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March 3, 2003

where it's @ - The NewsLetter

Written BY, FOR and ABOUT retail professionals

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CONTENTS

The Customer Perspective - Reinventing The Department Store

Common Sense #20

Issue #8: On Becoming the Low Cost Producer continued…

Here we are, well into 2003 and not a lot has changed from last fall. The economic slump doesn't seem to be bottoming out yet. Recent reports put consumer confidence at a ten-year low. Housing starts recently started declining and the anecdotal news seems even worse than the official reports. Every week brings more news of corporate scandals which inevitably lead to more layoffs. No wonder, department stores continue to be challenged. But the economy may be only one factor figuring into the their decline. Many believe that department stores are operating on business models that are out of step with the times.

Author Bill Clarke would agree. He contends that department stores are due for reinvention. He continues where he left off last year with his thoughts on reinventing department stores.

Read his continuing article below…

Friction In The Supply Chain

C-PTAT - New Supply Chain Rules in a post 9/11 World

As if the bad economy isn't enough, now it seems that American retailers are going to have to deal with an issue that is a direct result of the war on terrorism. Known as C-PTAT, the Customs -Trade Partnership Against Terrorism. Whether C-PTAT makes our borders safer or not remains to be seen. But C-PTAT does promise to deliver additional layers of complexity and costs for major importers. What are the consequences for retailers and what can they do about it? Jim Kline takes a closer look.

Follow along below…

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UK Retail Snippets

Our UK associate, Martin Hall, weighs in for the first time in 2003 bringing us up to date on the UK retailing scene. Martin writes:

A reader of where it's @ was kind enough to email me the other day asking what had happened to this column. "I enjoyed reading it", said the correspondent, "and your quirky take on the UK retailing scene always brought a wry smile to my face. So will you please start writing it again".

With press like that, and a little more time at my disposal nowadays, it's good to announce that UK Snippets is back for another series of sideways looks, and occasional swipes at retailing in Britain.

Read Martin's full report below . . .

Common Sense Series # 20
The Customer Perspective - Reinventing the Department Store
by Bill Clarke

Issue #8: On Becoming the Low Cost Producer continued

The intent of the Common Sense series is to investigate areas that do not make sense as seen through the eyes of the customer. The current series has focused on the department store segment and the challenges they face in today's dynamic market. This edition will focus on the eighth of ten issues that department stores need to address in order to improve sales and profits.

In the previous issue, I suggested the need for department stores to evaluate and change their business and financial model because the old model no longer meets the needs of their owners and customers. The new department store business model must recognize the reality that they must operate a profitable store on a reduced level of gross margin but with a comparable reduction in traditional operating expense. I called on department stores to challenge their traditional ways of doing business and the implications and cost of operating within a full service paradigm. Finally, I suggested that something had to give. Either the department store has to change their business model or they have to re-create the old department store model and provide traditional levels of service to a smaller target audience.

This issue will focus on the need to develop a comprehensive program that includes both expense reduction and productivity improvement.

The first step in an expense reduction strategy is to systematically review each and every expense in the company. There are four stages that range from relatively routine to extremely difficult. I relate expense reduction to the human anatomy and suggest that the four levels or layers of expense reduction are reducing fat, then muscle, then bone and finally vital organs.

The first stage eliminates the fat that always accumulates during good times. This is the easiest stage because just about everybody in the company knows the people who are not pulling their weight and where the silly money is being spent. All you have to do is look and listen. The first stage reductions rarely affect the overall performance of the business. Usually, it provides a sudden boost in morale because everyone realizes that the company is committed to becoming more efficient. For example, getting rid of the baby grand piano on the first floor.

The second stage involves the cutting back of expenses and services that requires significant change and adjustment. Just like when a muscle in the body is impaired, the body cannot function exactly the same without it. The trick is to find ways to restrict the expenses without creating irreparable negative reaction from customers and business partners. For instance, when a company experiments with self-service in certain areas of the store, they have to create a perception of service by having someone visible and available to provide help if needed.

The third stage is always undertaken with dead seriousness (no pun intended) when additional cuts are required to remain competitive and viable. This stage involves the reduction or elimination of expenses that were previously considered necessary. When a bone is broken, the rest of the body is jeopardized. For instance, the elimination of all travel expense for buying trips and store visits is a "bone cutting" issue. The challenge is to go on the offensive and attempt to find ways to stay in touch and informed by other less expensive means of communication.

The final stage is the elimination of a vital component of the business. For instance, when a company files for Chapter 11, they have the opportunity to close under-performing stores and facilities. Or, short of bankruptcy, there are examples of where companies sold off or shuttered divisions or facilities. The decision some years ago by Sears and Wards to get out of the catalog business comes to mind. They walked away from billions of dollars in sales in order to reposition the business for future success.

In any retail segment, including department stores, there is one company who is the low cost leader or producer. The low cost leader sets the standards for both expense reduction and productivity improvement. It is generally true that a company needs to be amongst the top three expense leaders in their segment in order to compete effectively. I am reminded of the plight of Kmart when they tried to compete head to head with Wal-Mart (the low cost leader) and got bloodied and beaten. The low cost producer has systematically squeezed out operating expense through a combination of actual expense reduction and productivity improvement.

The key to successful expense reduction is the use of innovation and standardization. Innovation is a result of a management process that recognizes and rewards people for finding ways to do things faster or better or with fewer resources. It requires the ability to think outside the box. The goal of standardization is to identify and implement the best ways of doing business throughout the enterprise. There is a recognition that you cannot change one element in a process without reviewing and considering change in all other elements. That is why a business cannot simply eliminate people and expect the remaining group to become more productive. Expense reduction and productivity improvement must be viewed as a total "system", not as a series of individual components.

If a company is able to find continuous improvements through innovation and standardization, they will become a low cost producer. This is the strategy that Wal-Mart used to achieve their cost dominance.

I am reminded of the incredible effort that Wal-Mart started in Sam Walton's era to become the low cost producer in the discount store segment. First, they had a goal that was clearly communicated. Second, they realized that they had to consider making major changes in the way they did business. One of the major opportunities they discovered was the need to reduce the time and expense of moving merchandise from their vendors into their stores. The result of their evaluation was the creation of their version of "quick response" or "just-in-time" merchandise management. The unique change was the open transmission of unit sales data directly from POS to the vendors (which was revolutionary at that time). This one improvement probably did more to reduce operating expense than any other program in their history.

The message is clear to all retail companies, especially department stores: you must find ways to improve the productivity of all assets (people, merchandise, systems, facilities and equipment). If the present department store business model if failing, then it is time to develop a new model.

There are four components of the new department store model: first, the new model must recognize the reality of reduced margins; second, management must evaluate the need and cost of some of the traditional ways of doing business; third, they must reduce expense or improve productivity to level of the lost margin; lastly, the new model must be introduced to customers so that they can better understand the tradeoffs that must occur between pricing and service, and to allow the customer to adjust their expectations relative to the previous levels of service and support.

It makes sense, common sense for department stores to change their business model. The reality is that department stores can no longer operate a full service store on reduced margins and operational budgets. They need to be open and honest with customers as they create a new business model that marries the expectations for value pricing with the appropriate adjustments in customer service and support.

(To be continued in a future issue of where it's @ - The NewsLetter)

About the Author

Bill was born and raised in Dayton, Ohio. He received his undergraduate degree in Business Administration, major in Retailing, from the University of Dayton and MBA degree in Marketing & Management from Xavier University in Cincinnati. Bill has worked with dozens of national retail clients on projects in systems, distribution and logistics. In addition to the consulting and line management assignments, Bill is an accomplished author and a public speaker with a filing cabinet full of white papers, articles and speeches. He also served as an Adjunct Professor of Marketing for 5 years in The Ohio State University system. He currently lives in the Atlanta area and can be reached at 770 396-7722 or via e-mail: bclarke@mindspring.com.

Friction In The Supply Chain

C-PTAT - New Supply Chain Rules in a post 9/11 World

By Jim Kline

In the days immediately following the September 11th terrorist acts, our country realized more of its vulnerability to attacks from terrorists. In the early days following the attacks we closed our borders, then tightened security of people and cargo arriving by plane. This caused some major disruptions in our supply lines for foreign sources, but considering the state and mood of the country at that time we saw it as a necessary response to those tragic events.

In the more than one year that has passed, our heightened concern for terrorism crossing to our shores has not diminished and we are putting even greater resources to guard our shores and to secure the lines that goods (and potentially terror) flow through. The Government and importers are rethinking the methods and strategies of how things will be brought in to this country.

In April, the US Customs Service launched the Customs -Trade Partnership Against Terrorism (C-TPAT). This joint program is designed to protect the security of cargo entering the United States. C-PTAT requires importers to take steps to assess, develop, and communicate new practices that ensure increased security to those goods being imported to this country and to generally secure the supply chain. In return for these measures, the participant's goods and vessels (Air, Road, and Water) will receive expedited processing from customs.

According to Bryan McCarty, MBA and Licensed Customs Broker for Zenith Electronics, Customs is clamping down on importers to ensure the security of product coming in to the country. Earlier this year Customs announced the CSI program (Container Security Initiative). They are identifying high-risk ports and placing inspectors at some 20 or so mega ports around the world to screen cargo before it enters the US and won't have to be screened again. Mr. McCarty stated, "As importers we will have to be extremely careful in how we import our products and file our paperwork with Customs. Failure to meet the new standards will force a 100% inspection rate at cost of about $400 per container and add 5 to 7 more days in the process."

Importers are beefing up their information systems to ensure 100% data accuracy and compliance. Customs will require electronic filing of manifests and ASNs (advanced shipping notices) to ensure a speedier and smoother importation process. Many importers are considering changing terms and methods of how they import products and parts as well. Increased consolidation of containers will slow down the process. Many importers are changing the terms of shipment to freight collect terms to gain not only better efficiencies of enterprise wide rates, but also better control of information flows.

In a difficult year for retailers, many are seeking ways of slashing costs, increasing supply chain visibility, and accelerating the flow of goods coming in. Compliance to these new initiatives is key to the continued uninterrupted flow of goods, while concurrent investments in the information systems will yield both short and longer term financial advantages to those willing to take on these critical systems.

About the Author

Jim received a B.S. in Business Administration, majoring in Business Logistics, and a M.B.A in Finance from Penn State where he was an instructor of Business Logistics. He has held leadership positions with organizations like FedEx, Zenith Electronics, and Blockbuster. Jim has lectured and worked internationally in distribution, supply chain management, and financial management. He is co-author of the Finance Logistics Impact Workbook, and has authored a number of articles and case studies in logistics and finance. He currently resides in the Dallas area and can be reached at 469.585.0637 or via email at jim.kline@earthlink.net .

UK Retail Snippets

by Martin Hall, Managing Consultant, IntelligentCommerce

Not The Best of Times

Of course, as in the US, the spectre of war in Iraq is haunting everyone, and especially retailers. Putting aside for the moment the moral dilemma of whether an attack against Saddam Hussein's vile regime is, or is not, justified, the worry for UK retailers comes not from the outcome of impending battles in the Middle East, but from the expected counter-retaliation of terrorist reprisals here in Britain itself.

The fear of empty streets, when people are too frightened to venture out of their homes, is making the industry extremely nervy. And not without reason too. But, with true British resilience, it's pretty much business as usual, even if the consumer is being much more careful these days to contain their spending - in marked contrast to a year ago when we were all much more abandoned and carefree about running up significant debts on our plastic cards.

So retailing's not having the best of times. After a patchy Xmas and New Year Sales season, most of the big stores and multiples are struggling to deliver figures which the City finds acceptable.

So shares are getting marked down heavily, and, as predicted in this column a year ago, it's becoming open season for predators who sniff a good deal in the offing. A number of well known brands are now openly being stalked by outsiders, with Allders, the department chain, already definitely marked down for a 'change of ownership' and dear old House of Fraser, despite being brilliantly led for the last few years by the extremely talented John Coleman, also looking extremely wobbly.

Baugur, the men from Iceland, who caused Philip Green such embarrassment 12 months ago when he announced his bid for Arcadia, is being particularly active at the moment picking up pockets of shares in all sorts of retailers, and causing lots of consternation in boardrooms. Their latest prey is Mothercare, still struggling to make a comeback despite a change of leadership at the top, and the fact that they have now sorted out the dreadful mess with their distribution which caused customers to desert in droves.

But Mothercare also deserves some sympathy. Established in the 1960s to meet the fashion and clothing needs of the baby boom, it is now operating in a very different market. Not only have the likes of Asda, Tesco, AdamsChildrensWear, and a host of discounters successfully invaded its market territory, but Britain itself is producing significantly fewer babies than ever before. In the recently published results of the 2001 national census, we're told that for the first time ever there are more unmarried partners living together than husbands and wives. Women prefer careers to pram wheeling. Demographic forecasts clearly show massive increases in the numbers of 50+ citizens, and (by 2010) significantly less young people entering the labour market.

The answer for Mothercare is obvious. Change your name to Grandmothercare. Start catering for the swinging 60 year olds, and put the swinging 60s behind you.

Centre stage in UK retailing right now is the hit show "Gobbling Up Safeway", which is delighting the lawyers and bankers (huge fees), and providing the scribblers in the business press with endless column inches as they follow the antics of all the takeover contenders. And the bookies are doing nicely out of this too, with the odds changing on a daily basis about whether it will be (yes, you've guessed it) the ubiquitous Philip Green or Walmart who end up with the prize.

Whoever wins, with the exception of William Morrison, the only company to have made a firm bid, the takeover will be rigorously scrutinised by the Competition Authority to ensure that the ensuing carve-up of the market is fair, and that no one retailer has a monopoly in any of the UK regions.

My personal preference is for Morrison's original bid to be successful. This Northern based retailer is a fresh reminder of what good,old fashioned retailing used to be about. Sir Ken Morrison, the 70-something boss still runs the company like a family business, and perhaps unlike the CEOs of some of our more streamlined grocers who only don a white coat when they are doing store visits, actually enjoys getting his fingers dirty at the coalface. As a Yorkshireman, Sir Ken is particularly fond of his pies, and I'm told that each week he visits his pie-maker for a personal tasting session.

The news which has just broken about Ahold, however, who must surely engage in a fire-sale of massive proportions in Europe, The States and South America just to stave off insolvency, may just persuade the likes of Walmart, Tesco and Sainsbury's to back out of the race for Safeway, and go for greater international expansion instead. We shall see.

But back to the High Street in the UK, and in central London in particular. We talked earlier about the spectre of empty streets in the event of war. In Central London the streets are already empty of the cars that bring in the shoppers. Thanks not to Saddam Hussein, but to Mayor Livingstone's new congestion charge. Whilst retailing in the suburbs has received an unexpected boost, the stores of the great inner London shopping areas are having a very thin time indeed. Mayor Livingstone may have a smile on his face at having de-congested the centre of the capital. The retailing bosses have every reason to call him some very unprintable names indeed!

About the Author

Martin Hall is lead consultant with IntelligentCommerce, a consultancy that delivers creative business solutions into the consumer facing industries. He may be reached by email: martinshall@hotmail.com

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