Update from the Goldman Global Retailing Conference
September 2008

retailnetgroup.comOur team just spent two great days at Goldman Sachs' 15th annual Global Retailing Conference.

No one was ready to say they could see the end of the current economic challenges facing the US consumer. The consensus seemed to be that conditions will return to "the new normal" some time between June 2009 and January 2010. Of course, there are major regional variations--underscoring the need for highly local analytics. Remember that the Northeast housing market caved in 2006 and California /Arizona fell 18 months later. Recovery will come sooner in some places than others.

Still, generally, consumers today are buying what they need. Coupon usage is up, more goods are being sold on promotion, and shoppers are cherry-picking stores based on price. Cheaper categories like meat, pasta, and flour are on the rise--indicating that more people are eating at home, and trading down in-store. Discretionary habits are shifting too--people are going to the movies less and watching more TV, for example.

We're still processing everything we heard, but we wanted to share our early impressions as soon as possible.

Dan O'Connor,
President & CEO
Pricing is center-stage

Pricing increases abound. Retailers are saying that branded vendors are taking up prices faster than underlying commodity costs are rising--so CPI is growing at a very different rate than PPI.
  • Costco showed range of price increases coming from its 25-30 major suppliers - very high percentages. Because all had to wait 60-90 days before being implemented, these won't show up until Q4. RNG expects this to have a significant effect as consumers start to see the price increases.
  • Wal-Mart is focusing on regional pricing and targeted categories, one outcome of its Demandtec capability
  • Retailers are moving quickly with price & promotion optimization capabilities - no fewer than 5 majors spoke about this
  • All talking about their understanding of elasticities by product sub-categories - easier to pass through in consumables than in hard lines
  • Watchout! Rising prices will cause LIFO charges this year for many retailers - more to follow on this topic
Concurrent inflation & deflation in US
  • China, food, health care costs are all inflating - only Dollar Tree says that they are able to continue to expand GM rates with goods from China
  • Commodities - deflating?
  • In the 70's & 80's labor agreements and other costs were all considered inflation. In a sense it was embraced. Today people are fighting inflation - trying to move away from what is inflating
  • Jeff Noddle - Supervalu doesn't see any reduction in price inflation for the rest of this year
  • Wheat, Rice and other ingredients have increased worldwide
CapEx discipline intensifying
  • Lots of discussion about re-focusing capex and the trade off between using capital for capex (and therefore impacting the P&L) or for share re-purchase or dividends.
  • New Store ramp up are lengthening (except @ Petsmart, Dollar Tree and a few others
  • Real estate costs have gone up  over the last 5 years (it's been a landlord market for the last 5 years) - that is flipping slowly

Commercial real estate trends
  • US commercial real estate market transitioning downward favorably impacting long term rents but negatively impacting an already slowed store expansion
  • Developers negotiating to ever lower rents
  • Developments are falling through as retailers negotiate from internal P&L/hurdle rates instead of the "market rates" set by the developer
  • Commercial real estate prices declining
  • So they are behind on new stores as the issues in real estate market transitions
Format innovation is everywhere
  • Stores closer to the customer are doing better today - very important to retailers' real estate and store format choices
  • WMT opening Marketside in AZ this October - more to follow
  • Tesco is a great operator, but Fresh & Easy is facing challenges. They are running a 1 million sq foot DC supporting the equivalent of 12 large supermarkets--but spread across less than 100 F&E stores
  • Lots of effort to re-apply good ideas globally -Toys R Us, WMT and others. WMT will bring new formats to the US and will take Mexico formats to Brazil and to China and more.
Merchandising innovation
  • Merchandising optimization tools are expanding but are still a point of distinction today
  • Cross marketing of food and fuel - either a retailer's own or a neighboring fuel station - is really working with consumers when retailer takes inside the store merchandising $'s out to the pump
  • Merchandise portfolio strategies spreading - Variations on Wal-Mart's win/place/show category segmentation showing up at leaders. Home Depot has segmented every category by its overall strategy - traffic builder, growth, etc. Best Buy pursuing similar strategy
  • New tools that help retailers tailor products to specific households - use the segmentation models - adding marketing resources - targeted and custom
Private and exclusive brands
  • 3-5 tier programs are the new norm
  • Consumers trading down are positively impacting store brands' sales
  • Safeway taking - O Organics and Eating Right to non-competing retailers like Loblaw has with President's Choice
  • Many retailers trying to lead with innovation, safety, and other consumer centric metrics into their private or exclusive labels first
Supply chain changes
  • Supply chain changes are a focus - both creating new networks and optimizing existing
  • Rapid increase in regional distribution - Dicks, Home Depot and others who traditionally had 70% plus of overall volume drop-shipped to the store are now aiming to flip that ratio
  • Inventory will still be concentrated in the stores - like WMT, all of these intend to make warehouse inventory irrelevant
  • Tight inventory rules - space to sales, inventory to sales and unit sales per week per store
  • WAG plans to reduce SKUs by 6-7% by Thanksgiving and again 7-8% by December...focus is on non-essential categories like flashlights, air fresheners, etc.

Global sourcing models changing
  • Changed global sourcing models - especially GM/Apparel to adjust for rising country costs
  • Inflating costs, export complexity etc driving need to change
  • Moving to blended models including direct in China/India and agents to round out sourcing options in other geographies - Lat AM, Vietnam, etc.
  • Watch for significant pressure to continue re-wiring these networks
Gift cards
  • Changing legislation on breakage not being talked about
  • And of course the movement to a digital gift card marketing network
  • Especially interesting that Safeway was not clearer about implications to Blackhawk
Agility - Seasonal and Trend

Retailers are shortening lead times -speed is everything - so rapid replenishment capability is essential.
  • At Target, rapid re-ordering and a speedy supply chain that let it quickly pile into winners is a big part of the profit equation
  • Seasons are short (Fall is Sept to Christmas), so it is essential to rapidly fill
  • Because of differences in temperature zones the Spring Season can run from March to September, so rapid replenishment is essential - takes 30 days
  • Consumer demand is fluctuating widely and in a way that is harder to predict
Commercializing IP

Safeway, PetSmart, Delhaize and others have found specific competencies inside their companies that they have decided to commercialize
  • Delhaize - Guiding  Stars
  • Safeway - Health Services, Blackhawk
What We Didn't Hear (This Year)
  • Associate engagement (exception Home Depot,  who spent a lot of time on what they were doing here)
  • Shopping environment or experience - Home Depot and WMT were 2 exceptions; both have this on their top 5 priority list
  • Health & wellness - exception was Delhaize with its "Guiding stars"
  • Services strategies - all agree it drives loyalty, but only Petsmart really drove the message
  • Media - few really mentioned anything (unusual) - those that did emphasized direct marketing overall.  Even when we asked people they said they did not see any change in consumer response rates to individual media forms
RetailNet Group is the leading insight and advisory firm focused on retail growth strategies and consumer-facing transformational capabilities. We are deeply experienced retail/consumer analysts and strategists working exclusively to help brand-led businesses and large-scale retailers grow.

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Meet Our Analysts

Dan W. O'Connor
Dan W. O'Connor is the President & CEO of the RetailNet Group.  He also is the Founder of Management Ventures, Inc. (MVI), a WPP Group company. Dan is a widely known industry speaker and thought leader.
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Aaron Chio
Aaron Chio is a Senior Analyst leading RNG's  development of new research, insights and growth strategies in Latin America.
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Tim O'Connor
Tim O'Connor is Vice President at RNG, currently responsible for RNG's Growth Strategies Curriculum and European market insights.
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Keith Anderson
Keith Anderson is a Senior Analyst and responsible for RNG's North American research practice and transformational
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