The retail value chain: How to gain competitive advantage through efficient consumer response (ECR) strategies

The Retail

Value Chain

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London and Philadelphia

SAMI FINNE & HANNA SIVONEN

The Retail

Value Chain

How to gain competitive advantage through

Efficient Consumer Response (ECR) strategies

iii

Publisher’s note

Every possible effort has been made to ensure that the information contained in this book is

accurate at the time of going to press, and the publishers and authors cannot accept respon￾sibility for any errors or omissions, however caused. No responsibility for loss or damage

occasioned to any person acting, or refraining from action, as a result of the material in this

publication can be accepted by the editor, the publisher or any of the authors.

First published in Great Britain and the United States in 2009 by Kogan Page Limited

Apart from any fair dealing for the purposes of research or private study, or criticism or

review, as permitted under the Copyright, Designs and Patents Act 1988, this publication

may only be reproduced, stored or transmitted, in any form or by any means, with the prior

permission in writing of the publishers, or in the case of reprographic reproduction in

accordance with the terms and licences issued by the CLA. Enquiries concerning reproduc￾tion outside these terms should be sent to the publishers at the undermentioned addresses:

120 Pentonville Road 525 South 4th Street, #241

London N1 9JN Philadelphia PA 19147

United Kingdom USA

www.koganpage.com

© Sami Finne and Hanna Sivonen, 2009

The right of Sami Finne and Hanna Sivonen to be identifi ed as the authors of this work has

been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.

ISBN 978 0 7494 5456 2

British Library Cataloguing-in-Publication Data

A CIP record for this book is available from the British Library.

Library of Congress Cataloging-in-Publication Data

Finne, Sami.

The retail value chain : how to gain competitive advantage through effi cient consumer

response (ECR) strategies / Sami Finne and Hanna Sivonen.

p. cm.

Includes index.

ISBN 978-0-7494-5456-2

1. Retail trade--Management. 2. Consumers. 3. Competition. 4. Consolidation and

merger of corporations. I. Sivonen, Hanna. II. Title.

HF5429.F4973 2008

338.89--dc22

2008028275

Typeset by Saxon Graphics Ltd, Derby

Printed and bound in India by Replika Press Pvt Ltd

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Contents

Foreword vii

Acknowledgements ix

Introduction 1

1 Change drivers in the retail value chain 5

Industry consolidation 6

Internationalization 11

Value chain integration 18

Convergence 21

Consumer and product trends 28

Sustainability 37

E-business 45

2 Retail formats 50

Chain operations 51

Shopper segmentation and target group selection 53

Key success factors in retailing 55

Alternative retail strategies 83

Summary 104

3 Collaboration in the retail value chain 106

Collaboration and supply chain management 107

Quick response (QR) 108

Effi cient consumer response (ECR) 110

Retail partnership levels 122

ECR as an industry community 127

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vi Contents

4 Demand management 130

Format development and category portfolio management 135

Category management 156

Space management 173

Summary and some insights into the future 187

5 Store operations 188

Store ordering 189

Product replenishment process 192

Implementation of assortment changes 195

Campaign implementation 198

Customer service 200

Store management and key performance indicators (KPIs) 205

Centralized store operations 212

Chain-level execution 213

Store refurbishment 216

Supplier role in store operations 219

Summary 221

6 Information technology trends in the retail value chain 223

Main trends 224

Key development areas of retail IT 234

Fact-based management with shopper information 254

Summary 277

7 Loyalty programmes and shopper information sharing 278

Loyalty concepts 281

Partners and joint programmes 290

Opt-in customer clubs 292

Use of shopper data 296

Data sharing in the retail value chain 309

Customer information sharing study 314

Key future trends in customer loyalty 330

8 The future 333

Globalization and consolidation 334

Operational effi ciency 337

Fact-based management 340

Innovation and exclusivity 342

Customer dialogue management and service extensions 344

Adapting to the local environment 346

Success formats 348

References 354

Index 355

Foreword

If ECR is to progress beyond the considerable strides already made, then

it has to focus hard on extending the search for knowledge on an industry￾wide basis. How do we best understand consumers’ needs? How do we

operate supply chain processes to create most value and least waste?

Sustainability is a key challenge for the supply chain and ECR can help

attain it. At Tesco, we build our business back from the customer – but we

need our supplier partners to help us to do this. Knowledge is key, but

sharing the knowledge makes it useful and this is why ECR continues to be

important.

Sir Terry Leahy

Chief Executive

Tesco plc

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Acknowledgements

The Retail Value Chain was an extensive project involving several people we

would like to thank sincerely.

The Retail Value Chain is largely based on an original Finnish book by Sami

Finne and Tuomas Kokkonen. Special thanks to Tuomas who has been

closely involved in this project, reviewing and commenting on all chapters.

Your uncompromising and constructive style contributed much to the quality

of the book and, as always, it has been a pleasure to work with you.

The inspiration for this project came from the effi cient consumer

response (ECR) community. Thanks especially to Professor Saara Hyvönen

from the University of Helsinki and Professor Arto Lindblom from the

Helsinki School of Economics, Kristina Metso from ECR Finland and Antti

Sippola, Co-chairman of ECR Finland, as well as Bernard Karli and

Stephanie Pfenning from ECR Europe – your supporting comments

encouraged us to undertake this project.

We would also like to thank the following retail industry leaders and

experts who were willing to share their experiences and views for this

book: Saliha Barlatey, Chairman of ECR Operations Committee (Nestle);

Kenneth Bengtsson, Chief Executive Offi cer and President of ICA AB;

Stefan Fröberg, Supply Chain Business Unit Director for Aldata; Dr Brian

Harris, Chairman of the Partnering Group; Peter Kabuth and Ralf Kern

from SAP; Bernard Karli from ECR Europe; Matti Karlsson, CEO of Sello;

Rob Turtle, Director of Pricing and Promotions at dunnhumby; Jenni

Virnes, Product Marketing Manager of Corporate Venturing at UPM￾Kymmene Corporation, and all 22 other interviews carried out for the

original Finnish version of the book. We also thank the 16 retailers from 11

countries participating in our shopper-information sharing study, and

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several Capgemini colleagues who helped with the interviews on this fasci￾nating topic and provided interesting results never seen before.

As non-native speakers of English, we are grateful to many people for

helping us with the language. Thanks to Maarit Tillman for the fi rst version

of the translation for most chapters. Without your help this project would

not have been possible in the tight time span. Special thanks to publishing

manager Priscilla Donegan from Capgemini, who has contributed greatly

to the quality and readability of this book. You are absolutely great! Thanks

to our commissioning editor Annie Knight and all others at Kogan Page,

who stretched with our tight schedules and always had a very positive atti￾tude. The awesome cartoons starting each chapter were drawn by Huib

Jans. We have always been fans of your cartoons, so it was a great honour

to have your work in this book. Special thanks for fi nding the time and

squeezing work for our book into a very tight schedule.

The biggest thanks belong to our friends and colleagues who have com￾mented on the book, contributing considerably to the quality of the text

and the richness of the content. Thanks to Olli Ek, Miia Finne, Anton

Helander, Harri Hovi, Kees Jacobs, Tuomas Kokkonen, Antti Syväniemi,

Päivi Vuorensyrjä and Edward Westenberg for your comments, questions

and suggestions that have undoubtedly made this book signifi cantly better.

Anton also provided the case study example in Chapter 4.

A great number of Capgemini colleagues around the world have con￾tributed to this book, directly or indirectly. We want to specially thank

Brian Girouard, the global leader of the Retail & Consumer Products

Sector in Capgemini for support and guidance, and Vice President Jyrki

Veranen and Sales Director Elja Kirjavainen for their encouragement and

support for this project. Alongside these, we also thank all our colleagues

in Capgemini, our customers and partners with whom we have had the

honour to work. The way we see the retail industry has been signifi cantly

shaped by the experiences and lessons learned from you. The journey

continues, thank you.

Finally, and most importantly, we want to thank our families and friends

for all the support. Warm thanks to Miia, Camilla, Melinda and Olli who

have been our support and joy, and understood us during the long

process.

x Acknowledgements

Introduction

The retail industry is changing all over the world at a fast pace.

Internationalization, consolidation and intensive price competition, espe￾cially driven by different value retailing formats, have defi ned new bench￾marks for competition. On the other hand, premium retailing and local

initiatives are also gaining share. New, increasingly heterogenous con￾sumer and product trends constantly set new requirements for retailers,

sustainability being a major theme for both retailers and manufacturers. As

convergence continues new entrants enter retailing, and many retailers

also expand to new business areas such as banking, insurance, healthcare,

mobile telecommunications and travel. Online retailing gains share in

many categories, and personalization enabled by customer loyalty pro￾grammes transform the customer dialogue. Small micro-segments can be

targeted ever-more precisely, and special assortments for them grow con￾stantly. Retailing polarizes as some formats become more and more

complex, hedonistic experience centres, and at the other end some players,

such as hard discounters, count on very simplifi ed formats and operational

models. There will be several formats for success, and totally new players

will also emerge.

This book discusses the above topics and several other key trends occur￾ring in the retail industry. The book is largely based on the original Finnish

version Asiakaslähtöinen kaupan arvoketju – kilpailukykyä ECR-yhteistyöllä by

Sami Finne and Tuomas Kokkonen, published by WSOY in 2005. Tuomas

has also been heavily involved in this project, and has reviewed and com￾mented on all chapters.

The Retail Value Chain consists of the following eight chapters.

Chapter 1: Change drivers in the retail value chain. The retail value chain

is changing at an ever-increasing pace, as for example industry consolida￾1

2 The Retail Value Chain

tion, internationalization, value chain integration and convergence drive

the rise and fall of different players in the industry. This chapter intro￾duces key change drivers in the retail value chain including these trends,

as well as consumer behaviour and product trends and key areas of sus￾tainability in the retail value chain. Also, the key effects of the e-business

are analysed – which players will gain most using the ‘long tail’?

Chapter 2: Retail formats. The best retail formats are memorable for cus￾tomers and have a clear value proposition delivered consistently through￾out all customer contacts – the moments of truth. There are several ways

to differentiate a store in the market: service and staff, price, in-store expe￾rience and continual assortment renewal are among some of the key areas

where retailers may differentiate to meet the needs of the target customer

segments. This chapter focuses on key success factors of retail formats and

options available for differentiation. Also, key retail format types are

described, and selected retail growth areas including value retailing

formats, premium grocery retailing, convenience stores and malls are dis￾cussed in more detail.

Chapter 3: Collaboration in the retail value chain. This chapter intro￾duces the key discussions in the retail value chain collaboration, such as

quick response (QR) and effi cient consumer response (ECR). The core

areas of ECR are also presented, including the ECR scorecards. One size

still doesn’t fi t all – there are several types of successful retailer–manufac￾turer relationships. The end of the chapter covers the key retail partner￾ship levels in retailer–manufacturer collaboration.

Chapter 4: Demand management. This activity is essential for all retail￾ers, and covers areas like how to drive value to the target shopper seg￾ments, and how to differentiate from competitors. Which categories and

services should be included in the product range, and how can a retailer

drive growth in different categories? These questions and several other

areas of retail demand management, such as assortment management,

space management, product development, new product introductions and

activity management are discussed. A holistic framework for shopper￾oriented demand management in retail is also presented and it guides the

structure of the chapter.

Chapter 5: Store operations. Effi cient implementation of new concepts and

operational models is vital for all retailers. Most retail variable costs are per￾sonnel costs, and competence building in a low-pay industry with high

employee attrition is a real challenge. However, constant concept renewal

with effi cient, low-cost implementation is a key sustainable competitive

advantage for retailers. This chapter discusses the key store operations prac￾tices, such as product replenishment, store management, customer service,

as well as campaign and assortment change implementations. In addition,

the latter part of the chapter includes areas like store refurbishment, chain￾level execution and the manufacturer’s role in store operations.

Introduction 3

Chapter 6: Information technology trends in the retail value chain. Retail

is detail, and effi cient information systems enable totally new effi ciency

levels in several retail processes. Customer loyalty programmes make pos￾sible the collection and analysis of data specifi c to the target group, increas￾ing the possibilities for fact-based management. This chapter describes the

main IT trends affecting the industry, including for example offshoring,

international IT operations and the development of identifi cation stand￾ards. Key trends in retail enterprise resource planning (ERP) and other

selected solution development areas are also discussed. The chapter intro￾duces a framework for fact-based management with shopper information,

and describes its key components, which is essential for all retailers running

loyalty programmes.

Chapter 7: Loyalty programmes and shopper information sharing.

Loyalty programmes are key differentiators for some retailers enabling,

for example, personalized dialogue with customers. The programmes also

enable collection and use of shopper information. The key retail customer￾facing processes can be redefi ned to truly serve the target shopper seg￾ments when shopper data is available and actively used. This chapter

examines key loyalty programme types and their core areas, and discusses

the use of shopper data in retail customer portfolio management and in

other key retail processes. Interesting results of the shopper information

sharing study of 16 retailers from 11 countries are published and address

the question: Do the retailers ‘walk the talk’ in ECR? The end of the chapter

discusses future trends in customer loyalty programme development.

Chapter 8: The future. The last chapter summarizes the key retail devel￾opment trends and discusses the authors’ views of the future development

of retailing in areas such as globalization and consolidation, operational

effi ciency, innovation and exclusivity and adapting to local environment.

Seven possible future success formats are also described to illustrate the

key development trends in practice.

We wish to give a holistic and understandable big picture about the retail

value chain, and the key operational models and success factors of its main

players. As there are quite a few discussed topics – actually most of them

would deserve their own book – only some of the areas are covered in

detail. Our objective in the book is to provide a holistic description of the

modern retail value chain, its players and steering models, and provide

insights into successful retail formats and operational models. We are pas￾sionate about retailing, and we hope that this book will inspire others to

join this interesting industry, and also provide some new insights for expe￾rienced retail practitioners.

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