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Abstract
In this article secular trends and market conditions in North America are examined and linked to a series of major structural shifts and changes in US and Canadian retailing over the last two decades (1990–2010). Antecedents and consequences of developments, such as the emergence of category management as a new marketing paradigm, formation of a new value ‘Trinity’, and the rapid movement of markets towards dominant lower cost (value) retailers are reviewed, and their collective impact on other competitive market spaces, (for example, the department store industry and shopping centres), are critically examined. The study also reviews the emerging managerial imperatives in retailing – focusing especially on the centrality of inventory management, the rapid movement of merchandise and information, and the significance of new business processes beyond systems and analytics – as the key elements in a new strategic frontier for higher performance. The paper concludes the strategic review of the last two decades with a preview of the next two, as expectations for the North American retailing scene, both locally and globally, are outlined. The authors fear that the ‘extreme market share’ in the hands of a few retailers may be leading consumers to end up with less choice to shop, researchers with less ‘variance’ to examine, and a continent bereft of any significant retailing innovation in the years to come.
Notes
1. In this article, we use the term North America, to refer only to United States and Canada. Other essays in this issue cover developments in Latin America and Mexico separately.
2. For both the USA and Canada, the figures on ‘international immigration’ reflect only the legal immigration into these countries, exclusive of all illegal or undocumented entries – which for the USA, can be as high or higher than the legal immigration annually.
3. The disparity between the low and high income groups has become even more devastating than this chart suggests: over roughly the last 15 years, 65% of all real income growth in the USA has been captured by the top 1% of income earners, or roughly 750 thousand tax payers (Saez Citation2009).
4. The momentum of income growth and its distribution in both the USA and Canada are nearly identical, and hence our observations here are generalized to the entire North American continent.
5. Total revolving consumer credit in the USA, as at mid 2009, stands at about US$2.5 trillion. This is exclusive of all other non-revolving consumer credit and mortgages, which stand at an additional US$10.5 trillion.
6. Median earnings of men in the United States who worked full-time, year-round, were US$45,556. For women, the median earnings were US$35,471, or 77.9% of men's earnings. In Canada, the ratio stood at 74.4% for 2007. The good news is both ratios were below 70% in 1990. In this case, the bad news is the same as the good news.
7. The term ‘irrational exuberance’ is from a speech by the former chairman of the Federal Reserve Board, Alan Greenspan, titled ‘The Challenge of Central Banking in a Democratic Society’ before the American Enterprise Institute in Washington, DC given on 5 December 1996. The term is often used to describe a heightened state of speculative fervour.
8. Sears Roebuck of 1990s was, of course, a highly ‘diversified’ retail company, that had other interests – in insurance (Allstate), financial services (Dean Witter), residential (Coldwell Banker) and consumer credit (Discover card) among others. Throughout this time, however, Sears ‘merchandising’ unit was still its largest strategic business unit (SBU) with an annual sales in excess of US$30 billion.
9. And in the case of ‘value retailers,’ the ‘price’ and ‘promotion’ decisions were in fact ‘blended’ into a new value proposition called ‘EDLP’ or Everyday Low Prices, which meant, simultaneously, that low and stable prices were not only the embodiment of their pricing strategy, but also of their promotional offer!
10. No one really knows the exact scale of the South East Asian presence in North American retailing. However, it is certain that China, for example, has become Wal-Mart's single most important supplier in the world today. During 2004, it was reported that ‘Wal-Mart's inventory of stock produced in China [was] expected to hit US$18 billion [that] year, keeping [with] the annual growth rate of over 20%'. (For a comparative value, the year-end inventories reported by Wal-Mart during 2004 were US$30 billion.) In the same news report, Lee Scott, then chief executive officer (CEO) of Wal-Mart was quoted as saying that ‘[Wal-Mart] expects the procurement of stock from China to continue to grow at a similar rate … in line with Wal-Mart's growth worldwide, if not faster'. Wal-Mart China's then director of external affairs, Xu Jun, was also noted as saying that ‘If Wal-Mart were an individual economy, it would rank as China's eighth-biggest trading partner, ahead of Russia, Australia and Canada' (Jiang 2004).
11. At about US$130 billion, or a 3.5% share of the total retail sales in the US, retail ‘transactions’ over the Internet are still considered to be a very small portion of consumer spending in NA – though it has reached these levels of volume (and share) fairly rapidly in about a decade and a half! However, it is a mistake to seek evidence of the Internet's significance (on consumers' buying behaviour) using such traditional metrics. The best way, to think of e-commerce (or ‘iRetail’) is not what is transacted online, but what is decided online and then purchased at a traditional store. By that measure of ‘size’, it is not inconceivable that iRetailing's size and scale in the USA is likely to be 5 to 10 times greater than these figures indicate, growing at perhaps 4 to 5 times the traditional retail volumes in the USA. The indicators of this scope are in fact already quite evident from other areas of the US marketplace – from music sales (via iTunes) to implosion of newspaper and magazine circulations in major US cities; and from rapidly declining television ratings to the impact of ‘social networking’ activity on box office sales for newly released motion pictures. (And even, one might say, to the election of Barack Obama as the President of the United States!)
12. As is well known, a key measure of an enterprise's Return on Investment (ROI) is its net profits (NP) divided by its net worth (NW) or simply RONW = NP ÷ NW. When this quantity is multiplied by the firm's Retention Ratio, or (NP – Dividends) ÷ NP, it yields the familiar Sustainable Rate of Growth formulation, or SRG = (NP – Dividends) ÷ NW. SRG is the rate at which a firm can ‘increase’ its asset base or investments in the marketplace without changing any of its other key financial metrics (for example, profit margin and financial leverage).
13. It is interesting to note that all three of the largest discount retailers in the USA – Wal-Mart, Kmart and Target – began operations within four months of one another. In March, S.S. Kresge Co. opened the first Kmart in Garden City, Detroit; in May, Dayton's opened its first Target store in Roseville, Minnesota, and the first Wal-Mart began operations in Rogers, Arkansas, in July 1962.
14. In this context, it is instructive to note that during and after Hurricane Katrina hit the southern US coast in the summer of 2005, Wal-Mart was credited as being more proactive and better prepared than the Federal Emergency Management Agency (FEMA), the US Government's Disaster Relief Agency, and the US Army and Reserves in tending to the needs and after-effects of the disaster in the region. There were more Wal-Mart trucks on the road, and more logistical support provided by Wal-Mart as an enterprise, faster and more efficiently, than the US Government. Wal-Mart, for many years has maintained a full-time emergency task force as part of their normal day-to-day operations, including a number of staff meteorologists who monitor the weather around the USA and the world on a real-time basis!
15. You will note that this consumer segment is also the only household quintile that has consistently gained in average or median household incomes over the last several decades. (And on even closer inspection, you will find that it is the first decile of this group, which has really gained in incomes over the last 20 years.)
16. It should be noted that, in pure ‘tonnage’, apparel volume growth is still positive in North America, but barely. However, when combined with significant deflationary pressures, the ‘dollar volume’ of clothing has been declining for nearly a decade.
17. Among the key contributors to the make-up of the Consumer Price Index in North America, the annual price movements in the clothing and accessories category has been at or below ‘zero’ for most years since 1990.
18. Small scale community, neighbourhood and convenience oriented shopping venues or ‘open-air centers’ have always been a very large part of retailing in the USA, accounting for more than 80% of all retail square footage. This footprint has changed very little over the last 20 years, and will is likely to continue unaltered in the future.
19. Wal-Mart actually tries to avoid Power Centers as much as possible, as their Supercenter format tends to already have a very loyal customer base, and they believe the traffic – and their wallet share – may be diluted by the presence of others in the center. Target, on the other hand, tends to be more open to locating in Power Centers, as they try to offer a more differentiated store, and cater to a slightly more upscale customer segment.
20. The pace of Power Center developments in Canada picked up a few years later than in the USA – during the mid-1990s – and the Life Style Centers still remain at a nascent stage north of the 49th parallel. Given the much smaller market size and other uniquely local market realities of Canada (for example, a relatively reserved consumer base who always seeks a deal and lives in vibrant inner cities), it is likely that Life Style Centers may never grow to be a major factor in Canada.
21. Another defining aspect of the shopping center industry over the last 20 years – that is perhaps less significant from a customer's point of view, but very significant when it comes to its present and future structure – is the emergence and rapid development of REITs, or Real-Estate Investment Trusts. Since its inception, the shopping center industry in North America had been mostly privately owned, ‘family operations’ with virtually no public exposure. With the Tax Reform Act of 1986, the stage was set for a huge wave of REIT ‘IPOs’ where Kimco Realty's decision to go public in 1991 was perhaps the key event. Subsequent REIT formations rapidly enabled the shopping center developers to suddenly have access to virtually unlimited sums of new capital, and are now credited for a retail space boom in the USA that was already considered unsustainable. Today, virtually all major shopping centers in North America are owned and operated by REITs, such as Simon Property Group, General Growth Properties, and Kimco Realty – a number of which are currently in the midst of serious financial difficulty, as they, too, try to consolidate like their former tenants, the department stores!
22. It may be easier to see the emerging centrality of merchandise inventories also from the Gross Margin Return on Inventory, or GMROI formulation; where GMROI = (GM ÷ Sales) × (Sales ÷ Inventory). With historical price ∼ gross margin (GM ÷ Sales) latitudes threatened or under pressure due, for example, to the presence of large Value Retailers, merchandise turnover (Sales ÷ Inventory) becomes the only lever available for higher GMROI.
23. Due perhaps to ‘global warming,’ but certainly due to more frequently recurring natural disasters in certain key parts of the USA, (for example, California and Florida), the local food chain in North America faces significant risks to its supply (and price structures). Though such risks sometimes can be mitigated by utilizing other suppliers from South America, the time and distance to North American markets inevitably puts severe costs pressures – especially at a time when the oil prices are high and rising. Unfortunately, this has now become a recurring theme and a new reality for the North American markets where food inflation has often been outstripping the consumer price index (CPI) in most years.
24. Many of the ‘best of breed’ retailers work relentlessly on improving all four of these ratios as part of their normal business processes. For example, gross margins are actively ‘managed’ by a diverse set of retailers such as Loblaw, Wal-Mart or Lowe's by constantly adjusting the merchandise mix, perhaps with the addition of stronger private labels, or by negotiating a lower cost of goods sold, or by improving markdowns, electronically. For other retailers, such as the warehouse clubs, Dell or amazon.com, accounts payable is always very closely managed to never exceed inventory investments, so that they always end up carrying a ‘net negative working capital’, in effect ‘running’ their businesses with the suppliers’ money (That is how they can often survive (and thrive) on gross margins in single digits!) Other retailers such as Zara depend on their strong value chain and logistics systems so that they can turn their merchandise inventories about 10 times per year, compared to about 4 to 6 times for most fashion retailers, by controlling every step of the value chain from product design and development to procurement to racks on the sales floor.
25. We believe the department stores’ improving fortunes on this key metric have less to do with their ‘achievements’ in the competitive marketplace, but more to do with their consolidation. In fact, you will note that the magnitude and direction of improvements for this group since 2000 has been marginal to flat – following the last and perhaps the final set of mergers in this industry.
26. We consider the ‘business processes’ to be the collection of tasks, activities, practices, methods, and so on that are uniquely engineered, tested and adopted in organizations which ultimately become part of the way ‘things are done’ in the organization – and which, ultimately, become an integral part of the social and economic fabric of an enterprise.
27. For the purposes of this discussion, we consider the USA, Canada, Mexico, Puerto Rico, Virgin Islands and Guam to be part of North America.
28. On 7 May 2009, Tom Schoewe, the executive vice president and chief financial officer for Wal-Mart Stores, Inc. announced that ‘[Wal-Mart] will no longer report monthly sales, [but] will provide comparable store sales results on a 13-week basis, along with guidance for the upcoming 13-week period’ (Wal-Mart 2009). It is true that monthly comp sales reporting can and does create some volatility for retail stocks. However, we believe the recent Wal-Mart decision is probably based more on the acceptance of the fact that there is no longer much ‘news’ for Wal-Mart to report on, from month to month, when it comes to comp store sales!
29. It is, of course, anybody's guess that if North America retailers are not there by then, if it might not be a little too late for them to contest this already dense competitive space.
30. At the end of FY09, Apple had 273 (land-based) stores (217 in the USA) which collectively generated US$6.6 billion. in ‘retail’ sales. Apple stores' sales per square foot, at more than US$3,250, are considered one of the highest sales productivity performances recorded in the ‘physical’ retailing world. (Never mind that some of those retail dollars are actually ‘virtual dollars’ that can only be spent online!) In most Apple retail stores, there are virtually no queues as each associate in the store can double up as a check-out register, whose hand-held wireless units can process sales, credits or returns – instantly sending the invoice to the shoppers’ e-mail. Apple Inc. is rapidly emerging as a premier multi-channel retailer, seamlessly blending store and online sales, where innovative products, applications and services can be purchased anywhere, any time, and any way the customer wishes.
31. Though we would like to claim some originality here, the conceptual framework described in Rule of 2 is really not much (or more) different than the generic pathways outlined in Porter's (1980, 1985) Competitive Strategy and Advantage. In this low-cost-leader dominated competitive space, the only avenues for survival are really either maximal differentiation to achieve some level of scale to compete with the leader, and hence try to be a differentiated co-leader, or an orderly retreat to a corner niche, where you hope to thrive serving a smaller consumer segment or a specialized need. This is the classic Porterian world, where only the strong or the subservient survive.
32. We think two clear exceptions to these rules can be found in food distribution – where price and locational convenience are nearly always the key drivers; and in the specialty apparel retailing – where the value for the money (but never really the lowest price), and wide selection or assortments tend to be the key determinants of store choice (Tigert, 1983). This is in fact why both in the USA and Canada, food retailers have been the most resistant to Wal-Mart's intrusions, and in apparel retailing, Wal-Mart, again, has not been able to make as significant an inroad as they had initially hoped with their George brand. In Canada, the food distribution sector actually provides an interesting twist to the Rule of 2 principles, where several seemingly differentiating major players (Loblaw, Sobey and Metro) are all heavily invested in ‘deep discount’ retail formats of their own – which claim a 20 to 25% share of the grocery volume. We have always thought this was something ‘akin to a Rule of 2’, in principle, as each of these competitors appeared to have the duality (low cost-price leadership vs. differentiation) built inside their organizations (see Serpkenci Citation2003, Citation2006, Citation2007 for a historical progression of the key events players in Canada). Increasingly, of course, all Canadian food retailers are now competing heavily with Wal-Mart, as they meet up with its rapidly expanding Supercenters in most parts of the country – which are expected to number more than 80 by the end of 2009, up from 0 units at the beginning of 2006!
33. As one of our colleagues also wisely commented, as one reflects on the last 20 years of retailing experience in North America, there is not really much to see, except a bunch of ‘firms continuing to refine old models … or exploit existing competencies (around) the old trinity of retailing – labor, space, inventory and of course gross margins – (with) virtually zero innovation … just refinements’. One wonders, however, how much of this is due to the value retailers just sucking up all the oxygen!
