Making Brick & Mortar Stores ” matter in a multi-channel world ” | McKinsey

As the role of the brick-and-mortar store evolves, retailers will continually have to refine how they use their real estate…!!

For decades, the retail industry has followed the same straight forward formula for growth: open new stores. By replicating a proven store format in a new catchment area, retailers could reliably enlarge their customer base and count on healthy increases in sales.

But the world has changed. More than half of consumers now research their retail purchases online, making purely in-store purchase decisions the shrinking minority. In many categories, e-commerce has dramatically lessened the need for physical stores. “Virtual space”—which we define as the floor space that would be required to generate the sales volume that online retail now accounts for, at a sales density equivalent to the industry average—is expanding at a staggering rate. In this new world, what is the role of the brick-and-mortar store?

Many retailers find themselves struggling with the question and saddled with more real estate than they know what to do with. After all, their property departments are geared up for expansion and acquisition. Their finance departments have traditionally focused on reaping investment returns from stores and tend to be jittery about investing in new and unproven technologies. On the flip side, their e-commerce directors are frustrated by this lack of understanding of the pace and mind-set such companies need to become digital winners.

To position themselves for success in a multi-channel world, retailers would do well to take a disciplined approach that begins with a reassessment of the role of the physical store. We recommend a FIVE-step approach we call STORE : starting with a clear vision for the future role of the store, tailoring categories and formats accordingly, optimizing the store portfolio using forward-looking analytics, reinventing the in-store shopping experience, and executing systematically across channels…

The incredible shrinking footprint: 

The effects of online migration in the retail industry are evident in every category. In the United States, apparel retailer Gap closed more than 250 stores in 2013; department-store chain Sears closed almost 200. Walmart’s new stores are about a third smaller than they were five years ago…!!

Online retail has affected more than just physical floor space. Amazon, for one, has put intense pressure on retailers’ top and bottom lines by having key items priced 13 to 20 percent lower than average, an assortment 17 times larger than the average retailer’s, and a cost base that is 3 to 4 percent lower than brick-and-mortar competitors’, all while achieving the highest customer-satisfaction scores in the industry. The combined effects of Amazon and other online retailers have rapidly hurt traditional retailers’ return on invested capital, as fewer sales flow through existing physical assets.

Many retailers’ instinctive response to these headwinds has been to close under-performing stores and to look for operational efficiencies, but these moves only buy time—they can’t fully close the performance gap…“Shrinking to greatness” is not the answer.

A framework for change: 

Shifting from a store-focused approach to a multi-channel mind-set requires retailers to change their traditional frames of reference and ways of working. As consumers increasingly shop across channels, terms like “convenience” and “efficiency” take on new meanings. Customer expectations are rising: for instance, customers now expect price consistency across channels, the ability to buy online and pick up or return in store, and a range of payment options. Price transparency puts pressure on retailers to develop ultra-efficient operating models. The wealth of online information available to consumers raises the bar for in-store service and expertise.

But let’s be clear: the brick-and-mortar store is not dead; it just plays a different role now. In fact, in a multi-channel world, physical stores can provide a competitive advantage… Some multi-channel retailers have seen growth in their online sales and penetration among consumers who live near their stores. In several sectors, “click and collect” is proving a popular and increasingly efficient means of serving the customer. More than 50 percent of Walmart’s online sales and around 40 percent of Best Buy’s already are picked up in stores. Best Buy’s store-within-a-store partnerships with Microsoft, Samsung, and other suppliers capitalize on manufacturers’ need to show off their products in a physical retail environment. Former online pure plays such as Oak Furniture Land and sofa.com have opened physical stores that now generate as much as 60 percent of sales.

Some retailers are now reshaping their store networks in response. One approach is to lead with a handful of flagship stores—which essentially become a marketing and service channel for the online business—supported by numerous smaller outlets that offer convenience and a curated product offering.

In light of rapidly evolving technology and consumer behavior, we believe retailers that take a forward-looking view and heed the following five imperatives can position themselves for multi-channel success.

Start by Redefining the role of the store:

The first question that retailers should ask themselves at the beginning of their store-network transformation journey is, “What role will my brick-and-mortar stores play in a multichannel world?” To answer the question, retailers must find out what their customers truly care about. They need to know which aspects of a store matter most to customers and what purpose a store serves for them:

  • Convenience and proximity.
  • Efficiency
  • Inspiration
  • Instant gratification.
  • Discovery of a solution, information, or service.
  • Entertainment and social interaction.
  • Experiencing brands and products.

 

Economic considerations are important as well. For each of the purposes above, retailers should ask, “How can stores do this profitably?” There may be more than one answer and therefore more than one winning store format. In any case, the agreed-upon role (or roles) of the store should dictate every decision about the store operating model: location, assortment, staffing, supplier funding, employee training, and so on.

Tailor categories and formats accordingly:

Customer priorities and store economics should next become critical inputs into ongoing category reviews, to ensure that assortments and space allocations are continually optimized for a multichannel world.

Format decisions should also be driven by customer needs and priorities. Some retailers are adapting their store formats to the tastes and preferences of certain customer segments. Macy’s, for example, has embarked on a major effort to court millennials: it has launched more than a dozen segment-specific brands and created “destination zones” for millennials in its stores.

Optimize the portfolio using forward-looking analytics:

The next step is to re-evaluate the store portfolio through a multichannel lens. Leading retailers regularly analyze correlations between sales performance and catchment data to identify promising locations for new stores and to figure out the winning formula for top-performing stores; they examine factors such as population density, income, competitor presence, and average tenure of the sales staff. This is a valuable exercise, but in a fast-changing business environment, it’s not enough. Retailers must look ahead: they must extrapolate the impact of macro and industry-wide trends on the store network’s economics and operating model. And they must understand the impact that channels have on one another. One retailer that already had 100 unprofitable stores in its network found that another 100 would be in the red within three years given competitor trends and the shift to e-commerce.

The most forward-thinking retailers use analytical tools and techniques to reshape their entire store networks. They use financial and geospatial modeling to highlight not only where stores should be opened but also which should be closed, resized, or reformatted.

Re-invent the in-store shopping experience:

Creating the store of the future will mean overhauling the in-store customer journey, in part by using new technology to make the shopping experience as seamless and easy as possible. Some retailers simply copy the in-store moves of multichannel champions such as Apple and Burberry or equip sales staff with iPads to give their stores an updated, high-tech look. But cosmetic changes alone won’t result in lasting impact. A multichannel mind-set must be embedded in the store design and in employees’ new ways of working.

Retailers should prioritize the basics: again, focusing on what matters most to their customers and enabling multichannel shopping (for instance, by establishing fast-pickup counters for online orders) while being ruthless about taking costs out of the things that customers don’t care about.

Execute systematically across channels:

Change of this scale is not easy and affects many functions across the organization. Some retailers make the mistake of developing a store-network transformation plan that extends past 2020, by which time parts of the plan will probably be obsolete, or else they embark on a massive change program that will take so long to roll out that it will be out of date before it is halfway done. Retailers are typically better served by developing a detailed plan for the next 12 months and a high-level road map for the next three years.

Pace and flexibility are critical. “Gold plating” an entire store takes too long and tends to be expensive. Retailers should instead test new ideas quickly, and they should pilot individual aspects of store design to figure out specifically what is working and what isn’t.

Of course, capabilities and organizational design, both at headquarters and in individual stores, must evolve as the network evolves. Retailers should ask themselves: Does the organizational structure support the new network size and role? What would it take to shift the mind-sets of the property team away from a focus on opening new stores and toward making better use of existing space, introducing and refreshing store concepts quickly, and even scaling back on real estate? the store of the future should allow shoppers to move seamlessly across channels…Store staff should be well trained and comfortable in directing customers to the right products, both offline and online.

The logistics and store teams should work hand in glove with the online team to ensure that orders are fulfilled efficiently and to get products to consumers quickly….!!

Advertisements

Using “Analytics to Detect Retail-Fraud” : practices to “Help recover Margins Lost” | by: Deloitte | The Wall Street Journal

” Retail company CIOs are deploying “Predictive Capabilities”, continuous monitoring tools, and a host of innovative practices to help recover margins lost to criminals”…

As widely reported in 2006, a fraudster systematically deprived retailers of more than $600,000 over a three-year period by placing counterfeit bar codes on high-end toys, greatly reducing their price. The thief then bought the toys at their artificially low price and resold the items online for nearly full value. After monitoring sales reports for trends and anomalies, loss investigators eventually caught the perpetrator—but it took them three years.

Since this high-tech heist was exposed, “Shrinkage”—Retail inventory losses caused by fraud OR error—has not abated. In fact, global retail shrinkage increased worldwide 6.6 percent to $119 billion in 2011, an average of 1.45 % of retail sales…

Today, Retailers routinely find themselves battling attempted manipulation of their Financial-Statements & POS Transactions, collusion among Vendors, Shoplifting & Refund Fraud, plus a host of often elaborate schemes involving salaries, wages, and Employee-Theft / Pilferage..

“ It’s likely retailers will have to step up the pace of innovation in their fraud prevention and detection activities if they are to recover more of the margin currently being lost to fraudsters,” says Keith Denham, a principal in Deloitte’s Consumer Products, Retail, and Distribution Advisory practice.

“ It is time for the retail industry to consider how new technologies and data analytics may help to detect more fraud and improve margins.”

Common Fraud Management Challenges:

While designing and implementing strong internal controls in known risk areas is an important part of fraud management, it may not be enough to recover more of the margin currently being lost to fraud. Consider the limitations of traditional fraud prevention activities and how deploying analytics could help CIOs and business leaders transform their approaches for combating Retail Fraud :

Resource Constraints & In-efficiencies – The resources needed to prevent and detect fraud are often limited for budgetary reasons. Those that do exist are likely focused on traditional activities, such as internal audits and detection techniques chosen primarily for their simplicity and economy. For example, when a retailer has many locations, personnel experienced in audit and inspection processes and who possess historical knowledge of audit outcomes often determine which locations warrant increased scrutiny. Yet staff reductions throughout the retail sector have led to a loss of experienced personnel, thus hampering the effectiveness of traditional practices. “New analytics technology can help fill the void created when experienced personnel leave and take their accumulated knowledge with them,” says Darren James of Deloitte.

“ By using analytics to mine transactional, financial, and other data, auditors can flag investigation locations that display greater anomalies. Moreover, they can use these tools to learn from audit and inspection efforts, and retain that knowledge for ongoing data analysis and monitoring.”

Outdated Technologies & Limited Data Analytics – “In their use of analytics, some retailers appear to be playing catch-up,” observes James. “Basic point-of-service (POS) analytics only take you so far. By deploying predictive analytics to better understand anticipated sales volume of a given stock keeping unit (SKU) and anticipated sales of products in the secondary marketplace, retailers might be able to identify certain product transactions as outliers and alert stores to increase their scrutiny of such sales.”

Inadequate Control Activities – “Internal thefts are pervasive in the retail industry. Indeed, some of the most significant fraud is committed by employees who hold high positions and have the authority to override internal controls to achieve their goals”. For example, commissioned employees might abuse their power by selling below the company’s discount limit to reach a personal sales quota, and franchise owners may be tempted to under-report sales OR buy supplies from someone other than the franchiser to reduce franchise fees and procurement costs. Data analytics can provide a new level of transparency and insight into such activities.

Oversight & Lack of Continuous Monitoring – Traditional fraud prevention techniques tend to be historical rather than predictive. As such, effective oversight processes are often labor intensive and time consuming. In contrast, the credit card industry uses real-time alerts to flag unusual customer transactions, thereby triggering a hold on these transactions and avoiding potential losses. As a result, credit card companies can use employees to intervene, when necessary, in high-value transactions requiring more sensitive handling, such as those involving lucrative accounts. “In some ways, the retail industry has not kept up with other industries in implementing continuous monitoring techniques,” says Robert Fowlie, a partner in the Forensic practice of Deloitte.

“ Many retail companies have significant amounts of data at their disposal, captured daily through operations. But turning that data into insight through continuous monitoring and real-time feedback remains a challenge.”

Building an Effective Fraud-Risk Framework :

Retailers can often benefit from implementing a holistic fraud framework that supports the continuous innovation of fraud management strategies. Rather than simply augmenting traditional activities, this model takes a fresh approach to improving retailers’ ability to prevent and detect fraud. The framework comprises “FOUR Main components” :

1. Cultural Assessment – By examining a company’s culture, business ethics, and actions, decision-makers can focus their fraud management efforts and apply data analytics to important areas. One strategy for gaining needed insights could involve gathering anonymous feedback from a large group simultaneously using an established web-enabled survey tool. The survey can include six principal areas: awareness of relevant policies and follow-through; corporate culture; observed unethical or questionable actions; issues that either facilitate or reduce the likelihood of fraud occurring; respondents’ perceptions of the desired outcomes of ethics and compliance efforts; and specific risk issues. By evaluating the results of the survey, decision-makers can better identify areas of fraud risk using objective data rather than the potential biases and misinformation.

2. Technology & Data Analytics – Understanding the fraud-related challenges a company faces can help focus IT’s efforts to build and implement a tailored technology solution. An organization can likely accomplish this by analyzing data from daily transactions and activities such as purchasing, accounts payable, POS, sales projections, warehouse movements, employee shift records, returns and store-level video and audio recordings. Rigorous and regular sample-based analysis of data across the company can help pinpoint fraudulent activity and develop appropriate priorities for case management and investigation. It may also reduce the false positive rate of detection and prevention strategies.

3. Effective Control Activities – Many companies begin to build control frameworks and processes after a large and public fraud causes significant negative financial and reputational damage. All retailers—even those with established control activities—can benefit from reviewing their existing risk environment and processes, and identifying how innovation can enhance these activities before an incident occurs. One way of evaluating a control environment is to hold a series of facilitated stakeholder workshops, which can help the company assess the likelihood and potential impact of different types of fraud, as well as help to identify limitations in the control environment, such as potential management override.

4. Continuous Monitoring & Innovation – Fraudsters continuously adjust their activities to circumvent fraud prevention and detection controls. If retailers want to fight fraud effectively, they should take a similarly flexible approach. Continuous monitoring can include several tactics, such as tracking product and inventory movement for unusual patterns that may indicate shrink and store associate theft, and monitoring exceptions and trends, such as the number of invoices from suppliers over time, unusual invoice number sequencing, and the amount of money spent for goods and services purchased from a particular vendor. In addition, companies could consider building a model for a predicted number of product returns per shift. When numbers exceed a set threshold for returns by product or by individual, manager verification can be invoked.

Risk management programs will vary depending upon a Retailer’s Fraud-Risk profile and the current state of its controls. Increasingly, the effectiveness of these programs may hinge on the way a retailer leverages analytics. “ Staying one step ahead of the fraudsters is critical to protecting a company’s assets and reputation,” says Denham.

“Implementing Data Analytics into the elements of a company’s Fraud-Framework can help identify patterns, trends, and anomalies in the data. It can help detect a broader range of exposure, including previously unknown risks and uncover new patterns of fraud”.