The retail industry in the United Kingdom continues to be one of the nation’s most important. Traditional retailers are under increasing pressure from other sales channels such as mail order and electronic commerce. Ubiquitous technologies, in particular, the Internet and Internet enabled applications further force a previously unparalleled pace of change. Despite the apparent protestations of retailers that customer relations are important, many in the retail industry demonstrate differences in their ratio of technology spending and organisational culture. The current growth of customer relationship management (CRM) in most industry sectors is being enabled by technology. “Once an art practised by the best salespeople, CRM is a new science, still in its infancy” (Cap Gemini Ernst & Young and International Data Corporation, 1999, p. 7). There is a “relatively high level of corporate awareness” of the benefits of CRM across industry sectors as companies attempt to differentiate themselves from competitors (Cap Gemini Ernst & Young, 1999).
This paper provides insights into the retail industry and available customer relationship management tools, techniques and technologies. This area of study has important implications if the retail industry is to maintain current levels of turnover and profitability – in 1998, 23 percent of the Gross Domestic Product of the United Kingdom was derived from the sector, which remains the second largest employer in the U.K. (Cox & Brittain, 2000). Integrated technologies providing CRM in industries such as insurance and banking are far more advanced that those in the retail sector, it is now essential that retailers catch up (Datamonitor and Cap Gemini Ernst & Young, 1999). The main hypothesis of this paper is that traditional retailers can compete with the multifarious new sales channels, but only by applying new practices, often enabled by technology.
DEFINING CUSTOMER RELATIONSHIP MANAGEMENT
There are at present a myriad of definitions for CRM, yet “no one correct definition of CRM” exists (Goldenberg, 1999, p. 10). For the purposes of this paper the following definition provides the essence of CRM:
A comprehensive approach which provides seamless integration of every area of business that touches the customer – namely marketing, sales, customer service and field support – through the integration of people, process and technology, taking advantage of the revolutionary impact of the Internet (Chablo, 1999, p.12)
CRM, therefore, is regarded here as the concept or business process concerned with how retailers can increase retention of their most
profitable customers whilst simultaneously reducing costs and increasing the value of transactions, thereby maximising profits. The need for CRM strategies seems appropriate for the information age where, “traditional models of competitive strategy” no longer fit the needs of a customer centric marketplace (Reichheld, 1996). An examination of much of the current research manifests in almost unanimous consensus as to the aims of CRM. “A well-executed customer relationship strategy can result in a number of quantitative benefits” (Conway & Fitzpatrick, 1999. p. 32). Meltzer (1999) believes CRM is “a vision founded upon customer profitability as its centrepiece.” Davids (1999, p.22) indicates that the “new models in which customer relationships are becoming the central business issue.”
THE U.K. RETAIL MARKET
The Current Retail Market
According to Cox and Brittain (2000), the retail industry, employing 2.5 million people, almost 11 percent of the workforce, is a major contributor to the UK economy. In 1998, retailing provided 57,500 new jobs representing 19 percent of the total created for the year, with 42,700 of these being full time positions. Over the same period a 96,000 reduction in the workforce of the manufacturing industry was witnessed. Prices of retail goods in the 12 months to September 1999 fell by 0.1 percent, a significant factor in helping to keep inflation under control. The total number of retail outlets in the UK fell from 504,781 in 1971 to around 290,00 in 1990 (Sieff, 1999).
The industry is witnessing previously unseen magnitudes of change and at present little parity appears to exist between customer and retailer needs. The only certainty is that retailers “need to change the way they manage their business, go to market and satisfy the needs of their customers and shareholders” (Andersen Consulting, 1999. p.7). Peppers and Rogers (1996) identify four major change factors and business process interactions. These are increased competition, increased customer expectations, technology advances and political and legislative factors. Further information on each of these segments is presented below.
Competition is being driven by globalisation, merger and acquisition activity and market saturation. “Retailing is one of the world’s biggest but most localised industries” (Cox & Brittain, 2000, p. 23), however globalisation is affecting more and more markets (Peck, Paynes, Christoper & Clark, 1999) including retail, creating “considerable organisational challenges” (Corstjens & Corstjens, 1995). Merger and acquisition activity has reduced the number of players in the market place; acquisition growth is generally more rapid than organic growth and serves to change the market more significantly in shorter time scales. Market saturation may result in smaller players being forced to merge with larger rivals, seek new niche markets or close. Globalisation and merger activities are helping to fuel competition that is verging on oligopoly, particularly in grocery and electrical goods retailing. The major grocery retailers now control over 80 percent of the market in contrast to less than 50 percent in 1973 (Cox & Brittain, 2000). CRM strategies should address the issues arising from globalisation, merger activity and over capacity in the market place as part of the overall drive to improve customer service and retention.
It should be recognised that “the customer is the most scarce resource to today’s retailer” (Harbidge, 1995, p. 21). When customers are provided with a greater variety of retailers, delivery channels and products then loyalty to traditional retailers will be tested to the limits. Those retailers who become complacent often take customer loyalty for granted (Griffin, 1995). The down turn in the fortunes of Marks and Spencer arose largely as a result of customer defections and a belief that “what works in Manchester will work in Milan” (Capell, 1999, p. 8). It is no accident that the world’s number one retailer Wal-Mart uses its leading edge information systems to best serve the customer by knowing what they want, within an organisational culture of change (Wal-Mart, 1999).
Most modern retailers could not afford to trade without mass utilisation of technological devices. Front and back office processes have been automated – Electronic point of sale terminals (EPOS) [define this word] terminals facilitate transaction processing whilst supply chain activities have been shortened to provide increased efficiencies (Harbidge, 1999). The next major challenge to traditional retailers comes from the Internet and other delivery channels enabled by technology such as mobile telephony. Despite technological barriers having been overcome data mining techniques and other CRM initiatives do not appear to be used effectively by many retailers (Cox & Brittain, 2000). Puckey (1999) proposes an evolved model of the customer database that allows integrated delivery channels to access one customer’s view.
RETAIL SURVEY METHODOLOGY AND RESULTS
The researchers undertook a survey of 40 retail organisations selected randomly from the Financial Times’ 500 companies. The survey was conducted in June 1999. In order to help alleviate the often-poor response rate to surveys of this nature, respondents were offered the opportunity to request a copy of the survey results. To maintain the privacy of respondents, company names and addresses have been withheld from this paper. The survey was limited to “traditional retailers” as defined above. Restaurants and public houses were included in the survey as they operate in retail premises and have a long history of customer relationship management and unsociable trading hours, factors now becoming important to other types of retailers.
The questionnaire (Appendix A) was sent to the information technology (IT) managers of the companies with the aim of eliciting their views and those of employees in the IT department. The researchers sent 150 questionnaires, and a 27 percent response rate to the survey was achieved. Of these, only 28 percent of respondents elected to remain anonymous.
The questionnaire, consisting of three main sections, attempted to collect information about the participating companies, their IT strategies and their future strategies. A detailed analysis is presented in the following section.
Retailers were asked first to select the type that best described the sector they operate in according to the main product types sold. The major types and response levels identified are clothing/fashion – 36 percent, grocery – 27 percent, pharmaceutical – 9 percent, restaurant/pub – 1 percent and other – 27 percent. Within the ‘other’ category are retailers operating in furniture, cosmetics and confectionery sectors. There are no respondents from stationery, record or book sectors.
Retailers were asked if they operated a customer loyalty scheme as these are considered integral to enterprise wide CRM strategies. There are currently over 40 million loyalty cards in use in the UK, most of these are issued by the large grocery retailers (Lehmann, 1999). Sixty four percent of respondents did not offer loyalty schemes, 27 percent offer loyalty schemes across the whole product range with one respondent restricting its loyalty scheme to petrol purchases only. All respondents who operate loyalty schemes, including the petrol only card are in the grocery sector. This further reinforces the consensus that competition within the sector is intense and margins are slim (Cap Gemini Ernst and Young Retail IT, 1998). Such economic constraints forced major players such as Tesco to calculate the cost of each customer over a potential lifetime of purchasing – around £90,000 per individual. This long term view focused Tesco’s strategy to become more customer centric, hence the introduction of their loyalty card in 1995, the first one in the market (Peck, et al., 1999). Clothing and Fashion sector respondents were universal in their failure to offer any loyalty schemes. Non-food retailers do currently offer loyalty schemes; although these are limited in number, the companies concerned are major High Street names – Boots, WH Smith and British Home Stores are amongst them (Winnett, 1999).
To gain an understanding of current IT strategy within the sector, respondents were asked to rate the importance of a number of areas to the company both now and in 5 years time. Seventy percent of respondents rate merchandising as the most important use of IT both now (Figure 1) and in 5 years time (Figure 2). Supply chain is perceived as the second most important use of IT with 15 percent of respondents selecting supply chain currently, and 17 percent indicating it is most important in five years time. Loyalty is poorly represented in both charts, although a 2 percent increase – from 3 percent to 5 percent is indicated in five years time. Respondents do not seem to regard employee training as an important component of their long-term strategy, with only 7 percent giving this priority. Investment in loyalty schemes is projected to increase by just 2 percent of respondents. Most respondents operating in the clothing and fashion sector placed very little importance on loyalty schemes and employee training both now and in five years time.
To complete the first section of the survey, respondents were asked if they operate a call centre and if the facility is outsourced or run in house. Seventy three percent of respondents do operate call centres, with 87.5 percent of these being operated ‘in-house’ and just 12.5 percent being outsourced. Call centres together with loyalty cards form parts of an integrated CRM strategy. All grocery respondents operate call centre facilities, this is consistent with other responses from the sector respondents with regards to loyalty issues.IT Strategy
Respondents were asked to identify if their IT systems were custom built, packaged, tailored packages or a combination. Fifty-five percent use a combination of custom built and packaged software – the most common configuration. Eighteen percent use tailored packages, a further 18 percent use packages with no modification, and just 9 percent use custom built software (Figure 3).
IT System Software Configuration of Respondents
Packaged software was used without any adaptations by respondents in the Restaurant/Pub sector and the confectionery sector; this could indicate that very good commercial packages are available, or that the number of employees (average under 10) in their IT departments does not permit the time to produce customised solutions. Software providers may find areas for further research in these findings.
All grocery sector respondents implement a combination of packaged, tailored packages and customised solutions. The grocery respondents all have turnover in excess of £1bn and total employee numbers in excess of 20,000 – representing a larger contribution to both categories than any other sector respondents. Conversely the grocery respondents’ average ratio of IT employees to total employees is 1:194 whereas the respondents as a whole demonstrate a ratio of 1:132. The significance of these findings may impact on future development of CRM strategies within the organisations; the researchers anticipate that major CRM applications will be outsourced to specialised IT consultancies.
Respondents were asked to rate a series of strategies relating to ongoing business activities. The results have been collated and ranked by percentage according to the total of all the scores awarded by all sectors. Maintaining competitive advantage was ranked most important across the board with an overall score of 64 percent. In second place was optimise collection and use of data with an overall score of 62 percent. In effective CRM solutions, optimising data is integral to the overall strategy. However one respondent demonstrated a blatant disregard for potential CRM applications, stating that improved customer loyalty “couldn’t be done” and that “selling on the Internet is a long way off for fashion retail”.
The third most important consideration with a rating of 57 percent is improved return on investment. Improving internal communications is rated in fourth place with a score of 56 percent (Figure 4). In joint fifth position, respondents rated make better use of the customer database and define target markets with scores of 54 percent. Making better use of the customer database is fundamental to CRM strategies, three respondents however ranked it a major priority – two grocery retailers and one confectionery retailer. In contrast one other grocery retailer ranked this issue as least important – its loyalty card is for petrol only and does not require any personal details to be submitted to the company, hence a probable lack of customer data. It should be noted however that this retailer is a significant player in the sector although it does not fall into the top quadrant that is dominated by the big four – Tesco, Asda, Sainsbury and Safeway. With the exception of Asda, all utilise customer data gathered via loyalty cards to optimise potential future spending by issuing vouchers, details of special offers and so on based on previous spending patterns and buying habits.
It is also worth noting that the IT system at Asda is currently being upgraded to that of its new parent company, US retailer Wal-Mart. Even without a specific loyalty card scheme in place Wal-Mart is regarded as the most effective user of customer data in its sector (Jones, 1999). Wal-Mart is a significant force across many retail sectors, currently 83 percent of revenues come from non-food items (Norman, 1999) and it can
Importance of IT Strategies/Initiative
undoubtedly use its mass buying power to become overall cost leader in
their sector. CRM strategies can help provide differentiation for smaller retailers unable to compete on price but only if and when accurate interpretations are made of the customer database for customer identification, segmentation, buying patterns and profitability.
Improving relationships with suppliers achieved a score of 53 percent placing it in sixth place overall. Maximise Internet opportunities received a score of 50 percent. A major consideration when companies are integrating systems particularly where supplier retailer systems are being set up is operating platform differences. Increased use of Internet enabled applications, particularly for business to business transactions can speed up integration projects, enabling efficiencies to be realised sooner, thus improving bottom line profit. Lehmann (1999) uses the analogy of the telephone to impress on retailers the need to adopt Internet-based transaction systems, emphasising that it is yet another way of communicating with customers.
Recruiting quality personnel and changes to company structure both achieved scores of 48 percent. The least important uses of IT were regarded as training non IT personnel is the use of systems and preparation for EMU with scores of 47 percent and 44 percent respectively.
Respondents were asked to rate the importance of new in store systems used specifically for customer service. The scores have been converted to percentages and ranked according to overall scores. Forty five percent of respondents regard reducing out of stock items as the prime consideration for improving customer service. There was one notable exception to this: one respondent in the furniture sector regarded out of stock items as least important – physical size, cost and customer deliveries from special warehouses are attributable factors for this ranking. The furniture retailer did place most importance on increasing product awareness and improving customer loyalty.
Twenty seven percent of respondents regard increased speed of service as most important, although fast service does not necessarily equate to good service. Going some way towards offering excellent customer service is the improvement of shopping environments, although only 9 percent of respondents cited this as most important. Increased product awareness and improved customer loyalty were also rated as most important by just 9 percent of respondents, respectively.
To assess how important efficient business to business IT channels are respondents were asked to rate their main considerations when integrating supplier/store systems. Twenty seven percent of respondents cite the need to increase sales as the most important consideration for alignment of store/supplier IT. Nineteen percent consider reduced operating expenses as most important and a further 18 percent would like to see profit margins improved. These findings are consistent with the market as a whole. The last three months of 1999 saw no increases in average selling prices for the first time in over two decades. The Confederation for British Industry (1999) that reported the figures now believes that market forces are “working in the consumer’s interest”.
Eighteen percent would like to see a reduction in stock holding as a result of store/ supplier IT systems. Nine percent regard reducing out-of-stock promotional items as most important whilst the remaining 9 percent would like to see merchandising improved if there is integration of supplier/store IT systems. Overall the main reasons for considering integration of supplier/store systems are of a financial nature.
Respondents were asked if the opinions and suggestions of shop floor employees were taken into account when new systems were being introduced. New IT systems are often introduced with little consideration for the end users (Preece et al., 1998, Dix, Finlay, Abowd & Beale, 1998). Forty six percent of respondents stated that they encourage participation from sales/shop floor employees, 45 percent give consideration to sales/shop floor staff where they feel it is relevant and just 9 percent seek opinions sometimes. These results suggest that system designers are now taking the views of end users into consideration, although the researchers would be interested in extending this area of research by questioning a sample of end users.
Retailers were asked if the company operates a mail order service. Thirty six percent of respondents do offer a mail order service, with an even split between the clothing and grocery sector. One grocery retailer used the mail order facility to diversify from their core business, non-food items such as clothing form the main proportion of mail order goods. The grocery retailer outsourced the operation to a partner company, thus eliminating the need for major upgrading of existing IT systems, or the introduction of new processes within the company. The remaining 64 percent of respondents do not offer mail order facilities.
Retailers were then asked if they operated a telephone ordering service; yet again 36 percent of respondents indicated that they offered this service. There was correlation between the number of retailers offering both mail order and telephone ordering amongst respondents.
Retailers were asked if the company currently operates a web site. In contrast to the minority percentage who operate both mail order and telephone ordering the number of respondents who currently run web sites is 73 percent.
Those retailers who do not currently run a web site were asked when they expected to develop one. Sixty six percent had no plans to develop one within the foreseeable future, whilst 34 percent were already in the process of developing a web site. Fully integrated CRM solutions require transactional sites as opposed to merely promotional or content sites (Forrester Research, 1996). Transactional sites use the full power of the web’s integration with complex database systems. Encryption technology is a major consideration and along with other security elements requires adequate planning and resources.
To establish the extent of investment in their web sites, respondents who operated web sites were asked a series of questions relating directly to their sites. Respondents were first asked to indicate what services they currently offer on line. More than one answer could be chosen and this accounts for total numbers exceeding 100 percent (Figure 5).
One hundred percent of respondents who operate a web site provide information on products and services. Fifty four percent had the facility for customers to contact the company via the web site and a further 54 percent offered information on the history of the company. Only 36 percent of respondents have transactional sites for customer sales. No respondents currently operate web-enabled transactions with suppliers. Just 18 percent of respondents make use of their web site to promote current offers and activities.
Amongst those operating fully transactional sites were a major grocery retailer, a confectionery sector respondent and one of the smaller clothing retailers (under £50 million turnover). Respondents were unanimous in their use of the web for providing information on products and services, but they were equally unanimous in their lack of use for transactions with suppliers. Business to business use of the web is set to be a major growth area, one area where supply chain costs can be reduced.
There is no one overwhelming benefit cited as the reason for operating a web site. Reducing floor space and staff costs are rated as
Facilities and Information Provided on Web Sites (of the Companies Which Participate in the Survey)
main benefits by 16 percent and 15 percent of respondents respectively.
Attracting higher net worth customers is regarded as most important by 14 percent of respondents. Retaining existing customers and increasing the customer base are both regarded as most important by 12 percent of respondents. Financially it is more cost effective to retain existing customers than it is to attract new ones (Anton, 1996); long term customers tend to buy less ‘loss leader’ items thereby generating more bottom line profit from sales than new customers (Reichheld, 1999).
Eleven percent of respondents believe their web site will increase turnover, whilst maintaining competitive advantage and improving customer service are ranked last, each with a 10 percent rating.
Retailers were asked what they consider to be the main problems associated with electronic commerce. Technology constraints were not cited by any respondents as a major consideration. The two main areas for concern are poor return on investment and organisational change requirements; both are rated as most important by 23 percent of respondents but interestingly represent different ends of the change spectrum (Figure 6).
Twenty percent of respondents regard the logistics of delivering goods as the most important concern. Security is the main concern for only 15 percent of respondents and possibly reflects the apparent insignificance of technology constraints. A further 15 percent of respondents believe there is insufficient consumer interest in web sites. The remaining 9 percent cite storage of goods as the main problem.
Main Concerns of Respondents Regarding Web Sites
To sum up the attitude of respondents, they were asked to agree or disagree with the following statement: “IT applications, including the use of databases, data warehousing and the growth of e-commerce will change the face of British retailing for good.” Despite their apparent resistance to change elsewhere in the survey, 73 percent of respondents agreed with this statement, believing that IT would change British retailing. Twenty seven percent of respondents disagreed with the above statement.
To conclude the presentation and discussion of the results, it should be noted that the research was undertaken during some of the worst trading conditions for UK retailers in the last two decades. Throughout the above section, suggestions have been made for areas of further research based on the results presented in each of the three main areas – the company, IT strategy and future strategy. In analysing the results of the survey the researchers have found that there is little evidence amongst most sectors of existing CRM applications and that retailers are generally unaware of CRM as a strategy for future expansion and growth. The main exception to this is the grocery sector respondents who all offer loyalty cards and operate call centre facilities. These strategies give them considerable competitive advantage and pave the way for expansion away from core business areas.
This paper aims to analyse the retail industry in the UK as a sector undergoing cataclysmic change in a dynamic wider environment. This wider environmental change is not planned by the traditional players in the sector but is being forced by catalytic effects of global markets and technological impacts. Central to future success is the need to adopt different strategies that provide sustainable long-term competitive advantage.
Central to this paper is the notion that the UK retail market is doing little to implement CRM initiatives and plan strategic change. The implications that arise both from the research results and existing literature highlight an apparent ignorance of the impact of competition, lack of planning for integration of existing technology, and an unwillingness to invest in the ‘right’ technology to improve the current situation. Also, the results emphasise weakness in capabilities for dealing with organisational change effectively.
Technology is serving to provide methods of reducing costs in operating procedures for retailers, whilst the Internet opens up a global store to consumers. Competitive advantage must now be sought by applying the differentiation that CRM can provide. Certain retailers in the grocery sector have furthered the cause of CRM more than their competitors and as a result are now in the enviable position of having the infrastructure and resources that enable a move away from their core business area into profitable niche markets. In the wake of threats from US giant Wal-Mart and major European retailers, the U.K. retail sector must adopt drastic measures to remain profitable. The re-engineering philosophy underlying CRM allows for the radical change necessary to meet current market conditions.
Julie Kenyon and Maria Vakola