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WEATHERINGTHE STORM

1 An OC&C Insight Weathering the Storm

Contents

03 What makes a good retail strategy?

05 Identifying hidden growth: Mapping the opportunity landscape

08 The challenge of multichannel pricing

09 10 things every CEO should knowabout multichannel

11 Proposition index: Only the strong survive

An OC&C Insight Weathering the Storm 2

It is clear to all of us that our great industry is moving throughtumultuous times. A deep recession is being followed by a longstagnation. Traditional retail business models are beingchallenged by rising input costs, the migration of spend onlineand the emergence of new technologies that are changing howour customers research and shop for goods.

So, what can you do to weather this storm?

In part the answer lies in retreating back to the core principles ofwhat makes great strategy. Namely, developing a superiorunderstanding of your consumers and using that as a basis forestablishing distinctive, competitively advantaged strategies thatare commercially impactful and expose your business to newsources of growth and profit.

However, weathering the storm will also require retailers to have aperspective on the future. Those retailers who will win will be thosewith a clear view on how the industry landscape will evolve andimpact their business and have the confidence to invest now tobuild the capabilities that will succeed in this future world.

Given this context, we present five articles in this brochure thataddress these two related themes. Our first two articles introducethe key components of what makes a great retail strategy and thefundamentals of customer segmentation. We then provide ourperspectives on some of the challenges posed by multichannelretailing – specifically how to price across different channels and theten key issues any Retail CEO should have at the top of theirmultichannel agenda. Lastly, we introduce the second edition of theOC&C Proposition Index – a global survey conducted by OC&C thatbenchmarks the world’s leading retailers according to the feedbackfrom their customers.

We hope you enjoy reading the articles in this brochure. Furtherinformation can be provided by contacting any of our RetailPartners directly – contact details are provided in the back of thisbrochure. OC&C is a leading strategy consultancy and we prideourselves on bringing clear thinking to the most complex issuesfacing top management. We work side by side with ambitiousclients seeking market leadership. Retail is one of our longest-standing strengths and our work has often seen us at the vanguardof sector developments, with many of our creative and innovativesolutions becoming standard industry practice.

You will find OC&C across Europe, North America and Asiaand at www.occstrategy.com.


WHAT MAKES A GOODRETAIL STRATEGY?A practical perspectiveIn this era of huge economic uncertainty andrapid structural change the need for a clearand coherent strategy is greater than ever.Over the last 25 years, OC&C has helped morethan 100 of the world’s leading retailersdevelop compelling strategies. While no two ofthese strategies are the same, the principles ofdeveloping a good retail strategy remain veryconsistent, and below we have attempted tocrystallise these principles into a clear andpractical guide.

One of the most common reasons thatRetailers fail to develop robust long-termstrategies is a failure to understand thedifference between a mission, a vision and astrategy. While all have an important part toplay in defining corporate success they arehugely different. For example a mission laysout a simple but clear overall ambition for thecompany Nike: “To bring inspiration andinnovation to every athlete”.

Remind me –what is strategy?By contrast a strategy is a cohesive planthat provides long-term guidance for theentire organisation – critically it providesdetailed direction for each of the functionswithin any business.

HOW, HOW MUCH,SO WHATASPIRATION WHAT, WHY, WHO

Effectiveness

Ease

of C

onst

ruct

ion

Organisation Process

Vision

HRCulture Infrastructure

STRATEGY

Skills &Assets

CustomerNeeds

Mission

VISION

MISSION

The six ingredients Successful strategy depends equally on theconstruction of a differentiated and defensibleplan and the successful execution of the plan.Failure on either front is still failure – forexample flawless execution of a flawed plan isoften worse than doing nothing.

Our experience of good retail strategytherefore balances theory with practice – andrevolves around 6 key ingredients orcharacteristics.


1.DISTINCTIVE

2.DEFENSIBLE

3.RICH WITH

REWARD

4.SIMPLE

5.EMBEDDED

6.ENDURING (BUT

RESPONSIVE)

DEFINES A GOOD STRATEGY

DETERMINES WHETHER IT HAS IMPACT

IN THEORY, THERE IS NO DIFFERENCEBETWEEN THEORY AND PRACTICEBUT IN PRACTICE THERE ISIan Cheshire, Group CEO, Kingfisher

1. DISTINCTIVEA critical starting point for any strategy – youmust have clarity on why customers wouldchoose you over your competitors. Oftenretailers believe they are distinctive when thecustomer can’t spot it. Distinctiveness is veryoften the difference between winners andlosers.

2. DEFENSIBLE

The second key ingredient of good strategy isdefensibility – a strategy that is built onunique, or at least hard to replicate, factors.There are many potential sources of thisdefensibility – scale, property, route tomarket, capability, amongst others. Thecritical challenge through strategydevelopment is to make active choices aboutwhere you are going to build an advantage,and where you are not.

Too often retailers try to win on all fronts –you have to make active choices about whereto win, where to compete and where toconcede.

3. RICH WITH REWARDClearly, strategy is only worthwhile if itultimately delivers value either through profitor revenue growth or ideally both!

However, delivering this revenue growth indeveloped markets is increasingly difficult.Analysis of business plans across the last 10

years shows that 80% of growth has comefrom store roll-out, like-for-like (same store)sales growth and gross margin improvement.Each of these sources of growth are nowfundamentally challenged however, withchannel shift reducing the effectiveness ofretail space, consumer spending underpressure and the export of inflation fromChina.

Consequently, the challenge for futurestrategies is to unlock new sources of growth– with multichannel, international expansionand format development at the forefront.

4. SIMPLEIt is a truism that the execution orimplementation of a strategy increasesexponentially with complexity. Despite thisbeing somewhat obvious, one of the mostcommon causes of failed implementation isan attempt to implement strategies with toomany component parts. This complexity isgenerally caused by a combination of factors:

l Too many board agendas vying forrepresentation

l Lack of common objectives

l Failure to trade off and make the harddecisions

Only a ruthless insistence on simplicity and areal effort to force the debate to ‘what are wegoing to stop doing’ can overcome thischallenge.

5. EMBEDDEDRetail strategy ultimately has effect andimpact on the shop floor. Consequently theeffective implementation of retail strategyrequires it to be cascaded through theorganisation – shop floor up.

This challenge is made harder by the diffusednature of retail businesses, and the hugenumber of often relatively low skilledemployees that need to buy into and enactthe strategy. Those that excel recognise theimportance of relentless communicationacross the organisation, the role of strongand charismatic leadership and the need toclearly align individual incentives.

6. ENDURING (BUT RESPONSIVE)If strategy needs to be embedded throughoutthe organisation to be really effective then itcannot change on a regular basis. Oftenorganisations confuse the annual planningexercise with strategy, but they are verydifferent things. If strategy is to endure,especially in such a rapidly changingenvironment then it needs to be flexible andresponsive. While it is of course impossible tocreate a strategy that accounts for anyeventuality – an enduring strategy is builtwith a clear view of the evolution of themarket landscape.

YOUR LASTING LEGACY?If strategy is about setting the entireorganisation on a long term path to successthen it is also about writing the enduringchapter that each CEO will be rememberedfor. For those reading this and contemplatingwriting your own chapter then don’t forgetthe 6 key ingredients – they could be thefoundation of your lasting legacy.

HOWEVER BEAUTIFUL THE STRATEGYYOU SHOULD OCCASIONALLY LOOKTO THE RESULTSWinston Churchill

BE VERY CLEAR, STRATEGY ISNOT THE PRESERVE OF THEBOARDROOM... IT HAS TO BEUNDERSTOOD AND EMBRACEDBY ALL

By creating an opportunity map of a retailer’sexisting market landscape, we are able toidentify pockets of opportunity whereretailers are failing to capture their fair shareof existing core customers – or to identifyadjacent segments that provide ‘soft targets’for growth. This approach has proven highlysuccessful across a number of retailcategories allowing us to find short-termgrowth which is highly accessible. Ourapproach owes its success to establishing themarket dynamics at a segment-level andunderstanding the key metrics which act asdrivers of performance in each segment. Bymapping the opportunity landscape in this

way we are able to understand within eachsegment the share that each competitor inthe market holds of that segment, the keypurchase criteria (KPCs) within eachsegment, and the relative strengths andvulnerabilities of each competitor.

Not only does this detailed, segmented viewof the landscape allow clear prioritisation ofopportunities, it also enables a very clear setof actions to be developed and prioritised.

This is best illustrated by practically showingthe impact of segmenting the market withreference to a recent project Case Study.


IDENTIFYING HIDDENGROWTH: MAPPING THEOPPORTUNITY LANDSCAPE

Mapping the Opportunity Landscape: Finding the Treasure Closest to Home

WHEN YOU ARE TOO CLOSETO SOMETHING IT IS HARDTO SEE THINGS CLEARLY, BUTWHEN YOU TAKE A STEPBACK AND GAIN SOMEPERSPECTIVE, SUDDENLYTHINGS MAKE SENSE

Today’s circumstances combine to createchallenging times for traditional, store-basedretailers: consumer confidence is at an all timelow; the online channel grows apace, andinflation drives up cost prices. Faced with thesechallenges the sources of growth of the lastdecade (portfolio expansion, consumerexpenditure growth and lower cost sourcing)appear increasingly defunct. Retailersinevitably are now on the search for newsources of growth. A typical response is tosearch the distant horizons, looking beyond

core markets, into adjacent categories, newterritories and new brands. However, thefurther from the core retailers look, the lowerthe chance of success. More importantly, theinclination to search further afield oftenoverlooks hidden sources of growth that existwithin a retailer’s existing markets, andpossibly even within their core customer base.It is these opportunities, where the chances ofsuccess are higher and which retailers aremore capable of accessing that we advocatetargeting first.

In a recent client engagement we helped afurniture retailer combat the effects ofsignificant (c.10% per annum) market declinesby identifying new pockets of growth to pursuewithin their core market. The client’s ingoinghypothesis was that they were a ‘Mass-Market’retailer with relatively even share across allsegments and limited scope for share gain tosupport store LFL growth, and as a result theirfocus was on identifying new productcategories that could be added to their existingstores to provide a source of growth.

Through ‘Mapping the Opportunity Landscape’we were able to identify customer segments inwhich the client was very strong, with highlevels of market share, but also othersegments where their share was significantlyunder-weight. This identified two principleareas of opportunity for the client outside oftheir core customer segments, each of whichrepresented a significant opportunity forgrowth if the retailer could grow its sharetowards the level held in its core segment.

Delivering Tangible Actions


SEGMENT 1Existing Core Customers

c.40% Market Share Today

SEGMENT 2Grow Share of Mission Opportunity


SEGM

ENT 6

Capt

ure

New

Mis

sion

Opp

ortu

nity

c.5%

Mar

ket

Shar

e To

day

SEGM

ENT 3

Capt

ure

New

Pur

chas

e Ty

pes

–15

% M

arke

t Sh

are

Toda

y

SEGMENT 5Capture New Mission

Opportunity


SEGMENT 4Capture New Mission

Opportunity


Lifestage 1

Lifestage 2

Purchase Type 1 Purchase Type 2 Purchase Type 1 Purchase Type 2

Mission 1 Mission 2

OPPORTUNITY A• Client share today: 30%• Competitor 1: 35%• Segment KPCs:

– Product Quality– Modern Design

• Competitor Strengths:– Product Quality– High Service Levels

• Client Strengths– Product Quality– Modern Design

OPPORTUNITY B• Client share today: 12%• Competitor 2: 30%• Segment KPCs:

– Value for Money– Brand Choice

• Competitor Strengths:– Broad Range– Low Entry Price Points

• Client Strengths– Broad Range– Missing Entry Prices

Client Example – Key Opportunities

However, these two opportunities representedsignificantly different challenges and wouldrequire different actions to address them. Inorder to successfully deliver either of theidentified opportunities it was necessary tounderstand the share that each competitorheld of each segment, the KPCs of each of thesegments and how each of the competitorswas delivering against these. This could thenbe used to understand who needed to bebeaten to win in each opportunity, and onwhich dimensions of competition they neededto be taken on. The above exhibit shows ahigh-level view of the two identifiedopportunity areas, along with the KPCs of thekey segments and the strengths of the leadingcompetitors. This fact-base can be used toprioritise the identified opportunities anddevelop a tangible set of actions to deliverthem.

The first area of opportunity (Opportunity A)was to target customers conducting the sametypes of mission and purchase as the client’sexisting core customer segment butrepresenting a different demographic &lifestage (Segment 2). This was already astrong segment for the client who already held30% share, however this share was under-weight relative to both their share within theircore customer segment and relative to theshare of the leading competitor in this newtarget segment. To understand thesedifferences in share it was necessary tounderstand each Segment’s KPCs and howeach of the competitors was delivering againstthem.

The client was very strong in one area, leadingthe market in product quality which wasoverwhelmingly the most important KPC for

their core customer segment. By contrast, theclient’s position in the new target segment wasless strong: while product quality remained themost important KPC for these customers,design was also important and this was anarea in which the client lagged behind itsleading competitor and as a result they weredelivering lower share.

Understanding these KPCs within the targetsegment enabled us to identify relatively clearactions in order to compete more effectivelywith the leading competitor and steal share.Addressing the client’s perceived weakness indesign required a combination of ranging andmarketing actions to introduce more design-led product into the range and promote thisproduct in a way that would communicate amore design-led message in order to drawthese segments into the store.

Source: OC&C Consumer Survey, OC&C analysis


In OC&C’s experience the insights deliveredthrough mapping the opportunity landscapein a retailer’s core market can have a powerfulimpact on their business, revealing significantgrowth opportunities, normally in one of twoareas:

l Enable share gain amongst existing corecustomers through better understanding ofand delivery against their needs

l Identify attractive segments outside of theexisting core, where share is comparativelylow, and deliver practical actions to bettertarget these segments and grow sharewithin them

In the tangible example above we were ableto identify opportunities to drive share withinthe client’s core market which were equivalentto c.100% uplift to existing revenues.

As you can see, the opportunities revealedthrough mapping the opportunity landscapeare typically sufficient to drive a step-changein business performance and deliver long-term, above market levels of growth.

Mapping the opportunity landscape is aninsightful, data-driven approach to helpunderstand a retailer’s position within its coremarket. It identifies significant opportunitiesfor growth within that core market anddelivers a detailed and practicalunderstanding of how to deliver thoseopportunities.

Realising Substantial Impact

Target Segment KPCs and Retailer Strengths

Source: OC&C Consumer Survey, OC&C analysis

Store Environment 15%

Broad Choice 30%

Customer Service 33%

Modern Design 34%

Value for Money 43%

Product Quality 51%

1%

2%

4%

-3%

-6%

15%

1%

2%

3%

-5%

-9%

10%

-5%

-1%

-2%

5%

-9%

5%

-4%

-6%

-3%

4%

1%

7%

DECR

EASI

NG IM

PORT

ANCE

OverallSegment 1vs Average

Segment 2vs Average Client

LeadingCompetitor

KEY PURCHASE CRITERIA% Stating Important

COMPETITOR STRENGTH vs PURCHASE CRITERIA% Above / Below Average Rating

Key weakness in delivering Segment 2

The second area of opportunity(Opportunity B) was to expand the client’sproposition to serve customers conductingdifferent types of purchase and mission fromthe existing core customer segment(Segments 4 and 5). Almost half of the coremarket sat in Segments in which the clientsignificantly under-performed in shareterms. Once again, the key to understandingthis performance lay with the segments’KPCs. These segments were significantlymore value-led than the existing corecustomer segments, requiring a broad rangeof choice at Value price points.

The client was underperforming on value formoney perception because, despite having abroad range, they lacked coverage at entryprice points relative to competitors. Bycontrast, the leading competitor for thesesegments was delivering against these needsby bolstering their in-store proposition withextensive catalogue and online offerings whichprovided significant range depth, particularlyat the Value end of the range.

The set of actions required to deliver thisopportunity was similarly clear and practical asfor the first, albeit slightly more operationallycomplex; targeting these Segments required

investing in the online platform in order toprovide a level of range depth at value pricepoints to compete with the leading competitor.Whilst developing the online systems to deliverthis opportunity, and sourcing the new rangesinvolved significant lead-times and investment,we were also able to identify some quick winsto begin delivering this opportunity in theshort-term. These initiatives, which could all bedelivered at comparatively short lead-times,included introducing flat-pack ranges to the in-store proposition to strengthen the existingentry price point range and help deliverimproved value for Money perception to thecustomer.


SOME CUSTOMERS WILL VALUE THE IMMEDIACY THATSTORES OFFER AND PAY EXTRA FOR THE PRIVILEGE

THE CHALLENGE OFMULTICHANNEL PRICINGMultichannel retailers have converged on asimple axiom for pricing across channels:in-store prices and web prices must be thesame.

Customers standing in front of the fixtureconsulting their iPhones or challenging storestaff as to why the price isn’t the one theysaw earlier on the website, have quickly ledretailers to conclude that price differencesbetween the channels are customer-unfriendly and indefensible.

The channels might deploy differentialranging but like-for-like items must be pricedequivalently.

This increasingly received wisdom isunderstandable, formed from the bestintentions, widely held... and dangerouslywrong.

The reality is that for most products storesare a more costly channel than online, andretailers cannot be competitive in both if thisis not reflected in pricing.

Typically this leads multichannel retailers tobe uncompetitive online and to allowpureplay insurgents to erode their marketpositions. Or, worse still, retailers launch adifferent ‘fighter’ brand online, which deniesthe customer a cross-channel journey andthrows away any advantage from the brickspart of bricks ’n’ clicks.

But customers are smart enough toappreciate that price and value are a functionof service, convenience and trust, and thesearen’t the same between channels.

In fact, retailers already recognise this withtheir physical stores – shoppers are evidentlyquite prepared to pay a conveniencepremium in an Express versus a Superstoreformat.

So it should be in the multichannelenvironment: some customers will value theimmediacy that stores offer of being able totouch and feel the product and take it awaythere and then; some will want the ease ofhome delivery; some will click and beprepared to wait a day before they collect,and each will be willing to pay a differentprice for the service that suits them.

Shelf-edge labels often claim price-matchingwith competitors’ stores but avoid theawkward comparison with online. Insteadthey should display in-store and online pricesand encourage customers to choose theirchannel.

If they don’t need it now, customers canorder and come back later or wait in forhome delivery. Shops will become acombination of convenience stores with aconvenience premium, and displayshowrooms taking orders.

Ironically the largest online pure playsalready show how this might work. Buyers ateBay can ‘buy it now’ and sidestep theauction, trading certainty and immediacyagainst the chance of a bargain. Amazonoffers the reliable comfort of its ownshopfront, or else a range of sellers on itsMarketplace with varying ratings and deliverypromises. Shoppers place different values ontrust, speed and certainty, and choose andpay accordingly. This phenomenon can beillustrated with reference to Amazon’s pricingof the iPod Nano, where prices vary by c.30%according to whether it is used or new, whothey buy from and the customer’s preferreddelivery option (see exhibit below). So it willbe in the multichannel world.

Getting this right will be critical for manyphysical retailers. Customers need to bemigrated to a rational model sooner ratherthan later, where they’re offered atransparent choice of channel and serviceoptions and differing prices that reflect costto serve. Only when multichannel retailerscan operate this new approach will they beable to survive and thrive.

CUSTOMERS ARE SMARTENOUGH TO APPRECIATETHAT PRICE AND VALUE AREA FUNCTION OF SERVICECONVENIENCE AND TRUST

CUSTOMERS NEED TO BEMIGRATED TO A RATIONALMODEL, WHERE THEY’REOFFERED A TRANSPARENTCHOICE OF CHANNEL ANDSERVICE AND DIFFERINGPRICES THAT REFLECT COSTTO SERVE

119

119

119

119

113

100

15

5

5

6

9

105

Amazon Market Place – New – Cheapest 118

Amazon Buy New, 2-4 Day Super-saver Delivery 119

Amazon Buy New, 2 Day First Class Delivery 125

Amazon Market Place – Used – Cheapest

Ø 121

Item Price Delivery

Amazon Buy New, Express Delivery (Tomorrow by 1pm) 128

Amazon Buy New, Evening Delivery 134

c.30% premiumvs lowest available

online

Amazon Price Benchmarking, 8GB Blue iPod Nano (6th Generation)¹

1. As found online on 19th January 2011Source: Website searches, OC&C analysis


10 THINGS EVERY CEOSHOULD KNOW ABOUTMULTICHANNELRetail CEOs know their businesses have torespond to the rapid consumer adoption ofnew technology. This is particularly true inEurope and the United States, where retailersface stagnant markets and multichannel is theprimary source of growth.

While the opportunity is clear, the best route toexploiting it isn’t. Shoppers want to interactand transact through online stores accessedvia a plethora of devices (computers,smartphones, tablets, what next...) and theywant to blog and tweet about what they’vebeen doing. Every successful bricks andmortar business has had to go through a steeplearning curve, trials and tribulations before ithas been able to get its commercial prospectson the right trajectory.

Whilst the challenge is complex, we havedistilled from our experiences working withmultichannel retailers, the 10 things that everyCEO should be mindful of in the new world.

1. THINK CUSTOMER, NOT CHANNELBusinesses organise around channels, butcustomers organise their efforts aroundbrands/missions. As a CEO, you need to endthis disconnect.

Physical stores, online sites, contact centresand catalogues, all have very differentoperating characteristics and requirements.This makes channels a simple and clear way toorganise your business. But this does notreflect how customers think or act. Customersin store check prices online before decidingwhether to gratify themselves instantly or waitto get a better price; customers researchonline, and arrive knowing more than the salesassistant does, before making a final decisionon what to buy. The businesses that arewinning take a much more integrated view ofchannels and are led by customer goals, ratherthan business goals.

2. QUICKLY ESTABLISH APROFITABLE FORMULA FORGROWING YOUR CUSTOMER BASE

In the world of physical stores, if you got yourlocation decision right, you could bereasonably assured of the volume and qualityof traffic to your store. As a consequence,retailers generally have not had to grapplewith managing footfall to stores on a dailybasis. Winning in the online world however,means dynamically managing tradeoffs toacquire, retain and reactivate customers. Theyunderstand the tradeoffs between ‘near’ freetraffic (prime position on natural search, e-mail marketing, social media, PR), paid traffic(paid search, targeted banner ads, catalogues)and mass brand building media (television ads,outdoor, press). As a CEO, you should not beoutsourcing these decisions to specialistagencies, but actively leading yourorganisation to redouble efforts in improvingyour position in ‘near’ free mechanics – this ishard to get working right, but the rewards willmake it well-worth your while.

3. ACCEPT NOTHING OTHERTHAN JOINED-UP BUYING,MERCHANDISING ANDMARKETING DECISIONS

Buying, Merchandising and Marketingfunctions within a retail organisation havehistorically required only a ‘loose’ linkage foreach of them to deliver their respective goals.Winning in multichannel requires afundamentally more joined-up approach to‘buying’ and ‘selling’ functions. For examplein a multichannel world, if you launch apromotion, you need to change your searchstrategy, to ensure the promoted productachieves a high level of visibility on paid andnatural search, re-merchandise the website,address the challenge of competitive pricingversus online competition, and much more.

Delivering all of these steps requires aBuying-Merchandising-Marketing triumviratethat is more integrated and joined up, andsuch cohesion is unlikely to come naturally tothese teams. Your role as the CEO is toensure that the case for change and thenecessary enabling mechanisms are in place.

4. POPULATE YOUR MARKETINGTEAM WITH A MIX OF ‘ARTISTS’AND ‘SCIENTISTS’

As companies shift marketing spend fromtraditional channels to online channels, theshape and composition of talent withinmarketing teams has to alter substantially.Creative flair is still required, but needs to beaugmented by pools of professionals who arewell-versed in delivering targeted andmeasurable mechanics. The ‘artists’ need to becomplemented by the ‘scientists’ who canobsess about shaving the cents off customeracquisition costs by basing decisions on hardmeasures of return on investment at acampaign level.

5. INVEST AHEAD OF COMPETITIONIN YOUR CUSTOMER ANALYTICSCAPABILITY

Multichannel winners take customer dataseriously. They have a deep conviction that theability to understand their customers betterthan anyone else and to interact with them ina relevant and personalised manner isfundamental to success. Pureplay businesseslike amazon, netflix and google all started offwith a deeply analytical and customer-focusedmindset. Some retailers – Macys, Target andTesco – have built extremely advantageouspositions through their historical belief in thetransformational power of customer data.Retailers who have relied in ‘gut’ have foundthe transition much harder.


6. YOU WILL REQUIRE NEW KPIs –START GETTING THE KEY ONESIN PLACE

In store based retail the core list of KPIs is wellestablished – measures such as like-for-likesales growth, or sales per square foot give agood indication of retailing health.Supplemented with an ability to walk thestores, CEOs know quickly how healthy theirbusiness is. When retailing moves online, thelandscape becomes more complex. Managerscan no longer physically “walk the store” tosee what customers are doing; instead theydrown in an ocean of data. The keysimplification that a CEO can introduce is asingle-minded focus on the key drivers ofperformance. The five key metrics that everyCEO should know are:

l Growth in profitable orders (not like-for-likegrowth) as a measure of sales growth

l Net margin per order (not sales per squarefoot) as a measure of productivity

l GMROI (not gross margin) as a measure ofbuying efficiency

l Marketing cost percentage (not labour costpercentage) as a measure of costperformance

l Customer retention rates as a measure ofloyalty

7. ALIGN INCENTIVES TO ENABLETHE CENTRE AND STORES TOCAPITALISE ON CROSS-CHANNELOPPORTUNITIES

New channels can often be viewedsuspiciously – store managers may see theonline store as a competitor likely tocannibalise its sales; buying teams feeloverwhelmed by the requirement to increasetheir ranges and to refresh it more frequentlyfor something that is currently a small, ifgrowing, part of the business. As CEO youneed to align incentives. This can requireinvestment - Macy’s has installed 50k high-tech cash registers that allow staff to useonline channels to fulfil a sale if stock has runout in store and the salesperson is eligible for

commission on the online sales that theyassisted. But it can also be about newprocesses. At Globetrotter, a specialtyoutdoor apparel & equipment retailer, withc.35% of its sales online, store staff areincentivised by category rather than channel,encouraging them to promote cross-channelshopping. Addressing revenue recognitionand reward mechanisms is a powerful way tobring about behavioural change across alarge colleague base in dispersed locations,and a great way for a CEO to signalcommitment to exploiting opportunitiesthrough new channels.

8. TAKE THE OPPORTUNITY TORESHAPE YOUR SUPPLY CHAIN TOONE THAT IS MORE NIMBLE ANDLESS CAPITAL INTENSE

Online opens up the opportunity to exploit avariety of models to build, stock and deliverranges. Retailers no longer have to own thestock they sell; they can rely on vendors tosell them the stock only at point of purchase,or indeed absent themselves from the supplychain completely through drop ship vending.Retailers can act as aggregators of others,like amazon marketplace, or own the entiretransaction. The ability to operate acombination of increasingly flexible anddemand responsive models is a realopportunity for retailers to more nimblypursue category and range expansionopportunities. Far sighted CEOs willunderstand how they intend to use thisadvantage.

9. BUILD A FAST, FLEXIBLE TEAM OFTECHNOLOGY DEVELOPERS

Retail businesses that started life withphysical stores have been used to big ITcapital expenditures to upgrade tillpoints orBuying & Merchandising systems. But theyare entirely unused to a world in whichflexible technology changes need to be mademuch more frequently with a less ‘capex-hungry’ and rigidly ‘project-ised’ mindset. Thebest online and multichannel businesseshave more development engineers than they

do buyers! Technology and the nimblenesswith which you deploy it will be a keydifferentiator, so needs to be ownedinternally. CEOs also need to think radicallyabout how to build the capability to makesmaller and more frequent technologychanges; the days of waiting two years forthe next software upgrade must be banished.

10. INSTIL A ‘DAILY TRADING’RHYTHM (WEEKLY IS SIMPLYNOT GOOD ENOUGH!)

The weekly trading meeting on a Monday istypically the ‘spine’ on which the rhythm of thebusiness is based and the forum in whichmany trading decisions get made. In the bestonline operators though, this notion ofdecision cycles has been completelyabandoned in favour of a philosophy of tradingthe site constantly. Decisions whether tocontinue spending more on paid search termswithin a category/product line, addressavailability issues on key browsed lines, zero-inon pages with high bounce rates and changeprices in response to competitor action aretaking place in near real time. The ability to actdecisively in compressed timeframes is both amindset and capability that traditional storeand catalogue retailers are simply not gearedup to. CEOs will have to guide theirorganisations into this way of working bychanging what gets measured and when, andby creating the appropriate frameworks andforums of decision making to enable lots ofsmall decisions to be taken daily, rather than afew big ones every week.

Over the last decade the questionmany retailers asked themselveswas ‘how do I beat Wal-Mart (andother discounters)?’ Some rose tothe challenge, many fell by thewayside. The question for thisdecade is ‘how do I beat amazon(and other pureplays)?’ CEOs whounderstand the 10 key things aboutonline stand a good chance of risingto this challenge too.


PROPOSITION INDEX:ONLY THE STRONG SURVIVEConsumers continue to draw a stark line between their favouriteand least preferred retailers – which one are you?

Last year the OC&C Proposition Indexrevealed for the first time the consumer’sview of the global retail landscape. Given theopportunity to rate retailers across the fullrange of elements of their proposition,consumers identified a set of “ChampionRetailers” who were setting the standard, notjust for their category, but for all of retail.This year times have been hard forcustomers and retailers alike, and this hasbeen reflected in an overall reduction inretailer scores. However, the strongestretailers from last year’s Index continue tolead the way and have, in many cases,extended their lead over the chasing pack.

The OC&C Proposition Index builds a detailedpicture of how customers rate a whole rangeof retail businesses. Uniquely, it enables younot only to compare customer views bysector, but also across different sectors andinternationally. Crucially, it not only tells youhow well customers rate your propositionoverall – but also tells you how customersperceive different elements of yourproposition such as price, service or productrange – giving you the opportunity to identifywhich part of your own proposition you mayneed to develop.

The Index is founded on a simple principle.Thanks to their experience of internet sitessuch as Trip Advisor and iTunes, customersare used to rating price, service, quality andother areas through a five star system. As ameans of assessment, it is quick andconvenient. Customers understand itimmediately.

OC&C asked over 21,000 consumers in sixcountries to use the star system to ratenearly 400 retailers on price, quality, lookand feel, choice of products, online

proposition, value for money, service andtrust. The ratings offered by consumers allowus to analyse not only which retailersshoppers see as offering the leadingpropositions, but also the markets and retailsectors that are rated highly.

Furthermore, scoring highly in the index isnot just a measure of customer satisfaction,but also an indicator of potential for longterm revenue growth. On average, retailersranked in the top third of the OC&CProposition Index have delivered growth overthe last 3 years well ahead of those in thebottom third.

The past 12 months have been a difficult timefor consumers, with rising unemploymentand significant pressure on disposableincome, and consumer confidence is atrecord lows across a number of markets.These pressures have raised the thresholdsthat need to be met in order to satisfycustomers, setting a difficult challenge forretailers. In reflection of this toughenvironment, almost two thirds of theretailers in the Index have received a lowerscore this year than in 2010.

The area in which retailers have sufferedmost significantly is in Trust, which was lastyear shown to be the most significant driverof overall rating. This year, of all elements ofthe proposition, Trust has shown the greatestdecline. In particular this seems to be relatedto consumer confidence, with greatestdeclines in markets with the lowest levels ofconfidence.

However, in spite of this gloomy context thereare still signs that strong performers cansurvive even the choppiest of seas. At the topof the Index a familiar set of names continue

1 Amazon

2 Picard

3 M&S Simply Food

4 John Lewis

5 Play.com

6 DM

7 Waitrose

8 Ikea

9 eBay

10 Bol.com

Top 10 Retailers

Proposition Element Champions

Fashionability

Low Prices

Product Choice

Product Quality

PRIMARK

PICARD

AMAZON

ZARA

Value for MoneyAMAZON

Store Look & FeelDOUGLAS

Service AMAZON

Online PropositionOTTO

Trust AMAZON

to lead the way, led from the front byAmazon which is once again the highestrated retailer overall, retaining its topposition in 3 of the 6 countries covered andmoving up into second place in a fourth.Along with Amazon, 4 more of last year’stop 10 retain their places amongst theleading global retail propositions (Picard,M&S, Play.com and DM).

In addition to the best continuing to lightthe way, there is further evidence thatonline retailers are redefining the standardsfor their offline competitors. Of the five newentrants into the top 10, two are onlinepureplays, with eBay and Bol.com joiningAmazon and Play.com amongst the elite.However, there are also signs thattraditional Bricks & Mortar players areresponding to these challenges bydeveloping more sophisticated multi-channel propositions. Also amongst thenew entrants to the top 10, both John Lewisand Waitrose ranked amongst the top 10Bricks & Mortar Retailers for their onlinepropositions.

The OC&C Proposition Index identifies thestrongest performers in the market andhighlights the areas in which they aresucceeding. In these difficult and increasinglycompetitive times, a thorough understandingof the customer is the key to survival. We areactively working with clients to turn theProposition Index insight into clear actionand help them establish long termcompetitive advantage.

Find the full results atwww.occstrategy.com/psi


-5.5

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-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

YoY Consumer Confidence Growth (%)

NETHERLANDS

US

FRANCE

UK

CHINA

YoY Change in Trust (Index)

GERMANY

Growth in Consumer Confidence vs Change in Trust Rating%, Index

<#>An OC&C Insight The Future of Retail

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