Beyond the Big Box Backlash
One company that is certainly competing on analytics these days is Britain's supermarket giant, Tesco. The company gathers most of its data from its successful Clubcard. With 12 million cards in use in the UK, Tesco can closely watch what its shoppers are purchasing. It then explores linkages between the products people presently buy and the ones they might be persuaded to buy next. “We believe we have one of the largest databases anywhere in the world,” says Martin Hayward of dunnhumby, which handles data management for the company. 
Now, Tesco is bringing these capabilities to America. The company plans to launch new stores on the U.S. West Coast in 2007 with a convenience-store format and intends to annually invest £250 million ($436.1 million) on the expansion. In fact, half of Tesco's shelf space is now outside the UK. It has already set up shop in China and other emerging market.
The interesting thing to watch, however, is how the company will use analytics to determine how to localize, not merely globalize, its offerings. As Bain consultants Darrell Rigby and Paul Rogers pointed out this week in the Wall Street Journal (subscription required), Tesco is among the retailers that now recognize "regional market share is even more important than national scale if they are to grow profitably. An industry built on the principle that success requires standardization is now widely adopting strategies of localization."
Why is that? As the writers put it:
"Local communities are growing more diverse in age, wealth, ethnicity and lifestyle. Moreover, many locales are saturated with big-box outlets and customers are rebelling...In response, some leading retailers are customizing their offerings to appeal to neighborhood tastes and needs. It hinges on getting the balance right: Too much localization can cause costs to spike; too much standardization leads to stagnation. Industry leaders have focused on understanding which elements of a business should be considered for localization, how costly they are to customize, and how much impact they'll have from store to store."
The authors point out that retailers can and should now leverage their knowledge -- drawn from shopper cards and other information gathering resources -- to better understand local tastes and desires -- just as Tesco has done in the UK and elsewhere. "Downtown Tesco Metro stores, for example, often provide sandwiches at lunchtime, and create prepared dinner meals for customers to pick up on their way home," they explain. "The smaller Tesco Express store concept aims to appeal to convenience shoppers with a mix of groceries and household items. No surprise, then, that Tesco Express provides a model for the American convenience stores that Tesco plans to open in 2007."
WalMart, which has experienced the real brunt of the Big Box Backlash also is onboard with this localization strategy. It calls its new initiative "Store of the Community," tailoring formats, products and other services to local clientele. For example, readymade meals are provided at stores near office parks; pharmacies are expanded at stores near hospitals.
"Through its Retail Link program, Wal-Mart works with suppliers to tailor store merchandise with precision," the Bain consultants write. "Retail Link provides both local Wal-Mart managers and vendors with a two-year history of every item's daily sales." Explaining the analytical aspects of Retail Link:
It then creates maps of local customer demand, indicating which merchandise should be stocked when and where. For example, Wal-Mart stocks about 60 types of canned chili in the U.S. but carries only three nationwide. The rest are allocated according to local tastes. Five years ago, Wal-Mart used just five planograms -- diagrams showing how and where products should be placed on retail shelves -- to adapt its soup selection to local preferences. Today, Wal-Mart and its suppliers use more than 200 finely tuned planograms and have raised soup's growth rate by several points.
As Rigby and Rogers conclude, such retail localization leads to "a host of operational advantages -- higher sales productivity, fewer markdowns and faster inventory turns, among others. Just as meaningful, localization has kicked off a new round of innovation among retailers, by forcing executives and store managers to ask, "What if each store was our only store?" Indeed, the growing momentum of localization is a counterpoint to the assumption that the world will be packed with indistinguishable big boxes selling the same goods and services to everyone."
