6 underlying logics for retail enterprises to achieve new growth in 2023

At present, the market environment is still changing. Recently, many provinces have further relaxed the control measures against the new crown epidemic, and people's lives and business life have gradually returned to normal. So how should retailers achieve new growth in the post-epidemic era?

In recent years, the macro-economy has faced many uncertainties. Although the overall consumption fundamentals remain sound, the recovery of consumption has slowed down due to the impact of the epidemic, and the impact on the retail industry is particularly evident.

Bain & Company once summarized: After the outbreak of the epidemic, changes in consumer behavior and preferences will further affect the competitive landscape of the retail industry, the market competition landscape will intensify, industry concentration will accelerate, and the Matthew effect may become more obvious.

In the past three years, we have seen that whether it is the omni-channel platforms that have grown rapidly during the epidemic, large-scale national retailers with a scale base, regional retailers with geographical advantages, or traditional retailers focusing on offline stores, they are all attempting various reforms around the three elements of "people, goods, and places."

However, it is not easy for large-scale retailers to successfully achieve transformation and change overnight. As the saying goes, "it is difficult to turn a big ship around." The larger the scale, the more difficult it is to coordinate change.

Bain's research on leading retailers found that although some leading retailers are aware of the importance of transformation at the strategic level, it is not easy to carry out "model innovation" while doing a good job in "daily operations" at the level of change execution. Once they lose their composure and lack determination, all their previous efforts will be wasted.

Therefore, Bain recommends that retail enterprise management should clearly distinguish the strategic significance of "daily operations" and "model innovation", establish a dynamic management system for enterprise transformation, and carry out rhythmic changes:

Taking cities or stores as units, we conduct agile innovation pilot projects, quickly review and iterate the results, create an innovation management rhythm of "small trial, medium trial, large trial", and then expand the scale after it is successfully implemented, ultimately forming a systematic transformation.

1. Current situation and challenges of the retail industry under the epidemic

Data shows that the average annual compound growth rate of the total retail sales of consumer goods in China from 2020 to 2022 is 4.4% (8.9% from 2016 to 2019). Overall, the performance of retail enterprises is poor, and the performance of leading retail enterprises continues to be under pressure.

Taking offline retail as an example, Bain's research shows that the total operating income of the top ten chain supermarkets in 2021 fell by 2% year-on-year, and the overall profit pool fell by 120% . Among them, the profit margins of 9 companies in 2021 were on a downward trend year-on-year, and 5 companies had fallen into a loss-making state; although profits rebounded in the first half of 2022, there was still a big difference from 2019.

From the perspective of store operations, the net increase in the number of stores of the 10 leading chain supermarkets in the first half of 2022 was negative for the first time, with a decrease of 130 stores , and the average single-store operating income turned from positive to negative since 2019. This is also reflected in the capital market's valuation of retail companies: in 2022, the market value of 8 of the 10 leading offline retail companies fell sharply compared with 2019.

Online retailers are not optimistic either. During the just-concluded Double 11 Shopping Festival, none of the leading e-commerce platforms released GMV (gross merchandise volume) data; while new retail companies such as online fresh food and community group buying are still working hard to achieve a break-even point.

In the current retail environment, store traffic has not yet fully returned, home delivery business has not yet been fully implemented, and traditional retail companies focusing on fresh food and fast-moving consumer goods are gradually showing "incompatibility", with the main pain points concentrated in three aspects:

1. Low customer acquisition efficiency : The traditional offline model of attracting surrounding customers by "location" is not efficient enough and is seriously diverted by online traffic. The cost of online customer acquisition is high, and the exit of players such as Miss Fresh and Shihuituan shows that the customer acquisition method that relies on burning money and subsidies is unsustainable.
2. Product homogeneity : The product selection model and procurement channels are basically the same. It is difficult for companies to form significant differentiation advantages in terms of products. Ultimately, they still have to achieve conversion through lower prices, which puts profits under continuous pressure.
3. Growth encounters bottleneck : Faced with challenges from local leading retail companies, traditional supermarket retail giants find it difficult to establish cross-regional operational efficiency advantages through large-scale cross-regional expansion; the economic model of the home delivery business/community group buying business, which has been placed with high hopes, is affected by factors such as average customer spending and gross profit, and has not yet been fully implemented.

2. Potential Ideas for Retail Enterprise Transformation

Bain believes that retail companies can think about how to stand out from the crowd from two levels .

First, how to return to the essence of business and achieve store return through business model upgrading?

Second, how can we manage daily operations and model innovation at the same time through rhythmic change management?

In this regard, we have summarized the six core elements of business model upgrading and the change management ideas that support the transformation of these core elements.

Potential ideas for retail enterprise transformation

Core element 1: From “one size fits all” to “people are divided into groups”

Change the previous attempt to serve nearby neighbors indiscriminately, clearly define your core customer base, explore their preferences and needs, and at the same time consolidate differentiated value propositions in terms of products, prices and promotions, and strive to increase the wallet share of core customers.

When defining the above differentiated value proposition, companies also need to take into account the key demands of non-core customers. Although they do not seek to fully meet their expectations, they need to tap into the potential synergy between them and core customers.

Take a supermarket in China as an example. First, the supermarket defined its core customers based on consumer attributes and consumption behaviors: middle- and high-income, middle-aged and young families with children. By studying the expectations of the core customer groups, it redefined its brand value proposition - focusing on providing high-quality products, improving the store shopping environment, and supplementing service facilities for children, while not pursuing absolute low prices.

Bain's recent consumer research on leading retailers shows that this new value proposition has not only comprehensively improved the satisfaction of the supermarket's core customer base, but also taken into account the important expectations of non-core customers, laying a good foundation for the retailer's performance improvement.

Core element 2: From “price marketing” to “building brand loyalty”

Break out of the cycle of promotions and spending money to attract customers, and by forming unique selling points in terms of price, product mix, shopping experience, membership programs, convenience, etc., and conducting brand marketing activities around the selling points for target consumers, establish a broader long-term relationship with consumers and transform it into a valuable differentiated competitive advantage, attract high-quality core customers to the store, and further enhance their loyalty and wallet share.

Bain's recent consumer survey of leading retailers also showed that price is no longer the main reason for the gap in brand loyalty performance (NPS value).

Retailers that perform particularly well, that is, retailers with high NPS values, their target customers do not choose them only because of price. In fact, price is almost the only factor. Relatively speaking, customers make their choices based more on factors such as the retailer's product quality, category, and membership program.

Core Element 3: From “sedentary merchants” to “mobile merchants”

Instead of relying relatively passively on the competitive sales policies and terms of various brands and suppliers, retailers should step out of their comfort zone and take the initiative to build a unique product moat - clarify the positioning and strategic role of each category based on the needs of the core customer base. On this basis, focus on developing private-label products or cooperating with suppliers to create exclusive products, and actively develop new suppliers (such as direct purchases from the origin of fresh produce, exclusive sources of imported goods, etc.) to consolidate a differentiated product portfolio.

Take Sam's Club as an example. It uses its own brand Member's Mark to create a differentiation strategy to attract middle-class consumers in families. Currently, on average, about 20% of the SKUs in each store are own brands, contributing about 30% of sales. At the same time, it actively cooperates with domestic suppliers to develop products that focus on the Chinese market. For example, Member's Mark cooperated with Wufangzhai's factory to develop rice dumplings, etc., to increase consumer stickiness.

Core Element 4: From “Category Management” Thinking to “Single Product Operation” Thinking

We will finely calculate the economic benefits of individual products, optimize the pricing and promotion models of individual products , establish a strict commodity racing and last-place elimination mechanism internally, and shift from selling shelf space to selling attractive product combinations; at the same time, we will improve the assessment methods , from tracking the overall performance of the shelf to the performance of individual products, so as to achieve more refined management.

Compared with traditional stores that have nearly 10,000 SKUs, Sam's Club currently has an average of only about 4,000 SKUs per store. The company will continue to track the performance of individual products and the needs of members, constantly updating the product mix to give consumers a sense of freshness while establishing the most optimized product mix.

It should be pointed out that not all stores are suitable for creating a warehouse membership model, but Sam's single product operation thinking is of great reference value.

Core Element 5: Shift from “omni-channel slogan” to “omni-channel operation”

Integrate the online and offline operation teams to provide consumers with a consistent omni-channel consumption experience in terms of products, discounts, and after-sales service, achieve a seamless online and offline consumption journey and store-warehouse integration, and establish true "omni-channel retail"; at the same time, set more rational omni-channel goals, and transform from blindly pursuing GMV growth to omni-channel profitability.

Take Yonghui as an example. In the first half of 2022, the average customer price of Yonghui's online home delivery business reached 83.5 yuan, and the home delivery business will be gradually implemented; mainly relying on the selection of key cities to make efforts first, Yonghui has opened up a 800-1,000 square meter forward warehouse in Fuzhou using existing stores, and has connected the operation team to achieve store-warehouse integration, using the advantages of a large store base to generate economies of scale, operating 7,000-8,000 SKUs that meet the needs of online users, and the average daily order in Fuzhou can reach about 100,000 yuan.

Core Element 6: From “Scale Growth” to “Winning by Relative Market Share”

Gradually reset the network layout of the original terminal stores, establish regional competitive advantages (relative market share) in key markets, increase brand mind share on the revenue side, improve bargaining power with suppliers on the cost side, promote supply chain efficiency, and achieve greater operational synergy effects; at the same time, do a good job in classifying store groups, clarify store roles (such as experience stores, flagship stores, forward warehouses, etc.) to meet regional diversified needs.

In 2003, the US supermarket chain Supervalu and retail and wholesale supplier C&S exchanged assets; Supervalu acquired C&S's business in Fleming's Midwest, while C&S acquired Supervalu's business in New England. The asset exchange effectively improved the local market share and logistics distribution efficiency of the two companies, thus achieving a win-win situation.

3. Change Management: From "Traditional Management System" to "Dynamic Management Two-pronged System"

As mentioned earlier, it is difficult and complex for large retailers to achieve successful transformation.

For management, first of all, it is necessary to clearly distinguish the strategic significance and evaluation criteria of "daily operations" and "model innovation". Secondly, it is necessary to establish a rhythmic change management capability, conduct agile innovation pilots in cities or stores, and quickly review and iterate the results, so as to create an innovation management rhythm of "small trial, medium trial, and large trial", and then expand the scale after running smoothly, so as to finally form a systematic transformation.

Dynamic management system for enterprise transformation

The complex and changing market environment continues. With the further relaxation of control measures on the new coronavirus epidemic in many provinces recently, major business activities and people's lives are expected to gradually return to normal.

When prosperity and bustle return, how can retail companies establish and consolidate advantages over their competitors? Bain recommends thinking about the following questions in advance:

• In this round of market downturn, what shortcomings have been exposed in terms of corporate strategy, operational capabilities and support systems? In order to cope with future transformation and operations, what aspects need to be addressed and improved?
• In the difficult changes, how can we preserve our strength and accumulate more "ammunition" for future battles - how can we improve operational efficiency and at the same time streamline unnecessary expenses?
• What is the blueprint for the future business model? How can the different elements of people, goods and venues be upgraded to regain customer flow?
• How can we better grasp the rhythm of business model transformation and achieve a virtuous cycle with daily operations?

Tell me quickly, in the post-epidemic era, what do you think the growth of the retail industry will rely on?

Author: Han Weiwen, Liu Yang, Yang Dakun, Wu Hao

Source: WeChat public account "New Retail Business Review (ID: xinlingshou1001)"