Chapter 5: Strategic Process Flashcards
Drivers of a higher rate of return (R)
More Sales:
Like for like growth
New growth
Franchise
higher Margin:
Buying Conditions
Margin mix
Loss / Shrinkage
Bonus / Supplier Contributions
lower Costs:
Labour costs
Interest
Fixed costs
Although the retail target formula is easy to propose, optimizing it is extremely complicated in practice. It requires constant alertness to:
● changing consumer preferences
● Changing price sensitivity
● Changing efficiency opportunities
→ with the resulting need to adjust the product mix
→ the need to adjust the margin mix
→ the need to adjust the costs mix
Two opposing forces (frictions) are constantly working.
- Short term vs. Long term:
The contraction between the short term (tactics) and long term (strategy). In principle, this contradiction occurs in every company, but in retail it is more pronounced and a daily event. The sales mix that is optimal for profitability today may differ from the sales mix that is optimal for the long term. The same applies to the margin mix and the cost mix. - External market position vs. internal efficiency:
The average added value in the retail sector is low. This means that we constantly have to balance the revenue opportunities that arise in the market (external market position) with the costs involved in exploiting these revenue opportunities (internal efficiency).
Long term & External =
Strategic Market Position
- Refers to the external market position for the long term.
- For the retail sector, this means developing concepts and retail formulas
- points of attention: environment, market development, target group, positioning, concept development
External market position Concept development
Long term & Internal =
Strategic Efficiency
- The internal structure. It often involves building up operational advantages over the competition: effectiveness, here, is more important than productivity.
- Points of attention: operational excellence, benchmarking, performance improvement, sales driven
Internal structure process development
Short term & External =
Tactical sales efforts
- This quadrant is less about strategic aspects of the approach to the market and more about tactical aspects: successful implementation.
- Points of attention: price reductions, push marketing, promotions
Short-term market position successful implementation
Short term & Internal =
Tactical Cost Reduction
- Relates to managing costs. More about increasing productivity than about increasing effectiveness: development ofproductivity. Ultimately has an impact on long-term performance.
- Points of attention: cost control, productivity improvement, stock reduction, staffreduction
Managing costs development of productivity
Price formation within the e-tail infrastructure will often be done in a completely different way from in the traditional retail structure.
In traditional retailing, it is done by
calculating storage factors: a mark-up percentage is applied to the purchase price of the items. From this mark-up all costs excluding the cost of goods sold are then deducted. This includes the labour costs, logistic costs, rent of the store… all these costs can be high. Also the storage factors are often significant.
In a web shop environment, we should mention these factors:
- The search structure of the website
- The content of the search structure
- Traffic
- Delivery costs
1) The search structure of the website:
How easy can visitors of the website find what they are looking for (search engine of the website). It requires constant attention because it is the most important factor to successful conversion on a website.
Conversion indicates that someone turns from a visitor into a buyer, in percentage. The cost benefits will be greater in the online environment than in the physical environment. However, conversion in the online environment often does not exceed 3% (1.5% on average).
2) The content of the search structure:
the analogy for the stock clerks is keeping track of the content of the search structure. In a webshop, this will involve lower costs than in a real store. However, every customer searches differently. Reviews by other customers play an important role. Current stock levels in webshops is not simply entering the product once: the consumer expects extensive product descriptions (e.g. Alibaba has different product descriptions generated by AI).
In addition, customers are demanding faster deliveries and this requires up-to-date stock levels in the distribution centre. In the situation where physical and online are completely merging into an omnichannel situation, the importance of up-to-date stock levels becomes even more complex. All stock levels should be accessible at all times and in all places.
3) Traffic:
in traditional retail, rent is paid for the location and the amount determined based on the envisaged traffic - the number of visitors a location will generate on average. The better the location, the more traffic it will enjoy and the higher the rent per square metre will be.
The webshop is often the same. Here too, traffic is kind. The more traffic, the greater opportunity to earn more sales. The marketing costs per visitor have different dimensions than in physical retail. Online, the costs for getting traffic from other sites are an example (often charged per CPC, CPM, CPL, CPS, CPA…)
4) Delivery costs:
the analogy with logistics costs is usually not applicable to the webshop. In traditional retail, logistics costs are all those involved in the physical flow of goods from supplier to shelf. Generally, consumers care about the flow from the sheldìf to their house. Here, the prices of the items do not usually include shipping costs.
Although we have seen a trend in recent years whereby shipping costs are getting lower, and free shipping is being offered. Physical retailers with a webshop are primarily encouraging free pick-up-in-stores due to the advantage for them that pick-up-in-store reduces the probability of returns and increases that of extra sales (15% of consumers use pick-up-in-store).
S = sales There are various ways to achieve revenue growth. Some entail more costs and investments than others:
- Like for like growth (++++): This is the most profitable way to achieve revenue growth: from existing shops. There is no need to invest or increase the number of employees significantly. Because the costs remain low, the return on growth will be higher.
- Growth through franchising (++): As with like for like growth, there is no need to invest in new stores, but it will be necessary to spend more on monitoring the operation and part of the margins go to the franchisee.
- Growth through expansion (+): less directly profitable, but sometimes necessary to maintain the company’s market position. Investments will have to be made in new stores, and there will be start-up losses and other issues. As a result, returns may be negative in the first few years.
With the advent of the Internet and the merging of all channels, there is a new challenge about sales. Looking at sales from the customer’s perspective, we will combine all the revenue generated by a customer, whether on- or offline.
M = margin There are several ways to influence profitability from the standpoint of the margin:
- Improvement in conditions (++++): If we can buy cheaper without having to change the level of the selling price, this will translate into profitability. That is the most effective way. However, in order to take advantage of the improved purchasing conditions, we must gain a certain dominance over the supplier, which is possible if we have high sales volume and can show positive growth figures.
- Optimization of the margin mix (++): increasing or strengthening sales in high-margin product groups while slowing down sales, in relative terms, in low-margin product groups, increases the average margin of the total shop in the mix (for example: supermarkets place high margin/profitable items at eye level where are more likely to be bought). However, to control the margin mix, we need to change the layout of the store, and that can be expensive.
- Introducing supplier contributions (+): for example, special discounts in the shop, or advertising contributions.
- Reducing losses (+): Reducing theft(furti), breakage and administrative errors.
