Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail-18 FEB 2013

Supply Chain Metrics That Matter:
A Focus on Brick & Mortar Retail
Using Financial Data from Corporate Annual Reports to
Better Understand Brick & Mortar Retail

2/18/2013

By Abby Mayer
Research Associate

Supply Chain Insights LLC

Contents
Research ................................................................................................................................... 2

Disclosure .................................................................................................................................. 2

Research Methodology .............................................................................................................. 2

Executive Overview ................................................................................................................... 3

Understanding the Brick & Mortar Space ................................................................................... 4

Growth: Will it Recover?............................................................................................................. 6

Cycle: The Truth on Inventory .................................................................................................... 8

Profitability: Low Margins ........................................................................................................... 9

Case Study ............................................................................................................................10

Complexity: Past Excellence Leads To… .................................................................................. 11

Evolving to Compete .................................................................................................................12

Recommendations ....................................................................................................................13

Conclusion ................................................................................................................................14

Appendix ...................................................................................................................................15

Company Profiles ..................................................................................................................15

Other Reports in this Series:..................................................................................................16

About Supply Chain Insights LLC ..............................................................................................17

About Abby Mayer .....................................................................................................................17

Copyright © 2013 Supply Chain Insights LLC Page 1

Research
Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply
Chain Insights LLC. They are a deep focus on a specific industry.

These reports are based on data collected from financial balance sheets and income
statements over the period of 2000-2011. In these reports, we analyze supply chain
effectiveness to balance profitability, growth, complexity and cycles through the comparison of
supply chain ratios by peer group.

Within the world of Supply Chain Management (SCM), each industry is unique. We believe that
it is dangerous to list all industries in a spreadsheet and declare a supply chain leader. Instead,
we believe that we have to evaluate change over time by peer group. In this series of reports,
we analyze the potential of each supply chain peer group, share insights from industry leaders
from each industry, and give recommendations based on general market trends.

Disclosure
Your trust is important to us. As a research analyst firm, we are open and transparent about our
financial relationships and our research processes. This independent research is 100% funded
by Supply Chain Insights.

These reports are intended for you to read, share and use to improve your supply chain
decisions. Please share this data freely within your company and across your industry. As you
do this, all we ask for in return is attribution when you use the materials in this report. We
publish under the Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United
States and you will find our citation policy here.

Research Methodology
The source of information for this report is publicly available from corporate annual reports of
brick & mortar retailers from the period of 2000-2011. At Supply Chain Insights, we have
invested in building a database of 21 financial ratios that we mine as part of our research
process.

In this report, we take a closer look at retailers including those operating in the grocery, mass
and specialty industry segments. We do not believe that all retail companies can be grouped


together for comparison, but we do believe that the comparison of general trends across the
industry is useful.

In picking companies for the Supply Chain Metrics That Matter reports, we identify two
companies ranked on the 2011 Global 500 operating within the industry or industry segment of
focus. We augment these companies with hand-selected companies that we believe provide
meaningful comparison. Each analysis in this report is based on four companies operating
within each industry segment. Specific information for each company profiled is presented in the
Appendix.

To help the reader, we include metrics representing complexity, cycle, growth and profitability.
We believe that metrics should be evaluated as a holistic system. We use the financial data to
help readers learn from past trends, better understand current operating environments, and
provide recommendations for the future. We augment the financial data analysis with
information from our quantitative and qualitative research studies as well as our work with
clients operating within the industries.

Executive Overview
The bricks and mortar retailer is being squeezed. Growth is slowing and margin is under
pressure. With the rise of e-commerce, the role of the store is being redefined. It is about
service and the customer experience. As a result, it is time to rethink the metrics that matter
and focus outside-in on the shopper experience.

In this report, we share insights on the current state of bricks and mortar retail and offer our
suggestions.


Understanding the Brick & Mortar Space
"Online-only retailers have, by and large, been the winners to date in the ongoing
retail revolution that continues to see the volume of goods bought online grow and
grow, however traditional bricks-and-mortar retailers are starting to fight back by
investing in services and technologies that will help them remain both profitable
and relevant."

• Craig Sears-Black, UK Managing Director, Manhattan Associates 1 1

Brick & mortar retailers have weathered an intense decade with the persistent rise of e-
commerce. The shopper has changed and recovery from the Great Recession is ongoing, but
slow. Our previous Supply Chain Metrics That Matter: A Focus on Retail report focused on the
broader industry trends affecting five different divisions of retailers and the challenges of multi-
channel retail. This report narrows the focus to three segments of brick & mortar retailers
struggling to adapt to the new world.

A retailer is not a retailer. We believe that retailers should be compared by business model. We
do not believe that one can throw all retailers together and identify the “most improved” or “best”
supply chain. There are too many variables and circumstances affecting the retail landscape to
make valid comparisons. In our research, we find that small and well-defined peer groups offer
the best way forward for understanding both segment and industry specific trends.

The industry segments analyzed in this report are grocery, mass and specialty. Grocery retailers
are involved in the sale of perishable and non-perishable food stuffs. Mass retailers are larger
companies focused on providing a comprehensive retail experience to their customers. Finally,
specialty retailers are dedicated to specific customers, activities and goods. The companies in
this analysis represent both American and global retailers.

Our grocery peer group consists of Carrefour, Delhaize Group, Safeway and The Kroger Co.
The mass retailer peer group includes Costco, Metro, Target and Walmart. The choice of
specialty retailers was by far the most difficult because there are so many dedicated stores in
this category. For this publication, our peer group includes Bed Bath & Beyond, Dick’s
Sporting Goods, Foot Locker and Ross Stores. Additional information about all of these
companies is presented in the Appendix.

Table 1 illustrates the state of the industry and three key metrics that help to explain the
changing face of retail from 2000 to 2011. These metrics are days of inventory (DOI), operating
margin and revenue per employee.

1
Supply Chain Standard. “Tougher competition for online retail.”
http://www.supplychainstandard.com/Articles/4332/Tougher+competition+for+online+retail.html


Table 1. Retail Segments Financial Metrics (2000-2011)

Change has occurred rapidly in the retail arena over the past decade. Average operating margin
for retailers is very low, in the single digits. Today, retailers are squeezed between
manufacturers’ rising costs and consumers’ demand for the lowest prices. They are being
attacked in center store. Showrooming, comparative price shopping and cross-channel buying
are all transforming the retail business for brick & mortar.

In table 1, we note three trends. There is a pressure on margins. Productivity is increasing, but
not at the rate of the manufacturing supplier, and Days of Inventory is improving.

Surprisingly, we find that most supply chain leaders have not looked at financial supply chain
metrics in aggregate and that many are surprised by these results. A project-based mentality
has limited our ability to track long-term trends in inventory management and other metrics and
the gains from projects have often been exaggerated and oversold.

Operating margin shows both negative and positive movement among the industry segments
profiled above. While two of the three industries have seen increased margin, operating margin
remains in single digits for the majority of brick & mortar retailers.

Finally, all segments indicate large gains in revenue per employee. Revenue per employee is a
measure of business complexity as well as a proxy measure for successful implementation of
Enterprise Resource Planning (ERP), Advanced Planning Systems (APS) and other IT systems
implemented over the preceding decade. Moving forward, these systems will become more
necessity than luxury and we expect to see less consistent growth in revenue per employee.

Most importantly, table 1 illustrates large fluctuations and the high level of instability within the
brick & mortar space. Online retail is here to stay, but that does not sentence brick & mortar


retailers to a long, slow decline. We believe that new innovative techniques from various
companies, industries and even e-commerce companies themselves, offer a strong prescription
for brick & mortar to move forward with newfound strength. Here we present the financial
metrics that tell that story and the role supply chain can play in that transformation.

Growth: Will It Recover?
Brick & mortar retailers have been squeezed from all sides over the past decade. There is
pressure from upstream manufacturers as well as downstream customers. In addition, the most
dangerous force has come in the rise of e-commerce sites, such as Amazon.com, eBay, and a
multitude of others offering shopping in pajamas and home delivery with a simple click of a
mouse. Figure 1 illustrates the trend in year-over-year sales growth for the three segments of
retail profiled in this report.

Figure 1. Year-over-Year Sales Growth (2000-2011)

The overall trend is both rocky and downwards. The Great Recession dealt a serious blow to
brick & mortar retailers as consumers adapted to a new normal with lower discretionary
spending. Interestingly, grocery retailers started and ended the decade with the lowest
comparable sales values, compared to specialty which retained top billing, but dropped from
14% in 2002 to 9% in 2011.


It is time to redefine the store for service. While we believe the most recent recession is firmly
behind us and spending patterns should increase in the near future, there will not be a return to
the age in which brick & mortar reigned supreme. It is time to deliver on the cross-channel
experience. Amazon.com and other retailers have a strong foothold in the market and will
continue to expand their business. Even now, consumer products companies are seeing up to
2% market share through Amazon.com. This was unheard of as recently as five years ago.

Even in an environment of low growth and increased competition, we believe a variety of
opportunities exist for grocery, mass and specialty retailers. Accepting online competition as
here to stay is the first step in understanding the new landscape. Quite simply, what works for
online-only retailers is also a valid approach for brick & mortar retailers. With the blurring of our
digital and physical lives, it is imperative that brick & mortar retailers adopt some tactics of
online retailers, including home delivery, personalization of service and a focus on convenience.

Furthermore, the value network needs to be redesigned outside-in to deliver the cross-channel
experience. Figure 2 illustrates the separate channel orientation that has historically dominated
the retail space. While this has worked in the past, it is no longer a viable format for retail
organizations moving towards Supply Chain 2020.

Figure 2. Traditional Retail Format

The new retail orientation will stretch from customer’s customer to supplier’s supplier. Not only
is the retail value chain expanding both up- and down-stream, but the opportunities from multi-
channel selling and fulfillment present an additional opportunity for companies willing to take the
plunge. Refer to figure 3 to understand the changes successful brick & mortar retailers will
tackle now to prepare for the future.


Figure 3. Rethinking the Retail Format

Cycle: The Truth on Inventory
As referenced earlier, inventory statistics have been too often oversold and exaggerated. Many
supply chain leaders believe that we have reduced inventory by half or more over the past
decade. However, analysis of financial balance sheets and income statements tells a much less
rosy story. Days of inventory are down slightly. Much of the inventory reduction has been
accomplished by shifting it backwards in the channel.

For most retailers, inventory management remains an area with a lot of room for improvement.
Grocers have demonstrated the greatest improvement in retail with a 21%decline in DOI.
However, this is well below the level most supply chain leaders believe we have achieved.

Table 2. Days of Inventory (2000-2011)


True inventory management for many retailers remains a low-hanging fruit. While technology is
an important enabler for improving inventory management, it is not enough. Open
communication throughout the enterprise and the external value chain in the form of S&OP,
Collaborate Planning, Forecasting & Replenishment (CPFR) and other techniques hold potential
for freeing cash flow from back room inventory stores. This is an opportunity that must be
capitalized upon.

Profitability: Low Margins
The margins for brick & mortar retailers have been and will continue to be low. Table 3 illustrates
the changing values for operating margin over the preceding decade.

Table 3. Operating Margin (2000-2011)

For the three segments profiled in this report, operating margin is low, but not dramatically
decreasing. Industries with low margins operate with less wiggle room than other industries and
retail is no exception. Supply chain management has historically played an important role in the
profitability of retail enterprises. This fact is not changing.


Case Study
The following case study examines the relationship between operating margin and store count
for the grocery retail peer group. While these are common metrics on their own, we believe this
comparison offers a new perspective on the different factors affecting operating margin in the
retail space.

Figure 4. Operating Margin/ Store Count (2000-2011)

In the figure above, we see a slow but consistent decline in the ratio of operating margin to store
count. When we dig deeper into the numbers, we see two trends that help to explain this.
Operating margin for grocery retailers is declining and store count is increasing. The result is
that these four grocery companies have all seen steady decreases in their operating margin as
compared to the number of stores they operate on a global level.

This is not to say that expanding global reach is a bad strategy for retailers. In fact, it is tried-
and-true. However, it is a worthy relationship to consider that increasing store count usually
occurs in tandem with decreasing operating margin. Business success through improved supply
chain processes is a game of tradeoffs and this is simply a more unique look at the tradeoffs
business leaders struggle with every day.


Complexity: Past Excellence Leads To…
One of the most common and universally applicable metrics across peer groups, regardless of
industry, is revenue per employee. This metric illustrates what a given company or industry
segment is able to achieve with their manpower. Through our analysis of financial history over
the preceding two decades, we have found that revenue per employee is often a good proxy
measure for ERP and APS systems. This holds true for brick & mortar retailers, as well.

Figure 5. Revenue per Employee (2002-2011)

The past decade has seen a steadily climbing value for revenue per employee across the
industry segments. However, we do not expect this trend to continue indefinitely and we may be
reaching our limit even now.

The IT systems that have made this improvement possible are still necessary, but no longer
sufficient to drive greater gains. New technologies and analytics encompassing big data,
demand and supply sensing, and increased visibility into customer sentiment are the next step
necessary to continue to drive increased revenue per employee performance. We would
encourage retailers to step beyond the buzzwords and begin understanding the new offerings in
the market place. They may seem futuristic, but the future is now.


Evolving to Compete
While the challenges are many, so are the opportunities. Brick & mortar retailers can adapt to
this new retail landscape by mixing a bit of the old with a bit of the new.

Multichannel delivery is becoming more important and a key strategy for competing with online
vendors. This means that retailers will have to refine inventory management and customer
service channels to meet the changing demands and communication styles of customers. This
cannot be done with a project-based mentality; but, will require an entire redesign of the retail
supply chain with a focus on the consumer leading backward to the supplier’s supplier. Once
again, we would refer leaders to figure 3 for a conceptual representation of the new format. A
push-based supply chain is no longer competitive in today’s retail landscape, and those who
remain stuck with such systems will falter in the coming years.

Innovative retail models offer an additional avenue to combat the rise of online shopping as
explained by Dean Wyatt, Vice President of Business Development of Retail UK at DHL:

"Pop-up stores, smaller high street shops that stock one display item of each product,
order-in-store kiosks, and home delivery from the warehouse will become increasingly
popular as retailers seek to attract more customers through innovative retail models."
• Dean Wyatt, Vice President of Business Development of Retail UK, DHL2
2

Finally, retailers have long complained about the rise of showrooming. This occurs when
customers visit the brick & mortar location to feel and touch and interact with the product, but
ultimately go home and order from Amazon.com. Unfortunately, it is unlikely that we can
radically change customers’ behavior. Instead, brick & mortar retailers should see showrooming
as their opportunity to offer goods, services and experiences in-store that simply aren’t available
in an online shopping environment.

This would include options such as same-day delivery and installation, instant personalization of
goods and enhanced customer service based on personal relationships. Finally, brick & mortar
retailers have the ability of offer experiences unavailable from behind a computer. This includes
such varied techniques as wine tastings at the grocery store, complimentary bicycle repair
classes at the sporting goods store, or a dog groomer adjoined to the pet store. It is the job of
brick & mortar retailers to now offer an experience that can’t be bought from behind a computer
screen.

2
Retail Gazette. “Comment: Supply chain trends in 2013.” http://www.retailgazette.co.uk/articles/13314-
comment-supply-chain-trends-in-2013


Recommendations
Opportunities exist for brick & mortar stores that are willing to reinvent themselves in a more
sleek and optimized format for competition with online retailers. These are our
recommendations:

• Redesign the supply chain outside-in. The problems that retailers struggle with today
will not be solved by improving or optimizing the existing processes alone. Instead, there
is a need for a complete redefinition of the brick & mortar retail supply chain backwards
from customer’s customer to supplier’s supplier. For brick & mortar retailers to survive,
their business model must transition from a transaction to an experiential relationship
with customers. This starts with an understanding of who the customer is, what they
want, when they want it, at what price, etc. Structured and unstructured data from Point
of Sale (POS) to Twitter sentiment enables companies to listen and learn, if they are
willing to make the necessary investments.
• There is room for improvement in inventory management. Most supply chain
executives are surprised with balance sheet data that illustrates reported improvements
in inventory management have been chronically exaggerated. Excess inventory is not
only money tied up in a back room somewhere, but in this fast-moving retail landscape,
it is also likely to be quickly written off because of obsolescence issues. Over the past
decade it has become clear that inventory management cannot be improved with a
project approach, but requires constant attention and focus by all involved parties both
inter- and intra- enterprise.
• Understand the tradeoffs. Successfully managing a supply chain is like walking a
tightrope. Leaders understand the tradeoffs and the effect each decision may have on
the holistic enterprise. Laggards are whipped around by the supply chain due to a lack of
holistic thinking. As illustrated above, no company can be the best at everything; but the
best companies understand that and choose complimentary priorities.
• Redesign the role of the store. With the rise of e-commerce and the growth of multi-
channel retail, the store needs to be redesigned for service. Godiva, a manufacturer and
retailer of chocolates, saw a decline in chocolate sales in the store, and fought back by
offering a chocolate dipping bar. They drove traffic to the store by offering fresh fruits on
a dipping station. This drove foot traffic and improved store profitability. Increasingly, the
bricks and mortar retailer will be forced to rethink the role of the store to improve
profitability. We think that the secret is value-added services. Whether it is a wellness
clinic in a drugstore, a dog groomer in a pet store, or a cosmetic makeover in a


department store, more and more companies will be forced to introduce “services” to
drive foot traffic.
• Adopt e-commerce techniques. The strategies that have allowed the rise of e-
commerce can be adopted for use in brick & mortar stores, too. Increasingly, our digital
and physical selves are merging and retailers that understand and act on that evolution
will lead the pack. Personalization of services, as well as same-day or next –day home
delivery, are powerful value propositions for customers.

Conclusion
Brick & mortar retailers in the grocery, mass and specialty categories have weathered
tumultuous years with decreasing sales and increasing pressure from online peers. While e-
commerce is not a fading trend, there exists widespread opportunity for improved performance
of retail supply chains which will help brick & mortars compete in the new retail landscape.


Appendix

Company Profiles


Other Reports in this Series:
Supply Chain Metrics That Matter: A Focus on Retail
Published by Supply Chain Insights in August 2012.

Supply Chain Metrics That Matter: A Focus on Consumer Products
Published by Supply Chain Insights in September 2012.

Supply Chain Metrics That Matter: A Focus on the Chemical Industry
Published by Supply Chain Insights in November 2012

Supply Chain Metrics That Matter: The Cash-to-Cash Cycle
Published by Supply Chain Insights in November 2012

Supply Chain Metrics That Matter: A Focus on the Pharmaceutical Industry
Published by Supply Chain Insights in December 2012

Supply Chain Metrics That Matter: A Focus on Hospitals
Published by Supply Chain Insights in January 2013

Supply Chain Metrics That Matter: Driving Reliability in Margins
Published by Supply Chain Insights in January 2013


About Supply Chain Insights LLC
Supply Chain Insights LLC is a research and advisory firm focused on reinventing the analyst
model. The services of the company are designed to help supply chain teams improve value-
based outcomes through research-based Advisory Services, a dedicated Supply Chain
Community and public training. Formed in February 2012, the company is focused on
delivering actionable and objective advice for supply chain leaders.

About Abby Mayer
Abby Mayer (twitter ID @indexgirl), Research Associate, is one of the
original members of the Supply Chain Insights LLC team. She is also the
author of the newly-founded blog, Supply Chain Index. Her supply chain
interests include connecting financial performance and supply chain
excellence as well as talent management issues, and emerging markets.

Abby has a B.A. in International Politics and Economics from Middlebury
College and a M.S. in International Supply Chain Management from
Plymouth University in the United Kingdom. She has also completed a
thru-hike of Vermont’s 272 mile Long Trail, the oldest long distance hiking trail in the United
States. As part of the planning and food prep process, she became interested in supply chain
management when she was asked to predict hunger pangs for the entire three-week trip before
departure. If that isn’t advanced demand planning, what is?!?!


Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail-18 FEB 2013

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