New Approaches to Value Creation

It is no secret that retail is undergoing a dramatic transformation. With greater access to information and increasingly fragmented tastes, consumers are more demanding on price, assortment and in-store service: a “one-size-fits-all” approach is no longer an option.

Combine the transformation of customer expectations with the current state of the economy and the stakes have never been higher for retailers to respond quickly and precisely to demand for products and services.

Still, it is in exactly this type of environment where the greatest opportunities arise for retailers to differentiate and innovate to create value for their customers and shareholders. We
have seen three primary strategies, employed in varying degrees, by retailers in their pursuit of growth and shareholder value: operational excellence, customer intimacy and product and service innovation.

Operational excellence focuses on efficiency improvements that positively impact productivity, generate faster inventory turns and increase sales per square foot. Retailers began to adopt technology to help automate these improvements and take full advantage of the data collected to positively impact strategic business decisions.

Pursued exclusively, however, operational excellence will quickly reach diminished marginal returns. As a result, retailers are now confronted with the need to redefine themselves and to discover new paths for creating value that are no longer based on scale, but rather on breaking the very economic models that brought historical success.

Retail has historically operated around a product-centric, merchant-driven culture: Translating customer preferences into increased intimacy has not been common practice. To achieve customer intimacy, retailers must first acquire insightful data that helps determine who their customers are and what they want.

More important, they need to be able to act upon this insight and tailor their assortments to meet demand and generate sustainable brand loyalty. Target, for example, has generated tremendous loyalty by providing quality discount goods that are distinct and trendy in design.

Think like a marketer, act like a merchant
By blending the art of retailing with science, retailers can convert knowledge about their customers into incremental margin in sales and effectively think like a marketer and act like a merchant. American Eagle Outfitters has leveraged this strategy to analyze data across stores in different regions to look for similarities in merchandise performance and to plan assortments accordingly.

Another path to growth exists in a retailer’s ability to innovate with fresh product and service ideas. To be successful on this path, the retailer must demonstrate agility and speed in every aspect of the culture.

For example, the “fast fashion” model that Zara has developed injects excitement and freshness into its assortments while also capitalizing on margin improvement. This approach has had far-reaching implications, as department stores and even grocery retailers are looking to leverage inventory turns to create innovative approaches to delivering products and services.

Tesco in the U.S.
No retailer has been more successful at creating and delivering value in this space than Tesco: It understands the economics of its business, knows its customers and has made strategic investments in technology, all of which contributed to the development and launch of innovative concepts like Fresh & Easy Neighborhood Markets in the United States.

Retailers that emulate these paths of intimacy and innovation will be poised to take advantage of opportunities to create value, transform their businesses and build the foundation for future growth in the retail industry.