Slow companies use outdated design and distribution methods

China's retail industry increasingly resembles an army of mice running on wheels. More and more money is being invested, but at the end of the day, companies find themselves running neck and neck with the rest of the competition, with nothing much to show for all the effort.

The 2012 financial results of listed retailers all paint the same picture. Profits are slowly but surely being eroded, and operating margins are increasingly being squeezed in the face of rising costs and intensifying competition. It seems that the mighty consumption engine of the Chinese middle class is starting to show signs of wear and tear as consumers wise up to simplistic marketing tactics and make smarter buying decisions.

Fighting the price war is a zero-sum game that in the long term destroys an industry's profitability. Many companies now realize that the sustainable way of competing while increasing the industry pie is to make innovation a strategic focus and to continually create the first-mover advantage. They need to become "fast" companies to survive in the modern retail industry.

What makes a fast company? It must have the right products, develop customer-led insight, cultivate fast innovation and set up an enabling partner network.

For instance, fast-fashion leader Zara is finely tuned to customer desires. The company's central teams from different divisions maintain close relations with stores. Every day, managers not only send obligatory sales reports, they also detail what hasn't sold and why. If a customer eschews a given product, in-store representatives ask, "What's the problem? Are the stripes too wide?" If they are, Zara narrows them. Autumnal colors are all the rage? Zara changes its color palette. Few other retailers have created the loop Zara maintains between on-the-floor feedback to design and manufacturing.

Beauty and healthcare chain Watsons has also developed its customer insight to a high degree. Its market research into buying patterns found that female working professionals aged 18 to 35 like to splurge on themselves for their birthdays. In response, Watsons introduced the "birthday month special", where Watsons card members are given double their reward points for every purchase during their birthday month.

Watsons also found that women were using normal plasters as makeshift protection from painful abrasions caused by wearing heels. Identifying this as an opportunity to meet a customer need, Watsons introduced a purpose-made protective plaster for women who wear heels.

Being able to correctly and regularly identify what customers want creates a competitive advantage, and having in place the proper systems to gather this market information is critical for retail success.

Product lifecycles have become increasingly compressed and the risk of product obsolescence has become a huge challenge for many retail companies. Being able to innovate continuously is proving invaluable in today's fast-paced market.

China's largest leather footwear manufacturer, Aokang Group, has its own innovation assembly line that emphasizes the speed to market of all new products - 24 hours for conceptualization, three hours for production, 24 hours for distribution - and then the product is taken off the shelves in just 30 days. This speed has shaken up the retail scene for leather goods and increased the market for leather footwear.

The hard truth is that there exists a time premium for retail goods. The first to the game gets the lion's share of profit while the stragglers will always be left picking up the scraps. When it comes to the speed of product release, perhaps retailers can learn a thing or two from the software industry about iterative product development, where the product is put into the market first and then incrementally revised or upgraded after the retailer has gathered user feedback. This strategy avoids the trap of overly long gestation periods in product design and working only on improvements that they already know customers will value.

The development of new products often requires drawing on the network of business partners to achieve first-to-market advantage. US retailer Target joined forces with Italian fashion house Missoni to create a product launch so powerful that the company's online website crashed because of demand overload. Shelves were empty in some stores in minutes. The practice began in the fast fashion field with stores like H&M and Debenhams. With the success of Target/Missoni, the strategy shows no sign of slowing.

Winning in retail requires not only being right - it requires being right now. Creating differentiated, high-demand products will not add to profit margins if they are introduced a season too late. Getting the right products to market quickly requires strong capabilities in three key areas: repeatable platforms, integrated planning and agile multichannel supply chains.

Repeatable platforms: Many companies now realize that innovation needs to be structured and organized in a way that allows them to build innovations off past successes, rather than starting from scratch each time. Modular platforms are all about putting in place a template for innovation so that the organization does not need to always start from scratch when coming up with a new product. Through product lifecycle management (PLM) tools, the maker of men's shirts can start with a common product platform that can be tweaked according to the season's trends. So collars, buttons, buttonholes and stitching can be approached uniformly while specific fit, fabric and other style considerations can be tweaked.

Once the design process is done, the real legwork begins. Executing a product launch is an exercise in precise project management, where the overall strategy and the sales, marketing and inventory management plan, all come together to deliver the product to market with the greatest impact. Poorly thought-out and executed plans only result in wasted resources and reduced impact.

Integrated planning: To gain the agility needed to speed products to customers, retailers need integrated plans that connect to each part of the product value chain from merchandising to assortment to replenishment and so on. Implementing a seamless process takes considerable investment in enterprise systems and process management tools. It may even entail a change in methods of management and training. The considerable investment and effort required to effect change inevitably scares off many companies. What these companies don't realize is that they stand to lose much more in the form of reduced innovation capability and profit potential, and run the risk of becoming market laggards that fight solely on price differentiation.

Agile multichannel supply chains: The growth of online retail has risen inexorably over the past 10 years and shows no sign of slowing. In the early days of dot.com, many retailers chose to create stand-alone structures for order management and distribution to serve their online customers. Now more and more of them are merging online with traditional supply chains to create new levels of cross-enterprise product visibility. This allows merchandise to flow freely regardless of the original point of demand. This merged approach to multichannel supply chains can be supported by a dynamic order management system that allows a retailer to service demand across any channel by choosing the most cost-effective model to supply a given product to a given customer at a given time.

Jamie Nordstrom, chairman of Nordstrom Direct, says that effectively engaging customers at both the physical storefront and in the online space is critical if premium department stores are to maintain their edge over the competition. Online retail should be seen as an important extension of the storefront because it allows retailers to reach customers in their homes. Enabling the online shopping experience actually feeds traffic and sales to the physical storefronts as it generates product interest and awareness.

Another example is the collaboration between Amazon China and FamilyMart. Customers are able to pick up their Amazon purchases at a selected FamilyMart store. Such tie-ups exemplify the synergies that can be wrought between online and physical retail spaces as they marry the convenience of online shopping to easy and cost-effective delivery.

Slow companies fight bloody price wars. Fast companies pull away from the competition and create their own markets. Fast companies drive innovation directly to the bottom line. Fast companies also usually escape the price wars that are raging all around them. However, to achieve this, a company must first have a clear understanding of where value lies and how it can create value for the customer. Customers are demanding more and more from their retail experience but many companies are still stuck in the old ways. Looking at the brutal pace of change and competition in today's market, retailers that fail to evolve their culture and practices into those of a fast company may suffer fatal consequences sooner rather than later.

The author is managing director of retail lead for Accenture Greater China. The views do not necessarily reflect those of China Daily.

( China Daily European Weekly 08/30/2013 page12)