My Report to Management

Editor's Note: Last week, I wrote about the outline of my "undercover" work with a big box retailer. This week, Part 2 of the results of my report to management. Read on and enjoy. As always, you can find all my blog posts from 2013 to the present on my website at

First, though, a little bit of theory.........

The Big Middle of Retailing

Wal-Mart, Sam's Club, Kohl’s, Lowe’s, Target, Costco, and Best Buy are typical examples of retailers in what's called the Big Middle (of the marketplace). Since the Big Middle is the source of the largest potential base of customers, it is where most successful retailers want to compete in the long-term, although it is possible to be successful in the short-term using a different approach. In fact, many of the retailers now in the Big Middle have gotten there by way of initially providing either an innovative offering or low price or both, thus providing superior value to customers. For example, Ann Taylor began by offering innovative products that provided customers with high levels of value through excellent benefits, whereas Target had its start by providing customers with elevated levels of value through low prices for high-quality goods using its operational excellence. Others, like Lowe’s home improvement stores, were innovative regarding their assortment and category dominant format, while also offering value through its ability to build partnerships with suppliers.

Big Middle retailers have succeeded in leveraging their innovative or low-price position to transform their niche appeal to the mass market. They own an entirely different position in the marketplace by offering innovative merchandise assortments regarding depth and breadth at reasonable prices. Apparently, they have successfully transformed themselves from being perceived as the innovative leaders or the low-price leaders into a hybrid of the two that appeals to a much larger customer base. They reposition themselves by transforming their image as either offering naturally innovative merchandise or low price to being retailers that provide great value in a broader array of merchandise.

Wal-Mart/Sam's Club faltered in their expansion strategy, starting in 2005. They underestimated the power of labor to influence local municipalities to enact “store size” laws, minimum wage laws, and health care benefits and they have also faced some lawsuits. Wal-Mart has responded in part by modifying their assortment, such as offering low price prescription drugs and expanded banking services. It has also finally realized its “one size fits all” mentality doesn’t actually fit all. As a result, they are customizing assortments to cater to urban areas and geographical and ethnic idiosyncrasies.

Once retailers move into the Big Middle, they cannot expect to rest on their laurels, or they will get in trouble and potentially be forced to exit retailing altogether. The Big Middle is a very competitive and profitable space. Other retailers are always vying for consumers’ attention and a place in the Big Middle. Simply being in the Big Middle is not sufficient for long-term viability. A case in point is conventional department stores. Once the darlings of Wall Street, they are now considered among the dinosaurs of retailing because they have not been able to sustain superior value through innovative offerings and high levels of service for the mass market.

Strategic Levers for Retail Success Through Value
1. Store Factors - A key strategic value driver at the store level is developing the right combination of format and retail environmental factors. Customers often look beyond the functional benefits of a physical store to the overall experience it offers, or, the store’s “look and feel.” Since much of the shopping experience is rather mundane, those retailers who can distinguish themselves with unique and exciting store atmospherics add value to the shopping experience. Some examples of innovative retailers that are migrating to or are in the Big Middle because they excel at store factors are Crate and Barrel, Starbucks, Japan’s Jomo gas stations, Bass Pro Shops Outdoor World, and American Girl.

2. Service Factors -  Given the time and effort that is invested by retailers to attract customers into their stores, it 's incredible how many retailers pay so little attention to customer service. It is common to visit a retail store and see half-filled shopping carts abandoned by shoppers who were tired of waiting for their turn at the check-out, or to see customers looking for a particular item they wanted to purchase but could not find a service provider to assist them in locating the item or provide the information they need to ensure it is the right thing. But those retailers who do provide excellent customer service distinguish themselves from their competitors, and therefore add significant value to their offering. Innovative retailers that are migrating to or are in the Big Middle because they excel at service factors are American Girl, Build- A-Bear, Trader Joe’s, Best Buy, The Container Store, and Lowe’s. Retailers that attend to certain aspects of customer service can contribute to customer perceptions of value, resulting in a robust and loyal competitive position.
3. Merchandise - Most retailers devote a tremendous amount of time and effort to merchandise management. Retailers who excel in merchandise management do so in one of two ways. First, they can concentrate on finding unique merchandise that appeals to their target customers. Second, they can be confident that enough merchandise is where the customer wants it when she wants it. Those who can do both, like Spain’s Zara or Sweden’s H&M, are even more likely to provide superior value for their customers. Innovative retailers that are migrating to or are in the Big Middle because they excel at merchandise management are Wal-Mart, Carrefour, METRO Group, Urban Outfitters, Trader Joe’s, Crate and Barrel, Starbucks, American Girl, Build-A-Bear, Target, Dollar General and other “extreme value” retailers.

4. Price - Price is a critical factor that consumers consider in ascertaining the overall value of a product or service. Understanding what the customer is being asked to give up in exchange for what they get is, therefore key to the ability of the retailer to deliver superior value. Marketers try to carefully determine the price of a good based on the value of what is being offered in the mind of the potential buyer. Retailers that are migrating to or are in the Big Middle because they excel at the pricing factor are Wal-Mart, Target, Carrefour, METRO Group, Trader Joe’s, Zara, H&M, Kohl’s, Lowe’s, Dollar General and other “extreme value” retailers.

5. Technology - The use of technology goes hand-in-hand with superior supply chain management. It is not surprising, therefore, that the same retailers who we believe are migrating to or are in the Big Middle because they excel at supply chain management also utilize superior technology.

These successful retailers use technology throughout their supply chain. Most retailers collect sales data at the point-of-sale. It is what is done with the data after it is collected that separates superior retailers from the rest. As noted previously, retailers can use sales data to work closely with their suppliers to plan production and inventory replenishment. Advanced systems like CPFR (collaboration, planning, forecasting, and replenishment) use the data to construct a replenishment forecast that is shared by the retailer and vendor before it is executed.

Some retailers, notably Wal-Mart and METRO Group, are using radio-frequency-identification (RFID) technology. (RFID tags—tiny computer chips that can automatically transmit to a special scanner all of the information about a container’s contents or about individual products.) If every item in a store is tagged, RFID technology can be used to locate mislaid products, to deter theft, and even offer customers personalized sales pitches through displays mounted in dressing rooms. Ultimately, tags and readers will replace bar codes and check out labor altogether.

6. Supply Chain -  In times of slow or no sales growth, rising expenses, and increased difficulty finding great locations, a managerial acumen toward supply chain management can generate significant profits straight to the bottom line. This involves efficiently and effectively integrating one’s suppliers, manufacturers, warehouses, stores, and transportation intermediaries into a seamless value chain so that merchandise is produced and distributed in the right quantities, to the right locations, and at the right time, in order to minimize system-wide costs, while satisfying the service levels required by its customers. Retailers that are migrating to or are in the Big Middle because they excel at supply chain management are Wal-Mart, METRO Group, 7-Eleven Stores in Japan, H&M and Zara.

Enough for today; next week, in Part 3, I give my letter grades to management.

Next Week: Be Careful What You Ask For.........You Might Get It!