Perspectives on retail and consumer goods Number 4, Autumn 2015 Perspectives on retail and Editor McKinsey Practice consumer goods is written by Monica Toriello Publications experts and practitioners in McKinsey & Company’s Retail Contributing Editor Editor-in-Chief and Consumer Packaged Caitlin Gallagher Lucia Rahilly Goods practices, along with other McKinsey colleagues. Art Direction and Design Executive Editors Hil Albuquerque, Nicole Michael T. Borruso, Allan Gold, To send comments or request Esquerre Bill Javetski, Mark Staples copies, e-mail us: Consumer_ [email protected] Editorial Production Copyright © 2015 McKinsey & Runa Arora, Elizabeth Company. All rights reserved. Editorial Board Brown, Heather Byer, Klaus Behrenbeck, Peter Torea Frey, Heather Gross, This publication is not intended Breuer, Peter Child, Sandrine Katya Petriwsky, John C. to be used as the basis for Devillard, Dennis Martinis, Sanchez, Dana Sand, trading in the shares of any Jørgen Rugholm, Frank Sneha Vats company or for undertaking Sänger, Tobias Wachinger, any other complex or significant Anja Weissgerber Managing Editors financial transaction without Michael T. Borruso, Venetia consulting appropriate Senior Content Manager Simcock professional advisers. Tobias Wachinger Cover Illustration No part of this publication may Project and Content Keiko Morimoto be copied or redistributed Manager in any form without the prior Anja Weissgerber written consent of McKinsey & Company. Table of contents 4 12 16 28 Modern grocery and Amazon China’s president Winning in Africa’s Becoming a regional the emerging-market on ‘transformative’ consumer market powerhouse in food consumer: A complicated technologies For consumer-goods retailing courtship Doug Gurr reflects on how companies, Africa holds Croatian conglomerate In some emerging markets, China differs from Western much promise—but also Agrokor is the top grocery the response to modern markets and what role data many pitfalls. To succeed on player in five countries. In grocery formats has been informatics will play in the the continent, companies this interview, the company’s tepid. What’s a modern future of retail. must learn from the failures head of retail reflects on the grocer to do? and successes of others. rewards and challenges of cross-border growth. 32 38 44 50 Secrets to implementation Getting the most out Smarter schedules, better Is your company a success of your sustainability budgets: How to improve value creator or a value What do successful program store operations destroyer? implementers do differently Sustainability initiatives won’t Through activity-based By looking at performance from other companies? create lasting value if they’re labor scheduling and through the lens of economic Our survey of more than poorly managed. Here are budgeting, retailers can cut profit, retailers can better 2,200 executives yields four lessons from companies store labor costs by up to understand the effectiveness actionable answers. that are doing it right. 12 percent while improving of their business strategies. both customer service and employee satisfaction. ALSO IN THIS ISSUE 22 55 58 60 East Africa: The next hub Growth in the packaged- Contributors Regional contacts for apparel sourcing? food industry East African countries— The drivers of revenue growth in particular, Ethiopia and are investment in the right Kenya—have the potential markets, M&A skills, and to become bigger players in a pragmatic approach garment manufacturing. But to execution. the road ahead won’t be easy. Foreword I hope you had a great summer and enjoyed some For example, will consumer and retail companies time with family and friends. It seems 2015 is continue to manage IT as a cost line, with a focus shaping up to be another busy and successful year for on efficiency, or will technology become the most many of you. Consumer sentiment is on the upswing important competitive advantage? Will our largest in many European countries, the US economy is markets be the same ones as today, or will the gaining traction, and in general the outlook for majority of our sales come from regions in Brazil or developed economies is positive. On the other China that some of us haven’t even heard of yet? Will hand, China’s growth momentum is slowing, while retailers and consumer-goods companies remain Russia and other oil-rich countries continue to face distinct from each other, or will they become fully challenges. Consumer-goods and retail executives integrated direct-to-consumer companies (which is certainly have more than enough to think about already starting to happen in the apparel industry)? when it comes to managing the day-to-day business and the annual budget. No one can predict what will happen in 2020 or 2030. But I believe that consumers and our industry will Yet I’m sure most of you are already thinking ahead. change more dramatically than ever; business will What will the world—and the consumer sector in be fundamentally different. These developments can particular—look like in 5 or 15 years? We read news be exciting and energizing, rather than a cause for reports about Alibaba’s rapid rise to become one sleepless nights. of the world’s most valuable companies, the strong growth of e-commerce players Amazon and Zalando, Management is all about finding the right balance Google and Tesla’s efforts to develop self-driving between addressing short-term business needs and cars, and other potentially game-changing and opportunities and setting a long-term direction for paradigm-shifting events. What are the implications the future. One of my colleagues calls it “having a for the consumer sector as a whole, for specific microscope for the daily business and a periscope product categories, and for your company? for future direction setting.” In this edition of our 2 journal, we tackle both elements—the first half focuses on emerging markets and the second half on concrete business levers such as labor scheduling and implementation excellence. One highlight of this edition is an interview with Doug Gurr, Amazon China’s president, whose insights on what the future might look like were an eye-opener for me. I hope you, too, find each of the articles in this edition more than worth your time. Enjoy! Jörn Küpper Director, Cologne This edition of Perspectives on retail and consumer goods is available on mckinsey.com in several digital formats: HTML, PDF, and e-book (for iPad, Kindle, Sony Reader, and other devices). Each article is also available on the McKinsey Insights app. We welcome your thoughts and reactions; e-mail us at [email protected]. 3 © Keiko Morimoto Modern grocery and the emerging-market consumer: A complicated courtship In some emerging markets, the response to modern grocery formats has been tepid. What’s a modern grocer to do? Peter Child, Thomas Kilroy, and James Naylor Just 20 years ago, modern grocery retail appeared trade—the family-owned grocery chains, small poised to conquer every consumer market in the world. independent stores, and informal merchants that at Ambitious European grocers, having blanketed their the time accounted for the vast majority of grocery home countries with supermarkets and hypermarkets, sales in emerging markets. The prevailing expectation began setting their sights on growth both within and was that although there would be local differences beyond the continent. They held particularly high hopes due to cultural specificities, in every country the retail for China, India, and other emerging markets, where landscape would eventually consist of a combination fast-rising consumer spending seemed to presage an of modern formats: full-line supermarkets and unprecedented demand for gleaming new stores with hypermarkets, convenience stores, and discounters. large assortments, wide aisles, and bright lighting. These assumptions have been proved wrong. Global In the 1990s, the term “modern grocery retail” was grocery giants are struggling to grow profitably essentially a proxy for a small group of multinational in many emerging markets. Traditional trade has grocers including Ahold, Aldi, Auchan, Carrefour, proved remarkably resilient. And the market and Costco, Lidl, Metro, Tesco, and Walmart. It was channel structures taking shape in individual widely presumed that these retailers’ entry into any emerging economies are distinct from one another, market would lead to the demise of the traditional following no obvious pattern. 4 Perspectives on retail and consumer goods Autumn 2015 Why did this happen? What, if anything, did working so well in the developed world. But, in multinational grocers do wrong? And what retrospect, it’s clear that the countries in which the does it mean for the future of modern retail in hypermarket prospered had several characteristics emerging markets? in common: good road networks and high or fast- rising car-ownership rates, a large middle class that The hypermarket’s shortcomings enjoyed decent wages and stable employment, and a To understand the disparity between early high proportion of rural and suburban households expectations and the current reality, it’s useful with enough room at home to store groceries bought to examine the roots of the two quintessential in bulk. Also, those markets had grown to maturity modern-trade formats: the supermarket and the at a time when many women didn’t return to work hypermarket. The hypermarket in particular— after having children and therefore had time whether in its European form (in which food anchors