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Summary Retail Operations Management
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1CM40 – Retail Operations Management Q2 2021/2022Week 1
Introduction to retail
Why study retail operations?
- Retail is a very dynamic and innovative sector
- Retailers play a dominant role in many supply chains: not only important for retailers
but also for their suppliers to understand the processes in retail and their impact on
the supply chain
- Problems faced by retailers (data availability, dealing with increased variety, etc) are
shared by many other firms in any other industry
What is retailing? A set of business activities that adds value to the products and services
sold to consumers for their personal or family use. A retailer is a business that sells products
and/or services to consumers for personal or family use.
How retailers add value
- Breaking bulk: buy it in quantities customers want
- Holding inventory: buy it at a convenient place when you want it: buy it at a
convenient place when you want
- Providing assortment: buy other products at the same time
- Offering services: see it before you buy, get credit, layaway
Historical development of retail small local independent stores (~100 items in 1900)
versus large global retail chains (~100000 items in 2000)
Similarity with emerging markets versus western-Europe/USA
The retail supply chain: manufacturing wholesales retailer consumer
Retail strategy
Retailers use different retail mixes infinite variations survival
of the fittest: some combination of retail mixes satisfy the needs
of significant segments and persist over time
- Merchandise: variety: number of different product
categories (breadth) / assortment: how many different
products within one category (depth)
- Services
- Store design, visual merchandising
- Location
- Pricing
- Communication mix
Let’s compare two global retailers: Walmart (department store, offering huge amount of
different products) and Zara (fashion retailer, much more focused, only fashion retailer)
- What are the key differences in retail strategy between these chains?
- What is similar?
- What are the unique assets?
- How does their retail strategy have an impact on their operations management?
The Walmart case
- Number 1 retailer worldwide with $514 billion in global revenues in the fiscal year
2019 nowadays there are also large players in the online retail (e.g. amazon which
is in the 2nd place)
- Active on 27 markets outside the US
1
, - 2.2 million associates worldwide, 11300 stores
Walmart’s history, culture and key strategic decisions: Video is uit 2004
- Wallmart is setting a standard for the nation as a whole, which companies need to
compete with.
- Used to be manufactureres who have the most power, now global retailers are the
most powerful companies in the global economy
- Strive to keep costs as low as possible, such that they can make the customers
satisfied and add value and still make a profit
- How do they keep he prices so low? using a pda they keep track of the past history
sellings, which they can use to forecast the new sellings better helps to get the
right things into the stores
- Increased the efficiciency of the supply chain
- Shift from push system to pull system now retailers are deciding on what is being
sold and telling manufacturers what to produce and when to produce
- Suppliers want to sell their products in wallmart
- Walmart uses the information of what the customers want to buy and use that to
make sure the right products are in the store
- Prices are important, manufacturers are doing it the way of walmart instead of
viceversa
Opening price point strategy and why suppliers had to move to Asia early this century:
- morning meeting: talk about sales of yesterday --> opening price policy
- walmart shows the bottom up prices on the displays in the store
- every line of good has a opening price point, the cheapest item in the line --> to get
you into the specific department, they use the low prices, but when you walk into the
department you see the product you actually want and this is not the lowest price.
Once you walk through the opening price point, they got you, and you think that
everything that is standing there is the lowest price in town. However, this is not the
case
- Walmart went overseas in the 70s to find more products
- After sam died, the stock price of walmart decreased --> needed to do something
different
- Imported products (Asia) had a much higher margin than other products --> this gave
Walmart a higher profit
- If the suppliers wanted to still sell in walmart, the suppliers also needed to go to
China to be in the picture since the prices needed to be as low as possible
- For the suppliers to remain a valuable company over the long run, they need to move
to Asia to meet the bottom line price figures
- Trade flows between US and China were opened
Walmart vs Amazon: main competitor, they have a certain level of enemies and they are
competing with each other
2
,The Zara case
- Zara is part of Inditex (Spain)
- World’s largest fashion retailer (2nd is H&M, Sweden)
- Active in 202 countries worldwide, more than 7337 stores
- €19.6 billion in global revenue in the fiscal year 2019
- More than 176000 associates worldwide, many female
- Capable of spotting new trends very quickly and translating these trends to products,
these products are also delivered very quickly. The products look quite exclusive but
are sold at an affordable price.
- Zara: just-in-time organize your production such that everything is picked up right
from the production lines
- Quick to adapt to new trends strategy and affordable exclusivity pricing strategy
- Supply: mix from local and global supply chain in 2020was made up 1985
suppliers. To ensure the proximity of suppliers, 54% of production has its origin in
suppliers located near Inditex’s headquarters in Spain 50% Spain/Portugal, 25%
Morcocco/Turkey, 25% Asia
- Many other retailers choose to make
their products in Asia since this is
cheap, and then transport it to the
stores very large lead times so
you cannot react to changes in the
fashion market
- Zara can react since their production
is near the head quarter
Walmart Zara
Location Free standing stores Fancy buildings, high street locations in city
Outside of the city centers centers, expensive but many people are walking
stores are really large and by so the chance of selling more is present
they need a lot of space
To get a lot of customers,
they need large parking
spaces
Merchandise Large number of categories, Only a few product categories, all around
assortment few items in each category fashion, within each category they do not have a
They sell almost everything, huge amount of different products
but since space still has its
limitations, they do not have
a huge amount of items in
each category
Pricing Low, every day low pricing Offers affordable prices for relatively exclusive
Jumbo visited Walmart and products
really liked this pricing
strategy, they are still using
this nowadays
Communication TV and newspaper Rely on mouth-to-mouth advertising
mix Insert ads
Store design Basic, special displays for Very important, they spend a huge amount of
and display products money to make sure the store looks appealing
and modern and to the latest trends
Customer Limited Somewhat limited, fillrate is relatively low. They
service want to give the customer the impression that
there are only a few products available such that
people are going to buy the products sooner
3
, Alternative classification for retailer strategies
- First mile: concept to design, source, forecast, order and make
(Zara)
- Middle mile: DC to store (Walmart)
- Last mile: ex-factory to DC/store to consumer (Amazon)
- Magic mile: it is magic because it is required to sustain a margin
model in decline. This can only be when you really do something
different, e.g. re-invent store experience, use celebrities to
promote your product, be specialized in data analytics
Implications retail strategy for tactical and operational decisions
Example: zara case Quick to adapt to new trends
and affordable exclusivity pricing strategy imply a
moderate-cost-fast-supply-chain
- 1 DC, regional production near DC and
frequent parcel distribution to avoid long
leadtimes high responsiveness and less
markdowns
- Only stores in high-end traffic shopping areas
(to limit markdowns)
- Low inventories in store to create ‘sense of
scarcity/exclusivity’ and to limit markdowns
Thorbeck (2017). Retail strategy; Zara gap: Amazon, Walmart and the first mile
Last mile: amazon can generate disproportionate investment capital because it owns product
cash flows but not inventory.
Middle mile: in 1962 Walmart began to build its distribution network through small market
hubs, enabling unequaled DC-to-store delivery advantage. Walmart has to divert capital to
compete in the essential and only channel of retail growth.
4
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