RETAILNETGROUP STRATEGY ALERT No.

16 Issue
November 2008
Fending Off the Crisis: The Retailer Approach
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Greetings!

Last week we shared RNG's perspective on how consumers are reacting to In This Issue
one of the toughest economic environments we have seen in decades. The Retailer vs. Consumer
reality today is so unique that we have witnessed things that nobody could Approach
have seen coming - from bankruptcies among the largest firms on Wall Real Estate Changes
Street to the lowest Dow levels in years following extreme swings in the Supply Chain Changes
stock market. Retailers & Consumer Credit
In-Store Merch & Marketing
What this new reality tells us is that we cannot measure success the same Trip Marketing
way we have in the past, and just as likely that retailers will take a new How RNG Can Help
approach for solving this equation. As we near the end of 2008 we expect
to see several things happen in the marketplace - some of which are
Store Tours
already materializing.
10,000+ photos -
Please read on for our views on some of the key strategies retailers are Views of the most important
taking as they seek to optimize their businesses in the face of this new stores opened in North &
challenging consumer environment, and feel free to share yours. Latin America, Europe and
soon
Happy Thanksgiving to everyone - enjoy the holidays! the leading Asian markets

Dan O'Connor, Filter by department -

President & CEO Search/sort photos across
RetailNetGroup.com markets and
retailers by department (for
dan@retailnetgroup.com
brand managers looking for
great ideas)

Retailer Commercial Approach vs. Shifting "Best Ideas" galleries that

highlight the very best ideas
Consumer Behavior from across all of our store
galleries
We see five large overarching actions that retailers are undertaking - from On-Demand - Photos of any
re-thinking their global supply chains down to the shelf-level. But before store in most parts of the
we touch on those, there are a few examples on how retailers are reacting world in 72 hours or less.
today to the shifts in consumer behavior we talked about last week. Most
recently we have seen: Contact Mark Byrd to schedule
a demo or request more
• Share Grabs - HH Gregg is accepting Circuit City gift cards. Kohls information.
is opening stores in targeted markets and upping online ad
spending to gain share from Mervyns and others, even though it Updated
expects negative comps for the forseeable future.
Curriculum
• Labor Management - Labor management strategies are being
intensified on all dimensions: number of associates (huge
Subscribers to RNG can now
reduction in seasonal hiring), scheduling (targeting shifts to align
access our newest Retail
with peak periods), and efficiency. For instance, Meijer and others Market Development case for
are measuring individual employees' productivity).
 Latin and Central America.
• Holistic Health Management Approach - Not just around
health clinics, but also increasing emphasis on self-diagnostic
products & services-at-home testing and online information Prior Strategy
resources. See RNG's newsletter for more info on this.
Alerts
• Focus on Value Entertainment - Retailers are emphasizing
replay value, accepting trade-ins (very big in electronics, gaming,
Retail Pricing Update
and pawn shops), and focusing on value-added bundling (e.g. free
downloads with in-store purchases). Sophisticated retail pricing has
emerged as a key driver of
RNG expects retailers to increasingly focus on delivering solutions against long-term growth and
practical consumer concerns in light of the tougher economic environment. profitability.

Wal-Mart's Marketside: A
Small(er) Supermarket
Real Estate Changes RNG's visit and perspecitve on
Wal-Mart's new small box
Retailers today are challenged by a core issue that resembles what the format
airline and the steel industry faced decades ago: huge legacy costs.
Wining in a Zero-Sum
Over the last two decades retailers have invested hundreds of billions of Environment
dollars in building and expanding their store base. In addition, over the
RNG's forecast for total chain
last 2-3 years real estate development has been fueled by extremely low
sales, winning (and losing)
interest rates, but as the economy slowed down, demand eased off
market segments, and
tremendously. In addition, retailers closing down a record number of stores
retailers' playbooks for Q4 and
have added an excess real estate capacity that is bringing new dynamics to beyond
the marketplace.

Retailers are now looking for different ways optimize their real estate The Legacy Store Challenge
holdings. We have highlighted many of these in the past (See RNG's Why retailers' #1 ROI challenge
Legacy Store Challenge) but in addition RNG expects that over the next is driving growth in their
6-18 months retailers will be pushing for lease renegotiation existing stores, and how the
agreements as a way to reduce their cost structures. This is not as leaders win
relevant to most manufacturers, but there for those suppliers that operate
their own branded stores, there is an opportunity to optimize their Goldman Sachs Global
positioning as well. Retailing Conference
Get a quick download of RNG's
thoughts after hearing and
Supply Chain meeting with leading retailers

RNG sees three transformational changes occurring around supply Chain Retailing 3.0
chain that are taking place in the marketplace today: a move towards Over the next two years,
near-sourcing, increased focus on SKU rationalization and inventory de- branded manufacturers and
stocking. retailers will be challenged to
find new ways to prosper in
I. Near-Sourcing the fastest changing food
retail environment in a
Changes in global economic conditions and destabilized economies are generation
leading to the transformation of current supply chains. For instance, over
the last decade China became a prime spot for off-shore manufacturing of Mature Store Activation
labor intensive products. Today, the gap between China and other
emerging economies closer to the US has narrowed. When all costs are The new new thing in retail
considered - accessibility of qualified labor, freight costs, exchange rate growth is old stores, and how
impact, speed to market implications, product safety/recalls - retailers and to unlock their potential to
global supply chain leaders are starting to reconsider where and how they reach new shoppers and drive
invest. wallet share with existing
shoppers
Companies are already beginning to focus on repurposing labor and
resources closer to consumption, a strategy we simply call near- Social Networks
sourcing. Innovative companies like Alpine Access and Arise Virtual Online social networking
Solutions hire work-at-home employees in the US to handle call-center allows marketers to connect
tasks for their clients. with new and existing
customers and deepen the
RNG expects to see an increase on near-sourcing employment as level of engagement
companies re-consider their supply chain resources and pull them closer to
consumption. Pricing Optimization
Retailers are developing
II. Rationalization pricing as a strategic
capability, which also raises
RNG expects to see retailers to continue to rationalize their SKU several opportunities for CPG
assortments and vendors as a way to leverage scale and efficiencies (see firms
figure below from Walgreens, where <1% of vendors make 80% of
spend). Assortment optimization is nothing new, but we expect retailers to
be even more aggressive in this area as they focus on the right categories Private Label
and brand mix, including a higher penetration of private labeled items.
Strategic store brand programs
are a significant growth
In addition, fewer SKUs facilitate the shopping experience by improving strategy for retail leaders
shoppability at the shelf level and in many cases improving shoppers'
perception of product variety. RNG expects shoppers to continue to buy
more but smaller ticketed items vs. fewer, more expensive items. Express Stores
Convenience food retailing is
changing globally as consumers
express their preference for
healthy, fresh, and ready to go
(or consume) foods

Meet Our
Analysts

III. De-Stocking

Retailers and suppliers will need to be more diligent than ever before
around managing inventories. RNG expects to see a large influx of Dan W. O'Connor is the
discounted goods injected into the economy throughout the next couple of President & CEO of the
months from liquidations of failed retailers, and expect more particularly if RetailNet Group. He also is
the holiday season falls short of retailer preparations. the Founder of Management
Ventures, Inc. (MVI), a WPP
This will inevitably impact consumer trips as discounted products take Group company. Dan is a
them out of the market and will also influence how they shop the store, widely known industry speaker
and how long they will spend once they're inside the store. How will this and thought leader.
impact your products and categories? LinkedIn | Email

Retailers Enabling Consumer Credit &

Household Savings
We expect to increasingly see retailers become more competitive and
promotional around facilitating credit for consumers & small businesses.

Retailers have historically done this in the form of rebates or discounts Aaron Chio is a Senior Analyst
redeemable on the next visit, and RNG expects this activity to become leading RNG's development of
more aggressive during and post the holiday season. With consumers new research, insights and
focused on reducing household expenses & family related costs, retailers growth strategies in Latin
will need to be very tactical about pursuing opportunistic wins when and America.
where available. After years of getting out of layaway programs, many LinkedIn | MSN |
retailers are back into it or considering it to facilitate both the sale as well
as the trip when consumers come back to make payments.

Retailers will focus on re-directing part of their messaging to focus

on key consumer concerns. Whether it is to save money on meals or on
expenses, we are already seeing this behavior occurring at retail. (See
images below: Maxi Bodega's endcap (banner of Wal-Mart in Central
America) with fluorescent bulbs on sale; KFC's "Brining back dinner"
website; ASDA's "Staying in is the new out")

Tim O'Connor is Vice President

at RNG, currently responsible
for RNG's Growth Strategies
Curriculum and European
market insights.
LinkedIn |

In-Store Merchandising & Marketing Activities

Price, proximity and product availability will continue to be key success
drivers at retail. Staying in-stock, having the right assortment and the right Keith Anderson is a Senior
pricing will be more crucial than ever before, particularly as retailers focus Analyst and responsible for
on more tactical promotions to drive traffic into their stores. RNG's North American research
practice and transformational
capabilities
curriculum.
LinkedIn | Twitter | Windows
Live Messenger

Pricing in particular will continue to be a major driver of shopper behavior.

Four key considerations around pricing to keep in mind:

1. Pricing will need to be targeted enough while avoiding price

wars

2. Pricing will have to enhance margins. For price competitive

SKUs this highlights the need to enable cross merchandising
opportunities to increase basket ring as a way to offset lower KVI
Item margins

3. Price decreases due to lower energy & commodity costs will take
 time to trickle down the supply chain to the consumer. Speed
to market will be crucial to stay relevant and competitive.

4. Finally, the challenge for both retailers and suppliers will be to

manage a mix of aspirational brands with opening price point
offerings while maintaining brand equity and clarity at the
shelf level. (See image below)
Sephora "value" products rack

Trip Marketing
Retailers are increasingly focusing their efforts on what we call trip
marketing - successfully channeling shoppers into the store by defining
which trips to win (and which to give up on) and building an integrated
strategy for winning those trips. The most important thing to know is that
trip marketing assumes the retailer has already won in-store with
merchandising, assortment & pricing, noting that it can't win until the
shopper is in the store.

Several diagnostic questions arise from this notion of trip marketing. The
more shared insight retailers and suppliers have around each of these
questions, the better the prospects for growth.

• What are the steps that leading retailers need to take to win the
trip?

• How can retailers/suppliers influence the First Moment of

Truth for shoppers? (which one the retailers or the products?)

• What role do suppliers play in helping retailers achieve this

goal?

• What does each retailer's share of trip occasion look like? (e.g.
Wal-Mart might score highly on grocery stock-up, lower on
grocery fill-in, and very low on one-item pickup)

• What are the key categories and items that drive the trips each
chain wins?

• Can anything be done to win more of the trips each chain tends
to lose?

• Is there an integrated strategy for winning the trip

(messaging before, during, and after; merchandising support;
multi-channel integration)? Where can suppliers support that
strategy?
The RNG Solution
RNG is working closely with clients to diagnose shopper, trip, and basket
dynamics and develop strategies to drive growth today-and in the future.
Please contact us to learn more.

RetailNet Group is the leading insight and advisory firm focused on

retail growth strategies and consumer-facing transformational
capabilities. We are deeply experienced retail/consumer analysts
and strategists working exclusively to help brand-led businesses
and large-scale retailers grow.

Sincerely,

RetailNet Group
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