POST-RECESSION RETAILING

The recession has brought about a shift in Consumer Behaviour and spending patterns. The impact of the above will continue and fundamental changes are expected in 3 key areas: Increasing dominance of value retailing and cost control efficiencies related to supply chain and consolidation.

Syndicate Group 5 W&RSETA ILDP 2011 Kay Raidoo Woolworths, Jeremy Butler-Mr Price, Rudy Richards Edcon, Michelle Naidoo Makro, Rakesh Maharaj Shoprite Group, Sydwell Serakwane Pick n Pay

Executive Summary
Retailers are faced with the reality of a change in customer behaviour post the recession and in the current low growth economic environment. Most retailers are asking themselves the question do we conduct business as usual? This paper will investigate the shift in consumer behaviour and changing spending patterns the recession has brought about and how this shift in consumer behaviour has impacted both the local and international retail landscape. Key to this research is to determine the impact the recession had on international and local retail companies relating to expected changes in the way they deliver value to the business and to the customer. Areas such as value retailing, consolidation, and structural shifts in Supply Chain will be the emphasis of this report.

Problem Statement The recession has brought about a shift in Consumer Behaviour and spending patterns. The impact of the above will continue and fundamental changes are expected in 3 key areas: Increasing dominance of value retailing, structural shifts in supply chain and consolidation. Objective & Aim
In this study, we explore the degree to which the recession has affected the Retail Sector and how this impact has led to a change in consumer behavior, resulting in Retailers being forced to change their strategies. From a research perspective, this article may prove valuable as it identifies and describes a theoretical view on Value Retail, Supply Chain methodology and factors that will lead to Consolidation. This report will also seek to provide the W&RSETA and its stakeholders with tactical and implementable alternatives and recommendations on Value Retail strategies, supply chain efficiencies and opportunities to consolidate. These recommendations are intended to assist retailers in effectively managing the change in consumer behavior and the resultant demands on business to deliver value.

Research Methodology
A comprehensive literature review was conducted which was supplemented by qualitative and quantitative interviews. The research was also supported with an international retail in-market immersion. The paper provides insight into the effects of the recession and changes in consumer behavior. An in-depth analysis of value retailing, supply chain and consolidation was also conducted

Recommendations and Implementation

The paper provides implementable recommendations supported by a suggested implementation plan. We propose a compelling Value Retailing Model that extends beyond price, for retailers to consider in sustaining profitability now and in the future. We also recommend structural shifts in supply chain and consolidation as drivers to achieve competitive advantage in the market. In conclusion, it is stated that the change in consumer behavior will remain into the foreseeable future. It is therefore strongly suggested that Retailers review and adapt their strategies related to Value Retail, Supply Chain and Consolidation, to be successful companies in the ever changing South African retail landscape.

Syndicate Group 5 ILDP 2011 K RAIDOO, S SERAKWANE, R RICHARDS, R MAHARAJ, M NAIDOO, J BUTLER

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Table of Contents
Executive Summary ................................................................................................................................................ 1 Introduction ............................................................................................................................................................ 4 Problem Statement .................................................................................................................................................. 4 Objective & Aim .................................................................................................................................................... 4 Research Methodology ........................................................................................................................................... 5 Literature Review ............................................................................................................................................... 5 Qualitative Research .......................................................................................................................................... 5 Quantitative Research ........................................................................................................................................ 5 Research Limitations and Exclusions ................................................................................................................. 6 The Recession and its impact on Retail .................................................................................................................. 6 Table 1 South African Negative GDP Growth ................................................................................................... 6 Figure 1 IMF Global Economic GDP Growth & Forecast ................................................................................. 6 The change in consumer behavior .......................................................................................................................... 7 Local Customer Findings ................................................................................................................................... 8 Figure 2 Food Retailers ...................................................................................................................................... 8 Figure 3 Clothing Retailers ................................................................................................................................ 8 Figure 4 General Merchandise ........................................................................................................................... 8 Value retailing a strategy or must? ......................................................................................................................... 9 Figure 5 Customer Confidence........................................................................................................................... 9 Figure 7 Customer Preference .......................................................................................................................... 10 Figure 6 Service, Price & Quality Preference .................................................................................................. 10 Supply Chain ........................................................................................................................................................ 10 Consolidation .......................................................................................................................................................... 9 I. II. III. IV. V. VI. Brand Consolidation .................................................................................................................................. 9 Centralized Buying/Procurement System ................................................................................................ 10 New entrants into the market .............................................................................................................. 10 Centralized Distribution System ......................................................................................................... 10 Supplier Consolidation ............................................................................................................................ 10 SKU Consolidation ............................................................................................................................. 11

Recommendations ................................................................................................................................................ 11 Implementing a Value Compass....................................................................................................................... 11 Value Compass as adapted from JC Williams 2011......................................................................................... 11

Results .............................................................................................................................................................. 12

Syndicate Group 5 ILDP 2011 K RAIDOO, S SERAKWANE, R RICHARDS, R MAHARAJ, M NAIDOO, J BUTLER

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Implementing or amending a Value Retailing Model ...................................................................................... 12

Process Quality................................................................................................................................................. 13 Price ................................................................................................................................................................. 14 Customer access cost ........................................................................................................................................ 14 An exceptional supply chain must be tailored to the customer experience youre trying to have. ............... 15 Develop a seamless and efficient supply chain ................................................................................................ 15 Figure 8 Supply Chain...................................................................................................................................... 15 Outsourcing warehousing and distribution ....................................................................................................... 16 Outsource Management of Supply Chain......................................................................................................... 16 Centralised Distribution ................................................................................................................................... 16 Optimize cash and inventory management systems to manage costs ............................................................... 16 Monitor Information Systems .......................................................................................................................... 16 Centralized Buying ........................................................................................................................................... 17 SKU Consolidation .......................................................................................................................................... 17 Supplier Consolidation ..................................................................................................................................... 17 Implementation Plan ............................................................................................................................................. 18 Conclusion ............................................................................................................................................................ 19 Appendices ........................................................................................................................................................... 20 Appendix 1 Questionnaire for Business Executives and Analysts ................................................................... 20 Appendices 2 Customer Survey ....................................................................................................................... 21 Appendix 2 Customer behaviour trends post-recession ................................................................................... 22 Appendix 3 Executive and Analyst name references ....................................................................................... 23 Bibliography ......................................................................................................................................................... 24

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Introduction
The 2008-2009 economic recession changed customer and business behaviours, not unlike how a hurricane reshapes the built and natural environment (Canning, 2010). Retailers are faced with the reality of a change in customer behaviour post the recession and in the current low growth economic environment, most retailers are asking themselves the question do we conduct business as usual? To answer this question, the need for new and innovative ideas and strategies on how best to capture value through their products and services arises. This research will investigate the shift in consumer behaviour and spending patterns the recession has brought about and how this shift in consumer behaviour has impacted both the local and international retail landscape. Key to this research is to determine the impact the recession had on international and local retail companies relating to expected changes in the way they deliver value to the business and to the customer. Key areas such as value retailing, consolidation, and structural shifts in supply chain will be the emphasis of this report.

Problem Statement
The recession has brought about a shift in Customer Behaviour and spending patterns. The impact of the above will continue and fundamental changes are expected in 3 key areas: Increasing dominance of value retailing, structural shifts in Supply Chain and Consolidation.

Objective & Aim

Retailers agree that the biggest effect of the global recession on business has been on consumer behaviour. Many U.S. consumers have completely, and perhaps permanently, altered their buying habits according to Canning (2010). This means that the biggest challenge for any retailer is to interpret consumer trends and to gain valuable insight to help future planning (www.worldretailcongress.com). The recessions impact on customer experience is not going to fade quickly (www.destinationcrm.com). Certain financial and emotional issues will endure for many years to come. Our future customer, the one who experienced the global financial crisis of 2008/ 2009, will continue to live with residual uncertainty. The threat of unemployment and of a questionable financial future may ease but will most likely stay in their conscience. In this study, we explore to what degree the recession has affected the Retail Sector and how this impact has led to a change in consumer behaviour. The change in Consumer Behaviour forced Retailers to consider changing their strategies. From a research perspective, this article may prove valuable as it identifies and discusses the following: The impact of the recession on retail in SA Results in changes to consumer behaviour Theoretical analysis of the importance of value retail How to optimize supply chain efficiency, and Understanding consolidation as an alternative in cost control management.

This report will also aim to prove that customers are demanding more value from retailers and therefore a proactive response to this change in customer behaviour will result in: Increased sustainability Enhanced competitiveness Increase in market share Increased relevance.

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In conclusion this report will also seek to provide the W&RSETA and its stakeholders with tactical and implementable recommendations on Value Retail strategies, supply chain opportunities and options to consolidate opportunities.

Research Methodology
Literature Review
In the exploratory phase of our investigation and research, books and journals such as Competing in Tough Times by Barry Berman, Reacting to Consumer Trends by Angela Andal-Acion, Marketing out of the Recession by Nigel F. Piercy and Consumer Spending During Economic Downturn by Television Week played a vital role in our investigation and defining our problem statement. This literature also played a pivotal role in our theoretical discussions. Included in this research, is an investigation that was conducted through augmenting previously done research such as Value in use through service excellence by Sara Sandstrm, Bo Edvardsson, Per Kristensson and Peter Magnusson, and Consumer Perceptions of Price, Quality and Value by Valarie A Zeithaml.

Qualitative Research
We also conducted interviews with 15 business executives and 5 industry analysts from leading local and international companies, a list of which can be found in the Appendix. This provided us with qualitative information to supplement our overall findings and served the basis of our discussions and recommendations (refer to Annexure 1). The interviews we conducted with company executives and managers provided us with their insights on the recession and the impact it had on their businesses. Their responses also revealed their views on Value Retail, Supply Chain and Consolidation. The responses from the business executives and analysts helped us draw conclusions on the recessions impact on the retail landscape and the results of the customer surveys validated the change in consumer behaviour. Our qualitative research interview approach was to separate the type of questions asked to retail executives from the questions asked to analysts. In each case, retail executives provided us with an in-depth microanalysis of their own businesses as well as how they perceive the current global and local picture. Analysts provided us with a macro opinion of both the economy and the role the retail sector plays in it.

Our Research scope included the following questions which formed the f oundation of our investigations
Have retailers changed the way they are doing business? What was the impact the recession had on the retail landscape? Has the Fifa World Cup concealed the true impact of the recession on the South African Economy and the Retail Landscape? What was the Recessions impact on consumer behaviour? And did a shift in consumer behaviour really occur. And finally, how did the change in consumer behaviour prompt retailers to adapt their strategies with specific focus on Value Retailing, Supply chain management and Consolidation.

Quantitative Research
We also gained insights into consumer behaviour and preferences through conducting a customer survey (refer to Appendix 2). Customer surveys that were conducted included a small questionnaire whereby some of the major retail players were segmented into High-end, Mid-end and Low-end retailers across the Food, Apparel and General Merchandise sectors, as detailed in the appendices (due to the number of retailers in the Mid-end sector of the Food retailers the results were slightly over indexed in this category). The survey was sent to a

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group of 460 independent customers and the response rate was 97%. The target group in question are all active shoppers in the retail industry.

Research Limitations and Exclusions

For the purpose of this research, no demographic classifications were made. The list of stores used as part of the survey was not inclusive of all retailers operating in South Africa. Only well-known retailers with strong brands were used as part of the survey and these retailers were classified under high end, medium end and low end retailers. Consumers were not categorised based on race, income, male and female which could impact the outcome of the results of the survey.

The Recession and its impact on Retail

In 2009, South Africa entered a recession after 17 years of positive GDP growth. Recession is defined as a period of temporary economic decline during which trade and industry activity such as production; purchasing, selling and employment are reduced (www.wikipedia.com). South Africa experienced negative GDP growth as outlined in the table below. Table 1 South African Negative GDP Growth

Last Quarter 2008 First Quarter 2009 -1.80% -7.40%

Figure 1 IMF Global Economic GDP Growth & Forecast

Second Quarter 2009 -2.80%

Global Economic GDP Growth and Forecast

10 8 6 4 2 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 -2 -4 -6 South Africa Advanced economies Emerging and developing economies World

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In her recent address to the US Chamber of Commerce, Governor of the South Africa Reserve Bank, Gill Marcus, noted the following about the current state of the South African economy:The economy has made a fragile and uneven recovery from the recession, but the future growth prospects will be affected significantly by global developments. Favourable growth outcomes were achieved in the final quarter of 2010 and the first quarter of 2011, when annualised growth rates of 4.5 per cent and 4.8 per cent respectively were recorded. However the second quarter performance had been disappointing, with both the manufacturing and mining sectors likely to have subtracted from growth. The main driver of growth over the past 7 quarters has been growth in household consumption expenditure, which has averaged around 5 per cent since late 2009. However, for some time the Monetary Policy Committee of the Bank has questioned the sustainability of this consumption growth given the slow pace of employment growth, high levels of consumer indebtedness, and low levels of bank credit extension as well as negative wealth effects emanating mainly from the weak housing market. Recent retail sales developments indicate that there may be some slowdown in the growth of household consumption expenditure. This highlights the need for organisations to be pro-active in their response to changes in customer behaviour.

The change in consumer behavior

Retailers agree that the biggest effect of the global recession has been on consumer behaviour. Many U.S. consumers have completely, and perhaps permanently, altered their buying habits according to Canning (2010). This means that the biggest challenge for any retailer is in interpreting consumer trends and gaining invaluable insight to help future planning (Worldretailcongress.com, 2010). The new market situation is characterised as the "age of thrift" which has radically changed customer purchase behaviour, and provides an environment dominated by public scepticism and lack of trust in business and in marketing offers (ingentaconnect.com, 2010). Thorn Blischok, president of global strategy and innovation for Chicago-based Symphony IRI Group, described the new retail reality by stating that retailers should expect consumers to continue to make shopping decisions through a "lens of affordability". According to a McKinsey research report it was found that in the past 2 years18 percent of consumer-packaged goods were bought at lower prices. (McKinsey Quarterly, 2010). According to Adrian Saville the South Africa consumer is still conservative in their spending post-recession. This is due to the fact that a lot of jobs were lost and these jobs have not been fully recovered. Research done on consumer strategies in South Africa has shown that consumer behavioural changes brought about through the recession may very well be permanent and irreversible as people hold onto the lessons learnt and refuse to go back to their previous spending habits (Fusion Design, 2010). The vast majority of South Africans are continuing to live like they are in the midst of a recession, according to research by the UCT Unilever Institute of Strategic marketing (Advantage Magazine, 2011). The study presents compelling evidence that consumer behaviour has changed substantively, with many respondents reporting substantial changes to their purchasing patterns. The data reveals that 69% of consumers say they are more cautious with their spending than a year ago, while 58% say they and their families are financially worse off than in 2010. The trend of consumers following more frugal lifestyles can be seen in the fact that 55% say they shop in less expensive stores than before, while 68% of respondents say they look at several options before making a purchasing decision. In our qualitative research conducted in the South African retail environment the customer survey findings supports both the local and international trend on the shift in consumer behaviour post-recession.

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Local Customer Findings

In our local research the customer survey findings supports our initial assumptions on the shift in consumer behaviour over the period (2009 -2011) due to the recession. Figure 2 Food Retailers

Food
500 400 300 200 100 0 2009 2010 2011 High Mid Low

The research findings for Food retailers show the following trends: A downward trend in consumers shopping at high end retailers over the period 2009 to 2011 An increase in consumers shopping at mid-end retailers from 2009 to 2010 and a decrease in 2011 An increase in consumers shopping at low end retailers over the period 2009 to 2011

Figure 3 Clothing Retailers The research findings for Clothing retailers show the following trends: Consumers shopping at high end retailers increased in between 2009 and 2010 A decrease in consumers shopping at high end retailers from 2010 to 2011 An overall decrease in consumers shopping at medium end retailers from 2009 to 2011 And overwhelming increase in consumers shopping at low end retailers from 2009 to 2011

Clothing
200 150 100 50 0 2009 2010 2011 High Mid Low

Figure 4 General Merchandise

General Merchandise
120 100 80 60 40 20 0 2009 2010 2011 High Mid Low

The research findings for General Merchandise retailers show the following trends: An overall increase in consumers shopping at high end general merchandise retailers between 2009 and 2010 and a decrease in consumers in 2011 compared to 2010 An increase in consumers shopping at medium end retailers from 2009 to 2011

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Value retailing a strategy or must?

Value retail is not necessarily based on providing either the lowest cost or the highest level of differentiation. It involves providing trade-offs of price and differentiation that are desired by the retailers target market (Berman. B, 2011:2). According to Berman (2011:2), Value is offered through offering only the services customers either (1) absolutely require as a condition of purchasing your goods or (2) are willing to pay extra for because they view these services as meaningful. Successful companies typically start with a deep understanding of customer needs in a segment and translate these needs into a value proposition. Thereafter, businesses develop their supply chain capability to deliver on their value proposition. According to Billingtonand Nie (2009) many companies fail to reap the benefit of their value proposition because their supply chain capabilities are inadequate. Aligning the customer value proposition with the supply chain model is therefore critical to a companys competitiveness. Value occurs when needs are met through the provision of products, resources or services, therefore value is an experience. (Billington and Nie 2009) In a recession customers dont stop buying, they just stop over buying (Armbruster, 2009). In other words a customer rationalizes the need to purchase and what the purchase is intended for. One CEO of a well-known value retailer concludes that customers will continue to exercise great caution when making buying decisions and will be drawn to retailers where they can buy simpler offerings with greater value. Another Business executive states that Retailers today are spending more time on value strategies than on the traditional fluffy marketing campaigns. Figure 5 Customer Confidence Figure 5 illustrates a study Company with more than 2000 customers intended to spend at products, 10% on cellular beauty products and 18% on of 2011. Close to two-thirds of will shop at different stores with convenient (Berman, 2011). In and Jones, the first lean from the customers perspective. factors that need to be clarified value: conducted in the US by Booz & participants where only 9% of pre-recession levels on household phones, 11% on health and apparel, clothing and shoes as customers (64%) stated that they lower prices even if it is less Lean Thinking (2) by Womack principle was defining value From this come two critical when strategizing the creation of

Clothing & Footwear 18% Health & Beauty 11% Cellular 10%

Household 9%

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Who is the customer and what do they value? This study indicates to what degree customer preference for value has become the overriding factor when making a purchasing decision. This could also be symptomatic of a lack of confidence in pre-recession retailing. The prevailing evidence that the recession has caused a behavioural shift in customer shopping patterns, may just be what was needed for retailers to become more customer centric and competitive since customers are now more stimulated by value and saving.. In our exploratory study, different responses to the concept of value can be extracted from our customer survey and have been applied related to our value retailing model as illustrated in our recommendations found later in this report where (1) Value is low price, (2) Value is the quality I get for the price I pay, and (3) Value is what I get for what I give and encapsulated in the holistic experience through service. In our local customer survey some interesting results in terms of customer preference to Price, Quality and Service was discovered. Figure 6 illustrates how customers prioritised Service, Price and Quality in the different retail tiers (High-end, Mid-end and Low-end

retailers). In High-End retailers quality outweighs both price and service whereas Price and Quality are priority and outweighs Service in the Mid-End retail tier. Price is seen as the most important priority in the Lower end of the retail sector. Figure 7 concludes that customers prefer price and quality as the determinant when making buying decisions and to a lesser degree, value service. In our results 18% of customers value service, 48% value price and 34% of customers regard quality as important. A limitation to the research conducted relating to our value model is that customer access cost was not factored in as part of our immediate scope and will therefore be exluded as part of our overall discussions. Figure 6 Service, Price & Quality Preference Figure 7 Customer Preference

Service 18%

Price 48%

Quality 34%

High service

Mid price

Low quality Price Quality Service

Supply Chain
Supply chain is the activity that manages the flow of information, money and material across the extended enterprise, from suppliers through the functional silos of the firm to customers (www.manufacturingerp.com) It is made up of the people, activities, information and resources involved in moving a product from its supplier to customer. The key activities involved in the supply chain cycle are: Planning Raw Material Manufacturing Inventory Distribution Warehousing Transportation Forecasting Customer Service At the depth of the recession of 2009, SCM executives were focused primarily on survival and cost cutting. Today, as the economy slowly moves toward recovery, The attention of SCM managers is also directed at recovery. Fortunately for logisticians, supply chain management continues to be one of the few bright spots for retailers, including pre-, mid- and post-recession. More and more companies rely on supply chain management as a critical component to success and a bridge to better times.(The State of the Retail Supply Chain Study 2010)

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As expected, on the top of the list of concerns for SCM executives is the speed of economic recovery. Retail supply chain executives are actively and aggressively pursuing strategies to meet economic challenges, while also seizing on opportunities to refine their capabilities, increase efficiencies, drive down costs and collaborate with merchandising and store operations to maintain optimal shelf-level inventories. In addition to battling economic uncertainty and supply chain challenges, retail SCM executives must handle internal stakeholder demands and issues. These demands are varied and complex. According to the Supply Chain Study completed in 2010 by the Auburn College of Business, the internal requirements that drive supply chain activity and investment are: Alignment of strategies, responsive operations, continuous product availability, and rigorous inventory control and cost management. Collectively, these internal requirements elevate the importance of SCM. Retailers now assign greater responsibility to their SCM executives. However, supply chain teams are required to fulfil seemingly incongruent goals. They must balance requirements for service responsiveness against cost control, product availability against inventory rationalization, and high delivery frequency versus transportation efficiency. While the current business environment is not quite as chaotic as 2009, there is still no shortage of external and internal issues that keep retail supply chain leaders awake at night. They face an uncertain economic recovery, supply chain constraints and demanding internal customers. Integrating supply chain management across all departments is critical in the success of any supply chain management process as tight bonds and collaboration is formed across all departments. Agile supply chains are those that are able to rapidly respond to new customer requirements and unexpected competitive influences. The retailers that survived the poor economy of the past 2-3 years have already accomplished the belt-tightening and inventory streamlining needed to ensure they operate efficient supply chains. The strategic emphasis has shifted to agility as the path to establishing competitive differentiation.

Economic challenges are forcing retailers to get lean. At the same time, they have to figure out how to be agile.

Consolidation
Consolidation is a business strategy intended to improve the profitability of an organization. Retailers often consolidate at different points of their life cycle as a means to serve their markets better. The financial rationale for consolidation is that retailers can maintain or strengthen their competitive positions in the market place by increasing their size, thereby lowering their costs by improving their bargaining power, expanding revenues from consumers and markets and gaining market share across channels and formats. Retailers consolidate to pool resources together and improve purchasing power through a Centralized Buying System (www.onyxinvestments.com). There are various forms of Consolidation as listed below:

I.

Brand Consolidation

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Brand Consolidation offers retailers the opportunity to streamline costs, strengthen the brand and support profitable brand growth and expansion. The CEO of a leading Value Apparel Retailer indicates that whilst the South African economy enjoyed the excitement and hype of the World Cup in 2010, the recession hit South African high end retailers the hardest. When asked why, he concluded that most organizations have started consolidating their brands to the extent where their number of stores have reduced substantially, some of the independent and smaller retailers even closed shop. Another CEO of a leading Apparel & Home Retailer stated Consolidations are happening globally not only at brand level an example is Ackermans Comforts that no longer exist. Yet another CEO of a leading Apparel Retailer stated that Companies are forced to focus on their

core brands and to review their unsustainable brands. He also indicated that the challenge for retailers is to understand their customers better to be able to respond to their needs faster, having the right product and the right quantity at the right time.

II.

Centralized Buying/Procurement System

Centralized Buying/Purchasing system Most Retailers are taking this route because it makes large single orders possible thus bringing about economies of scale. This gives the Retailers more power to influence suppliers and secure favourable prices and terms. As supermarket chains grow in size and in number of stores, they develop and implement increasingly centralised controlled procurement systems (Reardon 2005). They are all able to dictate their buying terms to suppliers who are expected to deliver products to central depots or warehouses, where the products are then distributed to supermarkets and retail outlet stores (Gain report, 2005; FPMC, 2003). Lower prices, larger discounts and lower transportation cost are obtained. These Retailers will also be able to secure better and more favourable deals than companies that place small orders because of their decentralized structures. It also enables the retailers to develop a crop of specialist buyers with technical expertise and a deep knowledge of the market. Since the department spends all its time on purchasing, it can monitor the changes that are occurring in the economy and monitor new products entering the market. Because they are the specialists in the field of buying with intimate knowledge of the market, they would know the best place to buy the best product and the best time to make the purchase. This is a competitive advantage because retailers with a centralized buying system will have new products first.

III.

New entrants into the market

Consolidation in the Retail Sector in the longer term with the arrival of Wal-Mart is likely to lead to greater consolidation not only in South Africas retailing environment but also in some of the industries supplying its stores. In particular the 120 Cambridge Store rollout would impact the spaza shops and independent food retailers in low-income areas, and this would intensify competition particularly at the bottom end of the market and the weakest traders would take the most pain.

IV.

Centralized Distribution System

Most Retailers are going into regional distribution centres which are aimed at boosting the efficient handling of stock to cut working capital thereby creating more profits and enabling them to compete more effectively. The distribution channel considers the various parties for whom a product or service will travel through from the time the product is manufactured to the point at which the end user will consume the product. Spar is the perfect example of Centralised Distribution operation whereby much of the distribution channel is handled in house thus resulting in greater efficiencies in the distribution channel and a reduction in costs as volume discounts are still achievable from buying in bulk. Mass discounters, which include Game and Dion Wired stores, shed about 800 jobs in 2010 due to the development of distribution centres, new technology and the consolidation of workflows. The re-engineering and restructuring process was initiated in order to improve operational efficiencies and the businesss ability to compete more effectively. (www.bizcommunity.com).

V.

Supplier Consolidation

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Supplier consolidation is the term used by businesses to describe the process of eliminating low capacity suppliers in favour of a smaller number of high capacity providers. In a weakening economy, having a large number of active suppliers operating at low capacity can be a drain both on the suppliers and on the businesses they are supplying. Supplier consolidation is one way to combat the problems caused by such a situation. There are several risks associated with utilizing a large number of low capacity suppliers that can be avoided by practicing supplier consolidation. Firstly, many suppliers cannot afford to be competitive when production rate is low. Second, reduced production speed and quality can result when suppliers are forced to lay off employees due to low utilization. Also, suppliers often find it necessary to sell off equipment and close facilities in the face

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of financial troubles. The CEO of a leading Apparel & Food Retailer indicated in terms of consolidation, we drove our supplier base off shore which went from a low percentage to a higher percentage of direct imports. They have consolidated their supplier base to fewer more meaningful suppliers to allow for better pricing.

VI.

SKU Consolidation

In the interest of reducing costs and streamlining storage and handling, many organizations have substantially slashed the number of SKUs (stock keeping units) they use. They have also re-engineered their products to their specification.

Recommendations
In response to our problem statement very clear evidence emerged from our literature review as well as our international immersion that the behavioural shift in customers will have a definite impact on how retailers should conduct business. The retailers response therefore should be to decide whether a value strategy, low cost or differentiation strategy is most suited or a combination of these. 1. In response to the customer demands for value, our recommendations therefore include the following:

Implementing a Value Compass

A value compass is an effective tool to evaluate and assess the retailers unique value proposition through plotting its strengths on a scale of 0 5 (where 0 = low impact and 5 = high impact)

Value Compass as adapted from JC Williams 2011

The value compass will give a clear indication of an organisations key strengths and where the organisations value strategies are more focussed and also give insights to opportunities available to drive further value.

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The following key components form part of the Value Compass: Measure Description Refers to how accessible stores are to customers Ease Refers to how affordable the pricing structure is Economical Refers to the overall in-store experience Experience Refers to the emotional impact the brand has on you Ego Examples of how to utilize the Value Compass: Canadian Tire stores are located within a 15 kilometre radius of their customers. The company will therefore rate 5 on ease of access to shopping Wal-Mart is price focussed and will therefore score 5 on price. Local retailer Stuttafords will score 5 on the Ego axis of the compass, and Value Retailer Pep will measure 5 on the Pricing or Economic axis. Research has shown that where organisations do not have clear differentiation on any of the above, this could lead to mediocre performance in relation to market trends. Organisations therefore cannot be competitive in all four areas as this is not sustainable. It is therefore recommended that organisations clearly define their point of differentiation in one or two of the above 4 areas as key value drivers in the organisation and integrate this into their business strategy.

This value compass can be used as a responsive tool for retailers with a current value retailing model during a low economic period or it can be used as a conceptual tool to determine future strategies.
2. As a response to retailers whose current value retailing model is ineffective or to retailers who do not have a current value retailing model we recommend the following:

Implementing or amending a Value Retailing Model

For the purpose of this study we will use the conceptual model of Value Retail developed by Berman (2010) that is based on the following measures:

+ +

In the above model Value can be viewed as benefits divided by costs, whereby benefits include results (functional aspects of products), as well as process quality (customer services). Costs include a products price as well as access cost (negative customer experiences) (Berman, 2011:3).

Results
The concept of results extends beyond the product concept and focuses on solutions as opposed to basic product. The focus for results must be on delivering value to the customer and is achieved through various offerings including: Designing sophisticated product ranges that has utility and functional features, advantages and benefits i.e.

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o o o o

Educational Toys delivering on its purpose of educating your child when being played with. Organic foods that seeks to address health risks posed by many processed foods. Producing innovation clothing lines that limits the amount of time wasted in doing laundry. Innovative technology in cars Mercedes Benz park assist which can park itself.

Process Quality
This concept refers to positive customer experiences. There must be a continual assessment of the customer experience. The Moment of Truth is the point at which the customer interacts with the business and the value offered is a determinant of whether that customer is retained or lost. Process quality concepts include: High Level of Support There must be a commitment to the product offering and business must be prepared to offer the customers efficient mechanisms to deal with after sales service requirements. IKEA in Canada sell furniture pre-packed in flat boxes that require DYI installation. However, they also offer the services of trained installers as an alternative. High Quality of Sales Person Interaction There must be a dedicated service offering in specialised department stores i.e. House & Home and personal shopping at Stuttafords. Knowledgeable sales associates with excellent product knowledge further enhance the shopping experience. Successful service recovery efforts (what the retailers will do when things go wrong) Retailers must be prepared to support their brand and the commitment to addressing customer service and product failure issues with speed and efficiency. This will ensure that customers remain loyal. A fair returns policy also ensures customer loyalty. Short Check-out Queues Management can monitor customer flow and staffing can then be structured to ensure that the flow of customers at check-out points is efficient and that the wait for customers is minimised. Self-check-out cash points offer the customer the opportunity to scan and pay for their own purchases as used in WalMart. High availability of items advertised Stock management in response to actual sales and forecasts for promotion periods is key to ensuring that the correct quantity of advertised products are available at the time that the customer is in the store. SEARS provide customers with access to browsing through catalogues electronically while in the store. Simplicity H&M does this well in that they keep it simple from signage to labels and ticketing. There is no printed signage however signage is displayed in the form of writing on the walls. This writing is in line with the store's young and vibey image. There is no confusion with customers as to what they are to expect in relation to price competitiveness. There is a strong focus on private labels that speak to low cost fashion. A companys sustainability strategy also adds value to the customer in terms of brand loyalty. Customers are drawn to companies that employ more sustainable strategies. Environmental awareness and responsible green initiatives show customers that if retailers care about their environment, then they will surely care about their customers. Providing recipe solutions At Wegmanns in Pennsylvania in the USA they have a magazine called Menu that offers customers a variety of recipes. The Magazine is offered at no cost to the customer.

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Price
Price refers to the final purchase cost and is usually the primary competitive advantage in a low-cost strategy. The pricing structure must offer the best value to the customer and must include: Delivery charges and credit terms The full value offering to the customer on price must include terms and additional charges. Retailers may be competitive on prices, but smart shoppers will also consider additional charges to ensure that the entire offering has better value than any other retailer Promotional Strategies Retailers must create new and innovative promotional strategies like link savings. Apparel retailers in Canada (Sport Check) offer a Buy 1 and get 50% off the second item. Everyday Low Pricing on volume core items Wegmanns advertise the lowest price on certain products and advertise that these products will remain at these low prices for the rest of the year. Costco monitors their competitors pricing every week and adjust their pricing structures accordingly to ensure that their prices are the lowest prices. Integrity Pricing strategies (standing your ground against bargain hunters) This pricing policy is employed by Leons Furniture. They do not negotiate or offer discounts to customers as they believe that their price offering is the best value that they can offer their customers, even though it may not be the lowest price in the market. Structuring Packaged Deals Companies like Leons Furniture offer promotional deals and allow the customer to structure a deal that only requires payment after 2 years. Many car dealerships in Canada offer similar structured deals. Pricing differentiation can effectively reflect greater value for customers This requires a negotiation for better prices with your suppliers, reducing gross margin and offerings of value packs for certain products ranges. The value offered by Costco Wholesalers in Canada is the lowest price, but the best quality. Product ranges must offer the best quality and an assortment of choice.

Customer access cost

Customer access Costs includes negative customer experiences. Stores that are inconveniently located with little or no public transport accessibility has high access cost. Ease of finding items Large stores require extensive in store browsing store maps at strategic points in the store (entrance, back aisles) can ensure ease of access to products. The layout of the store can further encourage random and impulse shopping. Liquor Control Board Ontario (LCBO) has signage indicating the area for international wines to create ease of shopping for customers as it clearly differentiates not only by product but by geographical location of imported product. Communication Headset and mobile communication between store staff will reduce the number of disruptions between customer interaction and staff. This will promote enhanced customer interaction and speedy resolution to customer queries. Inventory Scanners must be provided and highlighted on the sales floor (especially in foods) to assist customers with real time price enquiries. Tailored assortments cater to customers demographics and needs.

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Online channel and home delivery On-line advertising creates visual stores and allows customers to use their cell phones and e-mail to shop. A multi-channel strategy can be effective in being a low cost operator A fun in store experience and adequate parking. One of the LCBO stores is located in an old railway station and the store retained the history and original building to create both a shopping and history experience for the customer. Pictures of celebrities who shopped there are proudly displayed for customers to look at.

Our recommendation is that the above value model be integrated with retailers existing retailing strategies or be used to develop new value strategies to differentiate themselves from their competitors. 3. Our recommendation to optimizing supply chain capabilities due to the structural shifts in supply chain post-recession is listed as follows:

Business strategy outlines the plan to achieve competitive advantage in the marketplace. The supply chain organization must develop its own strategy to ensure supply chain operations support overall company goals. An exceptional supply chain must be tailored to the customer experience youre trying to have. Develop a seamless and efficient supply chain
Dominion Warehousing and Distribution in Toronto, Canada, have invested in technology that provides inventory management solutions for real time access to inventory. Dominions supply chain success is due to the increased use of automated systems and multiple user applications vs. single user applications. Their centralised distribution system allows their customer variable space costs as you only pay for the space you occupy, unlike when you own the warehouse.

Figure 6 Supply Chain

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Outsourcing warehousing and distribution

Companies can choose to trim their warehousing and distribution costs by outsourcing to a third party. When outsourcing the distribution and warehousing, you stand a better chance of saving costs and that becomes a solution to better serve your customers. It reduces over ordering and controls redundant SKUs. It increases inventory control It reduces warehousing & distribution costs due to bulk shipments Improves delivery costs Eliminates rush/expedited or duplicate orders thus reducing the carbon footprint. Improved stock availability Satisfied customers Network flexibility Retail outlets can receive fewer shipments with smaller quantities of each item Order cycle time is reduced Value added services can be performed more easily Improved delivery time Effective collaboration Proper control over inventory Increased sales Increased service levels Business can own the property and rent it out to an outsourced logistics company. They can then pay the logistic company fees to run their supply chain. This will allow the business to focus on what they specialize in which is to grow the business. Brand still can be marketed Inefficiencies can be eliminated Efficient handling of stock reduces working capital and increase profit Proper control of inventory Stock availability Direct control over their SKUs This can help on consolidating the SKU Use Information Management systems to improve Gross Margins and inventory productivity pre and post-recession. Invest correctly in technology and on the right projects. Remain laser focussed on core customer and value needs. Periods of low growth is also an opportunity to find alternative income sources i.e. subletting unused and unnecessary space, this can include service vendors like dry cleaners, in-house bakeries, pharmacies, jewellery shops, tailor shops, electronic repair services etc. (Berman, 2011). Innovation - Microsoft spends money in research and development even in tough times so that they can deliver innovative products in their market, which demands innovative products. Put transport management systems in place Use improved IT systems to perform information collaborations Use product monitoring systems, which includes monitoring new listed products All suppliers can be on EDI and SAP

Outsource Management of Supply Chain

Centralised Distribution

Optimize cash and inventory management systems to manage costs

Monitor Information Systems

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4.

Our recommendations on how to become a low-cost retailer through consolidation are listed below:

Centralized Buying
All buying divisions can be centralized and one buyer should be responsible for one category It makes procurement easy It gives the business competitive advantage Price negotiations to add that to customer value Proper promotions planning Lot of risk involves due to incompetence of an individual Bad business decision

SKU Consolidation
Retailers consolidate SKUS to alleviate shopper confusion. It also allows better facings to brand merchandising (better facing for the lines that sell), provides improved inventory control, high profitability/cost savings. It also allows shrinking shelf space so to improve trading density. It also allows private labels to be better exposed. As an example, Canadian Tire in Canada constantly looks at ways to improve their range of their assortment and constantly look at ways to remove SKUS that do not sell.

Supplier Consolidation
The most important reasons for consolidating your supplier base are performance improvement of the supplier base and the internal organisation. Fewer suppliers results in improved resource allocation within the organisation to manage the supplier base. A smaller supplier base also allows more resilience during a downturn in trade. The time to reduce your supplier base is during a down turn, when materials resourcing is reduced (Jamie Lidell, The trend towards Vendor Consolidation)

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Implementation Plan
Value Compass Value Retail Model
Conduct analysis on business's existing value strategy To be used pre and post Strategy planning Process to be owned by senior leadership To be measured though sales perfomance, marketshare, consumer confidence levels in brand

Use to analyse key value strategies in conjunction with value compass Integrate in strategic planning process Owned by Business Leaders, Brand managers, Buying, Planning, Operations and customer facing staff To be measured by Sales performance, marketshare and customer serivce indexes

Supply Chain

Assess supply chain efficiencies and establish cost saving opportunities Complete as part of ongoing business efficiency reviews Owned by supply chain executives and driven by the board To be measured through inventory management, on floor availability and cost savings

Consolidation

Assess the need for consolidation opportunities to drive costs, improve brand presence and drive efficiencies Complete as part of strategy planning and ongoing review Owned by senior leadership and driven throughout the organisation To be measured through improved profitability, efficiencies andprocess management

Retailers need to examine their ability to increasingly adopt a low cost or differentiation strategy through honestly assessing their capabilities (Berman, 2011) Ensuring low cost operations is the primary driver in ensuring sustainability since costs are controlled by management.

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Conclusion
The above report discussed the impact of the recession on the South African retail environment. It is evident from research that the biggest impact the recession had, both locally and internationally, was on consumer behaviour and spending patterns. This report further shows that consumer behavioural changes brought about through the recession may very well be permanent and irreversible as people hold onto the lessons learnt and refuse to go back to their previous spending habits. As a result of the recession a need arose for fundamental changes in 3 key areas, namely increasing dominance of value retailing, structural shifts in supply change and consolidation. The retailers response therefore should be to decide whether a value strategy, low cost or differentiation strategy is most suited. This study highlighted the degree to which customer preference for value has become the overriding factor when making a purchasing decision. There is a need for retailers to become more customer centric and competitive since customers are now more stimulated by value and saving. Value retail however is not necessarily based on providing either the lowest cost or the highest level of differentiation. This research provides an alternative view on the concept of value, and recommends that in response to the customers demand for value the implementation of the Value Compass and the Value Retailing equation is considered. This report makes further recommendations relating to optimising supply chain capabilities and consolidation. Several low cost or differentiation strategies are presented in the form of recommendations that retailers can use. Our report shows clearly the need for Retailers to examine their ability to increasingly adopt a low cost or differentiation strategy through assessing their capabilities. Ensuring low cost operations is the primary driver in ensuring sustainability and providing real value to the consumer. In conclusion the change in consumer behaviour will remain into the foreseeable future. It is therefore strongly recommended that retailers review and adapt their strategies related to Value retail, Supply Chain and Consolidation to be successful companies in the ever changing South African retail landscape.

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Appendices
Appendix 1 Questionnaire for Business Executives and Analysts

Business Executives
No 1. Question One of the most significant results of the recession is the change in consumer behaviour. How significant is this for your company? Do you think customers have changed the way they shop permanently (even after the recession) Has your business changed the way it is doing business post-Recession? With Particular focus on Supply Chain, Value Strategies and consolidation. Do you think Companies are forced to change their strategies with some of the big players entering the market place? Was there any temporary mechanism or strategy that was used to help your organization to cope with the recession?

2. 3.

4.

5.

Analysts
6 Did the World Cup provide South Africa with an opportunity to buffer the effects of the recession on the Retail Industry? How severely was the South African economy and in particular whole and retail affected by the recession? Has the retail landscape changed since the recession? If so, what has been the major area of change? Do you think Companies are forced to change their strategies with some of the big players entering the market place? Do you believe that the Retail Industry is agile enough to adapt to changes in the economy and ensure sustainability in a recession?

10

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Appendices 2 Customer Survey

Fast Forward Customer Survey July 2011

Questions 1. Have you changed your shopping pattern in the last 2 years? 2. Did the recent recession change the way you shop? 3. If Yes, where did you make the most changes in your shopping patterns?
Food YES NO

YES

NO

C lothing

Furniture

Retailers

Where did you shop in 2009

Where are Where did you Is it due to Is it due to Is it due to you shopping shop in 2010 Service? price? quality? in 2011

Food Retailers Woolworths Pick n Pay Shoprite Spar Checkers Other Apparel Woolworths Edgars Mr Price Foschini Truworths Other General Merchandise Makro Game Other 4. Do you buy Private Labels or Branded Products?

5. Research has shown that consumer behaviour patterns have changed for good, does this apply to you?

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Appendix 2 Customer behaviour trends post-recession Consumer behaviours and trends emerging Further trends that will drive consumption from the recession Recession Secret Shopper The authors identified the above as skilled bargain seekers. Demand for simplicity Consumers are seeking uncomplicated, user-friendly products and services that simplify their lives. Downturns are stressful and typically increase peoples desire for simplicity. Focus on the boardroom Outraged by corporate malfeasance, people are punishing companies for unethical governance. The financial crisis has put a spotlight on corporate governance, in particular the malfeasance of some executives and the complicity of companies boards. Discretionary thrift Even those who do not need to economize are pursuing a more wholesome and less wasteful life. Increasingly, though, many affluent consumers are economizing as well, even though they dont always have to.

See-Saw Consumer The above group of consumers is in perpetual search for bargains for their daily needs, as well as investment items that will keep their value for a long-term. Austerity Chic The above term was adopted largely by the no-frills affluent, a new breed of middleclass savvy consumers that are expert bargain hunters, consciously shopping in discount stores and who manage their diaries around the sales and bargains to be had. Lipstick affect Lipstick effect is the theory that when facing an economic crisis, consumers will be more willing to buy less costly luxury goods. Instead of buying expensive fashion, women will buy a lipstick-a little luxury treat that is immediate and affordable. Domestic God/dess In a recession, homeowners are electing to redecorate rather than relocate. They are embarking on home improvement projects and doing it themselves rather than employing professional decorators. Individuality The globalization of brands has created an opposing trend, the search for bespoke, personalized, and individualized products and services

Mercurial consumption Easy access to information and friction-free purchasing is making consumers ever more agileand less loyal.

Green consumerism Consumers are for - going pricey green products and instead are cheaply and discreetly reducing waste

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Decline of deference The decline of deference is also driven by mounting scepticism about the quality of information provided by traditional sources of authority such as businesspeople, economists, doctors, and the clergy. Ethical consumerism Altruistic consumption and spending, such as eating cagefree eggs and giving to charity, are falling as people focus on their own dire situations. Extreme-experience seeking Expensive, frivolous, or risky recreational experiences, is quite common post-recession.

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Appendix 3 Executive and Analyst name references Position Company Company Executives Chief Operations Executive Executive Executive MD Furniture City GM Gauteng Region CEO Group Director Retail Group CEO Apparel MD Financial Director Apparel CEO Vice President Marketing CEO CEO Head of Logistics Analysts Chief Investment Officer Chairman Chairman and Founder Analyst Director of Consumer Insights Edcon Edcon Edcon Ellerines Holdings Pick and Pay Woolworths Woolworths Mr Price Mr Price Mr Price Leons Furniture (Canada) Canadian Tire (Canada) Dominion Warehousing and Distribution Comet (London) Allied Bakeries (London)

Canon Asset Management British Retail Consortium J.C. Williams Consulting Price Waterhouse Coopers Canada Nielson Canada

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