Overstored How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels Table of contents Channel Migration and Overgrowth of Selling Space Have Left Retailers Overstored 4 How Did We Get Here? Old Habits Die Hard 6 There’s No Going Back 9 What’s an Overstored Retailer to Do? 10 INSET: Rationalizing the Store Base: Not Giving up, but Getting Smart 12 CASE STUDY: Tackling Channel Migration Head On: The Toys’ R Us Story 13 The Last Word 14 2 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels Caught between the massive channel migration to online and mobile and the inertia created by yesterday’s bricks and mortar success, retailers need to make tough choices on the role of physical selling space in tomorrow’s world. 3 Channel Migration and Overgrowth of Selling Space Have Left Retailers Overstored Since the late 1990s e-commerce boom, analysts, investors, and technology purists have been predicting the end of bricks-andmortar retail. And while the prediction of the bricks-and–mortar format’s end has been greatly exaggerated, the fact is customers continue migrating rapidly from physical stores to online and mobile channels to fulfill their shopping needs (Figure 1)1. Consequently, the online and mobile channels, once merely a supplemental revenue stream for traditional retailers, are now a bona fide force that is wreaking havoc on physical store sales productivity. In fact, Accenture’s analysis of 29 top U.S. retailers reveals that from 2005 to 2010, total square footage and stores in operation increased by 38 percent and 21 percent, respectively, while sales per square foot has actually declined 5 percent2. And these less-productive stores are affecting the bottom line. Return on invested capital for the same set of retailers during the same time period also declined 25 percent. Given these trends, the evidence is clear that the majority of traditional retailers today are overstored. Figure 1. The evolution of customer buying behavior and its impact on retailers’ financials. Rapidly declining foot traffic... Retail Foot Traffic YOY % Decline 2008-2011 2008 2009 2010 2011 -0.6% -1.1% -3.3% -3.8% ...combined with continued online growth... Online vs. B&M Retail Sales Growth Rate 2005-2010 25% 24% 6% 20% 5% 15% 3% 4% 1% 6% -2% 2005 Online 2006 2007 2008 B&M 4 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels -8% 2009 2010 …is dramatically reducing store sales productivity… Total Sq. Foot vs. Sales per Sq. Foot, US Retailer Index 2005-2010 Sales per square foot 3,458 $412 Total square footage $392 2,497 2005 2006 2007 2008 2009 2010 ...and in turn impacting financial performance. Average ROIC—29 Top Retailers 2005 vs. 2010 10.39% 7.76% 2005 2010 5 How Did We Get Here? Old Habits Die Hard How did bricks-and-mortar retailers, and store productivity, get here? Conventional wisdom is that a confluence of factors, including technology innovation and consumers’ ability to shop anywhere, anytime, led to this point. While this is true, it does not fully explain why retailers have reacted slowly to correct their course. The more complete answer suggests retailers suffer from a classic case of overestimating (and overfunding) the continued success of the store-dominant model while underestimating (and underfunding) the emergence of a new model altogether. In the past, the winning strategy for retailers was real estate-centric and simple to execute. Once retailers had a format and formula customers wanted, they “infilled” each local area with large, experience-friendly stores that conveniently capture customers near home and work. This model worked well and retailers were incented to see it continue, given the cheap money and real estate appreciation seen in the mid 2000s. At the same time retailers were overestimating their “infill” strategy, they were underestimating the growth of online and mobile channels, how adding virtual space decreases the need for new physical space, and how online and mobile would define retail relevance to consumers. Underestimation by retailers took many forms. Some retailers, such as Borders, partnered with rivals such as Amazon without fully realizing the decision’s impact on their own online site. Others, such as Blockbuster, were slow to adapt to ecommerce altogether. All the while, online-only retailers such as Amazon and Netflix were finding ways to remove traditional barriers to virtual purchasing (especially payment security and exchange or return hassles), thus shifting consumer behavior and the competitive landscape in the process. The result has been a gap in talent, knowledge, and capabilities around these new channels for some traditional retailers and outright bankruptcy and closure for others. 6 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels 7 There’s No Going Back While it may be convenient for traditional retailers to take a “wait and see” approach to the sustainability of channel migration and its impact, it seems highly unlikely physical selling space growth will make a big comeback. Between 2011 and 2014, online sales are expected to grow by 14 percent per year (versus 3 percent for total retail sales), while Web-influenced sales will increase to 53 percent from an already high 48 percent today.3 Additionally, mobile commerce sales are expected to grow by a stunning 800 percent through 2015.4 These growth predictions do not seem unreasonable when one also considers that in 2011, venture capitalists more than doubled their online retail investment to a record $2.4billion versus the prior year.5 Beyond the raw data, however, the reality is that online and mobile retailing is a commerce phenomenon that is only beginning to catch fire. Since 2000, the percent of American adults with broadband internet access at home has skyrocketed from less than 5 percent to 62 percent, and in 2011, 55 percent of all Americans made purchases online. Additionally, the newest generation of shoppers only knows a world where they can buy in any channel. Ninetysix percent of American teenagers access the Internet at least once a month (compared with 74 percent of the remaining population), and 43 percent of those teens are already shopping online.6 The truth is, there is no going back. Channel migration from stores to technology-driven channels will continue, and the time for traditional retailers to adapt and change is now. 8 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels 9 What’s an Overstored Retailer to Do? Store-dominated retailers should address channel migration by rethinking how they attract, serve, and retain customers, then allocate capital and resources accordingly. Doing so is a three step process that starts with assessing current vulnerability to channel migration. 1. Assess the current store model’s vulnerability Channel migration is and will continue to occur across most retail categories, but the level and pace of migration will vary (Figure 2)7. For retailers to address channel migration effectively, they should first assess their migration vulnerability to understand how dramatically it will impact their business. This assessment addresses two key dimensions: the type of products offered and the profile of customers served. Vulnerability for each of these dimensions can be analyzed separately, and then together, to develop a full picture for each retailer’s business (Figure 3). 2. Be aggressive about tactical options Each retailer needs to address head-on the underlying causes of vulnerability. For those retailers that are particularly vulnerable, the plan should be aggressive, swift and consider all potential options. Retailers with low vulnerability, on the other hand, should monitor migration closely and look for opportunities to get ahead of both traditional and online competitors. Figure 2. Online penetration by retail category as of January 2012 34.2% 28.8% 19.0% 13.9% Office Supply Books & Music, Magazines Movies & Videos Toys & Hobbies 13.9% 10.3% 9.9% Computer Consumer Flowers, Software Electronics Greeting, Gifts 9.3% Home & Garden 7.8% 6.2% 5.8% Jewlery & Sports & Watches Fitness Other 4.8% 3.2% Apparel & Furniture Consumer Accessories Appliances Packaged Goods Figure 3. Assessing store model vulnerability Product vulnerability Customer vulnerability Store model vulnerability Easily comparable/commodity Younger Product vulnerability Non-exclusive Higher educated H “Digitizable” Not time sensitive or replenishmentoriented Low service requirement + Higher income Extreme = Price sensitive Moderate Tech savvy Less social L 10 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels Low L 2.0% H Customer vulnerability While each retailer will vary in how they choose to move forward, there are three tactical options that can be applied to almost any retailer: Real estate: renegotiate, reformat, rationalize. Based on the level of channel migration, most retailers should take methodical action with their store base. The first place to look is lease renegotiation. While US rental rates have already declined 13 percent from their peak in 2010, according to the National Association of Realtors, retailers should continue to have the upper hand on rental rates, especially on lower quality properties. Additionally, retailers should be bold about reformatting and rationalizing their store base. In a recent Accenture Survey for The Retail Industry Leaders Association (RILA), 60 percent of retail executives believed the number of stores will decrease by 2020 and 90 percent believed that formats will be smaller or fundamentally different in that same timeframe. And while there are typically emotional hurdles that retailers must address when considering reformatting and rationalizing, it’s important to note that it does not and should not be about “slash and burn” or acknowledging defeat on growth. Instead, savvy retailers understand that it’s a positive pivot toward the future. They are smart about how they proceed, using advanced analytics to asses who will continue to shop their stores, what their needs are, and how they can most effectively address those needs with their current locations, types of products carried, level of service offered, or the actual physical formats (see inset on page 12 for more details). Customer: create channel equivalence. Vulnerable retailers need to determine the best way to attract and retain customers in all channels, which means developing channel equivalence to ensure a consistent brand and customer experience. For most retailers, the starting point is to invest in and develop an online and mobile presence that compares well against competitors, yet also integrates with their in-store experience. For example, out of stock items should still be available to customers through a mobile POS with the ability to be shipped to their home. Conversely, if that same customer buys an item online and wants to return it, they should be able to take it back to the store and exchange it for a different item, if necessary. Retailers who can offer their customers the flexibility to start and end their shopping experience in any and all channels, and move back and forth effortlessly, can offer a level of convenience and service that pure online retailers do not have the infrastructure to match. Merchandising: think exclusive and local. A key method for addressing migration, particularly for products that are easily comparable or simple to understand, is to develop exclusive offerings that competitors, online or otherwise, cannot match. These offerings can be internally developed (i.e. private label) or designed in partnership with key suppliers. Additionally, retailers can have a more tailored in-store assortment that connects to the surrounding community. For example, retailers can invest or carry local merchant’s goods as a means to create a unique kinship to the physical space in a way online-only retailers cannot match. In either case, the goal should be to meet and exceed customer needs while generating positive buzz for the brand. 3. Pivot corporate headquarters and its resources to future growth channels With future retail growth continuing to accelerate in non-store channels, the final step requires C-level pivoting of corporate headquarters accordingly. This means addressing organization structure and capital and resource allocation. Retailers might do this by instituting an EVP-level lead of Channels reporting to the CEO, with cross-channel responsibility for stores, online, mobile, and call center. This unified channel structure enables a single executive to have positional authority to make difficult cross-channel decisions and reduce complications in integrating the customer experience. For example, Walmart has stated its intent to integrate the Merchandising and Operations capabilities of the online organization with those of its traditional retail business.8 Further, recent statements from Walmart leadership indicate exactly how this is integration is happening. President and CEO of Walmart US Bill Simon stated, “We are now moving toward a strategy called continuous channel shopping,” while President and CEO of Walmart. com Joel Anderson commented, “Our store teams next year will get sales credit for both store sales and .com sales.”9 Beyond organization structure changes, growth channels and their projects should be at the forefront of resource and capital allocation. Simply stated, the proof that retailers are embracing the impact of multichannel’s growth is demonstrated by project staffing and funding. If a retailer is fully committed to non-store channels as the future growth engine, those channels will receive the best talent and outsized funding relative to their current contribution to the P&L. This demonstrates the retailer is not only aware of the rapid shift in consumer buying preferences, but also is willing to support this reality in action and deed. From an organizational structure perspective, online and mobile channels should be raised to the same level as stores, giving them equal decision input on inventory allocation, pricing, marketing, labor, and most importantly, execution of the customer experience. 11 INSET Rationalizing the Store Base: Not Giving up, but Getting Smart Most traditional retailers are going to be moderately or extremely vulnerable to channel migration and will likely need to rationalize their store footprint to optimally serve customers in all channels and maintain a requisite ROI. While it may seem logical to simply close the poorest-performing stores based on sales and profitability trends, doing so will likely not produce desired results. In fact, store rationalization should focus on determining how successful each store is likely to perform in the future, leveraging the same level of thought and analytics used when retailers open stores. The starting point for retailers is to perform a comprehensive analysis on the current store portfolio, leveraging both quantitative and qualitative assessments, to identify format modification or rationalization opportunities. Quantitative analysis should focus on predictive modeling—using chain-wide store-level data to determine the internal (store age, distance to other stores, etc.) and external (local share, competitive density) factors that are drivers of store success for each type of format. With the factors defined, retailers can analyze each store in the network to determine if it is likely to be financially viable in the future. Accenture believes that this store-level analysis should be done on a market-by-market basis, as opposed to chain level, in order to ensure adequate competitive positioning and scale in the key geographic areas in which the retailer competes. Once the quantitative analysis is complete, a set of qualitative filters should be considered in order to ensure rationalization decisions are not in conflict with other strategic considerations. These strategic considerations can include regulatory stipulations, the role of certain stores (i.e. showcase store) in a market or chain, and likely competitor response. Once market and store-level rationalization targets are identified, a retailer should plan and execute changes or closings carefully, while considering and managing key stakeholder issues: • Customer Retention—Communicating and incentivizing migration to a sister store or channel • Talent Retention and Morale—Retaining top talent while supporting employees who are leaving as part of the transition • Marketplace Communication—Delivering a clear message on why changes are being made and why addressing the overstored position means the retailer is getting smart, not giving up Group of Stores (Market) Internal Factors • • • • External Factors Financial Performance Store Age Store Proximity Management Quality • • • • Competitive Intensity Market Growth Customer Demographics Local Share Store & Market Level Analysis Strategic Considerations Store Rationalization Decisions 12 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels CASE STUDY Tackling Channel Migration Head On: The Toys’ R Us Story Amidst the many big-box retailers that have faltered in the race to compete against their more agile competitors, Toys “R” Us stands out as an early success story. Through the mid-1990s, Toys ”R” Us built a dominant 25 percent share of the US toy market served by a massive store footprint consisting of Toys “R” Us, Babies “R” Us and Kids “R” Us outlets (peaking at 1,053 US stores in 2001). In the late 1990’s, Toys “R” Us began a fall from dominance as low-cost competitors such as Wal-Mart and Target, and eventually Amazon, aggressively targeted the toy market. As a result, Toys “R” Us saw earnings decline and actually reported an operating loss in 2005, causing many analysts to predict the end of big-box toy retailing. While most big-box retailers defaulted to store expansion to grow revenues, Toys “R” Us ran in the other direction. It closed 10 percent (87) of its stores in 2006 and reduced overall square footage by 3.3 million.11 Despite reducing its footprint, Toys “R” Us actually grew revenue and dramatically increased profitability, due to its crosschannel capabilities and competitive tactics (see charts). Toys “R” Us Financial Results 2003-2010 Revenue ($B) 16 14 0.8 12 Revenue Operating Income Turnaround begins 0.6 10 0.4 8 6 0.2 4 0.0 2 0 In 2005, Bain Capital and Vornado recognized a turnaround opportunity and took Toys ”R” Us private. As many retailers are now learning in 2012, Toys “R” Us had to critically evaluate how it could differentiate its channels and customer experience from competitors in the eyes of its customers. Toys “R” Us improved the customer experience with access to exclusive toys and trends (via exclusive contracts and co-created products) and broadened its toy assortment across channels, shifting toward more online retailing (acquiring toy websites such as eToys.com and babyuniverse.com) to pull customers away from competitors that offered low prices on a much smaller selection of toys (Walmart).10 Operating Income ($B) 1.0 2003 2004 2005 2006 2007 2008 2009 2010 -0.2 Toys “R” Us Store Count 2003-2010 Number of stores Domestic International 574 601 641 678 715 713 717 744 927 898 901 837 845 846 849 868 2003 2004 2005 2006 2007 2008 2009 2010 Turnaround begins 13 The Last Word Customers are in the process of migrating away from stores, and this is a trend that is accelerating. For traditional retailers, the time to address migration is now, as those who don’t will be left with high store counts and large amounts of square footage, but few shoppers and minimal profits. To tackle migration, retailers need to assess their vulnerability, look to smaller and fewer stores, and shift capital and resources to equally support tomorrow’s multichannel growth. The journey will not be easy, but those that can do so successfully will continue to be competitive in a more channel equivalent world. 14 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels For more information contact: Christopher Donnelly christopher.donnelly@accenture.com Peter Madden peter.k.madden@accenture.com David Forsythe david.h.forsythe@accenture.com Katherine Smith, an Accenture Products consultant also contributed to this article. References US retailer index 1 ShopperTrak, “Foot Traffic Trends,” November 7, 2011 Walmart, Kroger, Target, Walgreens, The Home Depot, Costco, CVS Caremark, Lowe’s, Best Buy, Sears Holdings, Safeway, SUPERVALU, Rite Aid, Publix, Macy’s, Ahold USA/ Royal Ahold, Kohl’s, J.C. Penney, TJX, Meijer, True Value, Dollar General, Gap, BJ’S Wholesale Club, Nordstrom, Staples, Ace Hardware, Toys “R” Us, Bed Bath & Beyond 2 Accenture analysis and SEC filings (Annual (10-K) and Quarterly (10-Q) filings) 19952010 for the following: Walmart, Target, Walgreens, The Home Depot, Costco, CVS Caremark, Lowe’s, Best Buy, Sears Holdings, SUPERVALU, Rite Aid, Publix, Macy’s, Kohl’s, J.C. Penney, TJX, True Value, Dollar General, Gap, BJ’s Wholesale Club, Nordstrom, Staples, Ace Hardware, Toys “R” Us, Bed, Bath & Beyond NOTE: Ahold USA/Royal Ahold and Meijer data was excluded for these two privately held companies 3 Euromonitor International, January 2011; Forrester Research: Web-Influenced Retail Sales Forecast, December 2009 4 Barclays Capital, “U.S. Internet: Internet Trends & Picks for the Year Ahead,” January 11, 2011 5 Thomson Reuters, December 9, 2011, http://www.reuters.com/article/2011/12/09/ us-venture-retail-idUSTRE7B722L20111209 6 Pew Research Center, 2010 7 Comscore, November 9, 2011, www.comscore.com/Press_Events/ Press_Releases/2011/11/comScore_ Reports_36.3_Billion_in_Q3_2011_U.S._ Retail_E-Commerce_Spending_Up_13_ Percent_vs._Year_Ago; US Census Bureau, November 17, 2011 - Retail Indicators Branch 8 Walmart press release, January 28, 2010 9 Nicholas, Leon “Continuous Selling at Walmart,” Kantar Retail research and Kantar Retail analytics, April 2012 10 Rosemboom, Stephanie. “Toys “R” Us Makes Deal for F.A.O. Schwarz,” New York Times, May 27, 2009 11 Toys “R” Us 10-K (2003-2010), Los Angeles Times (Jan. 2006), Associated Press, January 2006 15 About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 246,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become highperformance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com. About Accenture Management Consulting Accenture is a leading provider of management consulting services worldwide. 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