June 18, 2011

The Route to Improved Profitability for Middle East Retailers

After a couple of decades of building up their infrastructures and making capital investments, Middle East retailers are turning their attention to developing their capabilities.
Some of them are turning to retail analytics, a discipline that retailers in more mature markets, like Tesco PLC in the U.K. and Amazon.com in the U.S., have used since the 1990s to make fact-based decisions about everything from category management to inventory practices to how to respond to competitors’ moves.
Although Middle East retailers can learn from these companies, they shouldn’t try to match their level of sophistication overnight. Instead, they need to realize that moving to analytics requires a cultural shift.

If there were ever an easy time for Middle East retailers—a time when top-line growth was so rapid that profitability took care of itself—it is over. Growing competitive pressure and the lingering effects of the 2008–09 recession are forcing the region’s general merchandisers, grocery store chains, and specialty retailers to look for new ways to improve their performance. The biggest areas of opportunity are very basic: Middle East retailers are trying to figure out which new markets they can enter; what are the best locations for new store openings; how they might shift their product categories in more profitable directions; how they can generate more value out of their best customers; and how they can negotiate better terms with their suppliers.

One solution is for Middle East retailers to turn to retail analytics, a discipline that has been in use in the most mature retail markets since the 1990s. A way of integrating data into both strategic and day-to-day decisions, retail analytics has been instrumental in the success of some of the world’s best-known retailers. Like their peers in these other countries, Middle East retailers are increasingly using data analytics to get a better understanding of their customers, differentiate themselves from competitors, and fuel their growth. “Some early retail analytics initiatives in the region, in particular in the area of category management, suggest double-digit growth opportunities in sales and high potential benefits on margins—between 1 percent and 5 percent of sales,” said Gabriel Chahine, partner Booz & Company.

So far, however, few in the region have been able to capitalize on the promise of analytics. Although most Middle East retailers have collected a substantial amount of data from point of sale (POS) systems, customer surveys, market research, and other sources, they lack the tools and capabilities to analyze the data, and the expertise to generate actionable insights. If they want to gain an advantage over their rivals through their use of data, retailers will have to fill these gaps.


Competitive Advantage

The sophisticated use of retail analytics can strengthen retailers’ capabilities in a variety of areas, including category management, sourcing, supply chain, and network development (the science of figuring out where to open new stores). Those enhanced capabilities typically result in two major sources of competitive advantage; superior planning, especially with respect to understanding and anticipating long-term consumption and competitive trends and superior adaptability, especially in response to changes in consumer demand or in a competitor’s tactics. “There are four dimensions in which this superior planning and adaptability can then be applied: product, pricing and promotions, customer insights, and locations,” said Andrea Di Gregorio, principal Booz & Company.


Facing Learning Curves

Because most Middle East retailers haven’t used data analytics in a concerted fashion, they might understandably be concerned that they face steep learning curves. However, there is also an advantage in entering an area where others have led the way: Retailers can avoid their pitfalls and learn from their successes.

There are four especially important principles that regional retailers should bear in mind if they are to develop a differentiating capability in the area of retail analytics.

  1. Structure the capability around available customer data

  2. Implement gradually and don’t overcommit to technology

  3. Institutionalize and formalize the use of data in business processes and across the organization

  4. Get executive sponsorship and hard-wire analytics into the organization

In determining how to begin putting retail analytics in place, retailers will first need to set their priorities by identifying which area or areas would benefit most: products, pricing and promotions, customer insight, or store locations. At the same time, they have to gauge the current sophistication of their analytics capabilities—including data sources, systems, and methodology—and begin from that point. They would then test this theory by applying it to a small portion of the business, to get a sense of how much value can be created. Once the strategic direction has been approved, the project team will support the development of a more sustainable analytics capability and will oversee the capability’s expansion to other parts of the enterprise.


In Conclusion

“It’s important to realize that for retailers just beginning this journey, even relatively basic solutions can offer significant results,” said Karl Nader, senior associate Booz & Company. However, as retailer’s system evolve toward more advanced forecasting and inventory policies, they will need to evaluate each subsequent wave of analytical development on its own merits and determine whether the investment continues to offer sufficient value.

In the end, although there is certainly some science to retail analytics, its value doesn’t lie in the sophistication of any particular technology, but in its end result, which is to provide retailers with more insights on their customers. Indeed, it is wisest, when developing an analytics capability, to start slowly and proceed gradually. The Middle East retailers that do this—forging some early successes and then building on them—will have the opportunity to turn their analytics capabilities into a key source of competitive advantage for many years to come.