Localization Next Big Retail Innovation

CHRISTINA VEIDERS

WHITE SULPHUR SPRINGS, W.Va. — Localization, the ability to customize product offerings to a local market, is a decade-old concept that is beginning to take form on a national scale. It was the topic of a closed-door session of the CEO/Presidents Forum during the recent Grocery Manufacturers Association/Food Products Association Executive Conference here. One of the presenters, Darrell K. Rigby, who is a Boston-based partner of Bain & Co. and leads the firm's global retail practice, has studied the progress of localization extensively. SN asked him to give an update on where the food industry is in relation to other sectors on customizing their offering to satisfy customers at the local level.

SN: You call localization the next frontier of retail innovation. Where does the food retailing sector stand in this revolution in consumer markets?

DR: Sadly, I think the grocery industry is still in the early days of the revolution. For many, they are still trying to figure out how to make it work.

SN: Why is food retailing behind?

DR: It's hard work to localize profit effectively. Figuring out the parts of the offering that have the greatest impact through localization, and figuring how much of that offering should change in order to improve the experience but not create too much complexity and excess cost requires very sophisticated analysis of in-store purchase behaviors, insights from store associates, vendor feedback, analysis of the geo-demographic and consumer lifestyle preferences around stores. It's not easy to do and the information technology that makes it possible is just now emerging to make it profit-effective.

SN: What technology is needed?

DR: A lot of technology is in understanding consumers' needs. It's sophisticated technology that is just coming of age. It gives you the ability to take a lot of information that has been collected and analyze it. Previously, this information was not utilized by retailers because it was too complicated to tear it apart and really figure out what it was saying. You also need the technology required in the entire supply chain and logistics systems to get the right merchandise and right pack sizes to the right stores at the right times.

SN: Are there other sectors more advanced than food retailers?

DR: A broad range of retailers are applying localization. But I think for some reason a number of grocers seem to be operating with older IT systems. It's not just a matter of product complexity, either. There are lot of apparel companies who jumped on this, realizing the importance localization can play in increasing sales and reducing markdowns. When the inventory is perishable, as it is in fashion apparel, that is really important. The best examples come from companies in the fast-fashion business — Zara and H&M, which has very rapid cycle times and is figuring out which merchandise belongs in which stores almost in real time.

SN: What allows them to do that?

DR: Zara can move from concept to having merchandise on the floor in as little as four to six weeks. They are using a combination of technology, very short cycle times, very quick reaction to fashion cycles and a very sophisticated supply chain.

SN: How far away is the grocery industry from getting to this stage?

DR: There are very impressive moves on localization in the food industry. I think the regional players probably understood the need for localization before the national players. Part of it is because the national players worked so hard to take advantage of the economies of scale that they were looking for ways to standardize in ways that often hurt localization opportunities. In some cases, part of it was trying to avoid bloody battles with Wal-Mart or warehouse clubs. The regional players have led the way in localization. Later, some national chains began to realize that was a fairly effective practice and they should be able to do it as well as some of the regional players. Lately, you've seen Safeway and Kroger doing it effectively. Wal-Mart has its “store of community” program. I believe everybody is in the early stage of it, but clearly Wal-Mart is trying to get it right.

SN: Is there anything that can derail this movement?

DR: I think what could hurt localization is if people try to go too far, too fast and don't understand how to make the economics work. You have to understand what the brand stands for on a national basis and not confuse consumers by having them walk into one store and confuse them about why it is so different than another store. Localization is often so subtle that consumers often don't notice dramatic changes. They just feel satisfied that it is perfect for their particular needs. If it is done well, it's not shocking to consumers. It's something comforting and natural.