Retailers That 'Act Vertical' Will Weather the Recession, New Kurt Salmon Associates Study Predicts

While the deepening recession is decimating the U.S. retailing landscape, forcing steep markdowns and pushing traffic to the discount channel, a new Kurt Salmon Associates (KSA) study predicts retailers with unique and compelling products and experience, supported by seven capabilities, will emerge from the recession successful. KSA studied the performance of more than 100 major U.S. retailers over the last 10 years and found that the recession has only accelerated a more pervasive trend: a surplus of merchants with insufficient differentiation in their product offering and customer experience. As a result, KSA sees the retail shakeout as a sign of cash-strapped consumers rejecting retailers that do not offer a compelling reason to shop with them rather than with discounters.
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NEW YORK -- While the deepening recession is decimating the U.S. retailing landscape, forcing steep markdowns and pushing traffic to the discount channel, a new Kurt Salmon Associates (KSA) study predicts retailers with unique and compelling products and experience, supported by seven capabilities, will emerge from the recession successful.

KSA studied the performance of more than 100 major U.S. retailers over the last 10 years and found that the recession has only accelerated a more pervasive trend: a surplus of merchants with insufficient differentiation in their product offering and customer experience.

As a result, KSA sees the retail shakeout as a sign of cash-strapped consumers rejecting retailers that do not offer a compelling reason to shop with them rather than with discounters.

However, the KSA study also found that a small minority of U.S. retailers across every industry segment have realized superior financial and operational performance over the last decade. These retailers include Aeropostale in apparel, PetSmart in specialty, Coach in accessories, Trader Joe's in grocery, Apple stores in consumer electronics, and Target in mass merchandising.

Even in the current recession, retailers have maintained or increased market share and stayed profitable. They have done so by designing their own compelling offerings, which in some cases are services that help customers use their products and generate substantial margins (e.g., PetSmart). In addition, these retailers have provided distinctive customer experiences (both on- and off-line, but especially in their stores) that have showcased their unique offerings, helped consumers make better use of them and made them a vital part of their lifestyles. (Apple stores is the exemplar.)

"The recession is forcing retailers to radically rethink their businesses, and many are in survival mode," said Cari Bunch, who oversaw the research and is a retail strategist at KSA. "However, in our view, the economic downturn has created much greater clarity about what retailers must do to be successful over the next decade."

KSA refers to the strategy as "Act Vertical." Act Vertical retailers have learned to collaborate internally (by breaking down the barriers between functions), externally with manufacturers and suppliers (without owning production) and externally with consumers by redefining customer research as a continuous conversation rather than a one-off event.

Conducted in 2008, the study was based on an extensive survey of 101 U.S. retailers, including several of the nation's largest merchants. (All survey participants had annual revenue of at least $500 million.) The study also included 10 in-depth case studies on a variety of retailers, including Aeropostale, Apple, Coach, PetSmart, Trader Joe's, Apple, Talbots, Target and two women's apparel chains.

The survey found that retailers with Act Vertical strategies were a minority of the sample, making up only 15% of all respondents. However, between 1998 and 2007, on 14 key measures, this group substantially outperformed their peers on several key metrics, including annual revenue growth, operating margins, same-store sales, gross margins and sales per customer.

KSA's Sr. Partner Madison Riley said, "The historic relationship between retailers and consumers has changed substantially over the last decade. There are too many retailers selling too many of the same product brands. Consumers can use the Internet to find the retailer with the best price in minutes, which means trouble for retailers that compete only on price. As a result, the traditional model of most retailers - being purveyors of national product brands and doing little to connect those products to the lifestyles and emotional needs of consumers - is rapidly becoming obsolete."

KSA's survey and case research found that the ability to Act Vertical requires a clear retail brand strategy (including sharp delineation of target customers) that is in synch with the offering (products and services) and experience strategies. In addition, the study found the most successful Act Vertical retailers had strong capabilities in seven areas:

  • Market research that identified emerging customer needs
  • Product design and development that balanced creativity and commercial
  • appeal
  • Consumer testing that shaped the offerings and customer experiences
  • Sourcing relationships that accelerated manufacturing but delayed key
  • product decisions
  • Assortment, allocation and replenishment that rapidly shifted products
  • to places of greatest demand and maximized pricing
  • Design and execution of engaging and consistent brand experiences
  • across all channels
  • Marketing that communicated the brand promise and the uniqueness of
  • the offering

Mike Brown, a KSA Partner and retail industry veteran, said, "Every retailer in every segment needs an Act Vertical component in its overall business strategy today. Unless a retailer can truly compete on price or convenience, it will be the only way they will be able to continue to attract and maintain their customers."

Email actvertical@kurtsalmon.com to request a full copy of KSA's 100-page report, titled "Competing on a Unique Offering and Distinctive Experience: The Rise of Act Vertical Retailers,"

About KSA

Kurt Salmon Associates is the leading global management consulting firm specializing in the retail and consumer goods industries. We leverage our unparalleled industry expertise to help business leaders make strategic, operational and technology decisions that achieve tangible and meaningful results.

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