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A report from the Economist Intelligence Unit
sponsored by SAP
Thinking bigMidsize retail firms and the challengesof growth
© The Economist Intelligence Unit 2006 1
Thinking big
Midsize retail firms and the challenges of growth
Thinking big: Midsize retail firms and the challenges of
growth is an Economist Intelligence Unit white paper,
sponsored by SAP.
The Economist Intelligence Unit bears sole
responsibility for the content of this report. The
Economist Intelligence Unit’s editorial team
conducted the interviews, executed the survey and
wrote the report. The findings and views expressed in
this report do not necessarily reflect the views of the
sponsor.
Our research drew on two main initiatives:
● We conducted a wide-ranging survey of 526
executives of midsize retail firms from October 2005
to January 2006, using both telephone and online
surveying techniques. This was part of the
Economist Intelligence Unit’s global survey, Midsize
companies, in which 3,722 executives took part.
● To supplement the survey results, we also
conducted in-depth interviews with several senior
executives of midsize retail firms.
The author of the report was James Watson and the
editor was Denis McCauley. Mike Kenny was
responsible for design and layout.
Our sincere thanks go to the interviewees and
survey participants for sharing their insights on this
topic.
March 2006
Preface
2 © The Economist Intelligence Unit 2006
Thinking big
Midsize retail firms and the challenges of growth
Executive summary
In markets dominated by large, powerful players
with enormous purchasing power, midsize
retailers face a difficult set of challenges. They are
decidedly growth-oriented, but they also find
themselves squeezed in a very tough competitive
environment, manifested in downward pressure on
prices and market saturation, not to mention
consolidation of competitors and suppliers. To cope
with these challenges while continuing to pursue
growth, they will take great pains over the next three
years to improve their operating efficiency.
This white paper, sponsored by SAP and based on
an Economist Intelligence Unit survey of 526 retail
executives from around the globe, suggests that
midsize retailers will focus on the following growth
priorities:
● Keep focused on the bottom line. Midsize retailers
plan to expand over the next three years, but always
with an eye on profitability. While half of retail firms in
the survey (50%) will pursue expansion of the
customer base as their primary means to secure
revenue growth, nearly as many (49%) say that
improving operating efficiency and reducing costs is a
central plank of growth strategy. Moreover, a majority
of retailers are oriented toward an optimal rate of
growth, suggesting a recognition that expanding too
fast can strain existing resources and structures.
● Growth from within. More than two-thirds of
midsize retailers (69%) plan to deliver profit and
revenue growth organically, using either their own
resources or a network of third parties. This internal
focus comes far ahead of any possible M&A-based
strategy, with companies preferring to partner where
necessary, rather than engage in the risky process of
taking control of other rivals.
● Stay nimble and responsive. Midsize firms
typically lack the muscle to compete effectively
against their larger rivals, a situation exacerbated by
the trend toward consolidation. Midsize retailers enjoy
the advantages of being closer to their customers, and
of being more flexible in strategy execution and
pricing. But survey respondents worry that these
attributes will erode as their firms expand.
● Good IT, good people. If used effectively,
information technology (IT) can help to stem the
erosion of speed, flexibility and customer intimacy
that usually comes with expansion. Indeed, two-thirds
of midsize retailers believe IT is critical to their firms’
ability to maintain flexibility as they grow.
Technology, however, is only as good as the people
who manage and use it. More than other types of
firms, midsize retailers struggle with a shortage of IT
expertise among their staff. Beyond deploying better
IT systems, they will need to improve their recruiting
and training practices in order to meet their growth
objectives.
© The Economist Intelligence Unit 2006 3
Thinking big
Midsize retail firms and the challenges of growth
Who took the survey?
A total of 3,722 executives from
around the world participated in the
Midsize companies survey,
conducted by the Economist
Intelligence Unit from October 2005
to January 2006. Of this number, 526
respondents hailed from the retail
industry. Of the latter group, 47%
were C-level executives such as CEOs,
CFOs and CIOs as well as owners, and
the other 53% were other senior
managers.
We have chosen to employ a
definition of midsize firms based on
revenue. Thus, 91% of the retail
firms in our survey have annual
global revenue of between US$20m
and US$500m. The other 9% range
slightly above or below these
thresholds. (For more detail on the
survey sample and results, please see
the Appendix to this report.)
In addition to our survey, we
conducted in-depth interviews with
senior executives of midsize retailers
in different regions, obtaining their
insights into the nature of the
growth challenges facing them over
the next three years and how they
plan to overcome them.
4 © The Economist Intelligence Unit 2006
Thinking big
Midsize retail firms and the challenges of growth
Midsize retail firms have an enormous appetite
for growth, but they currently find themselves
squeezed by the effects of an increasingly
tough global competitive environment. Downward
pressure on prices is the most troublesome
manifestation of this, as technology advances and
market liberalisation combine to lower entry barriers
to new competitors using traditional as well as online
channels.
Perhaps for this reason, leaders of most midsize
retailers also appear to appreciate the limits of
expansion. Over half, or 54%, of the executives in our
survey say that their firms are oriented toward an
optimal rate of growth. An even higher proportion
(57%) say that they have also identified an optimal
size. (Retailers in Asia-Pacific and the US are
considerably more likely than those in Europe to have
set optimal size and growth figures.) This suggests a
realisation on the part of midsize retailers that overly
rapid growth can strain the firm’s financial, human
and other resources.
First things first—boost operating efficiency
In order to deliver the growth they desire, midsize
retailers will focus their attentions on a variety of
methods, although a consistent area of focus will be
on sharper operational efficiency. Half of all retailers
polled for this survey plan to cut costs through better
operating efficiencies, while also expanding their
customer base. Lori Schafer, a board member at a
US$500m speciality US retailer, says her firm needs to
entirely re-engineer its operational processes to
become more competitive. “We’re making significant
changes to the company, because for the first time in
our history, growth has completely stalled. We’ve hit a
plateau”, she says.
Retailers will pursue a number of strategies to
achieve revenue growth, but the priority of most firms
in the survey will be expansion of the customer base.
US retailers will pursue this path particularly
aggressively: 71% of American respondents cite new
customer acquisition as their top growth objective.
Beyond this, 34% of retailers surveyed will look to
diversify the products and services they provide.
TheFaceShop, a speciality cosmetics retailer based in
South Korea, will rely on an ever-expanding range of
products that fit within the brand’s value identity to
fuel its growth. “No products in our Korean market sell
for more than US$15”, says COO Tom Kim. “[Our range]
provides an attractive value proposition, and people
love the choice and availability of stock. We always
have about a thousand different products on the shelf
at any one point”.
Nearly a third of retailers polled will also focus on
squeezing more out of their existing customers. Some,
What are the most important ways in which your company will implement its growth strategy over the next three years? Top responses (% respondents)
Source: Economist Intelligence Unit
Expansion of the customer base
Cost reduction via better operating efficiency
Diversification of product/service portfolio
Further penetration of existing accounts
50
34
49
26
53
37
71
33
38
3126
4029
4948
60
Global Europe APAC US
Strategies for growth
© The Economist Intelligence Unit 2006 5
Thinking big
Midsize retail firms and the challenges of growth
such as the UK’s Phones4u, a High Street mobile
phone retailer, will achieve this through ongoing staff
training to deliver a superior customer service over
rivals. “The best way to grow is to train up people”,
says group managing director Tim Whiting. “It’s about
delivering on our sales process, in every store and on
every day. When we get it right, we take a very high
level of market share”.
Marshaling internal resources for growth
Larger midsize firms appear to be opportunistic about
acquisitions, but few midsize retailers will pursue
mergers or acquisitions (M&A) as a central plank of
growth strategy. Nearly seven out of ten survey
respondents believe their primary growth
opportunities will be based on organic expansion,
rather than through M&A or joint ventures. About 43%
of companies polled say they plan to rely on organic
growth via the use of wholly owned resources, while
more than one in five will use a network of third
parties for production and distribution to deliver
organic growth.
Phones4u plans to achieve organic growth in its
local market through an expansion of retail locations.
“The focus is on organic growth”, says Mr Whiting. “All
our growth occurs through this”. And those firms that
have gained a strong position in their local markets
will seek to expand abroad. “We are looking at markets
for growth outside of the UK, although the UK remains
our number one priority”, he adds.
By comparison, just one in ten retailers will use
M&A as a tool for expansion and 9% will engage in
joint ventures. In fact, some firms believe an
acquisition would actually hinder further progress,
especially for companies grappling with the transition
from a smaller niche player into a more substantial
midsize retailer. Ms Schafer says her organisation
needs to rebuild itself organically before considering
any possible acquisitions. “An acquisition wouldn’t
help; in fact it would probably compound our
problems”, she argues.
Expansion abroad will become a key driver for
growth for nearly a third of retailers. Clearly,
globalisation is not just for the big players. Midsize
companies are tapping into global markets to reap the
same benefits that multinationals are, including both
revenue growth and cost reduction. One in three
midsize retailers believe that tapping into new
geographic markets will be among the most important
ways that they’ll implement their growth strategy in
the coming three years.
As it approaches market saturation in its home
territory, TheFaceShop has moved aggressively beyond
its national borders into 14 different countries in the
space of just a few years. Its key targets include the
US, China and Japan. “They are the largest cosmetics
markets outside of South Korea, excluding Western
Europe”, says Mr Kim. Albert Béchet, CFO at France’s
Dexxon, a computer media and consumables
wholesaler, believes any firm unable to expand
internationally will suffer. “Those who can’t grow at an
international level will be in some trouble”, he says.
TheFaceShop is pursuing expansion by awarding
mass distribution licences to firms in local markets.
The agreements establish a franchise for the firm’s
trademark and products, as well as its technical
infrastructure and know-how. The rest is left to the
partner, who’s free to roll out stores in any location
In your company, what is viewed as the single most important measure of growth? Select one only.(% respondents)
Growth of total revenue 34
Growth of market share 18
Growth of profit 28
Growth in number of customers 16
Growth in number of employees 1
Growth in number of geographic markets reached 3
Source: Economist Intelligence Unit
6 © The Economist Intelligence Unit 2006
Thinking big
Midsize retail firms and the challenges of growth
they see opportunity. “We love the shopping malls and
department stores”, says Mr Kim. “In fact, in Korea
40% of our revenue come from these channels.
Wherever there’s the right traffic, that’s where we’re
going to be”.
No smooth sailing: a raft of challenges
But achieving growth will not come without
challenges. For midsize firms around the world,
downward pressure on prices is the most troublesome
manifestation of a tougher global competitive
environment, and the retail industry is no exception:
45% of survey respondents reckon that downward
price pressure will remain a hard fact of life over the
next three years. Technology advances are reducing
entry barriers to new competitors—in both traditional
and online channels—and big-box retailers with scale
economies are forcing many rivals to compete on
price. Margin squeeze is the result.
Mr Béchet says his firm now has to compete with
very aggressive rivals in France and other European
countries. “They’re not yet able to deliver high levels
of service, but can give some good prices”, he says.
“They’re low-cost organisations. They compete on
commodity products, but not on the whole range. This
hurts, because it puts pressure on the price, and
margins are very low already”.
As if price declines aren’t enough, 38% of midsize
retailers also see demand saturation in their markets
as a significant impediment to growth. One-third of
firms also believe they will encounter serious
difficulties in hiring sufficiently talented staff (a top
barrier to growth for the absolute majority of Asia-
Pacific retailers). And 34% cite the rising costs of
inputs as another issue to contend with.
What do you believe will be the most serious impediments to growth in your key markets over the next three years? Top responses (% respondents)
Source: Economist Intelligence Unit
Downward pressure on prices
Market saturation
Rising cost of raw materials and services
Shortage of talented staff
45
34
49
30
42
38
43
38
29
3319
5138
3833
50
Global Europe APAC US
© The Economist Intelligence Unit 2006 7
Thinking big
Midsize retail firms and the challenges of growth
The biggest competitive threat for most midsize
retailers comes from larger rivals in the same
market. And existing rivals aren’t the only
concern: nearly one in five midsize retailers are
concerned about larger organisations suddenly
entering their market and jostling for market share.
But there are some advantages involved with running
a smaller organisation. Survey respondents believe
their firms maintain deeper customer relationships
(46%), can implement changes in strategy more
rapidly (43%) and enjoy greater flexibility in setting
prices (42%).
Speed of execution in implementing strategy
resonates as a key competitive attribute of midsize
firms across industries. Ms Schafer says the
turnaround of her company will rely on a commitment
to change throughout the organisation. “The good
news for a company of our size is that it’s normally
much easier to achieve. We’re smaller, more willing to
change, more entrepreneurial. There are fewer layers
of bureaucracy”, she says.
But aggressive smaller rivals are also a worry,
nipping on the heels of midsize retailers and fighting
for market share. 31% of executives cite these firms as
their principle competitive threat. But as with larger
firms, midsize retailers hold key advantages. For
example, 40% say their firms can marshal resources
more effectively than smaller retailers to enter new
geographic markets. And they’re able to forge
stronger supplier relationships, something that 37%
of respondents see as a primary advantage over
smaller competitors.
In comparison with other industries such as
manufacturing, retail firms are considerably more
focused on local competition than the threat of
overseas entrants. For example, European
respondents view German and French retailers as the
principal threats to their position, whereas in the Asia-
Pacific region, expansion-minded Chinese retailers
pose the main worry, along with US and Japanese
retail rivals.
Growing pains
But as retailers grow, so their challenges evolve. The
company becomes harder to control as tightly as it did
before, and implementing change becomes tougher,
tending to get bogged down more frequently. When
asked which of their competitive attributes are most
likely to erode with growth, 37% of retail respondents
to the survey cite their ability to execute changes in
strategy quickly.
Just as serious a concern for executives of midsize
retailers is that their ability to maintain close
relationships with customers will deteriorate. Another
28% worry about the loss of pricing flexibility. And
about one in four think either the quality of their
products and services or their ability to specialise in
particular products and services will deteriorate.
Ms Schafer says that maintaining a strong brand
identity and close relationships with customers is
Staying one step ahead: Competitors, customers and suppliers
What types of firms are likely to pose the main competitive threat to your company over the next three years? Select one only.(% respondents)
Existing players in our market(s) larger than us in size 41
Existing players in our market(s) smaller or equivalent to us in size 31
New entrants to our market(s) larger than us in size 18
New entrants to our market(s) smaller or equivalent to us in size 10
Source: Economist Intelligence Unit
8 © The Economist Intelligence Unit 2006
Thinking big
Midsize retail firms and the challenges of growth
critical for midsize retailers as they expand.
Consequently, her firm is investing in customer
intelligence software, expanding loyalty programmes
and engaging in more closely targeted marketing.
“The challenge is being able to increase the customer
base, while also keeping the existing ones happy”, she
says. “It’s not just about discounting, but about
making a statement to specific categories of our
customers, such as teachers, children, camps,
churches and so on”.
Diversifying suppliers … and customers
Battling against large retailers with enormous scale is
tough enough, but midsize retailers also find
themselves having to deal with larger and more
powerful suppliers, another effect of consolidation. A
majority of executives (51%) believe there is a medium
or high level of risk that their firms will become overly
dependent on a few large suppliers for key inputs, and
16% consider the risk as high.
TheFaceShop’s Mr Kim says the key to his firm’s
success is being able to procure and manufacture
product at a sufficient scale, without disrupting
quality levels. Less than 0.5% of items returned by
customers are due to quality control failures. At the
same time, the company strives to attain a rapid time
to market to ensure that stock turnover times, and
related costs, are kept low. “We don’t hold too much
In your view, which of the following attributes is most likely to erode as your company expands in size? Top responses (% respondents)
Ability to execute quickly on changes in strategy
Deep customer relationships
Pricing flexibility
High quality of products/services
3731
4333
3737
3257
2824
325
26
2730
24
Global Europe APAC US
Source: Economist Intelligence Unit
Investing in people
Phones4u, a UK-based reseller of mobile
phones and services, has been one of the
country’s fastest growing retailers over the
past few years, even after entering the
market later than many of its rivals.
Operating in a fast-moving business with
constant pressure on prices and margins,
the company attempts to differentiate itself
from its High Street rivals with superior
customer service. Group managing director
Tim Whiting says his organisation is set up
to provide an entirely different experience
for customers. “This is a complicated market
and there’s a lot of anxiety with consumers
about what handset and tariff to get, so we
pride ourselves on giving a service to our
customers and the best advice”.
To get this right, the company has
invested more than £10m over the past year
in a major staff training campaign. Mr
Whiting firmly believes that the best way to
grow is to train people well. “We have a
bespoke national training academy, and
every person in does one week of training at
this facility before setting foot in our
stores”, he says. Retail locations are also
configured differently from rivals, with
more attention paid to how customers are
handled. “We’re very different from our
rivals; you’ll see that most of our floor space
is taken up not by display shelves, but by
desks”. According to Mr Whiting, staff
spend an average of an hour with every
client helping them complete a contract.
The result for customers is something
more of an appointment-based concept,
where they are led carefully through the
mass of available options to find one that
precisely suits their needs, rather than
simple self-service. “When we get it right,
we take a very high level of market share”,
says Mr Whiting. “So for us it’s not about
the generation of footfall, but the
conversion of that footfall”.
© The Economist Intelligence Unit 2006 9
Thinking big
Midsize retail firms and the challenges of growth
inventory. Typically less than three weeks turnover”,
says Mr Kim.
In her business, Ms Schafer says the focus is on an
increased reliance on IT to improve the company’s
supply chain and stock replenishment. She says the
firm currently relies on staff walking around stores
with scanners to manually update stock levels. “These
are the kinds of issues we’re bumping into. It’s the
classic type of issues for this size of business, in the
$300-$500m range”, she says.
Dependence on large customers is less of a concern,
but retailers of certain types of goods, such as office
suppliers or computer equipment, can generate large
chunks of revenue from corporate accounts, in
addition to individual consumers. A startlingly high
45% of survey respondents say there is a medium or
high degree of risk of becoming beholden for revenue
to such key customers.
10 © The Economist Intelligence Unit 2006
Thinking big
Midsize retail firms and the challenges of growth
Coping with competition from dominant big-box
retailers and nimble new entrants will require all
the speed, adaptability and responsiveness that
midsize retail firms can muster. Retaining some
measure of these attributes as they grow is a tall order,
but not impossible. One tool at their disposal in trying
to achieve this is a team of managers skilled in
adapting business processes. Another is IT.
Executives of midsize retail firms appear to
appreciate IT’s potential to pull this feat off. Although
they display marginally less enthusiasm than peers in
other industries, midsize retailers nonetheless put
great store in IT’s ability to help them grow and to do
so while retaining their best attributes, at least in
part. Fully 63% of respondents (and 73% in Asia-
Pacific) agree that IT is a crucial enabler of their firms’
growth. And 65% (80% in Asia-Pacific) say that it is
critical to helping them grow while retaining
operational flexibility.
Ms Schafer says her company, currently undergoing
a major shake-up to reinvigorate business growth, will
need an entirely new IT infrastructure. “We need
technology to better analyse our customers, improve
our logistics and merchandising. If we don’t automate
everything, then we’re going to be deflating our
growth”, she says. In her view, IT plays a crucial
function in three distinct areas of the business:
logistics, to help deal with inventory replenishment;
merchandising and planning, for laying out stores and
displaying optimal stock volumes; and customer
intelligence, to help manage and fine-tune the
company’s loyalty scheme and email marketing
programmes. To kick-start growth, she says midsize
firms like hers need “the systems that a $5bn company
would rely on”.
That midsize retailers appreciate the value of
technology is supported by the affirmation of 71% of
survey respondents that IT strategy is closely aligned
with business strategy at their firms. Moreover, CEOs
and managing directors appear to be the most
influential decision-makers at midsize retailers when
it comes to IT investment—so say 56% of surveyed
executives—a situation which ought to cement such
alignment. But with a few exceptions, the retail
sector—and particularly its smaller firms—have been
notoriously behind the curve compared to other
sectors in terms of technology deployment. How do
they plan to use IT in practical terms?
Where IT will make a difference
Nearly two-thirds of executives polled say IT will play a
crucial role in helping their firms to improve their
interaction with suppliers and partners. For this
reason, supply-chain management (SCM) systems are
seen as one of the most important technologies for the
midsize retail market. “Supply-chain management is a
big issue”, says Mr Whiting of Phones4u. “We don’t
have as many SKUs [stock-keeping units] as other
The IT opportunity
Share of respondents agreeing with the following statements about the role of IT in their company. (% respondents)
IT is critical to our ability to grow
IT is critical to our ability to retain operational flexibility amid growth
IT strategy is closely aligned with business strategy
6361
7367
6561
8062
7164
78
80
Global Europe APAC US
Source: Economist Intelligence Unit
© The Economist Intelligence Unit 2006 11
Thinking big
Midsize retail firms and the challenges of growth
retailers might have. However, if a new, fashionable
handset becomes available, then we need that to be
available. So SCM is very important”.
TheFaceShop’s Mr Kim says his firm tracks all stock
on a real-time basis in its home market, although it
has yet to achieve this level of control internationally.
“IT is very important to us. We would like to be able to
see all of our sales on a real-time basis and monitor
which product lines are doing well in different
markets”, he says. For a business like his, which also
produces the goods that it sells, SCM systems and
detailed sales forecasts are absolutely essential. “At
the end of the day”, adds Mr Kim, “we also make
manufacturing decisions on the products, and that
needs to be done at the right cost and volume and at
the right time. We don’t want to overproduce the
wrong product”.
For retailers that emphasize their strengths in
customer service, IT will play an increasingly vital role.
56% of firms polled say that IT is a critical tool for
maintaining tight customer relationships. Phones4u,
for example, aims to differentiate itself from local
rivals through superior customer service, with sales
staff spending as much as an hour with each customer
discussing their needs. In-store computers provide
sales staff with quick access to customer data via a CRM
application, which help staff to support their
interactions with individual customers. This is
focusing the firms’ IT spending accordingly. “The
biggest upgrade over the next 12-18 months will be in
our CRM systems”, says Mr Whiting.
Scaling up for growth
Midsize retailers point to a number of factors that will
drive investment in IT. First and foremost is the need
to accommodate the growth of the business, followed
by the need to replace existing systems and, not least
important, the overriding objective of boosting
Share of respondents agreeing with the following statements about the role of IT in their company. (% respondents)
IT is critical to our ability to improve customer relationships
IT is critical to our ability to interact with suppliers and partners more effectively
IT is critical to our ability to innovate continuously
5648
6848
6563
7286
6264
68
52
Global Europe APAC US
Source: Economist Intelligence Unit
What are likely to be the main drivers of IT investment in your company over the next three years? Top responses (% respondents)
47
39
36
29
23
23
22
18
18
6
15
Need to accommodate growth of the business
Inadequacy or obsolescence of current IT systems
Pressures on operating efficiency
Need to support company's competitiveness vis-à-vis larger firms
Need to enable adaptation of business model
Increasing concerns about information security
Need to support company's competitiveness in global markets
Increasing regulatory and reporting requirements
Need to create or maintain ability to innovate continuously
Mandates by key customers or suppliers (eg, on business processes, reporting standards)
Other
Source: Economist Intelligence Unit
12 © The Economist Intelligence Unit 2006
Thinking big
Midsize retail firms and the challenges of growth
operating efficiency. About one in three retailers
polled say their current infrastructure does not meet
their requirements for scaling up for growth.
France’s Dexxon has been investing heavily in
technology in recent years, including a new enterprise
resource planning (ERP) system. Its aim is to obtain a
real-time view of sales, profit and inventory details.
According to Mr Béchet: “We want information at our
fingertips across the business and across all of the
geographies we operate in. This is the backbone of the
company’s IT as a strategic asset and will remain so in
the future”. He is now working to make these systems
easily accessible by suppliers, partners and customers,
giving them a similar live view of the business. “We see
the need to improve the level of service that we can
provide our suppliers and customers, such as sales
reports, inventory lists, and so on. It’s a matter of
service and staying in the game”, he says.
But cost will restrain the IT spend of many midsize
retailers. Asked to list the top three barriers to their IT
investment over the next three years, a substantial
majority (61%) cite the cost of new systems and their
implementation ahead of all others. The limited IT
budgets typical of midsize firms, and fierce internal
competition for funds, also mean that other business
priorities will often take precedence over IT
investments.
This isn’t the only pitfall. Nearly a third of retail
respondents say that employees’ lack of adequate
technical skills is a major problem. Mr Béchet warns
that in businesses like his, with a total of about 20 IT
staff, everyone needs to be clued up on technology.
“We’ve all got to be experts, including people like the
chief accountant and myself”, he says.
What are likely to be the main impediments to IT investment in your company over the next three years? (% respondents)
61
34
31
24
23
23
22
20
14
7
Source: Economist Intelligence Unit
Cost of new systems and implementation
Other business priorities take precedence
Lack of employee technical skills to use technology
Employee resistance to change
Ineffective management of IT
Need to amortise existing technology investments
Technical shortcomings in IT systems and infrastructure
Lack of understanding of/confidence in technology benefits by senior management
Risk of business disruption from a failed IT project
Other
© The Economist Intelligence Unit 2006 13
Thinking big
Midsize retail firms and the challenges of growth
Midsize retailers face a unique challenge.
Although aggressively focused on growth and
expansion, they increasingly operate in
markets dominated by much larger rivals, but lack
their visibility, resources and influence. These
disadvantages often make it difficult to compete not
only for customers, but also for talent, finance and
sometimes even the attentions of suppliers,
weaknesses which are often magnified in foreign
markets.
Even as they grapple with larger competitors,
midsize retailers can usually rely on some advantages.
Execution is typically faster, they enjoy greater pricing
flexibility and often have deeper customer relations.
The key for growth-oriented retailers is to avoid or
mitigate the erosion of these attributes as they
expand.
Midsize retailers across the globe plan to invest in
IT and people to meet this challenge. “We’re a service-
based retailer, so having the best people and the best
skills will differentiate us going forward”, affirms Mr
Whiting of Phones4u. “This is all supported by IT, good
supply-chain management systems and strong
locations. But investing in people is absolutely key”.
Conclusion
14 © The Economist Intelligence Unit 2006
Appendix: survey resultsThinking big
Midsize retail firms and the challenges of growth
From October 2005 to January 2006, the Economist
Intelligence Unit conducted a survey of 526 executives
of midsize retail firms from 18 countries in Europe,
Asia-Pacific and the Americas. Our sincere thanks go to
all who took part in the survey.
Please note that not all answers add up to 100%,
because of rounding or because respondents were able
to provide multiple answers to some questions.
What is your firm’s ownership status? Select all that apply.(% respondents)
Privately owned 66
Publicly traded 18
Joint-venture ownership 11
50% or more state-owned 8
In which region are you personally based?(% respondents)
Asia-Pacific
Western Europe
Latin America
CIS (Commonwealth of Independent States)
North America
Eastern Europe
37
22
29
7
4
2
Which of the following titles best describes your job?(% respondents)
Manager
Head of department
CFO/Treasurer/Comptroller
CEO/COO/President/Managing director
Head of business unit
Owner
Other C-level executive
CIO/Technology director
SVP/VP/Director
Board member
Other
15
15
12
10
6
6
6
5
5
17
3
In which sector does your organisation belong?(% respondents)
Consumer goods & services retailFinancial services 100
© The Economist Intelligence Unit 2006 15
Appendix: survey results
Thinking big
Midsize retail firms and the challenges of growth
What is your company’s annual turnover in US dollars?(% respondents)
Under $10m
$10m to $20m
$20m to $40m
$40m to $50m
$50m to $100m
$100m to $200m
$200m to $300m
$300m to $500m
$500m to $600m
$600m to $700m
$700m to $1bn
More than $1bn
3
2
27
8
12
1
20
1
17
7
1
2
What are your main functional roles? Select up to three.(% respondents)
General management
Marketing and sales
Customer service
Finance
Strategy and business development
Human resources
IT
Procurement
Operations and production
Information and research
Risk
Legal
Supply-chain management
R&D
Other
32
28
24
22
16
13
12
10
8
5
5
7
2
7
5
Please characterise the primary type of growth strategy that your company will pursue over the next three years.(% respondents)
Organic growth via the use of wholly owned resources
Organic growth via a network of third parties for production and distribution
Mergers and acquisitions (M&A)
Joint ventures
Organic growth involving a public offering of equity
Other
43
21
11
8
4
12
In your company, what is viewed as the single most important measure of growth? Select one only.(% respondents)
Growth of total revenue 34
Growth of market share 18
Growth of profit 28
Growth in number of customers 16
Growth in number of employees 1
Growth in number of geographic markets reached 3
What are the most important ways in which your company will implement its growth strategy over the next three years? Select up to three.(% respondents)
Expansion of the customer base
Cost reduction through improvement of operating efficiency
Diversification of product/service portfolio
Further penetration of existing customer accounts
Tapping new geographic markets
Establishment/expansion of distributor network
More aggressive pricing
Establishment/expansion of marketing alliances with third parties
Establishment/expansion of licensing or franchising agreements
Outsourcing of production to third parties
Other
50
49
34
31
31
18
18
14
12
6
5
16 © The Economist Intelligence Unit 2006
Appendix: survey results
Thinking big
Midsize retail firms and the challenges of growth
Please indicate whether you agree with the following statements about your company’s size and growth.(% respondents)
Owners and senior management have identified an optimal rate of growth for our company 54 30 16
Owners and senior management have identified an optimal size (in revenue or other terms) for our company 57 24 18
Agree Disagree Don’t know
What do you believe will be the most serious impediments to growth in your key markets over the next three years? Select up to three.(% respondents)
45
38
34
33
25
21
18
15
12
10
7
Downward pressure on prices
Market saturation
Rising cost of raw materials and services
Shortage of talented staff
Consolidation among competitors
High labour costs vis-à-vis competitors in other countries
Tight availability of financing
Increased regulatory pressures
Customer-driven mandates (eg, on product standards, business processes, reporting standards)
Consolidation among customers
Other
What types of firms are likely to pose the main competitive threat to your company over the next three years? Select one only.(% respondents)
Existing players in our market(s) larger than us in size 41
Existing players in our market(s) smaller or equivalent to us in size 31
New entrants to our market(s) larger than us in size 18
New entrants to our market(s) smaller or equivalent to us in size 10
Competitors from which country are likely to present the biggest threat to your company in your existing market(s)? Select one only.(% respondents)
China
United States of America
Germany
France
Japan
Brazil
Argentina
Australia
Italy
Other
18
17
12
11
6
4
3
3
3
24
© The Economist Intelligence Unit 2006 17
Appendix: survey results
Thinking big
Midsize retail firms and the challenges of growth
To what extent does your company enjoy the following types of competitive advantage vis-à-vis firms of different sizes?(% respondents)
Higher quality of products/services
36 30 34
Deeper product/service specialisation
34 32 34
Deeper customer relationships
46 26 28
Deeper supplier relationships
31 37 31
Better ability to execute changes in strategy quickly
43 31 26
Better pricing flexibility
42 31 28
Lower cost of inputs and/or operations
38 33 29
Deeper knowledge of local market conditions
39 31 30
Ability to innovate continuously
35 32 34
Better ability to enter new geographic markets quickly
28 40 32
Vis-à-vis Vis-à-vis Vis-à-vis larger firms smaller firms firms of the same size
To what extent will large customers come to dictate the following aspects of your company’s operations over the next three years?(% respondents)
Pricing of our products/services 34 40 26
Deployment of staff 17 41 41
Financial reporting 11 36 53
Product standards 27 37 37
Technology standards/systems 20 39 41
Business processes 15 44 41
Terms of delivery 28 41 31
Substantially Somewhat Not at all
Please indicate whether you agree with the following statements about the role of information technology (IT) in your company.(% respondents)
IT strategy is closely integrated with business strategy 71 23 7
Achieving competitive advantage is dependent on IT 51 35 14
IT is critical to our ability to grow 63 26 11
IT is critical to our ability to attain or retain flexibility of operation while continuing to grow 65 21 14
IT is critical to our ability to improve customer relationships 56 31 13
IT is critical to our ability to interact with suppliers and partners more effectively 65 22 13
IT is critical to our ability to innovate continuously 62 22 16
Agree Disagree Don’tknow
In your view, which of the following attributes is most likely to erode as your company expands in size? Select up to three.(% respondents)
Ability to execute changes in strategy quickly
Deep customer relationships
Pricing flexibility
High quality of products/services
Deep product/service specialisation
Intimate knowledge of local market conditions
Low cost of inputs and/or operations
Ability to innovate continuously
Deep supplier relationships
Ability to enter new geographic markets quickly
Other
37
37
28
26
24
24
23
20
17
11
7
18 © The Economist Intelligence Unit 2006
Appendix: survey results
Thinking big
Midsize retail firms and the challenges of growth
How would you characterise the risk of your company becoming, over the next three years, overly dependent on a few large customers or suppliers?(% respondents)
A few large customers, for revenue 14 30 51 4
A few large suppliers, for key inputs 16 35 44 5
High risk Medium risk Low risk We’re already overly dependent
What are likely to be the main drivers of IT investment in your company over the next three years? Select up to three.(% respondents)
47
39
36
29
23
23
22
18
18
6
15
Need to accommodate growth of the business
Inadequacy or obsolescence of current IT systems
Pressures on operating efficiency
Need to support company's competitiveness vis-à-vis larger firms
Need to enable adaptation of business model
Increasing concerns about information security
Need to support company's competitiveness in global markets
Increasing regulatory and reporting requirements
Need to create or maintain ability to innovate continuously
Mandates by key customers or suppliers (eg, on business processes, reporting standards)
Other
Please indicate whether your company’s current IT infrastructure and systems meet business requirements in the following areas.(% respondents)
Scaling up to accommodate growth of business
52 34 14
Conforming to business process requirements set by customers or suppliers
54 30 17
Conforming to government-mandated reporting and other standards
60 18 21
Meet requirements Do not meet requirements Don’tknow
How influential are the following executives in key decisions your company makes on IT?(% respondents)
Owner/board members
54 27 14 6
Chief executive/managing director
56 29 8 6
CIO/CTO
40 33 15 12
CFO
34 44 11 11
IT manager
41 36 13 10
Line-of-business managers
19 44 26 11
Very influential Somewhat influential Not influential Don’t know
To whom does your company typically turn for external assistance on IT matters? Select all that apply.(% respondents)
IT consulting firm/value-added reseller
Software/hardware/telecommunications equipment vendor
IT specialist with supplier(s)
Management consultant
Accountant
Industry analyst
Legal counsel/solicitor
Other
49
43
40
20
15
12
10
9
© The Economist Intelligence Unit 2006 19
Appendix: survey results
Thinking big
Midsize retail firms and the challenges of growth
In your view, what will be the most effective ways that government can help mid-size companies grow over the next three years? Select up to three.(% respondents)
Offer more favourable tax incentives for investment
Reduce “red tape” (procedures for approvals, licenses, etc.)
Develop more innovative financing support mechanisms
Introduce more flexible labour laws
Provide better information about foreign market conditions and opportunities
Negotiate favourable trade agreements
Invest directly in companies
Expand export credit schemes
Other
63
51
47
41
24
19
14
14
7
What are likely to be the main impediments to IT investment in your company over the next three years? Select up to three.(% respondents)
61
34
31
24
23
23
22
20
14
7
Cost of new systems and implementation
Other business priorities take precedence
Lack of employee technical skills to use technology
Employee resistance to change
Ineffective management of IT
Need to amortise existing technology investments
Technical shortcomings in IT systems and infrastructure
Lack of understanding of/confidence in technology benefits by senior management
Risk of business disruption from a failed IT project
Other
Whilst every effort has been taken to verify the
accuracy of this information, neither The
Economist Intelligence Unit Ltd. nor the sponsor
of this report can accept any responsibility or
liability for reliance by any person on this white
paper or any of the information, opinions or
conclusions set out in the white paper.
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