Ernst & Young Analyzes the Top 100 Global Retailers

Selecting the right merchandise. Effectively operating stores in great locations. Adapting quickly to changing market conditions and tastes. It may not sound like rocket science, but these are keys to what makes some retailers wildly successful — while others struggle to maintain market share. They are among the lessons in the Top 100 Global Retailers of 2003, a new report from Ernst & Young LLP that appears in the December issue of Chain Store Age. Execution, innovation, global expansion, implementation of new technologies, risk management, and partnering are just a few of the factors that influence retail success. Conversely, “less successful retailers tend to focus their energy on restructuring to regain market position, often repeatedly and at high cost,” says Julie Kunkel, Americas Director of the Retail and Wholesale Sector, Ernst & Young LLP, and co-author of the report.

Among the top retailers of 2003: –Nordstrom is capitalizing on technology to improve inventories and yield higher margins and returns. While Nordstrom’s core focus has always been customer service, it has embraced technology to get a better handle on its inventories, as well as a better understanding of marketplace trends. Nordstrom’s systems can assess the popularity of sizes and colors for different SKUs, and determine appropriate markdown schedules to keep merchandise moving and facilitate replenishment. –Tesco has transformed itself from a traditional supermarket chain into a faster-growing, mid-line retailer, allowing it to gain ground on Carrefour, Europe’s largest retailer. Tesco now operates a range of successful formats including convenience and gasoline retailing (Tesco Express), small urban stores (Tesco Metro), hypermarkets (Tesco Extra), as well as having a 35% stake in Safeway’s Groceryworks.com.

Among the underperformers, a constant is that size is no guarantee of success. Top-rank retailers whose grasp appears to be slipping include two that recently announced they would combine. Kmart remains one of the Top 100, but store closures and difficulty generating customer traffic are eroding its sales base. Sears, again operating as a pure-play retailer after the divestiture of its credit-card operation, has yet to post clear and consistent success with some of its merchandise initiatives, especially in apparel. The report says that the opening of its new concept, Sears Grand, holds promise, but much depends on how well this strategy is implemented.

The report also notes that leading retailers effectively adapt their business processes to technological advances, and cites as a recent example the movement toward the adoption of radio-frequency identification (RFID). RFID is an example of how big retail operators are consistently breaking new ground to expand their market share. With both Metro and Wal-Mart as key drivers behind the adoption and implementation of RFID, the impact on the supply chains of both retailers and consumer products manufacturers will be enormous, and these two retailers will shape how that process unfolds. Ernst & Young notes that by driving out extraneous costs in their supply chains, retailers will be able to spend more to gain market share — whether that is through more marketing/merchandising efforts or through price cuts. At the consumer level, the availability of broadband has helped drive Internet retailing, as well as the rising use of mobile devices with mixed functions, such as cell phone/PDA combos or the Blackberry, which allow consumers to be connected at all times. Technology also will help to reduce staffing needs in retail — which is critical given the low or declining birthrates in many countries. In the U.S. supermarket industry, self checkouts are becoming more commonplace and helping margin strapped retailers lower costs.

Another area the report considers is mergers and acquisitions. While M&A activities continue, the overall focus has shifted a bit toward smaller, fill-in deals. Distressed retail assets can be hard to move in an intensely competitive market, although divestitures of well-known names such as Marshall Field’s department stores still command top dollar. But, says the report, M&A activity can have a downside. Federated Department Stores’ purchase of Fingerhut was supposed to give it a cost effective means of Internet fulfillment. However, the deal was not successful and Federated sold Fingerhut through a series of transactions in 2002. Afterward, Federated refocused energy on its core department store operations and was able to bounce back. Other divestitures include Target, which finally has morphed fully into a discount retailer by shedding both Mervyn’s and Marshall Field’s during 2004. And J.C. Penney sold off the Eckerd drug chain to The Jean Coutu Group and CVS in 2004.

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