9. Retail Renewal

100 THE McKINSEY QUARTERLY 1997 NUMBER 2

THE LIFE OF A TYPICAL RETAIL “CONCEPT” – the complicatedmix of products, service, locations, store format, operations,and brand image that makes a retailer unique – has been

halved over the past 25 years. Concepts born in the 1970s, such as the specialty clothing store Merry-Go-Round, had an average run of 15 or 16 years before earnings growth slowed significantly.Younger formats will probably last only four or five years beforegrowth slows (Exhibit 1).

Several developments are shortening life cycles. Consumers havebecome more sophisticated and tend to shop around for value, whileretailers have improved information systems to recognize andrespond faster to shiƒts in consumers’ needs. Overall competitiveintensity has increased, especially in the United States and theUnited Kingdom.

As formats mature, retailers need to act quickly. Once a retail conceptstarts to decline, its financial performance can tumble rapidly, makingrecovery increasingly diƒficult. A recent study of established retailerswith three consecutive years of negative earnings growth found thatalmost half went bankrupt and most of the others took at least anotherfour years to recover (Exhibit 2). To avoid this fate, retailers mustbecome expert at concept renewal. They must also expect to renewfrequently – even, as the best of them do, continuously.

RETAILING

The average life of a retail concept is becoming shorter

Renewal requires blending analysis with conscious creativity

Continuous renewal is at the heart of successful retailing

Kathryn Bye Burns is a consultant in McKinsey’s Washington, DC oƒfice; HeleneEnright is a consultant in the New Jersey oƒfice; Julie Falstad Hayes is a consultant inthe Chicago oƒfice; Kathleen McLaughlin is a consultant in the Toronto oƒfice; andChristiana Shi is a principal in the Los Angeles oƒfice. Copyright © 1997 McKinsey& Company. All rights reserved.

Kathryn Bye Burns, Helene Enright, Julie Falstad Hayes, Kathleen McLaughlin,and Christiana Shi

THE McKINSEY QUARTERLY 1997 NUMBER 2 101

T H E · A R T A N D · S C I E N C E

O F · R E T A I L· R E N E W A L

How to make renewalsuccessful

Successful retailers view re-newal as a significant under-taking that diƒfers in severalways from performance im-provement or new conceptdevelopment. To start with, itdoes not mean executing theexisting concept more eƒfec-tively, but rather reposition-ing the idea to address shiƒtsin customer needs. It will

probably alter the customer base – by, for example, focusing on serving the 15 percent of customers who account for 30 percent of revenue under theexisting concept so that they account for 70 percent under the new concept.

Renewal is also likely to involve asset changes. A retailer might find some ofits stores do not work with the new concept; some might need to be closedwhile others are remodeled. And line managers might have to be moved fromtheir jobs. In three of the cases we studied, up to a third of store managers andmore than half of senior managers were replaced (Exhibit 3).

At the same time, renewers do not have the freedom that comes with de-veloping a concept from nothing; they have to start with an existing brand,

THE ART AND SCIENCE OF RETAIL RENEWAL


Exhibit 1

Shortening retail life cycles

Representative life cycle curves*

Earn

ing

s g

row

th r

ate

3 ye

ar C

AG

R, %

Number of years after reaching $100 million in sales

*Based on analysis of the 15 largest single-concept retailers that reached $100 million in sales in each period; curves are smoothed

Source: Compustat; McKinsey analysis

1986–90

1981–85

1976–80

1965–75

70

60

30

50

40

20

10

00 2 4 6 8 10 12 14 16 18

Exhibit 2

The difficulty of recovery

33 retailers recovering from earnings collapse*

* Defined as returning to precollapse earnings levels after 3 consecutive years of negative earnings growth

Source: Compustat; McKinsey analysis

Went bankrupt/ did not recover

4–5 years to recover

0–3 years to recover

>5 years

15 7 8 3

Exhibit 3

Management changes during renewal

Percent of management changed

* Includes departmental and merchandising VPs † 58% from outside ‡ Regional VPs Source: Interviews; annual reports

Top team

District managers

Store managers

Smart & FinalGeneral merchandiser Lowe’s Specialty retailer

100†

70*70

80‡

80

60 20

2020

75

33 33

customer group, asset base, and frontlinesalesforce and somehow transform them. Yet despite the complexities of renewal, anumber of retailers have managed it. Onerecent sample of successful renewers gen-erated an average return on capital investedof 25 percent (Exhibit 4).

Rethinking the conceptRenewal begins with examining the existingconcept to identify strengths to exploit andshortcomings to address. The good news isthat a retailer does not have to start fromscratch to get growth from a mature concept.There can be strengths even in dire situations.

Kohl’s, for example, looked like any other USregional discounter in the mid-1980s. It hadbuilt a relatively profitable, low-priced rangeof clothing and general merchandise. But as Wal-Mart began to expand,Kohl’s was threatened.

Many other retailers responded to Wal-Mart by moving up market. ButKohl’s strengths were tight operating disciplines and a lean cost structurewhich, while no match for Wal-Mart, gave the company a notable advantageover some department store chains. It was able to use these strengths toreposition itself in the gap between the two, combining a department storefeel (parquet floors, recessed lighting, well-known national brands) with anear-discounter price and cost structure. As a result, Kohl’s increased salesproductivity and earnings during a period when many other regionaldiscounters went bankrupt (Exhibit 5).



Exhibit 4

The benefits of renewal

Average return on invested capital Percent

* Or failed to renew

Source: Compustat; annual reports; McKinsey analysis

30

20

15

10

5

0

25

Successful Walgreens (1981), CompUSA (1994), Lowe’s (1990), Tesco (1992)

Not successful* Merry-Go-Round (1990), Revco (1988), Venture (1992), Charming Shoppes (1991), Petrie Stores (1987), Rose’s Stores (1989)

–2 –1 0 1 2 3

Years from start of renewal

Successful

Not successful*

Exhibit 5

A renewal success story

Example: Kohl’s

Consumer proposition

Assortment

Pricing

In-store environment

Kohl’s circa 1986

A typical regional discounter

Broad assortment of clothing and other general merchandise

Primarily unbranded

Everyday low price

Kohl’s circa 1996

Department store brands and ambience at discount store prices

Category killer in moderately priced, branded basic clothing and domestics

Absolute lowest price on national brands – heavily promoted (70% of volume)

Department store feel (parquet floors, recessed lighting…) with discounter cost structure (centralized checkout…)

Discount store feel

Competitive dynamics

Wal-Mart encroaching on territory, but…

…a gap in market created as department stores move up scale

Strengths to leverage

Operating discipline and low cost structure of a discounter

Results

$257 sales per square foot (30% growth over 5 years)

Rethinking a concept in this way involves four elements:

1. Understanding the building blocks of renewal. Many retailers believequantitative analysis and market research get in the way of creativity. Yetmost eƒfective renewers start by developing a solid fact base about the poten-tial building blocks of renewal – customers, brand image, competitors, andcapabilities (see text panel) – because they know that understanding themwill reveal opportunities and identify distinctive strengths to work on.

One gasoline retailer studied the shopping patterns of hundreds of con-sumers. As well as highlighting the occasions that brought customers to

the retailer’s sites (journey to work in themorning, school run in the aƒternoon), theanalysis revealed other stops made on thesetrips (to pick up dry cleaning or visit thebank) (Exhibit 6). The retailer was then ableto decide how it could use its numeroussuperior locations to take a greater share ofwallet by oƒfering selected convenience goodsand services.

Scrutinizing competitors can throw light onimportant factors. One multi-category re-tailer wanted to know why its main rivals hadhigher revenues per store. It used marketresearch to determine their market penetra-tion (the share of potential customers in amarket who visit a retailer) and the frequency

of customers’ visits; it also visited competitors to estimate the size of a typical customer’s basket of goods. The research showed that, contrary tomanagement’s expectations, the retailer fell short in only one of these areas.With this knowledge, it was able to focus renewal on that area, whilecontinuing to build on its strengths elsewhere.

A hard look at internal capabilities can also indicate how renewal should beapproached. Faced with fierce competition from electronics superstores,electronics retailer Radio Shack was hard pressed to maintain its perfor-mance. It clearly could not match the wide assortment, low cost structure,and equally low pricing of its formidable competitors. Instead, it capitalizedon meeting the needs that they did not satisfy: for friendly, accessible outletsstaƒfed by knowledgeable, approachable salespeople. To deliver its renewedconcept of “You’ve got questions, we’ve got answers,” Radio Shack built ontwo assets: its unique electronics repair facilities and its relatively small stores in neighborhood locations. It also focused on providing an exclusiveassortment of telecommunications products and services. Recent deals with



Exhibit 6

Understanding consumer behavior

Format visited

Grocery

Drugstore

Convenience

Mall

Restaurant

ATM point

Dry cleaner

Post office

Gas station

Video store

Work

(am

)

Work

(pm

)

Ente

rtain

men

t (pm

)

Erra

nds

Mea

ls

More frequent

Less frequent

Sprint and satellite television service DirecTV have helped make RadioShack the local telecommunications destination.

2. Injecting conscious creativity to generate winning renewal concepts.A strong fact base by itself is unlikely to lead to a winning concept. Eƒfectiverenewers take the facts and then apply bold creative thinking to them. Someretailers do this intuitively; others make more deliberate, structured eƒforts.

One drugstore chain was threatened by low-cost mass merchants encroachingon its profitable prescription business. Standard analysis might have suggestedrenewal should be based on an enhanced general merchandise selection; anumber of drugstores have moved in that direction. But aƒter holding work-shops in which senior managers and representatives from advertisingagencies, healthcare firms, and market research companies were encouragedto play creatively with its building blocks, this drugstore developed a “health-care advisor” concept instead. The concept builds on the retailer’s pharma-cists, who have a reputation for giving reliable health advice, to oƒfer goods


1. Understand what brings customers into your store. A gasoline retailer tookadvantage of the fact that it was one of many stops for people on their way to work. It added products and services such as food, dry cleaning, and video rental that consumerswere already purchasing at other stops tobuild transaction sizes and thus siteprofitability.

2. Understand how the consumer shops. A general merchandise retailer found its customers typically shopped in three to four categories but purchased in only one or two. It converted this desire to shop into actual purchasing and largertransactions by changing the store layout and remerchandising.

3. Know what your brand means toconsumers – where you have credibility and where you do not. Sears built on its reputation for quality in “hard” lines(appliances and tools) to convince its mainlyfemale customers to “come see the softer side of Sears” and purchase its relativelyprofitable clothing lines.

4. Understand what consumers like (anddislike) about your competitors. Smart &

Final recognized that while customersshopped at warehouse stores because of their low prices, they also felt that these storeswere inconveniently sited, too big, and limitedin their ranges. Smart & Final capitalized on itssmaller shops in more convenient locations todevelop a warehouse store tailored to smallfood service operators.

5. Know your competitors’ economics.Taco Bell understood the economics andprocesses of its hamburger-makingcompetitors, so it knew it could bring laborand other operating costs below theirs byoutsourcing food preparation. It was thereforeable to support value pricing with favorablefinancial results, while competitors were leftwith only unattractive ways of responding.

6. Know what unique capabilities youhave that are worth keeping. A retailpharmacy recognized that consumersassociated it with health knowledge and that its pharmacists had unusually strongrelationships with customers. In a competitive,generally price-led market it was able to carve a niche with a health-oriented concept,offering an expanded range of health-relatedproducts and further in-store counseling.

TOP SIX RENEWAL BUILDING BLOCKS: HOW RETAILERS USE THEM

and services geared to total health. Shop signs and literature explain thehealth implications of over-the-counter items; upscale cosmetics and skincareproducts have been remerchandised to emphasize their claimed healthbenefits; and the chain holds in-store health classes.

Recent McKinsey research into big ideas in other types of company foundthat many are generated by asking provocative “opportunity questions.”Southwest Airlines’ low-cost, low-service proposition responds in essence toan opportunity question in the airline industry: “What would it take to cut mycosts in half?” Starbucks coƒfee shops’ concept of an aƒfordable luxury – anexcellent cup of coƒfee served in a smart, trendy environment – is an answerto another question: “What emotional, psychological, or status benefit couldpeople derive from my product/concept?” Such a structured approach can beuseful to retailers seeking to move from facts to powerful ideas.

3. Renewing the back room as well as the front room. Some of the mostpowerful renewal eƒforts use breakthroughs in the “back room” (in-storeoperations and logistics, for example) to create more sustainable competitiveadvantages in the “front room” (in the range of goods, pricing, service, andother features visible to the consumer).

Taco Bell took this route when searching for growth in the 1980s. It identifiedan opportunity in radically low-priced, high-quality fast food and accordinglycut the price of its core menu by more than 25 percent. This concept of valuepricing drove sales growth of more than 60 percent. To make the ideaprofitable and sustainable, however, required changes in the back room toreduce costs and support higher sales volumes. Taco Bell reconfigured its back room by outsourcing food preparation and investing in systems to manage high traƒfic. This freed store staƒf to serve the crowds, released kitchen space to convert to seating, helped maintain consistent food quality,and reduced the operating expense ratio by lowering labor costs while main-taining high volume.

CompUSA, the US computer superstore, focused its renewal on developingbackroom businesses that support – and in turn rely on – its retail concept. Atraining business serves retail customers, for example, and then uses retailsites as classrooms for corporate customers. Corporate sales and servicebusinesses use the retail sites as a base for sales teams and delivery trucks.And mail-order customers across the country can avoid postal charges byreturning merchandise to the retail stores. These ancillary businesses havenot only increased CompUSA’s profitability, but made it a strong competitorin many areas beyond store-based retailing.

4. Modeling the economics and refining the concept until a viableformula emerges. Finally, successful renewers model a concept’s economics



rigorously and refine the concept through iterations and tests until a formulaemerges that can be rolled out.

One specialty retailer hoped to attract new customers and increase thefrequency of core shoppers’ visits by expanding into children’s merchandise;by creating an upbeat, high-tech environment; and by enhancing servicethrough the introduction of personal shoppers. But before jumping into apilot, it decided to try to increase its chances of success by gaining a thoroughunderstanding of the concept’s economic drivers. In doing so it gained threevaluable insights.

First, by modeling the concept’s economics, the retailer found that 60 percenthigher sales would be required to oƒfset estimated investment and expenses.But competitors’ benchmarks and market research indicated that sales wereunlikely to increase by so much. So the retailer reexamined the concept andestimated the return on investment of individual merchandise lines andservices. It did away with high-cost, low-return elements such as the personalshopping service and managed to improve returns without compromising thecore of the renewal idea.

Next, the retailer analyzed direct product profitability to determine whichproduct categories provided the greatest return for the amount of store spaceoccupied. The analysis indicated that it should narrow its assortment to focuson children’s stuƒfed animals and games and cut down on children’s books,CDs, and clothing.

Finally, the retailer modeled return on investment by store type, varyingassumptions for stores according to the demographics of their catchmentareas and their performance levels. It found that creating a high-techenvironment in every store would not maximize returns. In fact, it paid toconfine large investments to stores in areas where there were suƒficientnumbers of highly educated, middle- to high-income consumers aged 18 to 45.The retailer therefore decided to tailor investment according to the demo-graphics of each store’s customer base.

Using store pilots as laboratoriesOnce a concept looks good on paper, an eƒfective renewer uses an in-storepilot as a laboratory to confirm the overall idea and get the main consumer,operations, and economic elements right. While most retailers are familiarwith the theory of piloting, they use it with varying levels of success. The bestones distinguish themselves by turning piloting into a core skill.

The laboratory approach means taking the concept to market quickly, andthen adjusting it there through repeated piloting. A general merchandiseretailer opened six pilot stores as soon as its concept seemed right on paper, and



used the results to strengthen the concept. One category, expanded in expec-tation of competitive advantage, was poorly received, so the retailer slimmedit by 35 percent. Popular, frequently purchased items had been placed at thefront of the store for convenience but customers tended to buy them and thenleave. The solution was to move these items to the back of the shop so thatcustomers would be forced down the aisles and, it was hoped, succumb to othergoods as well. Demand for one new category of products was better thanexpected, but high operating and capital costs drove down the return oninvested capital; these items were therefore eliminated. Finally, new advertisingperformed poorly, leading to changes in advertising mix and spending. Overall,the changes improved performance greatly.

Other cases show that the way a renewal pilot is designed can make thediƒference between success and failure. Two pilots run by a category killertaught it lessons about site selection, investment levels, staƒfing, and perfor-mance monitoring. The first pilot tested a high-service superstore concept.One high-performing store was chosen as a testbed and more than 70 staƒfwere taken on to upgrade service; $1.5 million was spent on store design. Theresult was phenomenal sales, but the high cost of the investment made theconcept economically unattractive. In addition, because it had tested the ideaonly in one high-performing store, the company could not establish whetherother, lower-performing stores could achieve similar sales improvements. Thepilot was never rolled out to the chain.

The second attempt worked. The retailer ran pilots in various sites morecharacteristic of the broader network. It tried out two versions of the concept,with diƒferent levels of investment and varying products. It used a small, full-time, crossfunctional team to manage the pilot and the subsequent rollout.And it monitored performance thoroughly, tracking a broad range of financialmetrics (including return on invested capital and net present value) andmeasuring consumer reaction through focus groups and by accompanyingcustomers on store visits.

The retailer also tracked a set of control stores and adjusted the results toaccount for sales cannibalized from unrenewed stores near by, competitors’response, and site-specific cost diƒferences. As a result, it has sustained a 15 percent improvement in renewed stores and is rolling out the conceptacross the remaining network.

How to aƒford renewalOne of the biggest challenges of renewal is aƒfording it. Given the extent ofchange required and the asset-intensive nature of retailing, managing renewalcosts can appear overwhelming. Eƒfective renewers take deliberate steps, akinto those used in turnaround eƒforts, to manage operating and capital costsaggressively and to accelerate returns to make renewal aƒfordable.



Roll out quick hits immediately. Piloting enables a retailer to test a host ofideas quickly. Eƒfective renewers seize on cash-generating schemes that areeasy to implement and execute them immediately, without waiting for therollout of the main concept. One convenience retailer, testing a wide arrayof merchandising ideas, achieved good sales from lines of drinks andconfectionery that required little in the way of new store fixtures. It rolledthem out straight away before the pilot was complete. Sales and operatingcashflow rose 5 to 10 percent across the chain in these categories, reenergizingthe entire organization.

Tailor investment to each store’s ability to generate value. Successfulrenewers know from eƒfective piloting which aspects of their concept createvalue under which conditions. They therefore tailor investment to each store’s ability to generate value. A second gasoline retailer varied investmentaccording to each site’s format and potential for improvement. Medium-sizedsites with good improvement potential but no room to expand warranted a$750,000 investment to knock down and rebuild. Sites with limited potentialwere put on the closure/sale list, except for larger sites with good auto-repairfacilities, which were remerchandised for less than $20,000 (Exhibit 7).

Find ways to share costs. Renewers find creative ways to share costs withothers who have a vested interest in their success. Most retailers turn tovendors, which will usually provide support in the form of new fixtures,promotional programs, and consumer research and help in disposing ofexcess merchandise. Government agencies can assist as well. One NorthAmerican department store received government funds to develop a retail-ing school that provided training in renewal-related areas such as service, merchan-dising, and the supply chain to employeesand selected customers, vendors, and (non-competing) retailers.

Other companies negotiate tax or zoningconcessions. Shopping center developers,which benefit from a renewed store’s im-proved performance, may be persuaded toreduce lease rates, to provide additionalspace at cut prices, or to enhance facilities.The idea is to think broadly about sources offunds, then engage prospective partners in arenewal’s success.

Communicate the concept to consumersA renewer must dislodge consumers’ feelingsabout its old concept and create the right



Exhibit 7

Tailoring investments to potential for improvement

Store size

Small

Medium

Medium

Large

“Palace”

Auto repair

Yes

No

Yes

Yes

Yes

LowSite improvement potential

Medium High

Assessment criteria

Current fuel and store volumes

Location: highway, neighborhood, city thoroughfare

Competition: fuel, retail, fast food

Do nothing; investigate options to close/exitRemerchandise only (<$20,000)Refit and remerchandise ($40–60,000)Convert auto-repair facility to selling space ($80–200,000)Knock down and rebuild ($750,000–$1 million)

Example: Gasoline retailer

expectations and excitement about its new one. A fresh advertising approachmay be needed. One renewing retailer had to replace its advertising agencybecause the old one, which had worked with the previous concept for years,had trouble grasping and communicating the revised proposition.

For any retailer, eƒfective communication is vital at the point of delivery – inthe store. Because retailers have such a diƒfused front line, successful renewerstake various approaches to communication and training. One departmentstore uses a “cascade” approach, training managers in the head oƒfice andin the field who then train the sales staƒf. Another retailer uses a road show to explain new concepts. And one has installed a satellite communicationsnetwork to discuss rollouts with staƒf from headquarters and stores.

Don’t let rollout be the end of renewalSuccessful renewers don’t allow rollout to be the end of renewal. Theycontinue to identify, test, and implement ideas to improve performance.

Boots, the UK pharmacy chain, repositioned itself in the mid-1980s arounda large “health and home” format and a smaller “health and beauty” format.Although much of the implementation was completed by 1990, Bootscontinued to develop its concept (Exhibit 8). In 1992, it tested a food

store in London. In 1993, it experimented with pharmacies in Sainsbury’ssupermarkets, and took on homeopathic consultants. In 1994, it decided to



Exhibit 8

Continuing renewal throughout a rollout

600

500

400

300

2001990 1991 1992 1993 1994 1995 1996*

Tested Boots food store in London

After mid-1980s renewal, operating two concepts: •Large format – health

and home, incorporating 9 stores within store

•Small format – health and beauty, with large range of cosmetics projecting luxurious image

Opened Boots pharmacies within Sainsbury’s stores Put trained homeopathic consultant in every store

Boots No.7 cosmetic brand relaunched Boots magazine launched New store design piloted in Nottingham Loyalty card tested in Norwich

Medical advice booths added to pharmacy Further loyalty card tests Allocated £300 million to build 7 separate size-based formats New advertising: “Looking good, feeling good”

Health and food departments merged Sound and vision, gift shop, and cook shop amalgamated back into main store

Continuous development of new private labels and subbrands

Example: Boots

Sales per square foot (£)

* Estimated

emphasize healthy lifestyle by merging the health and food departments in its main stores, with the accent on private-label items. By 1995, Boots hadrelaunched its own-label cosmetics and introduced a magazine to educatecustomers on health issues and to promote products. The same year, it testeda loyalty card in Norwich and a new store design in Nottingham. In 1996, itadded medical advice booths at each pharmacy and ran an advertisingcampaign capturing the essence of the many changes made over recent years:“Looking good, feeling good.”

As a result, a Boots store in 1997 looks quite diƒferent from a Boots store in1990. Yet, as with other renewals, the concept is so frequently fine-tuned thatit is impossible to say where any one adjustment begins or ends.

Become a continuous renewer

Learning how to renew themselves continuously is the ultimate imperativefor retailers. Some, such as the US restaurant chain Sizzler and the grocerychain A&P, took on a new lease of life in the 1980s, only to falter later whentheir reinvigorated concepts ran out of steam. Those that have renewedthemselves continuously, such as the The Gap fashion stores and Walgreensdrugstores, have sustained superior returns (Exhibit 9).

Continuous renewal requires a retailer to do three things:

1. Establish a continuous renewal process. Successful retailers always lookahead for the next great idea. They establish processes to identify, test, andimplement ideas quickly.

To start with, these companies scrutinize the industry landscape for “redflags” – signs that herald changes in consumer needs or competitors’ orsuppliers’ activity. Walgreens monitors such early warning indicators throughmarket research, a sophisticated store and item-level tracking system, and



Exhibit 9

Sustaining value through repeated renewal

80

60

40

20

0

19961980 1980 1996 1978 19961996 1980

80

60

40

20

0

80

60

40

20

0

80

60

40

20

0–10 –10–10 –10

Pretax return on invested capital as a percentage of sales

Successful but unsustained renewals add less value over time…

A&P (1982)Sizzler (1981) The Gap Walgreens

…than continuous/repeated renewals

eƒficient communication between field and headquarters. The US warehousechain Smart & Final surveys customers, tracks shopping behavior throughpoint-of-sale systems, and sends staƒf to visit competitors.

Ideas are generated through formal mechanisms. At Smart & Final, ideageneration is incorporated into strategic planning; at one convenience storechain it is the responsibility of a concept development team; and McDonald’scanvasses franchisees for ideas (many of which, like Chicken McNuggets,are integrated into its concept).

Most renewers test their most promising ideas quickly and cheaply in storesset aside for the purpose. Wal-Mart has several “vendor stores” where it workswith vendors to test fixtures, assortments, and layouts; McDonald’s tests in 20percent of its company-owned sites; and Smart & Final and Circuit City,which sells appliances and electronic goods, have a laboratory store each. A European grocer has “SWAT” teams which move from market to marketacting on ideas ranging from new fixtures to fresh approaches to service.

2. Build flexibility into the asset base. Continuous renewers own andmanage their assets in ways that enhance flexibility. A creative view of assetownership led Loblaws, the Canadian grocer, to flip the traditional approachon its head: it owns sites (where they are easy to sell and leases would be longand expensive to break) and leases fixtures (so they can be changed as require-ments evolve). Wal-Mart buys and leases sites for its discount stores that arelarger than required to enable ready expansion or conversion to supercenters.

Location requirements alter over time, so successful renewers have to manageassets flexibly so they can open and close stores quickly. Smart & Finalretained only 20 of its original 84 stores when it reinvented its concept(Exhibit 10), while Lowe’s, a $7 billion home improvement retailer, changed30 percent of its 330 stores over five years as it renewed its formula to keeppace with Home Depot.

The flexible approach to assets reaches all the way down to store fixtures. Aspart of its renewal, one retailer has equipped stores with modular fixturesthat can be easily dismantled, reassembled, and moved around the store.



Exhibit 10

Restructuring the site portfolio

Example: Smart & Final Number of stores

Stores in 1984

Stores opened/ expanded/remodeled

Stores closed

Stores in 1996

147

167

84

64

Average size (sq.ft)

7,500

17,000

3. Continuously renew frontline skills and behaviors. Continuous renewalrequires frontline employees to execute frequent changes in the retail concept– which in turn requires adjustments in their skills and behavior. Smart &Final refreshes employees’ skills at “Smart University” and has 26 field train-ers to supplement the university’s reach. The cost is partly met by governmentfunding and by extending training, for a fee, to selected customers, vendors,and other retailers.

Some continuous renewers use individual scorecards to raise aspirations andmodify behavior down the line. The gasoline retailer that analyzed itscustomers’ shopping behavior addressed its employees’ behavior as well bygiving all of them, from senior managers down to forecourt attendants,scorecards describing the sort of conduct – greet customer within x seconds,for instance – needed to make the concept work and to hit financial targets.The cards also established measures and goals for the most importantelements. Employees were rewarded for hitting or exceeding goals. As theconcept evolved, behavior and goals could be adjusted using the cards.

In addition, continuous renewers find ways to increase their organization’scapacity. One European retailer rotated staƒf through dedicated renewalteams that identified and rolled out fresh ideas. For an incremental invest-ment of only four or five people at a time, the retailer continuously renewedits concept and upgraded its organization.

Concept renewal can rejuvenate a retailer and add substantial value. It isa challenging task, but it can be accomplished if creative concept devel-opment is combined with brutally eƒficient turnaround disciplines as aconcept is rolled out. Crucially, it does not stop aƒter one success: winningretailers stay on top by remaining vigilant over market conditions, buildingflexibility into their assets and organization, and constantly testing andadjusting their concepts. Continuous renewal, they know, is the heart ofsuccessful retailing.



9. Retail Renewal

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