Supply chains are the weakest links in retail costs

Last week I talked about prices at retail dropping over the coming year, and urged you to hold onto your till receipts so we could look at them in January 2011. I predicted that these things would come about because of well-planned productivity improvements, not knee-jerk discounting to damage retailers’ or manufactures’ margins.

The prediction was based upon what we have seen in the UK and US retailing environment over the course of the past two years, where prices have dropped, sales volume has improved a bit and profitability has improved a lot at Walmart, Tesco and Asda.

One week later, Coles and Woolworths both let shoppers know that lower national and state level pricing is here and being rolled out to a greater proportion of items over time.

At Coles, CEO Ian Mcleod launched the change on a state-by-state basis, but around 8,000 of 25,000 items are adopting national consistency, achieving the lowest national price point.

Then at the Woolworths’ mid-year results media briefings, CEO Michael Luscombe confirmed that Woolworths had started this process mid-way through 2009, and was acutely aware of the impact on margin if not managed properly.

So back to the ‘whys’ and the ‘hows’.

The CEOs and leadership teams among our largest retailers haven’t started a discount war. They haven’t decided to drop prices at the expense of margins.

Their teams have worked over many months with suppliers of every service and product to their businesses to identify the areas of duplicated or non-value-add cost in their suppliers’ systems, then worked together to remove this duplicated or ‘bad’ cost.

Some costs are from poor performing items that don’t sell fast enough and therefore need to be removed. Some of the costs are among the suppliers’ own structures to serve the retailers, warehousing, field forces, secondary packaging or freighting methods. Importantly, all of these are costs that sit outside the retailer’s business.

Remember two years ago Woolworths undertook ‘Project Refresh’ to do exactly the same task, but focused on Woolworths’ own internally controllable cost? It created a better shopper experience and improved margins at the same time.

SALMAT used the same consulting team with the same results within its business one year later, and from day one on the ground Coles’ Ian McLeod has been addressing internally controllable costs to significantly improve the shopper experience and margins.

The reason why there is a shift to looking at “bad” cost outside the retailers’ own walls, is that there is very little fat and poor process left in well run retailers. Sure, every retail leadership team will beat themselves up and believe there are areas in the business that would benefit from further tweaking and improvement, but the real “virgin” areas of undocumented and unidentified costs are within the combined supplier bases. They are the plethora of boxes, trucks, pallets and bodies that mill like ants around each store in order to service the product at shelf.

There is a huge amount of duplicated cost without a single lens being applied to understanding its overall composition. Don’t get me wrong, manufacturers and freight companies use their best endeavours to look at their own costs, but it is impossible to harness savings if you cannot see the whole picture. The problem is that it’s hard to identify and even harder to harness.

How do I know this? Well my own company’s fundamental raison d’etre, its “front office” in the words of Jack Welch, is in the area of productivity in the management of huge amounts of labour at retail. How huge?

In the last 12 months alone CROSSMARK in the US, across just three retailers and one service provider, has taken the tasks being completed by around 38,000 staff across retail stores, and performed those tasks faster, more accurately, and more cost-effectively with custom built IT systems, high levels of staff training – but with only 21,000 staff. The savings in duplicated labour and duplicated kilometre costs run into hundreds of millions of dollars, all of which feeds into lower prices at shelf.

Further up the supply chain to Australia’s producer prices, the cost of stuff leaving the farm or the factory, posted a fall in the December 2009 quarter of 0.8% compared with a 0.1% rise in the September quarter. The stage two, or intermediate price index, which covers inputs into the production of final commodities, fell 0.9% in the fourth quarter from the third, and dropped 6.5% from a year earlier.

Added together all of these productivity improvements will continue to drive the shelf prices within stores down.

In his role as CEO of CROSSMARK, Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores. In this insightful blog, Kevin covers retail news, ideas, companies and emerging opportunities in Australia, NZ, the US and Europe. His international career in sales and marketing has seen him responsible for business in over 40 countries, which has earned him grey hair and a wealth of expertise in international retailers and brands. CROSSMARK Asia Pacific is Australasia’s largest provider of retail marketing services, consulting to and servicing some of Australasia’s biggest retailers and manufacturers.