Rediscover your customers | With Customer Centric ... - Roland Berger

Roland Berger Strategy Consultants
content
Fresh thinking for decision makers
Rediscover your
customers | With
Customer Centric
Retailing | CCR for
short | It guarantees
profitable growth
even in saturated
markets
July 2011

Consumer markets in flux
Today retail success means knowing your customers inside
out and understanding current trends in consumption
❀
❀
Happy
89th
Birthday
❀
Demographic change
- Baby boomers
- Best agers
- Singles
- Children
TREND 1
Instant
Soup
Convenience Polarization Orientation
- Ready-made meals
- Discount vs. luxury
- Regionalism
- Efficiency culture
- Cheap chic
- Retro brands
- Single-person households
- Massclusivity Creme - The essential things
- Working mothers
- Ultra premium
- in life
21
TREND 2 TREND 3 TREND 4
LOHAS Shopping as an adventure Web 2.0
- Health
- Bio-sustainability
- Functional food
- One-stop shopping
- Entertainment
- Try out new products
- Enthusiasm
- Social networks
- Interaction
- User behavior
- Virtual consumer
- worlds
TREND 5 TREND 6 TREND 7
CUSTOMERS
are at the heart of CCR. They are grouped by
needs, shopping habits or even purchasing power.
CUSTOMER GROUP:
SINGLE PEOPLE
CUSTOMER GROUP: BEST AGERS
CUSTOMER GROUP:
ADVENTURE SEEKERS
CUSTOMER GROUP: FAMILIES

content Customer Centric Retailing
1. INTRODUCTION
Good retailers know their customers and understand what they want. Sounds simple?
In fact, it's one of the greatest challenges facing the industry today. Independent retailers
know their customers inside out, thanks to their daily customer contact. Big companies
don't have this advantage. They make their decisions in a head office, a long way from
where their customers make their purchase decisions. Accordingly, retail companies put
great effort into reaching potential customers. Each year they invest billions of euros in
advertising in Europe alone. The question is: Do their target customers even notice?
Today's retailers have more data at their disposal than ever before. They can use this data
to find out whether their advertising message is reaching potential customers. They can
also use it to optimize their business, easily saving 30% or more of their marketing spend
through improved effectiveness. Yet most companies fail to make full use of the available
data. Retailers regularly carry out market research, issue store cards and collect daily
sales data. But they very rarely connect data from these different sources, or from alternative
sources such as the rapidly expanding social networks Facebook and Twitter. Many
companies just look at approximate sociodemographic figures. If instead they put all the
available data together, interpreted it properly, analyzed it in line with data protection rules
and implemented the actions optimally in their business, they could achieve significant
efficiency gains.
Customers must take their rightful place at the heart of the company. Customer Centric
Retailing, or CCR, gives today's retailers the tools they need to understand their customers
inside out. This understanding is highly valuable, as can be seen from the market value of
Internet-based companies such as Amazon, Google and Facebook. The financial markets
long ago realized the importance of knowing your customers – both current and future –
in today's highly competitive environment. In our experience, retailers can improve their
margins by 1.5 to 2 percentage points by means of CCR, if properly applied.
CCR is a process. It goes beyond traditional category management and marketing strategies.
Ultimately it affects the entire company. Firms can use it to strategically develop
their retail formats. They can also use it to optimize their product range, advertising
channels and pricing. CCR provides answers to the key questions that retailers need to
ask themselves:
Impressive margin improvements
1.5-2%
Potential improvement in margins with Customer
Centric Retailing (CCR)
POINTS
Who are my customers and what do they really want?
How can I ensure lasting customer loyalty?
How can I adjust my product range to fit the location?
How can I spot gaps in my product range and close them efficiently?
What pricing policy won't eat into my margins?
What are the key articles for price-sensitive customer segments?
How can I manage my marketing budget properly and reach the right customers
with targeted offers?

Roland Berger Strategy Consultants
2. KNOW YOUR CUSTOMERS INSIDE OUT
The European consumer market is facing major change. Society is aging. People are becoming
more environmentally aware and concerned with health issues. Consumer needs
are changing fast. Retailers need to react just as quickly, adjusting their product range to
prevent customers from going elsewhere. Retailers who understand the changing needs
of their customers best enjoy a considerable competitive advantage in a largely saturated
and highly competitive market.
10010020030010002
STORE CARD
Wishes
Needs
Target group
Shopping habits
What makes my customers tick?
Retailers should collect customer data and use it
to derive internally consistent customer groups –
the basis for CCR
Customer segmentation – the key to success
To put your customers at the heart of decision-making, you first need to know exactly
who they are. Not every customer has the same needs, shopping habits or even the same
purchasing power. However, they do form groups that are by and large internally consistent.
Retailers can identify these groups through detailed customer segmentation. This
process forms the basis for implementing CCR. In particular, retailers can examine the
transaction data from store cards and evaluate it statistically. The customer data should
of course be compiled and analyzed in accordance with current data protection legislation.
Retailers should group consumers on the basis of actual purchasing behavior over a period
of twelve months. They can then add information from credit card and EC card payments
(or use this information on its own if they don't issue store cards). They should then
choose random customers from the different segments and put together focus groups.
Interviewing these focus groups will give them specific information about customers'
"value worlds" and requirements. They can use this information to refine their customer
profiles and get an even better picture of what makes their customers tick.
So, with the help of CCR, retailers can define internally consistent customer segments
made up of consumers with comparable shopping habits and requirements. One such
group might be "Healthy Eaters" – consumers who show a clear preference for high-quality,
fresh products. For this group, a key factor in choosing where to shop would be whether the
store has a good fresh produce section. For such customers, fresh, local produce is more
important than whether it's organic or not.
Finally, retailers can compare their own customer segments with external data, such as
GfK's household panel data. This comparison will reveal how customers behave in competitors'
stores: Are there specific articles that they buy in one store rather than another?
What could the reasons for this be? Using this approach, firms can not only identify business
opportunities but also calculate the actual potential for each customer segment and
category.
Form store clusters
The next step is for retailers to use the customer segments they have identified to form
clusters of stores in their network. Specifically, they should look at which customer segments
are most prevalent where. Rather than focusing on region, store size and location –

content Customer Centric Retailing
the traditional approach – they should focus on customers' purchasing behavior.
Here's an example. In one project, we advised our client to assign more shelf space to
store-label products in locations where customers were on the lookout for discounts.
At the same time, the retailer expanded the range of products offered in particular
segments, increasing the amount of deep-freeze space dedicated to ready meals and
pizzas and reducing the amount of space taken up by frozen fish and vegetables. In
locations with an above-average share of higher-income customers who were looking
for better quality foodstuffs, the retailer bumped up the share of premium items in
product categories such as wine and fresh produce. Of course, differentiating the product
range by store cluster means extra work for retailers, drawing up new planograms
and so forth. But the financial upside that comes from increased customer satisfaction
is also considerable and far outweighs the extra effort involved.
No two stores are alike
Retailers should decide which products to
sell in each store by examining the purchasing
behavior of relevant customer groups
Economy Standard Premium
3. CHOOSE THE RIGHT MARKETING MIX
Optimizing product groups means realigning the product portfolio. The goal of the
next step is to create a specially tailored product range for each customer segment.
This product range should also be as attractive as possible. Retailers need to
ask themselves:
Which customers prefer which articles?
How loyal are they to these products?
How many customers does each product reach?
By looking at actual shopping behavior, retailers can draw up a decision tree for
purchase decisions for each customer segment and product group. The decision tree
shows how customers move around the store and how they make purchase decisions
at the shelves. Retailers can use this information to arrange products on the shelves
the way that customers want to see them. They can also use it to optimize their merchandising.
This approach is the only way to ensure the correct decisions are made
about listing or delisting products. Companies also need to take into account the figures
for customers' "loyalty" to products. Tomato juice, for example, is a low-revenue item
but enjoys high loyalty levels in the important "Conservative & Brand-Aware" customer
segment. If the retailer ignores these loyalty figures, he might be tempted to delist
tomato juice – and in the process lose a key customer segment to the competition.
In the product range planning process, the retailer defines the optimum range of goods
with respect to customer requirements and profitability. He closes any gaps that he
identifies. In one client project, we discovered that the "Convenience Shoppers" customer
group was buying a much smaller share of frozen goods from our client than from
the competition. On further analysis, it became apparent that the range of products
offered by our client was less than optimal. Thanks to CCR, our client could make the
necessary improvements, including optimizing the price positioning.
Where products appear on the
shelf is key
Arranging products according to purchasing behavior
gives retailers a significant advantage over the
competition
By manufacturer
By purchasing behavior
A A A A A A B D C A
B B B B B D C B A B
C C C C C C A D C B
D D D D D D B C A D

Roland Berger Strategy Consultants
Now even
cheaper!
Now even
bigger!
The price strategy looks at price sensitivity
– not just per customer segment, but per article
Effective advertising campaigns
Segment-specific campaigns enable retailers to
improve purchase frequency and revenues
Loyalty card
0.0%
0.3%
0.6%
0.9%
0.1%
0.4%
0.7%
1.0%
0.2%
0.5%
0.8%
1.1%
Adjust the pricing strategy
It is normal practice in food retailing to reduce the price of the best-selling, most profitable
items to match the competition. However, doing so inevitably eats into margins. In
fact, retailers should adjust prices down only when price is relevant to customers. Firms
who know their customers inside out are at a distinct advantage here: they know how
price-sensitive their different customer segments are and what items they have in their
shopping carts. They can use the figures to work out which articles are truly relevant to the
price image of each segment and what the absolute or relevant customer penetration and
loyalty is for each segment. In other words, they can establish the price sensitivity not just
per customer segment, but per article.
An example: Affluent customer segments don't really care whether their bottle of champagne
costs a bit more or a bit less. But when it comes to products that they use every
day – flour, toilet paper and so on – they try to save money by looking for the best-value
products. By contrast, less well-off customers generally buy cheaper store-label products
when it comes to cosmetics, but prefer organic over non-organic produce. Retailers can
use such information to carry out targeted price investments aimed at specific customer
segments rather than resorting to the old-fashioned "scattergun" approach.
Manage promotions efficiently
Using CCR, retailers can increase the effectiveness of their marketing campaigns, too.
They now know exactly how different customer segments react to different types of promotions.
In this customer-based approach, companies will only use the types of advertising
that the customer group in question responds to best – flyers, loyalty-based promotions,
direct mail or whatever. They will also align their advertising with the shopping habits of
specific customer segments. This factor is particularly important given that the effectiveness
of traditional forms of advertising such as flyers has largely eroded over time. The
objective of retailers' advertising should be to promote the most attractive and at the same
time most profitable products.
Here's another example. A category manager for hair care products can analyze past
advertising campaigns to select the best shampoo for a specific customer segment. With
the help of CCR, he or she can identify a product not aimed at bargain hunters but at customers
who generate an attractive, normal level of revenue, or a product that reactivates
former customers. Segment-specific campaigns, information and offers enable retailers to
improve purchasing frequency and revenues, link advertising spend to advertising impact,
and demonstrably improve customer satisfaction.
4. COLLABORATION BETWEEN RETAILERS AND
MANUFACTURERS
CCR doesn't stop there, either. Besides using it for their own ends, retailers can sell sanitized
data on the shopping habits of customer segments (not individual customers) to pro-

content Customer Centric Retailing
duct manufacturers, as permitted by data protection legislation. This doesn't break
any rules on data protection. In fact, it hurts no one and benefits both the retail and the
manufacturing sectors. Selling customer data to manufacturers generates additional
income for retailers. Firms can also work with selected partners in industry to optimize
product categories and evaluate the effect of specific actions such as listing or delisting
products or new product concepts. Retailers can offer manufacturers packages of data
featuring various levels of analysis. This data helps manufacturers understand their retail
partners better. It also gives them insights into customers' purchase decisions at the
point of sale or the performance of new products in real-life purchasing situations.
A TREASURE TROVE
Customer data is capital – use it to set
yourself apart from the competition
As a rule, customer segment data from retailers is far more valuable for manufacturers
than data produced by large market research companies. This is because it is can be collected
more flexibly and supplied more quickly. Companies can monitor the impact of
specific actions more accurately and analyze the performance of individual articles better
due to the higher number of cases involved.
In other words, CCR equals added value for everyone involved. Manufacturers and retailers
improve their efficiency, and customers get more attractive products that are closer to
what they really want and need.
5. CONCLUSION: GET THE MOST OUT OF YOUR DATA
CCR is a powerful tool. Retailers will find it hard to do without it in today's competitive
environment. Companies that choose to ignore it not only miss out on considerable advantages
with regard to margins, they also risk losing their customers to competitors,
both online and bricks and mortar. The benefits of CCR are clear. Retailers acquire new
competencies and manufacturers no longer hold sway over their shelves. Investments
in the product range and prices are easier to measure and target more accurately . Revenues,
retail margins and customer loyalty grow thanks to improved customer acceptance.
At the end of the day, everybody wins: customers, manufacturers and retailers.
CCR allows companies to dip into the greatest treasure trove that they have: their customer
understanding. This treasure is often hidden among the bewildering variety of data
at their disposal. Making the best use of the mass of data produced by the digital world
and exploiting it for competitive advantage is what shapes the entire business model of
modern retail companies. In an earlier edition of think: act CONTENT, we looked at the area
of logistics, presenting our successful end-to-end ("E2E") optimization model from manufacturer
to shelf. Using the new data available as the basis for the relationship between
retailer and customer is the logical extension of this model.
Note that companies that really take CCR to heart don't use it just to optimize the product
range. They use it as it was designed, as a holistic management approach. In other words,
it reveals its full potential only when implemented in all areas of the organization.
IF YOU HAVE ANY QUESTIONS,
PLEASE FEEL FREE TO CONTACT US:
Patrick Müller-Sarmiento, Senior Partner
+49 (89) 9230-8489
patrick _mueller-sarmiento@de.rolandberger.com
Thorsten de Boer, Principal
+49 (89) 9230-8526
thorsten_de_boer@de.rolandberger.com
Dr. Florian Schmid, Senior Projekt Manager
+49 (89) 9230-8973
florian_schmid@de.rolandberger.com
think:act CONTENT
Editors:
Prof. Dr. Burkhard Schwenker, Dr. Martin C. Wittig
Project management: Dr. Katherine Nölling
Design: Roland Berger Media Design
Roland Berger Strategy Consultants GmbH
Am Sandtorkai 41
20457 Hamburg
+49 40 37631-4421
news@rolandberger.com
www.think-act.info

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