A Changed Starbucks. A Changed C.E.O.

RAISE your hand if you remember when Starbucks seemed cool.
Anyone?
Think back. To before the planet groaned with 17,000 Starbucks shops. Before the pumpkin spice lattes and the Ciao Amore CDs. Before the Strawberries & Crème Frappuccino ice cream, the Starbucks cream liqueur, the Pinkberry-inspired Sorbetto.
In short, to before Howard D. Schultz and his trenta-size ambition turned a few coffeehouses here into the vast corporate Empire of the Bean.
The world has often seemed three espressos behind Mr. Schultz — which is why the low-key guy sitting in his office here doesn’t quite seem like Howard Schultz.
Did he just say “but”? As in, “We have won in many ways, but ...”? Was that a “we” instead of an “I”? A note of humility?
Yes, this is Howard Schultz: the man who willed Starbucks onto so many street corners — and then, for a moment, looked as if he might lose it all.
Not even Mr. Schultz could have predicted how Starbucks would change our culture when its first shop opened here, in Pike Place Market, on March 30, 1971. Like it or not, Starbucks became, for many of us, what we talk about when we talk about coffee. It changed how we drink it (on a sofa, with Wi-Fi, or on the subway), how we order it (“for here, grande, two-pump vanilla, skinny extra hot latte”) and what we are willing to pay for it ($4.30 for the aforementioned in Manhattan).
But during the depths of the recession, Starbucks nearly drowned in its caramel macchiato. After decades of breakneck expansion under Mr. Schultz, tight-fisted consumers abandoned it. The company’s sales and share price sank so low that insiders worried Starbucks might become a takeover target.
So, after an eight-year hiatus, an alarmed Mr. Schultz returned as chief executive in January 2008. He shut 900 shops, mostly in the United States, drastically cut costs and put the company back on course.
Friends and colleagues say this hellish experience left Mr. Schultz a changed man. Starbucks, these people say, is no longer “The Howard Schultz Show.” The adjective that many use to characterize his new self is “humble” — a word that few would have applied to him before.
“Everything Starbucks did in the past, more or less, had worked,” Mr. Schultz said in an interview in January at the company’s headquarters, with a view of Puget Sound south of downtown Seattle. “Every store we opened was successful, every city, every country.”
He continued: “Growth had a life of its own — and that’s O.K., when you’re hitting the cover off the ball every time, but at some point, nothing lasts forever.”
One thing hasn’t changed: the man dreams big. In that same interview, Mr. Schultz spoke of expanding into still more products and in markets like China. He is pushing, of all things, a brand of instant coffee. The words “Starbucks Coffee” were just removed from the company’s green mermaid logo because he wants to waltz his brand up and down the grocery aisles. On Thursday, he announced that the company had struck a deal with Green Mountain Coffee Roasters to distribute Starbucks coffee and teas for Keurig single-serving systems. Shares of Starbucks jumped nearly 10 percent on the news, reaching their highest level since 2006. The stock closed at $36.56 on Friday.
Mr. Schultz and his colleagues say Starbucks will keep its feet on the ground this time, but some outsiders have doubts. Detractors say Starbucks long ago ceded its role as a gourmet tastemaker to become a “billions-and-billions served” chain like McDonald’s. Starbucks — “Charbucks,” to those who complain that its heavily roasted coffee tastes burned — will never rekindle the old romance, these people say.
“Has anybody said they came back because people love the coffee again?” asks Bryant Simon, a history professor at Temple University and author of “Everything but the Coffee: Learning About America From Starbucks.”
“They came back because they’re remaking themselves as a brand that competes on value, largely — a brand that’s everywhere, easily accessible, predictable,” Mr. Simon says.
HOWARD SCHULTZ, now 57, is a tall, sinewy man with a toothy grin and a silky sales pitch. He rarely sticks to script, preferring to speak off the cuff, whatever his audience. In conversations, he leans in, locks eyes and gives the impression that, right now, there is no one else in the world he would rather be talking to. When he speaks of “soul” and “authenticity” and “love,” you could almost forget that he runs a multibillion-dollar business that has become an uneasy symbol of globalization. Or that the British actor Rupert Everett once likened Starbucks to a metastasizing cancer.
The story of Mr. Schultz’s life and career has been told many times, not least by Mr. Schultz. (His second book, “Onward: How Starbucks Fought for Its Life Without Losing Its Soul,” is to be published on March 29.) But some highlights bear repeating:
He grew up poor in the Bay View housing projects in Canarsie, Brooklyn, received a football scholarship to Northern Michigan University and, after a variety of jobs, joined the fledging Starbucks in 1982, as head of marketing. Inspired by Italy’s coffee culture, he left Starbucks and opened his own coffee shop. Then, in 1987, he bought Starbucks, which at the time had all of six shops. By 1995, Starbucks had 677 shops. By 2000, it had 3,501, and that year Mr. Schultz stepped aside as C.E.O.
And so it went for Starbucks, one success after another, until the recession hit and exposed the company’s overreach to the world.
In December 2007, Mr. Schultz was worried that the Starbucks brand was losing its luster, and he and the board decided that in the new year, they would push aside Jim Donald and announce that Mr. Schultz would return as C.E.O. That month, Mr. Schultz, his wife, Sheri, and their two children flew to Hawaii for their annual getaway.
But on the beach in Kona, he just couldn’t relax. He kept checking the company’s daily sales figures and was horrified to see that they were falling by double digits.
Also in Hawaii then was his friend Michael Dell, who had recently returned to run Dell Inc. On a long bicycle ride along the coast, Mr. Dell told Mr. Schultz that when he returned to Dell, he wrote what he called a “transformational agenda.” Mr. Schultz then created his own plan for Starbucks.
His goals were to fix troubled stores, to rekindle an emotional attachment with customers and to make longer-term changes like reorganizing executives and revamping the supply chain.

He returned to Seattle, handed copies of his plan to the company’s senior executives and posed the big question: Are you in, or are you out? Eight of those top 10 executives have since departed. 

“What the company needed then was what he used to be to us — the innovation, the refusal to not be a champion,” says Troy Alstead, the chief financial officer. “A lot of people were questioning, in that span before he came back, ‘Were we done?’ And Howard came back, and it wasn’t even a question anymore.”
MR. SCHULTZ usually rises at 4 a.m., without an alarm, downs a Starbucks Sumatran coffee at home, followed by a short double latte or espresso macchiato from one of two Starbucks stores he visits on his way to work. He arrives in his office by 6:30.
Friends and colleagues agree that he is as fanatical as ever about Starbucks. Millard Drexler, the chief executive of J. Crew, recently e-mailed Mr. Schultz to complain that the coffee lids at a Starbucks on Astor Place in Manhattan kept spilling coffee on his shirt. Mr. Schultz’s reply: “On it.”
Mr. Drexler, who has a habit of e-mailing C.E.O.’s with complaints, says: “I can give you many more examples when they say, ‘I’ll send this to a research department or a gatekeeper.’ ” But, he says of Starbucks, “to have that kind of quality control they have around the world is pretty extraordinary.”
It was on such a morning in early 2008 that Mr. Schultz was convinced he had a product that would re-energize the company’s tired sales. It was called Sorbetto after the Italian for “sorbet,” and the drink was a twist on Pinkberry, the frozen yogurt chain in which Mr. Schultz is an investor.
Mr. Schultz had flown to Italy to taste the ingredients of his new product and thought he had the next Frappuccino. By that summer, 300 Starbucks locations in California were bathed in pink to promote the new drink. Starbucks had shipped in ingredients from Italy, and Mr. Schultz had primed investors.
But customers didn’t like the sugary concoction. And neither did Starbucks baristas, who had to spend an hour and a half cleaning the Sorbetto machines at the end of their shifts. A few months later, Mr. Schultz abandoned Sorbetto.
“Sorbetto, we did too quickly, and that was my fault,” Mr. Schultz says.
The headlong introduction was a mistake, but it was also classic Schultz.
“He likes things moving quickly, he likes people to be decisive, he’s got this energy level, this need for driving and for winning, and I think at times it’s hard for some people to keep up,” says Michelle Gass, the president of Seattle’s Best Coffee, which Starbucks owns. After his missteps, Ms. Gass says, Mr. Schultz has become more disciplined and a better listener.
Mr. Schultz concedes that he can no longer run Starbucks through the Cult of Howard. And he readily acknowledges that he badly misread the economy and underestimated the extent to which his customers would pull back during the recession.
At the time, he says, he had a hard time accepting that Starbucks would become a poster child for excess.
After his return, he halted new store openings and, with a P.R. flourish, closed every Starbucks in the nation for three hours to retrain baristas. The chain ran its biggest ad campaign ever, emphasizing the quality and freshness of its coffee. It ordered baristas to dump brewed coffee after 30 minutes.
But growth in same-store sales dipped below zero for the first time ever, and the company’s share price kept falling. It was a new feeling for Mr. Schultz, like the A student who breezes into college and then gets C’s.
Executives concluded that Starbucks had to close 200 American shops. The board suggested 600. Executives said that if sales and the economy got worse, they would also cut $400 million in costs. The board said no, let’s start cutting costs immediately, while closing locations. Starbucks ultimately closed 900 locations worldwide and cut $580 million in costs. As the decline in same-store sales neared 10 percent, board members asked executives to model what would happen if the sales slide hit 20 percent — which once would have been unthinkable.
“Nobody knew where the bottom was,” recalls James G. Shennan Jr., a venture capitalist who has been on the company’s board since 1990. “The general agreement around the table was we better have the doomsday plan.” 

In December 2008, almost a year after he returned as C.E.O., Mr. Schultz flew to New York on the company jet. He and his team were scheduled to meet with analysts from Wall Street, where Mr. Schultz, once a darling, was now being doubted as never before.
On the plane, he reviewed the grim quarterly numbers: Profits were underwhelming, and holiday sales looked dreadful. Just before the meeting, the company’s chief financial officer, Pete Bocian, resigned.
Mr. Schultz reread the script for the presentation — and didn’t like what he saw. He worried that the stock price might drop so low that someone would swoop in and buy the company.
He summoned his executives to his Fifth Avenue apartment. Late into the night, around the dining room table, they revised the presentation.
The next day, as the executives rehearsed, Mr. Schultz kept interrupting. Vivek Varma, who had recently joined Starbucks as head of public affairs, told him that he should leave.
No one could remember anyone talking like that to Mr. Schultz. But he left. The next day, he and the other executives painted a somber picture for analysts and laid out the recovery plans. Rather than plunge, the company’s share price rose 20 cents that day.
Over the next year, Starbucks made much deeper and more difficult changes than Mr. Schultz had originally envisioned. By April 2009, same-store sales, though still down from a year earlier, were finally rising. By the holidays, they had turned positive.
INSTANT coffee: the very words leave a bad taste in many people’s mouths. But Starbucks has been developing instant coffee in earnest since 2006. Mr. Schultz says his industry considers instant a “death category.” It is, however, a $20 billion one.
Before he returned, Mr. Schultz complained that if Apple could develop the iPod in less than a year, Starbucks could surely develop an instant coffee in that time. Finally, in January 2009, the new product, Via, was scheduled for a full-scale introduction.
But there was a problem: market research was showing that skeptical customers needed a lesson about instant coffee. Some executives worried that a big rollout might flop. Ms. Gass and a few others told Mr. Schultz that Starbucks should delay Via and introduce it in two cities before going national.
“That was hard for him,” Ms. Gass says. But rather than overrule his executives, as he might have in the past, Mr. Schultz agreed. It turned out to be the right decision. After testing Via in Seattle and Chicago, Starbucks rewrote the plan for a nationwide introduction. For instance, instead of just giving away free samples, which customers forgot in the bottom of their briefcases, purses and backpacks, it prepared Via in the stores and gave customers a blind taste test.
In 2010, sales of Via were over $200 million. The instant coffee is now also sold in grocery stores and in Britain, Canada, Japan and the Philippines.
The methodical introduction of Via offered a sharp contrast to the old Howard Schultz whose gut told him — wrongly — that Sorbetto would be a winner. But he has also gone so far as to embrace big-company ideas like focus groups, which he used to shun. Delegating, and accepting other people’s conclusions, is now easier for him. “There’s been more arguing, challenging and debate in the last two to three years than there’s ever been,” says Mr. Alstead, the chief financial officer.
Mr. Schultz’s take: “What leadership means is the courage it takes to talk about things that, in the past, perhaps we wouldn’t have, because I’m not right all the time.”
Born entrepreneurs are not necessarily born managers. You need creativity and drive to start a company, discipline and delegation to run one. In the last year, people who work closely with Mr. Schultz say, he has shown he can make the leap.

Perhaps the bigger question is whether Mr. Schultz can, as he likes to say, preserve Starbucks’s soul, or whatever soul it has left. In a switch, the company is designing new stores with local woods, furniture and art, to make them feel more like a neighborhood shop. It is also buying specialty beans in limited supply, as artisanal shops do.

Whether Starbucks can recapture a neighborhood feel, as Mr. Schultz insists, is anyone’s guess. For many people, especially in areas where carefully made, lighter-roast coffee from the likes of Stumptown and Intelligentsia is trendy, Starbucks has become a place to go for free Wi-Fi, or to use the restroom, or to buy a coffee on the go.
There is a market for a convenient coffee chain, as the recent Starbucks sales rebound shows. But some customers and analysts say that the mass-market approach conflicts with Mr. Schultz’s vision of a global giant that somehow feels local everywhere.
Mr. Simon of Temple University says: “When you’re selling stuff people don’t need, you’ve got to be selling something else, and that’s what Starbucks lost. There’s a kind of dissonance between the messaging and the actual practice.”
Mr. Schultz no longer plans to blanket the United States with new Starbucks stores, sometimes with multiple locations on one block — a practice that inspired a contest on Flickr to see how many Starbucks shops people could fit into a single photograph. Instead, like so many other executives, he has his sights on China. Starbucks already has roughly 430 stores in mainland China and plans to have 1,500 there by 2015. India beckons as well. The company also plans to sell a wider variety of drinks and foods in grocery stores and its own shops, like Kind fruit and nut bars, which Starbucks put on the map.
IT may be difficult to believe, but there was a time when McDonald’s was a novelty. But, like Ray Kroc, who took over a small hamburger business and built it into the most successful fast food operation in the world, Mr. Schultz has learned that growth can be seductive, and that it can exact a price.
Starbucks and its leader are more measured than during his last stint in the corner office. “I think we are very conscious of the things that we have done wrong over the years, particularly when we just got caught up in the growth phase,” says Mr. Shennan, the Starbucks director. “We are not going to do that again under Howard’s management, I tell you, or the current board’s.”
In January, three years after his return, Mr. Schultz stood before 1,100 employees at the headquarters here. Three thousand more from around the world were patched in via Webcast. The company had finished its strongest holiday season ever, and Mr. Schultz had just unveiled its new, “coffee”-less logo. Yet his words were laced with caution.
“We have won in many ways,” he said, “but I feel it’s so important to remind us all of how fleeting success and winning can be.”

http://www.nytimes.com/2011/03/13/business/13coffee.html?pagewanted=4&_r=1&partner=rss&emc=rss

The commodity crunch in consumer packaged goods

Packaged-goods companies have been socked by rising commodity prices. Executives in other industries can learn from their experience.

For almost 40 years, the US consumer goods sector was among the safest of havens for investors. It rewarded them with annual returns well above the market average—second only to those of the energy sector—and in a bumper period from 1985 to 2002 outperformed the S&P 500 index by almost 20 percent annually. Since then, the sector has barely outpaced the index, despite persistent attempts by companies to find winning strategies. While inadequate cost controls and a failure to deliver significant value from a wave of mergers and acquisitions haven’t helped, one factor is the dominant culprit for the current malaise: the industry’s response to changing commodity prices.

Losing control

From 1985 to 2002, consumer-packaged-goods companies regularly passed on to consumers increases in the price of inputs (including aluminum, cereals, oil, and paper) while holding the line on prices when raw-material costs declined. In this way, these companies maintained profit margins when input costs rose and enjoyed expanding margins when they fell. In fact, we estimate that between 1996 and 2002, the strategy of passing on commodity price increases was responsible for two-thirds of net margin expansion in the sector, or roughly $10 billion in value.
The tables turned in 2002. From that year until 2007, industry players passed on price increases of just 15 percent as cumulative commodity costs grew by 40 percent (exhibit). As a result, we estimate that the failure to pass on commodity price increases was responsible, during that period, for 75 percent of the sector’s margin contraction, which cost about $70 billion.¹

A return to the days of passing commodity price increases on to consumers won’t come easily. The structural shifts that dampened the industry’s pricing power remain: consumers are increasingly value conscious, and large discounters still dominate the retail landscape. These retailers, using detailed analysis of data available from their point-of-sales systems and shopper research, today have a sophisticated understanding of the prices they want and of their ability to demand those prices.
The net result is that the industry continues to face downward pressure on prices. Some of the solutions aren’t complicated, but they are extremely difficult to implement and probably hold lessons for companies—in sectors ranging from consumer electronics to industrial chemicals to medical devices—currently facing an unfavorable and volatile environment for raw-material costs and pricing.

Regaining the initiative

Many economists and financial-market forecasters believe that continued price volatility amid a general rise in commodity prices is likely as the world economy recovers, so companies across many sectors may easily destroy value in the years ahead. Suppose that in consumer packaged goods, commodity prices increase by about 20 percent during the next five years, and companies hold prices constant in a quest to maintain market share. In that case, up to 4.5 percentage points of margin could be lost—or about 33 percent of current earnings before interest, taxes, depreciation, and amortization (EBITDA). Avoiding this fate will require iron-willed pricing resolve, which may be richly rewarded if the environment turns slightly more favorable. If commodity prices fall by 5 percent in the next five years but companies hold product prices steady, for example, we estimate that industry margins will increase by around 1 percentage point, and EBITDA will jump by 8 percent, reversing the current trend.
Conceiving, developing, and marketing category-changing products that consumers crave has long been the lifeblood of leading consumer-packaged-goods companies—and, for that matter, a priority for companies in a great many industries. An important question for all is how to capitalize on the opportunity that such innovations present to reset prices upward across relevant product categories, as P&G managed to do when the company introduced its Swiffer cleaning product.² Capitalizing on innovations isn’t easy. But in an industry like packaged goods, it’s probably critical for companies that aim for a financially sustainable innovation pipeline, for consumers who seek a steady stream of new products that satisfy new needs, and for retailers that hope to benefit from greater demand for new and existing products.

 https://www.mckinseyquarterly.com/Retail_Consumer_Goods/Strategy_Analysis/The_commodity_crunch_in_consumer_packaged_goods_2719?gp=1

Why Can't Kmart Be Successful While Target and Walmart Thrive?

What drives some companies to succeed while others languish? Successful companies develop a system of a few truly unique capabilities that help them create differentiated value for their chosen customers.
Retailers provide many case studies in capabilities-driven success, one of the most compelling of which is the big discounter triad of Walmart, Target and Kmart. And in this fourth-quarter retail season, we thought it would be helpful to take a closer look at what really distinguishes these competitors because they provide valuable insight into the key components of a winning corporate strategy.
We believe that all successful companies — Walmart and Target included — know precisely how they provide value for customers. They make a deliberate choice about their "way to play" in the market, guided primarily by what those companies do uniquely well: their distinctive capabilities. We define capabilities not as "people capabilities," but as the interconnected people, knowledge, systems, tools and processes that create differentiated value.
They then select a set of products and services that best leverage those unique capabilities and optimally suit their chosen way to play. Most important, they avoid markets, products or services that require new or disparate capabilities, and thus threaten the company's focus.
Focus for us, therefore, is not about picking just one market, but rather about choosing one coherent way of competing. The true story about Walmart's and Target's success is that they have gone to great lengths to focus internally on building capabilities and product offerings that suit their way to play. Kmart, by contrast, has failed to develop a unique or differentiated way to play, and all that goes with it.
Let's take a closer look.
Walmart's success doesn't just stem from impressive logistics, aggressive vendor management and its position as a low-cost retailer. What really underlies Walmart's advantage is a coherent and differentiated approach to the market.

• Their well-defined way to play focuses on "always low prices" for a wide range of consumer items, from food to prescriptions to electronics.
• They support their low-cost way to play with an integrated system of capabilities, including: real estate acquisition; no frills store design; and superior supply chain management involving among others expert point-of-sale data analytics.
• Their product and service mix is kept tightly aligned with their way to play and capabilities system: avoiding big-ticket items (e.g., furniture or large appliances) where it has no cost advantage, or where new service capabilities might be required. And it innovates constantly within its chosen constraints: e.g., tailoring product assortments to local trends.

Target caters to a similar "money-saving" market, but offers a very different value proposition, focuses on different capabilities and has a different product portfolio.

• Target's way to play emphasizes design-forward apparel and home decor for image-conscious consumers. Everything from store layout to advertising to inventory conveys an eye for style.
• Its capabilities system supports this way to play with image advertising, "mass prestige" sourcing (with the use of private brand and exclusive offerings), pricing, and the management of urban locations.
• In product and service mix, Target is similar to Walmart in many ways, but Target satisfies the needs of its younger, image-conscious shoppers by stocking more furniture, clothing and exclusive designer merchandise than Walmart.

Kmart, the least successful of the group, is struggling to define its way to play, describing itself as a "mass merchandising company that offers customers quality products through a portfolio of exclusive brands and labels." Yet, that definition could describe just about any retailer. As a Walmart customer, you know you'll save money and still feel welcome. At Target, you know you'll get fashionable products at prices that feel reasonable. What, then, is Kmart's niche?
Walk through a Kmart store and you'll discover designers like Jaclyn Smith in the low-budget ambience of a warehouse. They carry Kenmore appliances, which may require high-touch sales assistance that many Sears customers expect and many Kmart stores lack. In short, Kmart has not established an identifiable way to play that reflects both customers' needs and its own capabilities. Harry Cunningham, the founder of Kmart, allegedly admitted that Sam Walton (the founder of Walmart) "not only copied our concepts, he strengthened them."
The lack of a clear concept about how to reach the market, in our view, is the single most important factor in explaining why Kmart's fortunes have fallen so far, compared to its two rivals. Without a clear way to play, and capabilities to support it, a company cannot achieve the coherence it needs to truly excel at what it does, and thus outpace competitors.

http://blogs.hbr.org/cs/2010/12/why_cant_kmart_be_successful_w.html?

What is McDonald selling?

AUGUSTA, Ga.—More than 100 items crowd the menus at Dee and Christine Crawford's five McDonald's restaurants, ranging from familiar Egg McMuffins to newfangled fruit smoothies. The family franchisees recently added oatmeal and caramel-mocha beverages. Next up for consideration: frozen strawberry lemonade.
In certain restaurants around the country, McDonald's Corp. is testing flatbread sandwiches and "garden" snack wraps—chicken and vegetables wrapped in a tortilla.

"Change is a part of our business, to keep up with customer demands, and there have been a lot of changes," says Dee Crawford.
Though McDonald's is practically synonymous with burgers, the chain's appetite for change has helped make it the nation's best-performing restaurant company during the economic downturn. Since early 2003, the company has posted 30 straight quarters of same-store sales increases. During the worst trenches of recession, in mid-2008, global same-store sales at McDonald's rose by 6.1%.
An increasingly diverse menu, with some items priced at a dollar and others as high as almost $5, has lured more cost-conscious customers while preserving profit margins. That's a departure from the days when McDonald's largely catered to so-called heavy users—customers who queue up to eat fast-food several times in a week. Today, many of those 18-34 year-olds, hit by the economic slump, can no longer afford to binge on Big Macs.
To help boost traffic, the company is keeping more restaurants open 24 hours, has spiffed up thousands of stores, created double-lane drive-throughs and now offers free Wi-Fi in most locations. The new menu choices are so plentiful that the Oak Brook, Ill., company has been running ads to remind customers that it still sells Big Macs and Quarter Pounders.

But as the changes mount, some franchisees and analysts are cautious about the chain's ability to sustain growth.
The chain's peak lunch-hour business has been flat for five years, according to a company email reviewed by The Wall Street Journal. A McDonald's spokeswoman declined to comment on the content of the memo, but said in an email response, "it's important to note that our entire business has continued to grow."
Pushing sales higher is a constant battle. "You may be leading the industry," says Jeffrey Bernstein, restaurant analyst at Barclays Capital. "But if you have a deceleration from where you were...investors might rather pursue a greater risk/reward scenario" with the potential for "more meaningful upside."
One reason for all the menu tweaks: the shifting landscape of fast-food, and food purchased by consumers on the go. Just a decade ago, chains like McDonald's and Burger King were a natural choice for people wanting a quick bite. Today, with more types of chains serving more types of fare, the big franchises are chasing market share from competitors such as 7-Eleven, coffee shops like Starbucks, smoothie outlets like Jamba Juice, and even gas stations that carry prepared food.

As business evolves, the franchisees who operate about 90% of the company's 14,000 U.S. stores bear the brunt of upgrade and expansion costs. With multiplying new demands in the kitchen, operations are more complex than ever, threatening slower service and mistakes in orders.
Several franchisees interviewed for this story declined to comment. Some worry that their investments will never pay off, according to an October franchisee survey by Janney Montgomery Scott analyst Mark Kalinowski. One franchisee polled said new McCafé coffee drinks are selling so poorly that, "we are not even paying for the electricity to run the machine."
"Our business is driven by keeping things simple and being able to deliver in a fast and efficient manner," says a McDonald's franchisee in the Southwest interviewed by the Journal. "So the more complexity you bring into the system, the more challenges you'll have," he says.
The introduction of snack wraps, for example, represented such a change in food assembly that one Augusta franchisee sponsored a snack-wrap making contest to give crew members extra practice. The winners received gift cards to retail stores.
With musts like a new $13,000 frozen-drinks machine, "the question always is, 'is the next dollar worth the next amount of investment and hassle?'" says the Southwest franchisee. "In most cases, so far, yes it has been, but not in every single store."

The company says the coffee drinks are a success. And McDonald's USA President Jan Fields says it's taking care not to repeat past mistakes. "I don't want it to feel burdensome to add new menu items, but we have to stay relevant."
Now that consumers are starting to open their wallets again, it's more tempting to be everything to everybody. "If McDonald's sticks to one thing, consumers will go somewhere else," says John Glass, restaurant industry analyst for Morgan Stanley. "It's a delicate balance between being simple and not responding to what consumers want."
The Golden Arches have been down this road before. In the late 1990s and early 2000s, the chain got into trouble opening new restaurants at a breakneck pace. Some offerings, like the Arch Deluxe, famously flopped. Service suffered, sales slumped and McDonald's then-CEO, the late Jim Cantalupo, vowed in 2003 that the company would "do fewer things and do them better."
Over the last three years, the company discovered that items consumed between traditional meal times, such as snack wraps, have become the fastest-growing part of McDonald's business. To capture more grazers, McDonald's began keeping its doors open longer. Today, about 37% of U.S. McDonald's operate around the clock and nearly all open earlier and close later than in previous years.
For customers who wanted an early morning coffee or a late-night snack, "It used to be that convenience stores were the only option," Ms. Fields says.
Being open 24/7, though, means higher staffing costs—and doesn't make sense for every store. The Crawfords learned this the hard way. They tried the all-hours approach at one location in a depressed area of Augusta, but "the labor was killing us," Dee Crawford says. "The business just wasn't there."
Mother Dee, 67 years old, bought her first McDonald's in Beaufort, S.C., in 1987, before adding four more to her empire. She's in the process of handing them all over to Christine, 38, who joined the family business in 2003. Since then, the Crawfords, like other franchisees, have needed to adapt considerably.
When Dee Crawford bought her second McDonald's, on Walton Way in downtown Augusta, Ga., in 1990, it offered so few products that she tallied inventory by hand. She had a one-lane drive-through and chicken sandwiches hadn't yet hit the menu. When she needed to restock, she ran out back to an outdoor freezer.
At the company's urging, she rebuilt the restaurant in 2007. Now, a two-lane drive-through funnels cars from a busy street past a menu board splashed with photos of salads, coffee drinks topped with whipped cream and snack wraps. The old exterior, with its red mansard roof and white walls, was replaced with a modern flat roof and stucco facade.
Sleek flat-screen televisions now hang from the walls and people linger with laptops, thanks to free Wi-Fi. Unlike the old days, a corporate distribution center handles inventory and two or three truckloads of food are delivered to each of the Crawfords' stores weekly.
With extra chores and more customers to serve, some of the Crawfords' restaurants now have as many as 18 staffers during peak hours—almost double the work force of a few years ago.
The Walton Way store was rebuilt specifically with the McCafé drink station in mind—one of the biggest and most expensive changes McDonald's franchisees have had to make in recent years. Located between the pick-up window of the drive-through and the inside counter, the space is equipped with a coffee brewer, a blended-ice machine, a specialty coffee machine and a tea brewer.
"There was a time when McDonald's coffee was considered the best, but somewhere along the way we lost our way on it," Ms. Fields says. "We didn't pay attention to details like temperature, packaging and freshness. We noticed a significant decline in our coffee sales while customer demand for coffee was going up."
Once McDonald's improved its drip coffee and saw sales react, it decided to branch out into specialty coffee drinks. Some franchisees balked, partly because of the price tag. The stations cost roughly $100,000 to install, with McDonald's covering only about $30,000 of the total expense.
The Crawfords placed McCafés in each of their five restaurants and figure it will take two to three years before they recoup their investment. In the mornings, a dedicated staffer mans the McCafé station.
Initially, Dee Crawford worried that fancy coffee drinks wouldn't go over well with her clientele. "Just the pronunciation of frappes and lattes was new," she says. "I thought customers might be intimidated."
She was encouraged by a visit to a McDonald's in Columbia, S.C., with similar demographics—lower-income and predominantly African-American—where customers were embracing the new drinks. When her own stores began selling them, she introduced them by offering free samples at community events.
This past summer, when McDonald's told franchisees to start selling berry smoothies, the Crawfords and other local franchisees paid the city of Augusta to have downtown water fountains churn out fuschia-hued water to coincide with the introduction of the new products.
Ms. Fields says the company tries not to stray too far afield with new items. In 2005, McDonald's halted testing of Oven Selects submarine sandwiches, partly because they took too long to make, partly because "market data told us that it's not a product customers recognize McDonald's for," Ms. Fields says. "We tried pizza at one time but people didn't recognize us for pizza, either."
Company executives decide how to alter menus based on changing consumer desires and areas where it suspects it may be missing opportunities, Ms. Fields says. Several years ago, the company noticed that a lot of drive-through customers already had drinks when they arrived. Limited choices and outdated packaging were among the reasons people weren't purchasing McDonald's beverages with their meals, McDonald's discovered.
"We said, 'We need to get more contemporary with our beverages and not just have Coke, Diet Coke and Sprite,"' Ms. Fields says.
A franchisee in the South saw how customers were going to a competing chain offering sweet tea. So McDonald's began testing its own version regionally. It became so popular that it's now offered nationwide.
Rising demand for healthier products prompted McDonald's to create fruit smoothies. Consumers' busy work schedules, longer commute times and a craving for convenience persuaded the chain to create more products that can easily be consumed on the go and at nontraditional meal times.
Some new items are made by re-purposing existing ingredients. Chicken snack wraps feature the same chicken tenders that make up a Chicken Selects meal of white meat chicken pieces. The chicken is then wrapped in the same tortillas used to make breakfast burritos. The multi-use strategy makes preparation simpler and reduces costs, McDonald's says.
To keep up with all the menu iterations, the Crawfords have still needed to increase staffing and open hours: one of their locations is still open around the clock, seven days a week.
Sometimes, all the changes—from the food to the imagery—can leave customers befuddled. The Crawfords recently removed window posters that touted a national Monopoly promotion and a sweet potato pie offered only in the South. The two messages, says Christine Crawford, seemed to clash and came off as confusing. " At a certain point it becomes white noise," she says.
Write to Julie Jargon at julie.jargon@wsj.com


http://online.wsj.com/article/SB10001424052748703531504575624741901256252.html

Case study: A Tough Sell at Sears

This holiday season, Sears and Kmart, which merged in 2005, are pushing a single message: Buy with layaway, buy with coupons, buy now and pay later, buy with loyalty rewards points — but please, just buy.

Five years after the merger, Sears Holdings is beleaguered, with sales markedly worse than its competitors’. The company’s revenue dropped more than 10 percent from 2005 through 2009, the most recent full fiscal year. In the same time period, Wal-Mart’s sales rose almost 31 percent, Target’s more than 24 percent and Macy’s about 5 percent. Sales at J. C. Penney’s declined by about 6 percent.
Recently, too, as shoppers seem to be cautiously loading their carts again, Sears Holdings has not benefited. In the first three-quarters of this year, Sears Holdings’ sales are down about 1.9 percent compared to the same period last year, while the competition moved into positive territory.
Edward S. Lampert, the billionaire hedge fund manager who engineered the merger and is chairman of the company, has promised that Sears Holdings will be “unrecognizable” in 30 years. To drive sales, it is emphasizing online shopping, mobile apps and an Amazon.com-like marketplace with other vendors, along with heavy promotions in stores.
Still, its long-term strategy remains murky, analysts say. Sears Holdings is primarily a physical retailer, and many of its 2,200 stores in the United States are run-down and in undesirable locations. Among discount stores, Kmart lags Wal-Mart and Target. Sears is trying to edge out Lowes and Home Depot in appliances on the one hand, and Macy’s and J. C. Penney in apparel on the other.
“People assume that Eddie’s got some magic formula,” said Gary Balter, an analyst with Credit Suisse. “If you’re Sears, you’ve got a problem because you’re trying to sell a product in a dilapidated building,” he said. And Kmart stores are “about a quarter the sales productivity of Wal-Mart,” he said. “How do you compete?”
When Mr. Lampert combined Kmart and Sears in an $11.9 billion deal that went through in 2005, many of the same analysts considered it a smart move.
Mr. Lampert, who became the majority owner of Kmart after it went into bankruptcy, said then that he wanted to combine the best of both, putting brands like Kenmore and Craftsman into Kmarts, and building Sears’s presence outside of malls by turning some stand-alone Kmart stores into Sears stores. Some attractive store locations, particularly in urban areas, led analysts to believe he could sell those to competitors for premium prices.
But the sudden consumer pullback in 2008 led to lots of empty retail space, at less expensive prices than Mr. Lampert’s. Today, Mr. Balter said, Sears Holdings still has some showcase spots, in high-end, high-traffic areas like Bergen County, N.J.; South Coast Plaza in Costa Mesa, Calif.; and in Manhattan and Bridgehampton, N.Y.
But much of the remaining real estate in older, decrepit malls is a problem, Mr. Balter said. “Of the 2000, there’s 1,500 that you don’t want to be in, that nobody’s going to buy,” he said. (It also has a growing division of about 1,600 specialty stores, like small hardware stores and outlets. ) The better locations “are where Sears and Kmart are making their money — if you sell those, what are you going to be left with?” Mr. Balter said.
Mr. Lampert has also not invested much in the stores themselves, analysts said. In 2009, capital spending only amounted to 0.82 percent of sales. That is about half of Macy’s spending, at 1.51 percent of sales, and a fraction of the spending at Target, Wal-Mart, J. C. Penney and even publicly traded dollar stores, all of which are at 2 percent and above.
In an interview, David Friedman, Sears Holdings’s new senior vice president and president of marketing, played down the importance of appearance.
“The customer’s experience is made up of lots of pieces,” he said. “The in-store experience is one of those that matters a lot, and we believe that the physical plant is one piece of it, but we believe the associates and the products drive the in-store experience.” Sears Holdings is experimenting with new layouts and fixtures and will introduce those more widely if they are shown to improve sales. And Tom Aiello, a Sears spokesman, said in an e-mail that brightness and cleanliness were priorities, and noted that customer-satisfaction scores had risen this year.
The stores’ products pose another challenge.
Sears has long commanded the appliance world, but Home Depot and Lowes are formidable up-and-comers. In 2009, Sears still led the group with a little more than $7.1 billion in major appliance sales, according to This Week in Consumer Electronics magazine and the Stevenson Company. But its appliance sales fell 8.2 percent that year. Lowes came in second, with $4.5 billion, up 3.8 percent, and Home Depot was in third with $3.4 billion, a 4.3 percent decline.
“That’s increased the competition for sure,” Mr. Friedman said, but he added that Sears’s employees and price-matching gave it an advantage. Sears is also now selling some exclusive brands outside its stores. Craftsman tools, for instance, are available at some Ace Hardware stores.
It is also trying to figure out apparel sales. In its high-performing stores, it has been able to sublease space to the teenage retailer Forever 21, and it is trying to lease other spaces to other brands.
New exclusive brands, like a fashion line by the Disney star Selena Gomez at Kmart, and ones by the British brands Next and French Connection, are the latest efforts to lure shoppers.

“When you have things that are more on trend,” Mr. Friedman said, “aligned with people that are more compelling, they’re more willing to take a separate trip to your store.” 


But exclusives may not hold the same cachet anymore. Kmart may have signed Selena Gomez, but Target has Demi Lovato, Wal-Mart has Miley Cyrus, Kohl’s has Britney Spears and so on.
Transforming Sears or Kmart into fashion destinations will be difficult, said Jason Asaeda, a retail analyst at Standard & Poor’s.
Mr. Friedman said that customers were “more willing to purchase fashion at a Sears than at a mass merchant,” and described Kmart’s fashion efforts as having a “very good response.”
Aside from working on appliance and apparel, Sears seems to be putting the most weight behind its promotions and Internet efforts.
Through a program called AdYourWay, shoppers can choose an item online and direct the site to notify them when it reaches a certain price, or ask the site to recommend products. Mygofer lets people shop online for basics like eggs or bread along with tools or gifts, and pick up those items in a store the same day. Sears Holdings has several mobile applications to help people choose gifts or order items. Earlier this year, it formally announced Sears Marketplace, where more than 18 million products were available via third-party sellers. And a single login and profile can be used across all Sears Holdings sites, like LandsEnd.com or TheGreatIndoors.com.
Analysts said that while they were impressed with the company’s forays online, they did not see the Web sites as a cure-all. The retailer is also trying to lure shoppers with promotions. It extended its popular layaway program this year, and is also running no-interest offers on the Sears credit card and buy-now-pay-later plans with monthly payments. It began a rewards program at Kmart last year and Sears this year, offering points for buying and activities like writing reviews online. It is also offering holiday-season promotions, like offering Black Friday-level pricing on weekends beginning in October, and keeping Sears and Kmart stores open on Thanksgiving day.
For longtime shoppers like Linda Formicola, the rewards are a nice bonus, but it is Sears’s history and good discounts that bring her in.
“We’ve been shopping at Sears since I can remember,” said Ms. Formicola, 43, of Franklinville, N.J. Her husband is a mechanic, so he picks up tools there while she looks at clothes and supplies. “If stuff’s on sale, it’s pretty much the same price as you’d buy at a Wal-Mart,” she said, adding she believed the quality was better at Sears.
Bill Dreher, an analyst with Deutsche Bank, acknowledged that the company had maintained some loyalty among shoppers, but said he was puzzled about its future. While an asset mix including brands like Kenmore and Lands’ End, real estate holdings and the successful Sears Canada division may be valuable, retailing magic seems to be lacking in Mr. Lampert’s vision, he said.
“He’s got this huge conglomerate of retailing which is really not doing very well right now, and frankly, if it weren’t for Sears Canada, would be in a real mess,” Mr. Dreher said. “He’s focused so much on reducing costs and driving cash flow, and not focusing on sales and market share.”
Cheryl Thomas-Gorny, a mother of three in McRae, Ark., may not be concerned with Mr. Lampert’s market share strategy, but shoppers like her contribute to Sears’s diminishing popularity and sales. Although she said she sometimes shopped at Kmart, she criticized the quality of its goods, and said she often found the employees disagreeable.
“Honestly, I’d rather go to Target,” she said.

http://www.nytimes.com/2010/12/22/business/22sears.html?pagewanted=2&_r=1&partner=rss&emc=rss

Rediscovering the art of selling

Even after researching products on their own, many customers enter stores undecided about what to buy. For retailers, that’s an opportunity to improve off-line sales in an increasingly multichannel world.

Retailers as far back as the legendary pioneer Marshall Field once focused intensely on clinching sales once customers walked into stores. But recently, the industry has been missing opportunities to make sales. New technologies, extensive retailer Web sites, mobile-shopping tools, and in-store Internet kiosks have separated customers from sales associates. Content to let consumers research products independently, many retailers have been reducing in-store sales staff and eliminating commission-based models. This approach has resulted in lower costs, but it has also reduced incentives for those left on the floor to make sales.
Many retailers assume that customers walk into stores for purely transactional purposes: they know what they want and just need to buy it. Yet McKinsey research indicates that as many as 40 percent of customers remain open to persuasion once they enter a store,¹ despite undertaking extensive product research, reading online reviews, and comparing prices on their own. Retailers that fail to have knowledgeable staff on hand to help customers make decisions, or even to create arresting in-store visual marketing materials, are losing sale after potential sale. More than ever, retailers need a sales-driven mind-set focused on having the right number of sales staff; ensuring those staff are knowledgeable, well-trained, and motivated to sell; and providing the right in-store experience for customers.

Bolstering the sales staff

Many retail executives argue they can’t afford to provide high-value sales help. Simple arithmetic suggests they can’t afford not to. It’s true that adding frontline staff that can sell effectively is costly and takes time, and we’re not suggesting a return to an old-fashioned, expensive, labor-intensive sales system. But there’s a powerful and straightforward business case for investing in frontline sales staff: when done correctly, adding salespeople offers one of the more attractive payback opportunities in retail.
Consider the case of home electronics sold through discount stores—the ultimate self-help format, where consumers typically undertake product comparisons independently before ultimately going to a store to make a purchase. With an average selling price of $200 and an average gross margin of 10 percent, or $20 per sale, the cost of hiring a good salesperson is recouped by selling just one additional product per hour on the floor. When the profit margin from up-selling or cross-selling accessories is added, just one additional sale every two hours is needed. At one self-help apparel company, for example, providing extra sales assistance during select hours increased the conversion rate by 1.5 to 2 times, driving fitting-room use 37 percent higher and recouping the cost of the extra human help within an average of 10 to 15 minutes during normal selling hours.

Building the right frontline sales force

Watch skilled salespeople at work and you soon realize that while selling is an art that can be approached in a variety of ways, it boils down to four basic steps: open, ask for needs, demonstrate, and close. Surprisingly few frontline sales associates know these steps well, and fewer do all four consistently. At one retailer, for example, we found that associates failed to ask to close the sale 86 percent of the time. Having staff that understand and enjoy the sales process is paramount, and that means attracting the right employees, training them effectively, and rewarding them appropriately.
Effective sellers share common traits: they are motivated by helping customers, have extroverted personalities, and are passionate about their work. Our research indicates that, at most, 45 percent of frontline employees across multiple retailing sectors have the personality and attributes to be effective sellers (for examples of right and wrong behaviors in frontline sales, see the interactive, “Secrets of making the sale”).² Retailers need to redesign the way they hire and deploy staff into selling roles to attract employees with the personality and attributes required to succeed. In addition, we found that few retailers provide training with the specificity and quality to effectively support sales associates in their mission to sell more. That leaves even natural salespeople often unable to answer basic questions about their products from potential customers who are increasingly informed (in some categories, more than 75 percent appear in the store having done extensive independent research).

Improving the in-store experience

Better visual merchandising can make a big difference in helping consumers make certain buying decisions, accelerating the payback on frontline staff. Consider one self-help retailer that simplified its point-of-sale signage for digital cameras to make comparing products easier for both consumers and sales staff. Rather than using technological jargon such as megapixels and zoom sizes, the retailer instead used “photo-enlargement sizes” and “distance to picture object.” Memory cards emphasized the number of photographs a card could hold, rather than describing them in gigabytes. Because sales staff could use the visual displays as a way to sell products to customers without having to memorize technical details, they were more confident and achieved more sales per hour.
Examining the way consumers make decisions also makes a difference. At one leading personal-bath-care chain, for example, executives realized that people preferred to shop by “scent” rather than “function”—they preferred all vanilla products in one area, rather than all shampoos in one area and all soaps in another. Reorganizing the entire merchandising layout from a function-based to a scent-based display resulted in increased category sales, as customers bought multiple products with the same scent, rather than just one. It was a simple but effective change reflecting how consumers actually shop. Paying attention to these kinds of customer behaviors remains invaluable, despite the unprecedented access to product information, reviews, and prices that consumers have online.

https://www.mckinseyquarterly.com/Organization/Strategic_Organization/Rediscovering_the_art_of_selling_2677

 

Confronting proliferation ... in retail: An interview with Wal-Mart’s John Fleming

The giant retailer’s chief merchandising officer explains why and how it is trying to reach a wider range of consumers than it has in the past.

To hear senior marketer John Fleming tell it, Wal-Mart Stores’ marketing mission is pretty similar to that of other retailers: to improve the in-store connection with customers. The level of complexity, though, increases dramatically for a company with roughly $350 billion in sales and 6,000 stores around the world.
Fleming has a unique perspective on connecting with Wal-Mart’s customers, thanks to his past roles as president and CEO of Walmart.com and as Wal-Mart’s chief marketing officer and to his current one as the company’s chief merchandising officer. In this interview with McKinsey’s David Court, Fleming explains how marketers at retailers can make the greatest impact: “Think like marketers,” who use data to make decisions, “but act like merchants,” who react rapidly to market changes.
Like many companies, Wal-Mart grapples with the fragmentation of customer needs. A key implication, says Fleming, is that it must segment its customers more finely than it has in the past and develop a variety of different in-store experiences. That creates execution challenges and makes managing Wal-Mart’s brand more complex.
Fleming also discusses the current role of Walmart.com, which is not only a distribution channel but also a powerful marketing vehicle. And he describes the importance for Wal-Mart of having marketers with diverse backgrounds ranging from packaged goods to manufacturing, advertising, and retail. Integrating such talents and experiences isn’t easy, but it’s the only way, in Fleming’s view, to operate in “basically every business known to retail” and to satisfy customers whose needs are becoming more diverse.
The Quarterly: How are changes in today’s marketing environment—the proliferation of market segments, distribution channels, media—affecting Wal-Mart?
John Fleming: Obviously, things are moving at a fast pace and have been for some time. The Internet supercharged proliferation. But we were slow to embrace the proliferation that was happening because we were able, for so long, just to deal with customers who had very little money. We had a great value proposition for them.
Today we have an opportunity to connect with many different customer segments. Eighty-four percent of all US households now shop at Wal-Mart, and almost everybody who comes into our stores will consider us for basic branded, nonperishable commodities. Yet as you look at different categories, the numbers go from 100 percent consideration to 90, 80, 70, 60, or less. In some stores we have products that only 20 percent of the customers coming through the door will even consider. The experience and the assortment that a segment of Caucasians in rural America is looking for is different than it is for a Hispanic segment. Another example could be a multicultural urban segment that takes mass transportation to our stores and has different needs in terms of beauty products, entertainment, or food.
That’s what we’ve been working on: boiling our customer base down to between five and seven segments and then lining up each store with a primary segment. What we’re focused on is getting the insights to identify, for each one of these segments, how the product offering it wants differs from our baseline. To really connect with those segments, marketing needs to aggregate research and customer insights—whether they come from suppliers, from other third parties, or internally.

The Quarterly: You’ve been quoted in the business press talking about the selective Wal-Mart customer who may be slightly different from the historic Wal-Mart customer. Can you describe that in more detail?
John Fleming: When I became chief marketing officer, in May of 2005, the first thing I tried to do was take a very basic look at how people shop with us. The loyalist, we found, shops with us frequently and shops in multiple categories. The selective shopper also shops frequently, but in a narrower range of categories. The skeptic is both infrequent and not in many categories.
The selective shopper is time starved. Time is their currency. They want solutions, not just items. For example, something like 85 percent of selective shoppers don’t even know what they’re having for dinner an hour before they have dinner. And you know what? We have a lot of people in our stores at that time, so we need to be able to present meal solutions. That’s a big change for us because we’ve built our business selling items.
Our Plano, Texas, store is a good example of the kind of customer experience that’s necessary for selective shoppers. We did put a couple of things in there differently, such as expanding wine pretty dramatically. But in the end there were only 3,200 SKUs¹ that were different from our base program. The primary driver of the results, which are very good, is the customer experience. We eliminated almost 10,000 SKUs so we could be more focused and have a clearer merchandise presentation. We think we can do the same thing with a number of different segments and, in doing so, probably reduce the amount of inventory we carry today, when we are trying to meet all segments’ needs in every store.
The Quarterly: What were the key aspects of the customer experience that you changed at the more upscale Plano store?
John Fleming: We asked ourselves, “What’s the next store coming off the line that will serve the selective demographic of typically higher- and dual-income, time-starved people?” We identified Plano, and in July of 2005 we took a quick pass at what is most important to the selective shopper. It’s about convenience. It’s about solutions. It’s about value more than just price.
We knew we needed to change the experience pretty dramatically. One thing we focused on was “adjacencies.” Typically, in our largest stores—our Supercenters—we put our pharmacy and health and beauty accessories over in the general-merchandise side of the store. Dry groceries and food are on the other side, pretty far away. The first time I shopped at a Supercenter, I was struck by the fact that I went in for groceries and then, on the way out, was thinking, “I need some soap. Yet it’s way on the other side of the store, and I’m not going across all those aisles!” So I was out of there. I admit I had never really shopped at a Wal-Mart Supercenter until I moved to Arkansas, because prior to that I spent 20 years in Minneapolis and 5 years in San Francisco, and there aren’t a lot of Supercenters in either city.
So anecdotally, I knew there was a need to pull these together. We also thought it was important for the time-starved customer to be able to navigate through the store very quickly. One of the biggest problems with our navigation system is the amount of inventory we carry. So we took out all the risers, which are the shelves that go up above the main shelves and are used for stacking additional merchandise that nobody can get at. In doing so, we were able to open stores up, improve the sight lines, and create a new navigation system to help customers get through the store more quickly.
The Quarterly: What do you worry about most as you move forward in an environment where you might have five or six different customer segments and types of stores?
John Fleming: One issue is that most of our systems were built to optimize the supply chain, not necessarily to maximize the customer experience. So there are some operational barriers we have to work through. But I worry most about the in-store execution. It’s one thing to say, “We’ve got six segments. We understand the assortment. We understand the occasions. We understand the experience. We understand the competitive set.” And it’s another thing to really make that work operationally at the store level.
I’ve already heard anecdotal examples of markets that have no Hispanic population but have stores with 80 percent of their business from Hispanics: workers who come into the community but don’t live nearby. Here in Arkansas, we typically profile all the stores that are within ten miles of the home office as the same because they’re in northwest Arkansas. Store number one—the very first Wal-Mart store, about seven miles from here—is a Hispanic store that never gets treated as a Hispanic store, because the data we use say that only 18 percent of the population is Hispanic in northwest Arkansas. Five miles away is the new South Rogers store, which should be a higher-income store because anybody who’s at a higher-income level in this area shops at that store. Yet it doesn’t necessarily get treated that way, because the average income of this area is in the $47,000 to $48,000 range.
Examples like these mean that a tremendous amount of responsibility is going to come down to the field. The idea is that we need to give information about what needs to happen in what store to a market manager who has ten stores. And the market manager needs to validate that data.
The Quarterly: How will you manage your brand as you move toward a more segmented business approach?
John Fleming: We’re on a journey. The first step is just about discipline and consistency in how we manage the brand. Even today, when the engine that drives the machine is the 200,000-square-foot Supercenter, we don’t have consistency. A couple of years ago, everybody—at every store and in the home office—thought that they managed the brand one customer at a time. Because buyers had the ability to get any kind of packaging they wanted with any kind of signage from suppliers, our stores looked like a city with no zoning. Furthermore, the signs in the stores were different from the circulars, which didn’t necessarily look like the television advertising. So we moved a lot of the brand decision making toward a more centralized function and developed guidelines and processes to ensure consistency.
At the same time, we are spending a lot of time doing research around the brand so we can better articulate where we want to take it. The brand has always stood for low prices, broad assortments, and trust. Over time, we need to evolve it to being a broader value proposition that takes into account products and experiences that are relevant to the segment we’re targeting in any given location.
The Plano store taught us that the brand is probably more elastic than we thought. I was worried about taking a 200,000-square-foot Supercenter and being able to present it in a way that was relevant to customers who had significantly higher incomes than our core customers. That doesn’t seem to be a barrier. I think we are able to develop a kind of consistency, by segment, that is relevant to that segment. At some point, we may be looking at other formats, and we may need different banners once we start changing the physical store. There too it will be about consistency and relevance to the segments.
The Quarterly: Wal-Mart has always been a major user of television and, through your circulars, of newspapers. As the audiences for these traditional media decline, do you expect to evolve your marketing mix?
John Fleming: Yes, we’re evolving. In 2005 our media mix was really three things: it was broadcast TV, it was monthly circulars, and it was the in-store signage. That was about 97 percent of our advertising budget and of how we communicated with customers. The next year was a big transition year, with a lot of learning. We placed some bets and tested a lot of different things—some direct mail, a lot of Internet advertising, developing analytics to measure results.
But the most significant change is in the look and feel of the stores, which are actually the most important media channel we have, with 130 million customers every week going through them. We have undertaken a 1,800-store remodel to get the adjacencies right so that, for example, all home products are pulled together and apparel is presented in a way that is conducive to actually selling apparel, as opposed to just getting product on the floor. Then, as we better understand the segmentation by store, there are different tools we can deploy, such as Wal-Mart TV, to present relevant solutions to customers at times when they’re considering a need.
The Quarterly: Our readers may not be familiar with Wal-Mart TV, the in-store television network where Wal-Mart itself, as well as vendors, advertise and promote products. Could you say a little more about how you are using Wal-Mart TV and whether you have any plans to change it?
John Fleming: When I became chief marketing officer, I was concerned about Wal-Mart TV because of its placement and because I thought it would just contribute a lot more messaging to stores that were already noisy. One of the things I had learned online is that presenting information is all about context. For example, when we started Walmart.com, we knew the Internet would be a place where customers went for information. So we created all these buying guides that would help to simplify complex purchases, from diamonds to electronics. We put the guides on the home page, and nobody looked at them. When we moved them to item pages, where customers had already reached the point of consideration, suddenly customers wanted the information.
I think of Wal-Mart TV in the same way. If we put TVs throughout the stores in locations that, like the home page, are heavily trafficked, then we’re just pushing a lot of content on customers who aren’t ready for it. But with technology moving in the direction that it is, we can really target the message and use the programming in much the same way we’ve used buying guides online to help customers make better decisions. We’re moving from big analog boxes that hang above your head to small LCD screens that can be placed at the point where the customer is making the decision. So the content in the food area is about meal solutions; the content in the apparel area is about how you put together new fashions to create a head-to-toe look.
The Quarterly: Let’s talk a bit more about Walmart.com. You have this rapidly growing dot-com business, as well as the largest store-based business in the United States. How do the two organizations work together?
John Fleming: Walmart.com was set up in 2000. During that time, there was a thought that the Internet was going to take over retail—bricks and mortar were dinosaurs. Walmart.com was set up as a separate company, with outside investors and with Wal-Mart owning a majority. The idea was that Walmart.com was going to tap into customers Wal-Mart didn’t have and, in doing so, would defend our position as the world’s largest retailer.
We saw very quickly that this wasn’t how customers viewed the online channel. Within six months, Wal-Mart bought back the outside interest. Since that time, our value proposition at Walmart.com has been about providing Wal-Mart customers with access to more of Wal-Mart—creating Web applications that are easy to use and giving customers access to things they can’t get in a physical store.
The interesting thing is how my view of Walmart.com changed over time. Initially, I saw it as a commerce vehicle, but it’s actually more valuable to Wal-Mart as a marketing channel. We have about 20 million customers who shop at Walmart.com, and 94 percent of those customers also shop at Wal-Mart once a month. These are Wal-Mart shoppers who are looking beyond the store for things that the online channel can provide—whether it’s information, additional services, or assortments. We carry over 1.2 million SKUs online, as opposed to an average of 130,000 SKUs in stores. And online, we can also see the things consumers are looking for that we don’t carry. So whereas we used to see Walmart.com as just another channel, now we see it as a complement to the stores and to the Wal-Mart brand.
The Quarterly: Now that you’re the chief merchandising officer, how do you think about the relationship between marketing and merchandising?
John Fleming: When I was chief marketing officer and went out on the circuit, the title of my talk was generally, “Think like marketers but act like merchants.” Marketers are very strategic; they use a lot of data to make decisions and are very focused on customers. Merchants are intuitive and will make fast decisions, without a lot of information, in response to changes in the marketplace. One of the frustrations early on for me as I brought in a lot of well-trained marketing people was that they were very focused on a year from now. But in retail we’re focused on next weekend. So we came up with the phrase “code blue,” which meant, “We have to do it tomorrow. Stop everything you’re doing and respond.” That’s not, typically, the way most marketers operate.
The Quarterly: What were your priorities as you were building your marketing team?
John Fleming: On the marketing strategy and customer insights side of the organization, we looked for people with a lot of packaged-goods experience. That’s classic marketing, with a lot of great discipline. Then, as we got into marketing communications, we were looking for more creative profiles: people with advertising agency experience, people from retail—even manufacturing. Overall, I was looking for diversity of thought.
The other day, I was telling someone about a book about the store where I previously worked—Marshall Field’s. The title was Give the Lady What She Wants.² That’s still what retail is all about, and I think it also speaks to the broad range of skills we need at Wal-Mart. We have around $350 billion in sales, a couple of big channels, 130,000 SKUs per store—and we’re building 300 stores per year. To focus effectively on discrete segments in basically every business known to retail, we need a wide variety of skills in different marketing fields.

https://www.mckinseyquarterly.com/Marketing/Strategy/Confronting_proliferation__in_retail_An_interview_with_Wal-Marts_John_Fleming_2022

 

The promise of multichannel retailing

In a year of doom and gloom for retailers, the continued emergence of online sales has been a bright spot. Why then do so few companies get true multichannel retailing right?

OCTOBER 2009 • Steve Noble, Amy Guggenheim Shenkan, and Christiana Shi

Source: Retail Practice

If one certainty about economic downturns is that they end, another is that traditional retailers recover slowly. In the United States, for example, only 25 percent of drugstores, 40 percent of mass retailers, and 60 percent of specialty-apparel retailers returned to pre-recession growth rates within five years of the 2001 downturn.¹ That’s time retailers can’t afford. The period when an economy emerges from a recession is pivotal to determining retail’s winners and losers, and our research suggests one of the keys to securing this success is to maintain investments throughout the business cycle. We believe that for companies coming out of the current recession, investing to build robust multichannel capabilities provides an attractive opportunity for retailers to set themselves apart from their peers.
For all the difficulty retailers have experienced in the past year, online sales have continued to be a bright spot: while overall sales have generally fallen in the United States, online sales have actually been increasing since the start of 2009.² In fact, the percentage of total sales made online continues to increase, and our research also shows that more and more consumers are using the Internet to investigate products they later buy in stores. By 2011, we believe the Internet will play a role in more than 45 percent of US retail sales, as either a research tool or a sales channel. What’s more, consumers who shop across a number of channels—physical stores, the Internet, and catalogs—spend about four times more annually than those who shop in just one (exhibit). Companies that get multichannel retailing right can enjoy larger profit margins and yearly revenue growth more than 100 basis points higher than companies that don’t.

So, why do so few retailers actually get it right? The challenge is that while making sales through a number of independent (or, at best, loosely connected) channels is relatively easy, capturing the full benefits of multichannel retailing in its true form involves much more than simply publishing a catalog or replicating an in-store product assortment online and assuming that consumers will click and buy. The kind of multichannel retailing that fuels sustainable growth and margin expansion requires a tightly integrated strategy across all channels, including physical stores, catalogs, the Internet, and mobile—and even homes, in the case of certain service offerings. Each channel needs to play a clear (and often quite distinct) role in supporting and reinforcing a retailer’s overall brand equity.
To understand the different ways this approach works in practice, consider the multichannel strategies of the Swedish home products group IKEA and the US department store chain JCPenney. IKEA uses its Web channel primarily to support its stores—in fact, it does not offer online sales in many countries where it operates. Instead, ikea.com primarily provides information that reinforces the company’s reputation for innovative products and low prices, as well as real-time store inventories and shelf locations that help customers plan store visits. By contrast, JCPenney has leveraged its legacy as a successful catalog merchant into a tightly integrated cross-channel commerce offering. Stores are outfitted with Web kiosks, and all point-of-sale terminals have Web access so customers can easily purchase product categories, styles, and sizes not available in stores. JCPenney is even testing a system that allows customers to scan coupons in the store that have been sent directly to their mobile telephones. What’s important is that each of these channels builds upon JCPenney’s overall “fashion at a value” brand equity by highlighting exclusive brands and deep promotional pricing.
As illustrated by these two examples, there is no one-size-fits-all approach to developing a strong multichannel strategy, but in our experience successful efforts typically involve many of the following steps:

• Understand how consumer, technology, and competitive trends are evolving. Consumer shopping behavior, for example, has changed dramatically given the ease and power of Internet access.³ Companies must adjust their marketing mix and channel strategies to better serve those customers.
• Develop a clear sense of the growth pockets being targeted. Is the multichannel strategy designed to acquire new customers online, or is the ambition to capture a greater share of the overall spending of current in-store customers by also meeting their online shopping needs?
• Sell the right products through the right channels by tailoring each category’s product assortment to the economics of different channels and making it easy for customers to buy what they want, when they want, where they want. Critical as well are sound pricing logic across channels and features such as the ability to order from Web sites while in stores.
• Understand the value of growth options and rank them by their potential returns and relative difficulty. Systematically analyzing different options enables companies to make trade-offs, such as deciding whether to invest in mobile commerce or instead to aim for driving higher in-store sales.
• Define success, measure performance, and reward it. Retailers need to focus on capturing that success by changing the organizational design, incentives, or both. To change behavior, you must first change incentives.

None of these methods is easy, and we’re working with companies to shape the focus and extent of their multichannel investments, understand and maximize financial impact on a category-by-category basis, and identify and overcome the hurdles that can prevent companies from unlocking multichannel’s full potential. We firmly believe that getting multichannel right is worth the effort: if correctly planned and executed, a truly integrated multichannel strategy will help a retailer not only maximize its share of a customer’s wallet over time but also emerge from the current recession stronger and more rapidly than its peers.

https://www.mckinseyquarterly.com/The_promise_of_multichannel_retailing_2448 

How the recession has changed US consumer behavior

Companies waiting for a return to normality following the recession may be disappointed. Their customers have tried cheaper products—and actually like them.

DECEMBER 2009 • Betsy Bohlen, Steve Carlotti, and Liz Mihas

Source: Retail Practice

While the downturn has certainly changed the economic landscape, it may also have fundamentally altered the behavior of numerous US consumers, who are now learning to live without expensive products. Many companies with strong premium brands are anticipating a rapid rebound in consumer behavior—a return to normality, as after previous recessions. They are likely to be disappointed.

New McKinsey research¹ found that, in any given category, an average of 18 percent of consumer-packaged-goods consumers bought lower-priced brands in the past two years. Of the consumers who switched to cheaper products, 46 percent said they performed better than expected, and the large majority of these consumers said the performance of such products was much better than expected. As a result, 34 percent of the switchers said they no longer preferred higher-priced products, and an additional 41 percent said that while they preferred the premium brand, it “was not worth the money.”

As a result, a growing number of consumers are now in play. The percentage up for grabs varies by category and depends on how many consumers switch from higher-priced brands, their experience with cheaper ones, and the way they revise their buying intentions. We found, for instance, that only 12 percent of beer buyers switched to cheaper brands. Of those, 31 percent said that their experience was more positive than they had expected, which means that only about 4 percent of customers are in play. Among buyers of cold and allergy medicines, however, we found that more than 20 percent tried a lower-priced option, and 48 percent of those consumers said the experience was better than expected. That means 10 percent of the people who buy cold and allergy medicines are now in play.

In industries where consumer shifts as small as 1 percent can severely dent the profitability of brands, these changes are significant enough to alter market dynamics and force brand leaders to respond. Earlier this year, P&G, for example, released Tide Basic, a cheaper version of its category-leading Tide laundry detergent, after Tide’s sales began to decline as consumers switched to less expensive brands.²

For companies attempting to address the change in consumer behavior, understanding the economic theory that explains why it is now shifting can help to inform decision making. Textbook theory posits that changes in the relationship between how much consumers are willing to pay, on the one hand, and their perception of the value they are receiving, on the other, underpins behavioral changes. As the exhibit shows, if consumers perceive enough value in a premium-brand product (Product A), they will favor it over the product of a more basic brand (Product B), despite the premium product’s higher price. In a recession, though, consumers become less willing to pay more—the slope of the demand line flattens, and the preferences of some consumers begin to shift from Product A to Product B.

Normally, the premium-brand product would return to favor as the economy bounced back. But the central implication of our research is that even if the willingness of consumers to pay rebounds as the economy does, changes to their perceptions of the value of lower- and higher-priced products may fundamentally alter what they choose to buy. That’s troubling for consumer-packaged-goods companies whose brands command premiums. If consumers see no legitimate reason to stick with such products, the premiums will slowly erode, and profit margins will shrink until category competition is determined mainly by price. A prime example is processed meats and sliced cheese, where the difficulty of demonstrating a product’s superiority means that there’s little scope for brands to differentiate by price. As a result, gross margins in these categories trail those of other branded foods.

Our experience in the consumer-packaged-goods sector suggests two priorities for companies addressing this fundamental shift in consumer behavior. The first is undertaking a situation assessment to understand a category’s dynamics at a greater level of detail than can be achieved anecdotally or through survey research. Such an assessment involves analyzing purchasing behavior and motivations to determine how consumer requirements are changing and the effect of these changes on lower- and higher-priced products.

In our survey, for example, while most consumers said that the quality of the lower-priced brand was higher than expected, their precise reasons varied. More than 33 percent of bottled-water users discovered that they no longer needed some of the benefits the higher-priced brand provided. Nearly 32 percent of facial-moisturizer consumers felt better about using the lower-priced brand than they had thought they would. What companies need is a fact-based understanding of the principles of typical consumer behavior to gauge how the willingness to pay for additional benefits has changed (illustrated in the exhibit by the slope of the line), the experience consumers have with products, and how perceptions of their value have changed.

The second step is developing action plans based on consumer dynamics and how well positioned products are for recovery. That means deciding where to position them in a way that will optimize the trade-off between prices and benefits, on the one hand, and margins and volumes, on the other. In the case of bottled water, the best response may be a lower-priced product that addresses the needs of consumers who no longer see the value in additional brand benefits. Yet decisions must also take into account the broader category strategy. We believe there’s an opportunity to identify and increase participation in categories that have the potential to recover more rapidly and fully while minimizing exposure to those that have a lower chance of recovery or can recover only at the cost of brand or category economics. Looking at the exhibit, this means that brand portfolios should be aligned around categories with smaller changes in slope and where consumers have less positive experiences with lower-priced products.

These steps are applicable beyond consumer packaged goods. There’s evidence that the shift of consumers away from more expensive products is a widespread trend. In the consumer electronics industry, for example, McKinsey research found that 60 percent of consumers were more interested in a core set of product features at a reasonable price than in the bells and whistles of the latest and greatest technology at a higher price.³ Similarly, in the building-products industry, there is a trend away from premium-priced design features and toward simpler, more basic designs. Understanding this challenging shift in consumer behavior is necessary for companies to compete successfully.⁴ It represents an opportunity for those that respond quickly and effectively to differentiate themselves from their peers.

https://www.mckinseyquarterly.com/Retail_Consumer_Goods/Strategy_Analysis/How_the_recession_has_changed_US_consumer_behavior_2477?gp=1