Retail

Under the cosh – can ‘value’ be sustainable in retail?

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Let’s face it – being a retailer isn’t easy. You could argue it never has been, and that might be true to some extent as many retailers have come and gone over the years (Yes, I still remember those visits to my local town centre with nan, popping into Rumbelows to extend the TV rental, then Adams Kids to get my new school shoes before finishing up in Woolworths for their famous pick-and-mix).

However, whilst this clearly isn’t a phenomenon, I would argue it is harder being a retailer today than it ever has been, with the emergence of all sorts from that big thing called the internet through to the emergence of new go-to-market models such as franchising or international.

Amidst all this retail madness, and central to the survival and sustainability of all retail businesses, is the ability to be profitable. The financial crash of 2008-09 added further pressure to this delicate balancing act – and slowly but surely the number of retailers being pushed close to, or over the edge, has risen. We have seen high levels of retailers reporting ‘distress’ and to reducing their costs. Several retailers, in their urgency to stay on top of pressure from pure-players and competitors to keep their customers happy, have spent millions on building customer experience and fulfilment, heaping even more pressure on that bottom . Many retailers wouldn’t know the true cost of their online customer fulfilment routes, let alone be able to think about controlling it.

For many years, retailers have looked to reduce the costs in sourcing and supply chain, and all too often this is in the form of unplanned, reactionary supplier pass-through’s on discounts to cost prices, as Debenhams and others have done in recent years, but in the end this will only prove unsustainable and ultimately lead to problems. It has also been through the form of rebalancing the supply base towards Far East sourced product – but as Drapers recently reported, Brexit is going to put a different spin on that, particularly since the vote to leave has resulted in upward pressure on import costs. Cost pressures are being compounded even further as more customers not only increasingly want speed they also want ethical assurance – the latest spin being the use of ocean plastics as a material source. So, with all of this squeeze on the retail balance sheet, are we going to witness the end of retailers to offer customers true value? What can be done to maintain value in sourcing product in a sustainable way that continues to support value for the customer?

For me, there are three key things that resonate with me:

  1. Buddying up with others in strategic partnerships

As demonstrated by the recent news of the buying partnership between Tesco & Carrefour, these kinds of partnerships are going to become ever more crucial to retailers looking to make the most of being able to consolidate souring operations to reduce costs. Consolidation in general is happening right across the market as bricks-and-mortar retails fail to keep on top of the pace of change, as demonstrated most recently by the failure of House of Fraser – only a couple of hours later to be bought by Sports Direct. The Grocer themselves alluded heavily to the importance of partnerships – not only in sourcing but also in technology, such as that made between Walmart and Google last year in an attempt to tackle the growing threat of Amazon. Clearly, pooling and sharing resources to reach a common goal is likely to be the cornerstone of successful retail businesses into the future.

Additionally, it is also interesting to consider where opportunities might exist to ‘outsource’ sourcing of product to third parties. In many other industries this is very common, and particularly so around indirect procurement, Capgemini already offer this as a service. In the future, given the specialism required to understand deeper and more vertical, end-to-end sourcing, it might well emerge that retailers can benefit from the direct procurement approach to make the most of the expertise, knowledge and connections that a specialist product sourcing enterprise might offer. Whilst this kind of arrangement doesn’t really exist today on a wide scale it is certainly the kind of partnership that we could see emerge.

  1. Removing the middle men with strategic materials management

For many years, retailers have attempted or planned to have much greater control over their end-to-end supply chains to streamline costs, not least in the field of raw materials. Of the total cost-of-goods (COGS) for any retailer raw materials is a substantial element (typically 30-50% depending on the type of product), but the majority wouldn’t have the transparency of this cost because they have traditionally left this down to their direct vendors, manufacturers, factories or sourcing offices. Pressure to provide transparency, this will not only come down to cost – increasingly customers will demand it. Retailers such as Everlane in the US are leading the way with what they call ‘Radical Transparency’ by providing customers with a breakdown of the product costs and margin.

In an effort to try to eliminate the ‘middle men’, retailers have jumped backwards and forwards between going direct, establishing offshore sourcing offices and still using their trusted suppliers. Despite these attempts, most retailers have failed to take control of raw materials procurement. Many years ago, the notion of a retailer undertaking ‘vertical sourcing’ and driving consolidated fabric programs was a hot trend in retail, but true adoption of this concept appears to have fallen by the wayside aside from a few notable exceptions such as Zara. A recent review of the sourcing operation for a leading UK fashion and home retailer identified over £50m cost reduction on the cost of garments achieved through taking control of the raw materials and driving transparency into the detail of garment costing.

  1. Better management of the supplier base through strategic segmentation

Ultimately, a large part of being able to control product cost sits in working with the right sources in the first place – being able to ensure that you are segmenting the supply base properly and getting the most out of those relationships. Many retailers acknowledge this problem and I personally have witnessed retailers attempting to consolidate the number of suppliers, and then fail as they grapple with the usual problems of trying to consolidate across vertical silos such as divisions and categories.

At Capgemini, we have taken part in assessments of the supply base in a number of retailers over the last few years and found a number of examples of issues in this area:

  • One with an established direct sourcing model in place for up to 70% of its product we found whole categories where there were multiple non-direct suppliers supplying just one order a season.
  • At another department store retailer, on investigating cross-costing within its sourcing division found that on some product types cost prices were 40% higher in some categories than others, sometimes from the same factories and suppliers.
  • In one food retailer, we found that in one of their prepared food categories across one range, they had 34 varieties of mayonnaise being used by their suppliers.

Often retailers suffer from a lack of expertise in the field of sourcing, and it is all too common for buyers to become the sourcing experts. In many retailers sourcing divisions are often not setup to strategically manage the supply base effectively, lacking the capability. This leads to a lack of true strategic relationship building with key suppliers, one good example of strategic relationships being placed top of the sourcing agenda is Adidas. The sports brand has focused heavily on the relationships with key suppliers to promote transparency and ensure that it can also meet its sustainability and ethical commitments.

To tackle these issues, retailers should focus on delivering two things:

  1. Tighter control of the sourcing process end-to-end through product lifecycle management

Most importantly when it comes to sourcing, every retail organisation must ensure they have a clear view of their product strategy to shape the operating model in the right way to ensure effectiveness in its sourcing operations. It is from this starting point from which everything else will flow. Essentially this means having the right people, doing the right things, and in the right order.

Enabling a smooth operating model to work effectively also relies on having the right tools to support it. When it comes to product development, a well-defined workflow is critical, so having a good Product Lifecycle Management (PLM) tool is something that should be considered. An effective PLM tool will delivery much greater transparency of the actions people take in the organisation, and with that a greater responsibility. Retailers should never, in any circumstances, underestimate the cultural challenges of implementing technology which might shine a light on existing ‘problems’.

It is important to consider how this cultural shift can be managed – PLM will not be successful if capability development for the people using is not a factor that is considered. At Capgemini, we have strategic partnerships with key PLM application providers such as PTC which helps us to ensure we are connecting the functionality and flexibility these products give with the organisation to deliver the right mix of business-led transformation.

  1. Greater transparency of cost and product information through better use of analytics

What PLM also enables is the surfacing of a lot more data – and a lot more granularity, depending on the design. Its use in the sourcing process is no exception. Having the data however is not enough – knowing how to best use it is essential to making sure it provides useful insights to drive the right sourcing decisions.

A recent study at a UK department store found the potential for cost savings of £30m around product sourcing costs, simply by being able to use the right data to drive insights across a whole host of costs that go into product sourcing – whist product and component costs are a large part of that, there are other potential savings to be had in areas like the duty paid on packaging. Whilst a PLM tool will help to surface lower levels of detail on the component costs of a product, it will also help you to aggregate demand at a much higher level so that you can begin to have a true raw materials sourcing strategy.

For many retailers, many of the topics I have covered in this article is not new news – many will have been tried and tested some of these solutions to some degree. However, these retailers will not have grasped what it truly means to endeavour on these paths properly, with the eye on the detail and the follow through that is required for them to deliver truly sustainable contributions to the bottom line. Ensuring that retailers have the right level of support is also critical – improving processes and having the right systems in place, as well as the change management required to ensure cultural change is long lasting. At Capgemini, we pride ourselves on working hard to have the right services to support retailers in achieving this, and have helped many retailers land successful change to enable them to deliver to their customers through increasingly challenging times.

My question was ‘can value be sustainable?’ – and without a doubt I strongly believe not only is it sustainable, but also that many retailers have not even begun to uncover the opportunities that exist to deliver even more.

 

Author


Lee Pettman
Managing Consultant

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