Cost of rapid growth a new challenge for Russian retail

1

• Cost of rapid growth - a new challenge for
  Russian retail

Solutions to maintain profitable growth as
retailers expand to the regions
Date September 5th, 2008
2
The leading retailers in Russia are in a race for
national scale, generating ambitious growth plans
498
Retail space of major players, 000 M2,
2007-2012F
Target cities for regional expansion, 2007-2012F
Illustrative
CAGR 2007-2012
22
1.070
1.679
X5
Magnit
1.780
1.119
19
498
7th Continent
172
326
22
24
M-Video
458
786
14
172
36,6
90
New by 2012
2007
Source Renaissance Capital, Company Data and
press releases, A.T.Kearney analysis
3
However, the rising costs of growth will present
challenges as retailers seek to maintain
profitability in this phase
Growth of Store Labor costs, RUB, monthly salary
Growth of rental costs, USD per m2
Moscow/Regions
Share of costs in Sales 8, in OPEX 40
Share of costs in Sales 7, in OPEX 35
8,7
36
18,7
Growth of utilities costs, index avg. energy
prices
Growth of logistics (transportation) costs, index
Share of costs in Sales 1,2, in OPEX 6
Share of costs in Sales 0,5, in OPEX 2,5
15,6
14,4
Notes () Sales staff salary in Central Federal
District Source Rosstat, FTS RF, Knight Frank,
A.T.Kearney analysis
4
Is it possible to focus simultaneously on rapid
expansion and profitable growth?

• Difficult for a fast-paced organization to
  recognize trade-offs between growth and
  profitability, and make consistent choices on a
  daily basis
• For local players with small and dynamically
  changing teams, large-scale systems-reliant
  solutions may not be feasible or timely
• Identification of quick win opportunities
  combined with a long-run plan for comprehensive
  change can facilitate balance between growth and
  returns

Growth
ROIC
5
Retailers should look comprehensively at
opportunities within four walls of the store
Receiving/Returns

• DC Receiving
• Unpacking, picking and restocking
• Vendor Receiving
• Customer Returns

Performance andCost Management
Services

• Financial Services
• Home Delivery

• Labour Scheduling
• Performance Metrics
• Store Expenses
• Staff Skills Development
• Roles Responsibilities

Inventory

• Ordering Replenishment
• Shelf Stocking
• Stock Adjustments
• Stock Management
• Warehouse Management

Merchandising Promotions

• Planogram Setting
• Promotions Handling
• Price Changes
• New item introductions

Customer Experience

• Buying
• Check-out
• Customer Service

Front-End

• Queue wait
• Service desk

STORE

• Communication and Store Support
• Communications/ Reporting
• New Initiatives and Directives
• Culture/Performance Reviews

• Distribution Centre
• Order picking and shipping
• Customer returns processing

CORPORATE/REGIONAL OFFICES STORE SUPPORT
6
Identifying quick-wins within key drivers of
retail profitability can help maintain EBITDA
during rapid growth
Key Drivers Of Retail Profitability A.T. Kearney
Accelerated Retail Profit Improvement (ARPI)
methodology

• Optimise labour efficiency through benchmarking
  and task allocation
• Enhance accountability efficiency

• Reduce the number of non-performing products
• Introduce profitable products
• Modify assortment by price point

Assortment
Store Operations
Labor efficiency
Pricing
Supply Chain

• Identify selective price increases
• Determine price sensitivity by customer segments
• Devise pricing communication

• Improve operational efficiencies (warehousing
  stock management, transportation)
• Align supply chain costs to industry best practice

Organisation Structure, Responsibilities,
Performance Metrics
Space
Supplier Management
Selective price increases

• Improve space allocation
• Determine optimal product placement to maximise
  revenue
• Improve visual merchandising

• Analyse supply base to determine negotiation and
  procurement strategies
• Maximise vendor funds
• Develop alternative supply sources

Promotions
Processes
Procurement strategies

• Improve promotional effectiveness by media type
  used, and leveraging customer insights from
  traffic generation and basket size analysis

• Improve ordering and replenishment processes to
  optimise availability
• Improve information flows

Promotional effectiveness

• Build the organisation lean with clear decision
  making processes
• Align organisation structure and roles to
  best-practices
• Develop clear performance metrics to support
  operational targets
• Enhance employee skill set

7
Pricing provides quick win opportunities to
increase net margin via selective price increases
and differentiation
Sample Analyses
Sensitivity Analysis
Competitive Pricing
Client vs. the Market Category x

• Are we truly over priced?
• Competitive category?
• Price sensitive?
• Brand strategy?
• Promotion strategy?

Priced Above the Market
Weighted Avg. Shelf Price

• Are we truly under priced?
• Price/Quality signal?
• Inelastic?
• Brand strategy?
• Promotion strategy?

Priced Below the Market
Dollar Sales per Store
8
Price actions based on category roles can
preserve total margin while defending price
position vs. competitors
Client Example
Total count of item sold
1 (top sellers)
x (slow movers)
Rank of Items by Volume
Zone
Seasonal/Apparel
Dept. Leaders
Inelastic
KVI
Source A.T. Kearney project experience
9
Promotions effectiveness should be reviewed for
both sales uplift potential and profitability
Sample analyses
Promotional Effectiveness by Channel
Promotion Effectiveness
Sales lift 2004
Sales lift 2005
Profit lift 2004
Profit lift 2005
TV
Weekly Leaflet
TV
Weekly leaflet
10
During rapid expansion, simply coordinating
promotion scheduling and space allocation can
impact profitability
Sample promotional space usage

• Promotional area coordination can help you more
  consistently communicate price, quality or
  category commitment
• In a rapid rollout situation, identifying key
  stores for basic promotions coordination can be
  done without advanced category management or
  systems in place
• Promotion space dicipline prevents invetory
  buildup by forcing buyers to prioritize
  promotions limited to coordinated space. In rapid
  undisciplined growth buyers tend to send two
  times more promotional product than the store can
  sell through.

Price Image
PL
Quality Image
Win Category
PL
Brand
Entrance
Entrance
Source Client example, A.T. Kearney retail
expert interviews
11
Store operations analysis can provide insights on
labour efficiency and task allocation
Sample analyses
Identify Non-Value-Added Activity
Store Labor Efficiency
Top 3 non-value added activities that take most
store managers time
Schedule and Absentees
Deliv. Order. Errors
Repetitive Emails
Phone calls
Recruit.
12
Store labor efficiency can be improved prior to
adoption of sophisticated scheduling systems
Methodology Example
Regression models provide fair and easy way to
budget store labor, and lower costs

• Collect data on basic traits that store managers
  say influence labor levels
• Develop regression models that capture most of
  the variance (expect 70 but 90 is empirically
  possible)
• Use regression line to set budgets and fairly
  allocated wage reduction goals.
• Prepare sister store comparisons to show
  underperforming stores how similar stores achieve
  better productivity

Hours
Sister Stores
Weekly Labor Hours (x1) SqMeters (x2)Hours
Open (x3) Customer Count (x4)Item Count
Rank of Stores
13
Reduced supply costs can be achieved by following
A.T. Kearneys proven Strategic Sourcing
methodology
Framework to select sourcing strategies A.T.
Kearney Purchasing Chessboard
Sample Client Results Office supplies for resale

• Conversion to private label imports 1.00MM to
  1.46MM
• Clips and fasteners (25 SKUs)
• Punches (4 SKUs)
• Rubber Bands (19 SKUs)
• Conversion to lower priced vendor 1.48 to
  1.56MM
• Replaced incumbent, approximately 50 cost
  savings (net pricing)
• Negotiations with current vendors 0.24MM to
  0.27MM
• Branded clips, fasteners, staplers

14
Quick wins are typically found in Goods-Not-For
Resale and Store Services
Global Client

• Sample of Typical Strategic Sourcing Results

15
Testing store productivity changes through a
learning store environment is highly recommended
Learning Store Roll-Out Approach
1
2
3
Avoid temptation to change everything in all
rollout stores at once
16
Finally, well-defined performance measures can
help maintain consistency and profitability
during rollout
2
3
Red Light issue identified
Choose the Champion
1
Measures defined and targets set, store-corporate
coordination
District Manager Support
Form a Rapid Action Team
Employee Skills Toolkit

• Managing Resistance
• Emotional Cycle of Change
• Effective Team Meeting Management
• Team Building
• Problem Solving
• Coaching and Feedback
• Roles Responsibility Charting
• Facilitation Presentation Skills
• Decision Making
• Plan-Do-Review Process

4
Plan
What is the cause of the issue, and what are we
going to do about it?
5
6
A.T. Kearney Store Performance Scorecard
Take Action
Review Improvements
Regional Manager Review
as needed
17
QA

• Leslie Fletcher
• A.T. Kearney, Moscow
• 52/1 Kosmodamianskaya Nab.
• leslie.fletcher_at_atkearney.com
• Office 7 495 258 5019
• Mobile [phone]

18
Key questions to panelists
Overall productivity assessment

• Where do you believe significant store
  productivity gaps exist in your operation,
  relative to Russian or international best
  practices? What are your priorities in the next
  five years to address these gaps?
• As you are expanding to the regions, what are the
  biggest surprises for you in terms of costs and
  productivity? Whats better/worse than you
  expected?

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19
Key questions to panelists
Labor productivity

• Can you talk in specific about labor productivity
  how do you balance these three interdependent
  issues
• high turnover and increasing salary demands at
  store labor level
• the need for increased labor productivity to keep
  EBIT margins high
• and the need to improve customer service to drive
  sales

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20
Key questions to panelists
Other cost drivers

• Own vs. 3P logistics or DSD Which method do you
  think helps you control costs in the long run vs.
  short run? How will your logistics strategy help
  with cost control and timely/fresh product?
• How have relationships with developers helped you
  to control costs? Do you use a 3P developer, or
  rely on your internal real estate team to source
  land and construction? Whats the best balance?
• Can you describe the current situation with
  energy costs and access in the regions, for the
  benefit of our international guests?

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21
Key questions to panelists
Organization

• When you identify cost and productivity issues
  (external cost increases or internal
  inefficiencies), how do you mobilize as an
  organization to address them? What incentives or
  financial controls do you recommend to keep costs
  in check organization-wide? Does your management
  team control costs in silos, or look at the issue
  of profitability company-wide to suggest joint
  cost-control initiatives?

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22
Key questions to panelists
New Technologies

• Have you adopted (or plan to adopt) any new
  technologies in order to better control costs
  and/or serve your customer? (For example to
  help with inventory control, logistics, customer
  data collection, etc.)

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