Restructuring retail networks: the large-scale maneuvers begin

Mature markets, saturated sales territories, and the rise of e-commerce and m-commerce: the opening of retail outlets needs to adapt to new realities, and rapidly come up with new answers to structural issues:

• How can the portfolios of store-brands be optimized to strike a balance between relevance for target customers and consolidation?
• What are the rules for better segmentation of store types?
• What direction should the back office take as it gears up to support these changes?
• How can the range of contractual solutions be used to leverage development?

The big discrepancy in expansion strategies

In November 2015, Société Générale set the ball rolling for a series of rationalizations in the banking and insurance sector, announcing the closure of 20% of its branches by 2020.

Among the major retail players, Gap is to shut 25% of its outlets in the United States. Best Buy has withdrawn from Canada, bringing down the shutters on its 66 locations; with Target doing the same: cutting out some 133 stores. The department stores chain, Macy’s, is to reassign some 1,300 employees from  14 sites which have been shut down.  And at the French clothing and footwear group, Vivarte, La Halle is committed to reducing its store network by a third.

Conversely, other operators continue to pursue their expansions: Burger King has announced it wants to boost its French presence from 20 to 400 restaurants. And internationally, Inditex, the owner of Zara, has opened an average of

400 stores a year, during each of the last five years.

In 2014, and then 2015, Monoprix opened some 70 sales outlets in France; the same territory where Kiko has gone from zero to no less than 130 shops in less than five years.

While the responses of the players differ, the central questions of the size and configuration of their networks, lie at the center of all retailers’ strategic agendas.

A pivot period for the big names

The commercial landscape in France, and the West in general, has become much more concentrated since the 1950s; and the pace is accelerating. Major chains have wiped out mom and pop stores, saturating the landscape, from the centers to the suburbs, and from cities, out to the countryside. The speed with which players have appropriated their territories has, though, at times, outweighed the returns; and, depending on the company, about 10% of the network is now made up of unprofitable or struggling stores.

The saturation of the retail spaces has been compounded with the double ceiling of the penetration of goods and quantities consumed per capita, such that the profitability per square meter of the most recently opened locations has deteriorated, with stores in the same chain fighting it out among themselves.

Hence, the functionality of commercial resources has become saturated.  Moreover, the scissors effect of e-commerce (despite only accounting for 7% of retail activity), compounded by the 2008 financial crisis, is especially onerous for non-food sectors. Centers of populations are shifting too, becoming concentrated in cities and, at times, frustrating retailers’ expansion plans: the 15 largest cities are home to 44% of the French population, compared with 36% thirty years ago.

All the ingredients are in place to challenge and shake the conventional wisdom that has guided business development for so long.

Store-brands: targeting or consolidation?

The first question, one of marketing, means challenging retailers’ store-brand portfolios. Following Tesco’s lead, supermarket operators have favored an overarching parent-brand architecture (seen in Casino and Intermarché), backed by identifying sub-brands in the same format (hyper, super, etc.); at least until Carrefour, concerned about market share and noise, removed the parent brand name from the branding for Market and City outlets, with store-branded goods still being marketed as Carrefour products.

In specialized retailing, the textile sector has been the trail blazer by using a clearly differentiated store-brand portfolio to finely adjust commercial propositions to their target markets – even if that means capitalizing on possible synergies in the back office only, and not in communications, for example. Inditex besides its Zara chain, also trades under the brands, Bershka, Pull & Bear, Massimo Dutti, etc.; and H&M does the same with COS, Other Stories, and Cheap Monday.

There is no iron rule when it comes to choosing between these two brand architectures. The key is to find the balance between the critical size of each brand’s network, the additional costs generated by not pooling operations, and the response to specific insights from the core of the target segment. In any case, the retail sector has been pushed out of its comfort zone of standard-model, mono-brand outlets.

Segmentation: complex but vital

Store-brands, when it comes down to it, are simply signs above  stores differentiated by their format, and, as a result, their economic logic. In retail, business models are intrinsically linked to the retail space and sales method (assisted or self-service). And these store formats are showing a clear trend towards diversification: ostentatious flagships, medium-sized units, or satellite outlets – dedicated to the clearance of goods or partial exposure to the product range.

Optimizing “clustering” across the sales outlets is one of the major challenges for centralized retail chains over the next five years. The rise of digital channels will result in upheavals in the sizing and structuring of retail networks, but this will play out more subtly than simply “closing up the store”—for good—across swathes of outlets.

Inflation in retail rents and developments in competition and consumption require players to strike out in completely opposite directions when it comes to retail formats: more “XXL” on the one hand (DIY stores, Primark, Decathlon villages, etc.), but better targeted and more urban on the other, with the development of a new localization, which, thanks to digital, is seeking to go beyond a mere “convenience store” approach (Sephora Rivoli, Decathlon Englos).

Often experimental, and drawing on ideas from the past, designing these for today’s consumers requires a deep, multi-criteria redesign, taking into account changes in catchment areas and competition, the costs of the logistics approach, and the specifics of each cluster’s trading account; but also, of course, the effect of the internet, that great eliminator of weak websites, or even generator of a mirroring effect between click and mortar. Far from simply being at loggerheads, these two can manage to complement each other; car rental companies know that the spontaneous brand awareness generated by the presence of a physical agency multiplies Internet transactions tenfold. The B2B sector, however, where most of these rental companies operate, has sometimes edged ahead of B2C in terms of segmenting the commercial market.

The “back-office” is facing change too

This rationalization and rearrangement of front-office locations clearly has significant consequences, including employee-related ones, which need to be considered right at the start of any planned change. In fact, these are highly strategic and complex issues, blending commercial, HR, and logistical elements, on a national or even international level.

Segmenting a retail network will only achieve lasting results if the chain’s information systems adapt too, in order to drive the differentiated sections of the product mix and measure the performance of clusters.

Managing a multiform retail chain encourages the exploration of new types of contract. Darty and Fnac are now using franchising to leverage expansion; the generic term “franchise” actually covers a range of possible solutions.

Some are discovering the benefits of commission-based affiliation, business-leasing or salaried management, or even using commercial agents; joint ventures are also a feature, bringing constraints, but also acting as catalysts where other structures are risky. Creativity in business models can also be coupled with flexibility in types of contract between principals and their agents.

Finally, supply chain masterplans need to be redesigned in parallel with business expansion plans, using the logic of the hard discounters (a warehouse = a cluster of stores). Approaches are changing rapidly in this respect too: plans for food storage mega-sites, the development of warehouses, fleets of multi-product-type, multi-temperature trucks, and multi-format stores.

And with the price of crude currently on “permanent discount”, transportation is benefiting from some favorable conditions. But this won’t last, and all kinds of constraints – regulatory, social, economic, and environmental – mean that mastering the flux of physical goods is critical. The full-scale maneuvers taking place across the entire sector (la Poste, couriers, Amazon, etc.) signal a not-too-distant future where support functions will evolve as fast as the retail spaces themselves.