The economy’s current instability makes it difficult to make any definitive projections from the back-to-school season onto the holidays.

back-to-school, holidays, B-T-S, A.T. Kearney, Mark Cooper, Walmart’s head of emergency management, Macy’s Inc., Terry Lundgren, chairman, president and chief executive officer, Kathy Tesija, executive vice president of merchandising, Target, Costco Wholesale Corp., BJ’s Warehouse Club Inc.

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Inside This Issue - News

Lessons learned

November 28th, 2011
by Joel Alden and Daniel Farmer

NEW YORK – The economy’s current instability makes it difficult to make any definitive projections from the back-to-school season onto the holidays.

In prior years, particularly before the 2008 collapse of the financial markets, B-T-S performance has served as leading indicator, and it has been possible to make an inference between one and the other.

But in recent years it has been harder to draw a direct correlation; and in 2011 it seems like any piece of news, good or bad, could sway consumer confidence and thus change purchasing plans. So while the July through September B-T-S season saw some of the best gains since 2007, during this same period we also saw a bifurcation of consumer spending patterns. Luxury and discounters did well, but middle-ground retailers were struggling. Recently those who have good jobs have actually seen wage increases. That said, consumer credit remains problematic. Therefore, many middle marketers are finding the need either to go up-market or to discount to appeal to either the affluent buyer or an increasingly spend-shy and value-oriented consumer.

High-performing retailers do not predict B-T-S shopping season better than others; but they are better prepared by learning from each season. A.T. Kearney has studied the trends in this year’s B-T-S shopping season and found three lessons for retailers that, despite the unstable economy, can be applied to the upcoming critical holiday shopping period.
Retailers who paid close attention to the underlying shopping patterns and consumer behaviors of the recently completed B-T-S shopping season outperformed their peers and delivered strong results. Our research identified three consistent lessons that can inform both short-term choices for the upcoming holiday season, and long-term strategic decisions.

1. Be prepared … for ­everything.
Retailers and industry analysts alike look to historical economic and industry trends to predict future consumer sentiment during annual shopping events. However, often missed are the more short-term potential wild cards such as weather, political issues and natural disasters that can impact supply, consumer behavior and store operations.

High-performing retailers have the operational foundation in place to deal with wild cards: flexible and responsive supply chains; agile field communications and store execution; and shortened planning cycles. This season was a case example of how wild cards can have a direct impact on retailers. Hurricane Irene impacted most East Coast retailers during the B-T-S shopping season this year, but this impact was lessened for retailers that were able to rapidly shift their offering in the days before and after the storm to meet consumer needs.

For example, Walmart directed more than 800 truckloads of merchandise to stores in the path of the storm. "As communities come back online they are going to need these supplies," said Mark Cooper, Walmart’s head of emergency management.
Macy’s Inc. was also significantly impacted by the storm, closing more than 100 stores; however, they were sufficiently upbeat that they will recover quickly. "Our team did a terrific job preparing for the storm, helping keep associates out of harm’s way, protecting the company’s physical facilities and recovering operations quickly once the storm passed," commented Terry Lundgren, chairman, president and chief executive officer of Macy’s.

2. Know your customers … better.
This lesson should be no surprise for successful retailers. However, the rapidly increasing trend toward consumer polarization between high- and low-income households, with both segments demanding value, has made it a challenge for retailers stuck between the discount and premium segments. This has caused an urgent need for middle-tier retailers to redefine their offerings to accommodate this seemingly contradictory set of demands.
One retailer that has successfully addressed this need, and met the challenge of consumer bifurcation, is Target Corp. — first, by understanding which categories are most impacted by this consumer trend, then by offering a deep assortment of both branded and private label products. This strategy is then complemented by exclusive partnerships with high-end designers such as Missoni and such style icons as Gwen Stefani. The retail offering is reinforced every day by delivering on a consistent brand promise of “Expect More, Pay Less” that aims to offer all consumers opportunities to indulge in smart ways.
"By listening to our guests and offering both value and fashion, low prices and a great guest experience, we earn their trust and loyalty, driving our performance both today and over time," remarked Kathy Tesija, executive vice president of merchandising at Target.

3. Maximize the shopping trip … through every channel.
B-T-S consumers arrived in stores focused on maximizing their shopping trip. High summer gas prices, economic uncertainty related to cost of goods inflation, and deep discounting led consumers to load up their pantries and take fewer trips to stores. Some consumers did not go into stores at all, with the high price of gas pushing them to make more use of multichannel options, such as online ordering. Club store retailers such as Costco Wholesale Corp. and BJ’s Warehouse Club Inc. were the beneficiaries of consumers seeking total trip-to-store value, posting comparable-store sales growth of 11% and 11.5%, respectively, in August. Such retailers as Kohl’s Corp., which struggled this B-T-S season, saw reduced August consumer traffic. Traditional brick-and-mortar retailers such as Macy’s (5% comparable-store sales increase in August) reaped the rewards of multichannel technology investments — with Macy’s “omnichannel” strategy bearing fruit this ­B-T-S season.

"We are using technology in our stores to mirror the online shopping experience, and adding functionality and content online to provide customers with additional assistance in product selection. The ultimate goal of our omnichannel strategy is to build deeper relationships with customers and to ensure Macy’s and Bloomingdale’s are accessible no matter how or when our customers prefer to explore or shop," stated Macy’s Lundgren.

In order to capitalize on this emerging trend, retailers can encourage shoppers to increase their basket size during a trip by utilizing more bundle packs, item combination promotions and buy-$100-get-$20-off type of promotions to encourage consumers to load up while they are in the store. Longer term, retailers should optimize their multichannel offerings to ensure that their online and phone-order consumer experience matches the ease of shopping in-store.

A broader definition of value is gaining strength — those who can deliver a better customer experience along with attractive pricing are doing relatively well. Consumers are becoming fatigued of value shopping, and they are starting to return to a broader definition of value. Brand appeal is returning, for example. And the total shopping experience is being valued more.

Consumer demand for the holiday season is driven more through discretionary spending than through the necessities that drive the B-T-S season. The ability to predict what’s going to happen during the holiday season is thus more difficult — there may be reduced spend in travel, in the service industry or in retail. And at the value end there is high risk. Nonetheless, we believe these lessons are directly applicable to the 2011 holiday season. They are not, however, capabilities that a retailer can turn on overnight. Operational capabilities in core retail functions such as merchandising, supply chain and store operations must be built over time and adapted to the demands of the current consumer trends and economic environment.

Fundamentals are amplified during seasonal shopping events, and the winners in the 2011 ­B-T-S shopping season were those who had their fundamentals right in the first place. Retailers such as Target, Nordstrom Inc., Limited Stores and BJ’s all were prepared for the influx of B-T-S shoppers with the appropriate product, pricing, promotions and shopping environment to meet the needs of consumers.

• Product — Retailers who aligned their product strategy to the ongoing polarization of North American consumers were particularly effective. In Canada, Walmart noticed consistent patterns in its data indicating a shrinking middle class. In response the retailer has introduced lower-price private label items as well as high-end specialty brands.
• Pricing — While budgets are tight in many consumers’ households, the retailers that succeeded this season priced appropriately for their customer, as opposed to blanket discounting. Nordstrom (6.7% comparable-store sales growth in August) and Saks Inc. (6.1% comparable-store sales growth in August) continued their premium pricing model and reaped the rewards.
• Promotions — Retailers such as Target (4.1% August comparable-store sales growth) saw strong results behind aggressive and frequent promotions. For instance, Target launched unique promotional ideas such as “text to get a coupon,” where consumers obtain coupons through text messages, and an online college care program allowing parents to send “U Care” cards to their children in college, while expanding its trade-in program for used calculators, DVDs and electronics.
• Place — The shopping environment, be it in-store or online, has never been more ripe for optimization. Macy’s successfully piloted mobile payment in 219 Macy’s and Bloomingdale’s stores during the season. The retailer outpaced such rivals as J.C. Penney by optimizing the in-store environment for its shoppers.

While having the Four P’s right is crucial for the everyday success of a retailer, these fundamentals are amplified in peak shopping seasons. Hence, successful retailers who redouble their efforts to understand their consumer to ensure that they are aligning their retail tactics to this consumer’s needs, will be doubly rewarded during peak seasons such as the holidays.

Joel Alden is a partner in the retail practice at A.T. Kearney, a global management consulting firm. He can be reached at Joel.Alden@­ Daniel Farmer is a consultant in the retail practice at A.T. Kearney. He can be reached at