Considering organic growth? Retailers don't forget to ...

As confidence heads back into the region, new and suspended growth strategies are reinvigorated and reinvented in attempt to capture market share.

While there are many challenges faced in delivering on any growth plans, a common conundrum often facing the business development directors, CFOs and CEOs is what is the right path to growth – do we take the organic or acquisition route?

In Retail, we often consider scale as a key winning metric and we tend to shoot for the stars when discussing store target numbers for years ahead. The reality is that delivering on these target numbers is often a hurdle too far for many businesses.

Having worked with clients across the region, the following points are not to debate the merits of either taking an organic or acquisitive route to growth but rather to highlight some of the elements that need to be on the radar when looking to expand your retail estate the organic way.

The little things add-up – control your costs
A costly decision on an individual store can be managed, once you roll-out this out over 20, 50 or even 100 stores this mistake can suddenly become a serious financial burden. Among others this could relate to fixtures and fittings or even site layout that impacts delivery of products. One client having procured a number of tailor-made gondola shelving for his estate, only then realized the depth was insufficient for his new product layout.

Location, location, location – do your due diligence
A good location now may not enjoy the same success in 12 months time and as this is always critical to the eventual triumph or failure of the store you need to be sure of the projected returns before investment is made. Understanding future property plans for the area and the possible competition needs to be assessed in depth. In markets across Southeast Asia where new malls and buildings are constantly being developed, it’s even harder to know the sustainability of a location in comparison to the mature western markets.

Be conservative with your numbers
Make sure your financial projections have the breadth that can incorporate all the variables that will have an impact on the overall cost of the store development. We are always keen to see positive returns on our plans and sometimes this can feed directly into the numbers we project; make sure they are given an objective view and all details are captured.

Do the detail, make sure the logic is there; first focusing on understanding the location, the impact of competition, the projected sales – average daily transactions, ticket values, days open etc – and then document all the capital costs and the back office needed to support the growth. With all projections make sure you provide at least 15 to 20 percent downturn on your numbers so that you’re not left high and dry should your sales not hit their intended target initially.

Connections – nurture key contacts
This is obviously country dependent, but we would be foolish to underestimate the influence of the authorities in any growth plans that may involve licensing, property or human capital decisions. Nurture these relationships and be proactive in networking with the right authorities and individuals to prevent those unforeseen time hurdles that will inevitably arise from ambitious growth targets.

Preparation is a key factor to driving a successful organic growth strategy and without the business platform, your targets will stay as targets but they just will not be met!

The points mentioned above are by no means exhaustive and there are many factors that lead to a winning organic growth strategy.

Trends that are shaping the World – part 7

The final mega-trend that is likely to have a significant global impact over the next 10-15 years is the increasing role of governments as enablers of the globalisation of markets, labour and capital. The role and success of governments will be critical across three areas:

1. Realising growth - Governments are likely to play an increasingly important role in delivering the growth potential of BRIC and other ‘emerging’ economies. As compared to the US and Europe, Asia may have favourable demographics but significant investments in infrastructure, education and healthcare must be carefully managed and executed for projected growth to be realised. This is easier said than done, particularly in countries with high corruption and less than exemplary track records in managing such investment.

2. Legal and regulatory environment - We have seen several issues in the past 12 months surrounding this, namely Google in China and Research In Motion in the Middle East and India. As globalisation continues apace, there will no doubt be other points of friction between global companies and national governments.

3. Competitiveness -  Governments will play a critical role in driving individual countries’ competitiveness. How they level the playing field between local and foreign companies, corporate taxation as well as the social models they adopt will all have an impact on the types of societies they become, the kinds of companies they attract and ultimately the direction in which countries develop.

On the flip side, globalization is about increased integration on a global scale. It is about how governments will work together on global issues such as sustainability, climate change and terrorism, to name a few (and not how they develop their own countries). The enlargement of the G8 to G20 is a recognition of the fact that economic power is re-balancing globally, but with power comes responsibility. As such, the most important role of governments may well lie in addressing cross-border issues.

Trends that are shaping the World – part 6

Sustainability is the sixth megatrend that will have a significant global impact over the next 10-15 years. There will need to be a balance between fuelling the growth of emerging economies and the environmental impact that this will have, both in terms of socio-economic damage but also the depletion of finite resources. This will continue to be an important topic for the world’s largest economies to tackle which may even lead to a more protectionist approach as countries look to secure the necessary inputs to achieve economic development and growth.

From a business perspective, consumption of raw materials will continue to be driven by global growth which suggests that prices can only go one way. How companies manage their resource requirements and how these are sourced will increasingly become a competitive advantage.

Renewable energy growth, driven by Government incentives and increasing efficiency and affordability of technology is likely and as such, we are likely to see a shift away from a dependency on oil and a rise in the importance of renewable within the Energy mix.

Maximising the return on resources may well become one of the key business metrics of the future.

Trends that are shaping the World – part 5

This week I want to consider the term interconnectivity and what does it mean. Business Dictionary.com provides this definition : “(Inter)connectivity is a measure of the extent to which the components of a network are connected to one another and the ease (speed) with which they can ‘converse’”. Current technology enables people and businesses alike to interact at an increasingly faster pace. Also the number of ways or channels companies can interact is growing. Social media networks are now a hotbed for businesses to drive positive marketing messages.

Many companies join these networks and make their own page in order to create word-of-mouth publicity to drive positive messages. A McKinsey study on “Unlocking the elusive potential of social networks” suggests making those people, who create positive word-of-mouth advertisement, seem important in their own network. The reasoning behind this is that recognition by your peers is a strong motivator. If this recognition is then publicised, this translates into strong word-of-mouth advertising. The study implies that this can be attained by issuing achievement badges that users can post on their profiles or by implementing an achievement table in which varying scores can be posted.

I believe that the most effective way for companies to use public media networks is to create their own profile on the websites and interact with interested members. New products and new promotions can be publicised on that page, questions can be answered and marketers can even engage with unsatisfied customers, preventing them from expressing negative publicity. Word of warning: Once you open up to a wide audience, be prepared for wide scrutiny.

Best Wishes

From all of us here at Point Consulting, we wish all our readers a very happy and prosperous New Year. Please stay in touch to read our upcoming blogs - beginning the week of January 10th!

Trends that are shaping the World – part 4

Whereas in the previous weeks we have looked at megatrends affecting emerging countries, this weeks’ blog will mainly focus on societal changes in developed countries. It is an aspect that almost all western countries face, often referred to as the ageing population as in the increase of the proportion of people older than 65. In Germany this proportion was as large as 20% in 2009. In the UK and the US it amounted up to 16% and 13% respectively and is rising. In comparison with China on a mere 5%, these numbers are very elevated. Why is this proportion so high in western countries and how should the public and private sector react to it?

Due to improved quality in health care and a relatively higher fertility rate in the 1950s and 1960s, there has been an increase in the ageing population. Another driver which further increases this proportion is the higher independency of women since the 1980s.

Unless more funds are made available to support the ageing population, the burden of this growing segment will continue to impact the economy further. To counteract this, if productivity can be increased especially in the public sector, more resources are freed to finance the elders’ pension schemes of tomorrow. There are a number of ways to improve performance that include organizational redesign, strategic procurement and operational design.

Firstly, organizational redesign is the broad term for streamlining processes to provide more of a focus on the end-customer. Secondly, a better understanding of a suppliers’ economics and the environment in which a public institutions operates in, often leads to positive savings and therefore performance improvement. Lastly, through redesigning the operations and subsequently reducing waste and duplication of effort, improvement can be achieved.

These three ways of performance improvement are already established methods in the private sector, why aren’t they commonplace in the public sector? It is often stated that in the absence of competition, managers do not have an incentive to take risks or to improve their business. This is what happens in most monopolies and why governments prohibit them in many industries. The same goes for public institutions: choices should be created for the end-user to create competition and private companies should be able to bid for social service contracts.

In terms of the private sector, businesses in B2C should position themselves to be able to address the growing segment of older people. The elderly of today and tomorrow are wealthier and more outgoing than yesterdays’. Hence, the right brand image and products could prove fruitful when tackling this growing segment.

The ageing population in western countries is a fact and poses a major change in the external environment of public and private entities. Therefore both types of entities should proactively approach this societal change.

Trends that are shaping the World – part 3

The third trend of seven is the increasing population migration from rural to urban areas – Urbanisation. The economic development witnessed in emerging economies has led to huge urban migrations as cities continue to be main drivers of GDP growth. This migration is occurring at a tremendous pace; the urbanisation rate in China for example has reached around 45% last year from a level of around 35% in 2000. This means that in less than 10 years over 130 million people or about a half of the US current population, have migrated to major cities in China and this looks set to continue. By comparison, urbanisation in the US stands at about 80% (i.e. 4 out of 5 people in the US live in urban areas).

What are the triggers for this explosion in urbanisation in emerging countries? Economic growth in urban areas far outstrips that of rural ones. This in turn provides jobs which then drives migration. Beyond this, services and infrastructure investment further accelerate the economic development and the cycle continues. It is this reinforcing spiral of demand, corporate investment and job opportunities which will continue to drive urbanisation of the next 10-15 years.

As urbanisation continues, there will be significant pressure points that Governments and the private sector will have to address if economic development is to continue. A study conducted by McKinsey identifies these pressure points as land, funding, human and natural resources.

Firstly, the land issue relates to urban sprawl, loss of arable land and traffic congestion. Governments should anticipate the growing proportion of people living in urban areas by providing the availability of decent housing and larger and more effective mass public transport.

Next to this, funding will be needed not only for infrastructure, but also for the provision of services. The provision of health care and educational services for migrants will become an important factor.  As an increasing proportion of the urban population will be from rural areas, there will be a huge need to develop skills for urban jobs in industrial and services sectors. This leads to the third pressure point, namely the need for high-skilled labour forces.

Even though the number of university graduates will rise significantly in the coming years, these people will move to mega-cities where more job opportunities with better benefits are. If an evenly distribution of talent is to be achieved, governments should address this issue, as otherwise shortages in labour supply will occur in small to mid-sized cities in emerging countries.

Finally, the demand for energy and water resources will likely surge as urbanisation increases. If continued economic development is to be achieved, resource efficiency will become very important.

Planning must be conducted across these four areas in order for the current and forecasted rate of urbanisation to be sustainable and for emerging economies to drive economic growth.