multichannel delivery is becoming more important and a key strategy for competing with onlinevendors. This means that retailers will have to refine inventory management and customerservice channels to meet the changing demands and communication styles of customers. Thiscannot be done with a project-based mentality; but, will require an entire redesign of the retailsupply chain with a focus on the consumer leading backward to the supplier’s supplier. Onceagain, we would refer leaders to figure 3 for a conceptual representation of the new format. Apush-based supply chain is no longer competitive in today’s retail landscape, and those whoremain stuck with such systems will falter in the coming years.Innovative retail models offer an additional avenue to combat the rise of online shopping asexplained by Dean Wyatt, Vice President of Business Development of Retail UK at DHL: "Pop-up stores, smaller high street shops that stock one display item of each product, order-in-store kiosks, and home delivery from the warehouse will become increasingly popular as retailers seek to attract more customers through innovative retail models." • Dean Wyatt, Vice President of Business Development of Retail UK, DHL2 2Finally, retailers have long complained about the rise of showrooming. This occurs whencustomers visit the brick & mortar location to feel and touch and interact with the product, butultimately go home and order from Amazon.com. Unfortunately, it is unlikely that we canradically change customers’ behavior. Instead, brick & mortar retailers should see showroomingas their opportunity to offer goods, services and experiences in-store that simply aren’t availablein an online shopping environment.This would include options such as same-day delivery and installation, instant personalization ofgoods and enhanced customer service based on personal relationships. Finally, brick & mortarretailers have the ability of offer experiences unavailable from behind a computer. This includessuch varied techniques as wine tastings at the grocery store, complimentary bicycle repairclasses at the sporting goods store, or a dog groomer adjoined to the pet store. It is the job ofbrick & mortar retailers to now offer an experience that can’t be bought from behind a computerscreen.2 Retail Gazette. “Comment: Supply chain trends in 2013.” http://www.retailgazette.co.uk/articles/13314-comment-supply-chain-trends-in-2013Copyright © 2013 Supply Chain Insights LLC Page 12
  • 14. RecommendationsOpportunities exist for brick & mortar stores that are willing to reinvent themselves in a moresleek and optimized format for competition with online retailers. These are ourrecommendations: • Redesign the supply chain outside-in. The problems that retailers struggle with today will not be solved by improving or optimizing the existing processes alone. Instead, there is a need for a complete redefinition of the brick & mortar retail supply chain backwards from customer’s customer to supplier’s supplier. For brick & mortar retailers to survive, their business model must transition from a transaction to an experiential relationship with customers. This starts with an understanding of who the customer is, what they want, when they want it, at what price, etc. Structured and unstructured data from Point of Sale (POS) to Twitter sentiment enables companies to listen and learn, if they are willing to make the necessary investments. • There is room for improvement in inventory management. Most supply chain executives are surprised with balance sheet data that illustrates reported improvements in inventory management have been chronically exaggerated. Excess inventory is not only money tied up in a back room somewhere, but in this fast-moving retail landscape, it is also likely to be quickly written off because of obsolescence issues. Over the past decade it has become clear that inventory management cannot be improved with a project approach, but requires constant attention and focus by all involved parties both inter- and intra- enterprise. • Understand the tradeoffs. Successfully managing a supply chain is like walking a tightrope. Leaders understand the tradeoffs and the effect each decision may have on the holistic enterprise. Laggards are whipped around by the supply chain due to a lack of holistic thinking. As illustrated above, no company can be the best at everything; but the best companies understand that and choose complimentary priorities. • Redesign the role of the store. With the rise of e-commerce and the growth of multi- channel retail, the store needs to be redesigned for service. Godiva, a manufacturer and retailer of chocolates, saw a decline in chocolate sales in the store, and fought back by offering a chocolate dipping bar. They drove traffic to the store by offering fresh fruits on a dipping station. This drove foot traffic and improved store profitability. Increasingly, the bricks and mortar retailer will be forced to rethink the role of the store to improve profitability. We think that the secret is value-added services. Whether it is a wellness clinic in a drugstore, a dog groomer in a pet store, or a cosmetic makeover in aCopyright © 2013 Supply Chain Insights LLC Page 13
  • 15. department store, more and more companies will be forced to introduce “services” to drive foot traffic. • Adopt e-commerce techniques. The strategies that have allowed the rise of e- commerce can be adopted for use in brick & mortar stores, too. Increasingly, our digital and physical selves are merging and retailers that understand and act on that evolution will lead the pack. Personalization of services, as well as same-day or next –day home delivery, are powerful value propositions for customers.ConclusionBrick & mortar retailers in the grocery, mass and specialty categories have weatheredtumultuous years with decreasing sales and increasing pressure from online peers. While e-commerce is not a fading trend, there exists widespread opportunity for improved performanceof retail supply chains which will help brick & mortars compete in the new retail landscape.Copyright © 2013 Supply Chain Insights LLC Page 14
  • 16. AppendixCompany ProfilesCopyright © 2013 Supply Chain Insights LLC Page 15
  • 17. Other Reports in this Series:Supply Chain Metrics That Matter: A Focus on RetailPublished by Supply Chain Insights in August 2012.Supply Chain Metrics That Matter: A Focus on Consumer ProductsPublished by Supply Chain Insights in September 2012.Supply Chain Metrics That Matter: A Focus on the Chemical IndustryPublished by Supply Chain Insights in November 2012Supply Chain Metrics That Matter: The Cash-to-Cash CyclePublished by Supply Chain Insights in November 2012Supply Chain Metrics That Matter: A Focus on the Pharmaceutical IndustryPublished by Supply Chain Insights in December 2012Supply Chain Metrics That Matter: A Focus on HospitalsPublished by Supply Chain Insights in January 2013Supply Chain Metrics That Matter: Driving Reliability in MarginsPublished by Supply Chain Insights in January 2013Copyright © 2013 Supply Chain Insights LLC Page 16
  • 18. About Supply Chain Insights LLCSupply Chain Insights LLC is a research and advisory firm focused on reinventing the analystmodel. The services of the company are designed to help supply chain teams improve value-based outcomes through research-based Advisory Services, a dedicated Supply ChainCommunity and public training. Formed in February 2012, the company is focused ondelivering actionable and objective advice for supply chain leaders.About Abby Mayer Abby Mayer (twitter ID @indexgirl), Research Associate, is one of the original members of the Supply Chain Insights LLC team. She is also the author of the newly-founded blog, Supply Chain Index. Her supply chain interests include connecting financial performance and supply chain excellence as well as talent management issues, and emerging markets. Abby has a B.A. in International Politics and Economics from Middlebury College and a M.S. in International Supply Chain Management from Plymouth University in the United Kingdom. She has also completed athru-hike of Vermont’s 272 mile Long Trail, the oldest long distance hiking trail in the UnitedStates. As part of the planning and food prep process, she became interested in supply chainmanagement when she was asked to predict hunger pangs for the entire three-week trip beforedeparture. If that isn’t advanced demand planning, what is?!?!Copyright © 2013 Supply Chain Insights LLC Page 17