Understanding Why Some Companies Operate at the Head of the Pack

By Michael Seid, Managing Director, MSA Worldwide

I was invited to participate in a retailing conference put on by Management Horizons, the retail consulting arm of Price Waterhouse. While the phrase “Best Practices” was not yet widespread at the time, the impact of the concept was astounding.

All of us in retailing had grown up with the understanding that the secret to success was great customer service. Yet we had all known of companies that smiled broadly to their customers while their bankruptcy attorneys were smiling broadly at the judge. Success, therefore, could not simply have been defined as customer services and required a new definition – Best Practices.

Tom Peters had part of it right when he discussed “management by walking around.” Michael Gerber had part of it right when he discussed “having the plan.” But both strategies rest on the de-cocooning of the business. That is the need to look elsewhere and everywhere – be it inside your business – at your direct competition – outside of your industry; and for franchisors – outside of franchising to truly understand and implement a “Best Practices” strategy.

There are reasons that certain companies become what we call “Category Killers” in their market segment. And, I can assure you that it is more than a broad smile and good product. Customer Satisfaction is not the same concept as Customer Service, and it is a mistake for any retailer to fail to make the distinction.

For the truly successful retailer, each transaction must build on creating the aura of satisfaction, or the customer will not return. Years ago, when I officed out of Neiman Marcus headquarters in Dallas, I fell in love with a retailer in San Antonio Texas called Frost Brothers. Frost Brothers was an old line family-operated specialty store that had the most skilled sales associates I have ever witnessed in retailing.

I would often visit their stores, and would send my staff to San Antonio to watch how Frost Brothers addressed the issue of pleasing their customers. The associates at Frost Brothers would remember their customers by name, greeting them at the door as if they were the most important person that had ever arrived at the location. They would walk with them, often hand in hand while they shopped, and ensure that they were served in the tradition of the store. But, Frost Brothers is now gone. While their customer service was spectacular, they failed to anticipate the changing needs of their customers in selection and value, which was served better by other specialty merchants.

Frost Brothers had failed to realize that they were competing with other merchants for the same customer. While they had the ambiance of greatness, their customer wanted more – more value, selection, speed, and ease of purchase.

Anyone who has ever visited a Nordstrom’s will recognize the difference. Tom Peters relates several stories about Nordstrom, one of which is my favorite. A customer came to Nordstrom’s to pick up several suits he had purchased which were being altered. As occasionally happens, the suits were not ready and the customer left to go on an overseas business trip that afternoon.

Upon arriving at his hotel in London, he found a Federal Express package waiting for him. Inside was a letter of apology from the salesman at Nordstrom’s.

In addition, he found the suits he had purchased and a selection of shirts and ties which were a gift from the manager, together with a leather suitcase to carry his suits. The salesman had called the man’s home, spoken to his wife, and found out the size and style of the shirts the customer liked and the hotel he would be staying at. While this was not a very profitable sale, it bought forever the customer’s loyalty. Tom Peters defines this as staff empowerment, and while many retailers talk the talk – few walk the walk like Nordstrom’s can.

Similarly, Home Depot owns their market. Some may point to the extraordinary number of SKUs that they carry, or their discount prices, but their real success is their low out-of-stock percentage – they have what you want – when you want it – in the quantity that you want it in.

Their staff is the best trained in their category. Not only do they know their products, and provide lectures for the do-it-yourselfer, but try this at a Home Depot and at one of their competitors. Go to the paint department and ask one of the stock personnel about a screw that you need for a project. Typically they won’t simply point you to isle five, they will escort you there, find a sales associate in that department, and explain to that sales associate what you need.

Home Depot out-services the competition in a warehouse concept, where other merchants simply point to aisle five and cut back on their staff.

While customer satisfaction is the key, customer service is still an important factor. Great retailers do not skimp on staff and payroll. They service their customer by moving their staff onto the floor, instead of building a staff that serves the back office. They recognize that it is the staff serving the customer that drives the business and makes the money, and not the back office staff and management.

Best practices requires you to break the cocoon and Learn by Looking Around. See who in your industry is doing “it” well – whatever “it” is – and steal “it” quickly. Look at your competition and learn from their mistakes. Many retailers have blinders on and often if it was a great idea in 2005, it must still be a great idea now. This can’t be further from the truth.

Also, look for people to emulate; understand their successes; and copy them. Look also for their mistakes – and avoid them.

Most retailers today receive extensive information from their POS, distribution management, and merchandising management systems. It is essential that this information be analyzed on a regular basis – at a minimum, on a daily basis. Don’t wait until the end of the year to discover you have a shrink problem. Don’t wait until the third promotion to find out the promotion is a failure. Review your trend analysis on a real-time basis, and react to the results.

Understand who your customers are by finding out who is coming in and what they are buying. Much of this information can come from your POS system. Identify your customers’ needs and merchandise to those identified needs.

Monitor your industry. Understand its market trends and do something – anything – but don’t stand still. You must anticipate the market and change so that you have what your customer wants, when they want it.

There are six Ps of marketing – Price, Product, Place, Promotion, People, and Positioning.

Customers are price-sensitive. They are looking for value – but not necessarily at the lowest price. Those who price shop Wal-Mart, for example, know that on some items they have spectacular bargains – on the most visible items. On others, they are at or even higher than the market. But the customer perception is still low prices overall.

Monitor your customer. Look at product trends and react. Unless you have a spectacular replenishment system, avoid the fads. What do I mean by a replenishment system? Most successful retailers have established vendor partnerships. For example, this allows Wal-Mart to keep most of its merchandise on the selling floor with limited merchandise in the back, reducing their inventory carrying costs. Through vendor partnerships, vendors can monitor sales independently and resupply Wal-Mart on a daily basis as required.

Location, location, location is as important today as it ever was; only now, retailers operate with a difference. They have established strategic partnerships with major retailers and property management companies for the best sites as they come on the market. They also make better use of their locations.

Become promotion-ready. By that I mean – get your message in front of your customer as often as possible. Stay visible. Retailers today send out promotional messages at least twice a month. They don’t allow their customers the need to discover their competitor.

People are your most important asset, as never before. Don’t cut back on your training. Don’t cut back on your people. They are your best marketers. Give your people a clear corporate message. Make it simple and direct. Finally, choose your market positioning and whatever it is, stay there. Don’t confuse your customer.

Customers perceive value as options. If you sell one product at full price, offer the customer the availability of a similar product at a lesser price. They may not necessarily buy the lower-priced item, but they will appreciate the choice and your perceived value.

Lots of retailers budget and forecast, but never compare their forecasts against actual results on a real-time basis. At a minimum, you should measure against plan on a weekly basis. Similarly, don’t wait for a promotion to be over before you measure its results. Use flash numbers on a daily basis, and make changes based upon the flash results.

I can’t emphasize enough the control of waste. Control your inventory so that it can be measured and maximized. Shrinkage can be caused by markdowns or product loss. Capture the data on store use items. Once you begin to control your inventory, you can then begin to control your costs and minimize your inventory carrying costs and risks. The smaller the inventory required to satisfy customers, the more profitable you can become.

Don’t be afraid of change. If you can teach one cashier to recommend an additional purchase to a customer, which accounts for a simple ten dollars increase in sales per day – this will amount to over $3,000 by year end. Multiply than $3,000 by every cashier in every store, and the impact on profit can be dramatic.

Be aware – not afraid of change. Respond to your customers’ changing needs. Give them what they want – not what you want to give them.

Finally, define your market niche and exploit it.

Best Practices for retailers and for service providers is basically outperforming the competition, at every level, every day. Much of what retailers in franchising need to do to become category killers is in our grasp. Franchisors and franchisees need to focus on the details – using up-to-date POS systems and Best Practices approaches which will enable them to better manage their businesses and prosper.