Striking a Balance

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Striking a Balance

By Ann Meyer - 04/01/2012

Tough economic times often bring consolidation as stronger players gobble up struggling competitors. To make the mergers pay off financially, acquiring companies seek cost savings in a centralized organizational structure, where executives at headquarters make decisions that are carried out at all locations. Contrast that with boom periods, when retailers are more likely to allow general managers at the store or regional level to have more autonomy.

Despite the trying economy, however, this time around many grocery retailers are moving toward a different model, where some functions are centralized and others are deliberately decentralized to get closer to the customer. It's a correction after the pendulum swung too far toward centralization following Walmart's expansion and the hyper-competition that ensued. Nimble retailers found a way to differentiate themselves by taking a localized approach with a decentralized purchasing strategy, while managing some functions from headquarters, says Ric Noreen, senior associated consultant at Lake Forest, Ill.-based AMG Strategic Advisors, a boutique consultancy recently acquired by Acosta.

While centralizing operations sounds good in theory with its emphasis on synergies and cost efficiencies, retailers also increasingly need to cater to shoppers' needs. And that requires understanding and serving those customers on a local level. "The pendulum has swung back to decentralization, but kind of a hybrid model," Noreen says.

HISTORICAL ROOTS

The grocery industry was largely local and fragmented until consolidation in the 1980s and 1990s, when the rise of technology also enabled centralization, Noreen says. Regional players expanded their geographic footprint by rolling up other supermarket chains, consolidating IT and distribution and standardizing product assortment and planogram design. But many didn't account for differences in customer taste from one location to the next.


"You move to a centralized model in a very consolidated market. That's where the problems started to occur, because – no surprise here – one size does not fit all."

–Ric Noreen,

AMG Strategic Advisors

"You move to a centralized model in a very consolidated market. That's where the problems started to occur, because--no surprise here--one size does not fit all," Noreen says. "You're trying to do a command-and-control from headquarters, trying to force feed economies of scale into all these disparate markets and, frankly, not making good decisions."

Economy aside, some companies have built centralization into their business models, while others are dedicated to a local approach. Think of the dichotomy as the difference between Walmart and Whole Foods Market, suggests Paul Dolman-Darrall, executive vice president, global delivery and strategy at Emergn in London. For each company, the respective organizational structure is part and parcel with their culture and identity. "Whole Foods' staff [members] have astonishing power," he says, including a say in who is hired onto their teams. "It almost has a democracy feel to it."

In comparison, Walmart is known for a top-down approach to management. It delivers mandates to employees and suppliers and maintains a fierce focus on price ahead of other aspects of the business. Walmart's rapid expansion into grocery has put pressure on other food retailers to centralize operations, including purchasing.

Moving from a decentralized structure that gives managers autonomy at the store level to a centralized organization is often accomplished initially by implementing company-wide computer systems, employee benefits and standard policies and procedures. Marketing, distribution and procurement usually come later.

U.K.-based giant Tesco strikes a balance by gathering data about customers centrally, then using it in a decentralized manner to stock individual stores. Similarly, Tesco has devised a centralized "Tesco in a box system" for rolling out its IT systems and predefined business processes as the company enters new countries, Dolman-Darrall says. Beyond that, however, purchasing decisions are made by executives within the new country to focus on local customers. "Decentralization across geographies is extremely common. Tesco in the U.K. is not managing Fresh & Easy in the United States," he says.

Kroger also has found a balance, using consumer analytics to determine whether a product category should be managed on a local or corporate level, Noreen says. "It's the unique insights [that] the dunnhumby analytics provide them on POS data that enable them to make discrete decisions on whether it will be centralized, or market to market or store to store," he says.

Retailers with a strength in market research and consumer analytics have an advantage over others in their ability to make fact-based decisions. "Shopper analytics is going to be the key to finding the right balance between centralization and decentralization," Noreen says.

TIED TO PERFORMANCE

Increasingly, shoppers want local merchandise, which is best delivered by companies with decentralized structures. That's why some mid-market supermarkets with autocratic management structures are being outperformed by competitors that can react to local market needs.

When it works well, a decentralized structure can lead to new ideas. It also can allow the company to tailor decisions about product sourcing, product assortment, merchandising and shopper marketing programs, Noreen says. "The extent to which you push those decisions down to the local level, by definition you are increasing relevancy and building brand affinity more quickly," he says. As a result, district managers are being given more latitude to market to local shoppers.

Local brands often mean more to consumers, but stocking products from local suppliers can mean sacrificing efficiencies. The theory goes that companies gain efficiencies through centralization and can share best practices throughout the company. "Retail often is seen as a clone model. You open up one shop and the shop is a success, so you open up a second shop," Dolman-Darrall says.


"Retail often is seen as a clone model. You open up one shop and the shop is a success, so you open up a second shop."

– Paul Dolman-Darrall,

Emergn

It's the model Walmart uses by leveraging its buying power. "Centralization works really well, presuming customers want the same thing," Dolman-Darrall says. "It doesn't work as well if customers want different things."

At Whole Foods Market, store managers are encouraged to stock local foods and promote them. In a decentralized model, the general manager of a store or group of stores can be more responsive to customers and has a vested interest in taking time to understand local customers' needs, so the strategy is often successful. On the other hand, "it can drive more costs into your business. It's often criticized for not being a particularly cost-effective model," Dolman-Darrall says. And customers may end up paying more for merchandise. That's one reason Whole Foods Market's prices are higher than Walmart's.

CHANGING COURSE

Reversing course, though, isn't always easy. Apparel retailer Gap started as a centralized model out of California, then tried to decentralize in the European market. But the company wasn't successful because it didn't differentiate its product enough, so it reverted to a centralized structure, Dolman-Darrall says. "They weren't able to change their product enough to appeal to customers. They didn't see the upside," he says. At one point, Gap was using the same denim fabric for its upscale banner, Banana Republic, as for its value-oriented brand, Old Navy. "You can't rip off your customers like that. I think [Gap] learned from that. Banana Republic sales dipped," he says.

When companies are centralized, most local managers are distanced from decision-making. For consumers, that means "a clone model can feel very impersonal," says Dolman-Darrall. And when centralization occurs as part of a merger, one banner often gets the short end of the stick. "When you have a merger, it's not really a merger of equals. One has to adopt the culture of the other, and that can be a challenge," he says.

Retail mergers often focus on real estate, with one company attracted to another's store locations and the customer base they bring. But if the two retailers' corporate cultures and target markets are distinct, expect some challenges to combining operations and brand identity. For example, when family-run William Morrison acquired Safeway in the United Kingdom in March 2004 for about 3 billion pounds (US$5.2 billion), it sought expansion in the South by rebranding Safeway locations as Morrison. It also hoped to realize cost savings of more than 200 million pounds (or about US$125 million), according to news reports.

But Morrison's stronghold was in Northern England, where it catered to lower- to middle-class customers, while Safeway's southern clientele was largely upscale, Dolman-Darrall recalls. The ensuing culture clash spurred Morrison to post its first-ever loss in March 2006, The Guardian reported.

EMPOWERING MANAGERS

With less voice in operations, store managers can lose some motivation when a company is centralized. But when a regional manager or a store's general manager is given responsibility for a budget, he or she often feels empowered. There's an understanding with the company that "this is your business. You can control everything," says Stephen Burnett, professor of management and strategy at Northwestern University's Kellogg School of Management. Store managers hire their own marketing experts, human resources professionals, production or quality control managers and financial types, and they have the satisfaction of knowing they can make decisions quickly as the need arises.

The general manager of a store or group of stores can be more responsive to customers than an executive at headquarters, so the strategy is often successful. By the same token, general managers should be held accountable when their units underperform.


Under a centralized structure, "What you've done is make it very complex and made it difficult to be held accountable."

–Stephen Burnett,

Northwestern University

Under a centralized structure, an executive vice president of marketing ultimately is accountable for all marketing efforts, with other marketing executives reporting to him or her. "What you've done is make it very complex and made it difficult to be held accountable," Burnett says.

"It's a disaster in the making if it's [centralization] not done right," adds James Shein, clinical professor of management and strategy at Northwestern University's Kellogg School of Management. "What happens is [that] silos form." Marketing doesn't want to talk to engineering, and engineering doesn't want to talk to production, so gaps emerge throughout operations.

A hybrid model can offer the best of both worlds. For example, the Coop Group of Italy, a network of grocery retailers, shares marketing and distribution efforts, while member companies determine their own pricing and promotions, Dolman-Darrall says. Retailers cut costs and build credibility by being part of the coop, while still managing their own operations.

Increasingly, retailers are recognizing that employees generally prefer a decentralized organization, where they are part of the decision-making process. Costco and Target – and even Walmart – have started decentralizing parts of their operations to provide more autonomy locally. "At Costco they've been trying to work out, how can we encourage employee ideas and reduce bureaucracy in allowing [workers at the store level] to do something?" says Dolman-Darrall. "Decentralization can lead to motivation."

Freelance journalist Ann Meyer is senior editor of Retail Leader, editor of SmallBusinessExecutive (www.SmallBizChicago.com), and chief executive of L3C Chicago, L3C.