2009-04-30-Bain-Bain_Retail_Newsletter_16页_540kb

2009 Retail Industry Summary

Core Content

The document provides an analysis of the retail industry's performance and strategy during the 2009 economic downturn. It highlights the impact of the recession on consumer behavior, retail sales, and store closures, as well as the need for retailers to adapt and innovate to survive and thrive in the new economic climate.

Main Points

Economic Context and Consumer Behavior

• The 2009 recession has led to significant changes in consumer behavior, including reduced spending, deferring purchases, and a focus on value.
• Retail sales are expected to decline throughout 2009, with a slow recovery anticipated.
• Personal consumption expenditures are expected to rebound to 2007 levels by 2012 at the earliest.
• The overall economic outlook remains sluggish, with GDP projected to fall by 3% in 2009 and grow only slightly in 2010 before returning to traditional growth rates.

Industry Trends

• Retail sales per square foot have declined by 3% in the first quarter of 2009.
• Retail inventories are down 3.2% from prior-year levels, especially in the general merchandise sector.
• Store closures have increased, with nearly 2,300 announced through April 2009.
• Mall operators, such as General Growth Properties, are facing higher vacancy rates and financial strain.

Strategic Considerations for Retailers

• Retailers must understand their unique position by assessing three key dimensions: sector sensitivity, strategic position, and financial position.
• Retailers vary significantly in their performance, with some sectors and companies faring better than others.
• The ability to innovate and execute effectively is critical in distinguishing winners from losers.

Key Strategies for Retailers

1. Clarify Strategies and Shift Resources to Core Activities

• Focus on the most profitable areas (geography, brand, product, customer, channel).
• Examples include:
  • Wal-Mart using a "Win, Play, Show" merchandising strategy.
  • PetSmart redefining its core as "pet parents" and launching a value proposition called Total Lifetime Care™.
  • Macy's implementing a localization strategy called "My Macy's" to tailor offerings to local communities.

2. Aggressively Manage Costs and Cash Flow

• Inventory Management: Rationalize inventory levels and mix, aligning with new consumer behavior. Examples:
  • Macy's shifting decision-making power to store managers.
  • Nordstrom analyzing price sweet spots and reducing inventory per square foot by 12%.
• Cost Reduction: Consolidate or outsource corporate functions, such as:
  • METRO Group consolidating finance, controlling, and compliance operations.
  • Liz Claiborne outsourcing Asian sourcing to Li & Fung.
• Store Operating Models: Adjust store models to align with new economics, such as:
  • Reducing labor zones and floor space.
  • Renegotiating rents and reducing store sizes.
• Capital Expenditures: Reallocate capital to outlet investments and reduce new store openings. Examples:
  • Wal-Mart increasing remodeling spend and slowing new-store openings.
  • Kirkland's shifting from mall-based to open-air locations.
  • Inditex (Zara's parent company) setting higher ROI expectations for new stores.

3. Increase Revenue and Margins

• Localize Consumer Offerings: Tailor products and services to specific communities.
• Add New Dimensions of Value: Focus on value beyond price, such as:
  • Starbucks emphasizing experience and social impact in its "Coffee Value & Values" campaign.
  • J.Crew introducing lower-priced items while maintaining premium offerings.
  • Wal-Mart revamping private-label products to compete with national brands.
• Make Shopping Fun and Easy: Enhance the customer experience through:
  • Apple using innovative displays, trained staff, and technology tools.
  • Closed-loop feedback systems to improve customer satisfaction.
• Communicate with Customers in New Ways: Use targeted and cost-effective marketing channels:
  • Amazon launching a Twitter campaign for "Lightning Deals."
  • Experimenting with mobile apps, targeted emails, and new points of distribution.

4. Seek Out Bold, Game-Changing Moves

• Consolidate or Restructure Brands and Formats: Align with customer preferences.
  • Sears restructuring its brands and formats.
  • Tween Brands converting stores to a more value-oriented brand.
• Overhaul the Business Model: Introduce new concepts and formats.
  • Systemax Inc. (parent of TigerDirect) acquiring Circuit City and launching a "Retail 2.0" initiative.
  • Sears launching a warehouse-style concept called MyGofer.
• Change Dynamics with Vendors: Pursue win-win collaborations.
  • Department stores offering preferred floor space and open-to-buy dollars to exclusive brands.
  • Kohl's pursuing a "captive licensing" model with Lauren Conrad.
• Opportunistic Acquisitions and Real Estate Investments: Secure assets at discounted prices.
  • Toys "R" Us acquiring sites from a bankrupt competitor.
  • Kohl's and Forever 21 winning leases on Mervyn's stores.
• Consider Financial Alternatives: Explore creative financing options.
  • Sears securitizing its brands through a subsidiary.
  • Retailers may consider securitizing intangible assets or future cash flows.

Conclusion

The downturn is a significant challenge for the retail industry, but it also presents opportunities for those who adapt and innovate. Retailers must understand their unique position, manage costs effectively, enhance the customer experience, and explore bold strategies to emerge stronger. Those who prepare for worst-case scenarios, clarify their core activities, and capitalize on the unique opportunities presented by the economic climate will be better positioned to survive and thrive.

Key Questions for Retailers

• Have we prepared for worst-case scenarios and developed contingency plans?
• Have we clarified our core business and developed a new game plan?
• Are we eliminating unproductive activities?
• Are we exploring game-changing moves for sustained success?

Additional Resources

• Winning in Turbulence: A Bain & Company report on navigating economic downturns.
• Localization: A quiet revolution in consumer markets.
• The Consumer of the Future: A study on evolving consumer behavior.
• Luxury Goods: Market forecast and insights.
• Bain Retail Holiday Newsletter: Historical insights and data.