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The Idea inside Brief
For decades, Wal-Mart, also more sultans of standardization own dominated the consumer-market country with their winning outlet formats also goods mixes. But their “one size fits all” strategy no longer fits: Diverse consumer communities—differentiated by ethnicity, wealth, lifestyle, also values—now request customized products. And persons more and more rebel beside cookie-cutter stores that intimidate their neighborhoods’ distinct character. Yet assuming retail giants respond with offerings customized to every location, they risk losing the economies of scale that oil their profits.
The answer? Authors Darrell K. Rigby also Vijay Vishwanath recommend localizing by clusters—tailoring elements such as outlet formats, goods assortments, pricing, also staffing to groups of consumers that reveal alike preferences. For example, casual-wear retailer American Eagle Outfitters—boasting 740 U.S. stores—found that western Florida customers’ purchasing patterns closely matched those of convinced communities inside Texas also California. By customizing products also promotions to these consumer groups across locations, the business boosts sales while period as|during the period that} retaining cost efficiencies.
Localizing by clusters requires considerable investing inside technology appropriate to collecting also analyzing data; centralized, data-driven decision making; also supply chain partners who can manufacture also distribute customized products efficiently. But the attempt pays big dividends. Consider Best Buy: inside 2005, its 85 “localized stores” posted interest gains two times the company’s average.
The Idea inside Practice
Rigby also Vishwanath suggest these steps appropriate to localizing by clusters:
Collect Data
Gather as much details as viable on top of key elements of your trade appropriate to every store—using sources such as district managers’ knowledge, census also more demographic research, details from outlet scanners also commitment cards, consumer surveys also unsolicited comments, Internet sales data, also intelligence on top of competitors. Consider elements associated to:
- What you sell—such as goods mix, pricing, promotions, outlet layout, also service levels.
- Where you sell—including consumer demographics, climate, competitor market share, also district attractions also cultural events.
- When you sell—such as monthly, seasonal, also yearly cycles.
Develop Clusters
Use the details you’ve gathered to develop consumer clusters—groups who portion individual preferences associated to what, where, also when you sell. To remain things simple, employ the smallest number of clusters that permit you to specify the nearly all promising elements of your offering. Example:
Best Buy identified quartet consumer clusters: 1) busy suburban moms who are the head buyers appropriate to their households also want quick, special back navigating the world of technology, 2) young tech junkies who want cutting-edge entertainment also gaming gear, 3) affluent, time-pressed professionals seeking high-end apparatus also special service, 4) budget-minded family men desiring technology to enhance home life.
Identify Localization Opportunities
Localize key elements of your trade inside ways that create the highest viable sales also lowest costs. Example:
After analyzing district demographics also request patterns, Best Buy created outlet types that cater to the consumer clusters it identified. For instance, inside some of Best Buy’s locations, busy suburban moms were an untapped part that offered the leading opening appropriate to expansion. To interest them, Best Buy designed stores highlighting uncluttered layouts with broad aisles also warm lighting, technology-related toys appropriate to kids, personal shopping assistants, also extra ground space allocated to home appliances.
Preserve Economies of Scale
No matter how advanced your clustering, you’ll motionless lose some economies of scale—in purchasing, marketing, also more activities. To reduce the loss, start with smaller expensive strategies, such as localizing markdowns or a product’s wrapping as opposed to than sustain the expense of customizing the goods itself. Example:
Wal-Mart found that while period as|during the period that} “ant also roach killer” sells expertly inside southern states, northern consumers are turned out by the word “roach.” Simply by labeling the pesticide as “ant killer” inside northern states, the business saying sales increase dramatically.
We’re inside the in good time stages of a soft revolution inside consumer markets. For decades, the chains that own dominated the landscape—titans same as Wal-Mart, Best Buy, also McDonald’s—have pursued single-minded strategies of standardization. They’ve fine-tuned their outlet formats, goods mixes, also operating also PR processes, also they’ve rolled away their winning formulas internationally. They’ve demanded equally rigorous consistency from suppliers, pushing the standardization ethic big into consumer goods companies also over the entire consumer supply chain.
But the era of standardization is ending. Consumer communities are growing extra diverse—in ethnicity, wealth, lifestyle, also values. Many areas, moreover, are at the moment soaking (wet) with big-box outlets, also customers are rebelling beside cookie-cutter chain stores that intimidate the distinct characteristics, such as architectural styles also favored brands, of their neighborhoods. When it comes to consumer markets, one size no longer fits all. In response, smart retailers also consumer stock companies are starting to customize their offerings to district markets, rolling away dissimilar types of stores, goods lines, also alternative approaches to pricing, marketing, staffing, also customer service. They’re moving from standardization to localization.
The era of standardization is ending. Consumer communities are growing extra diverse—in ethnicity, wealth, lifestyle, also values.
Combining advanced details analysis with novel managerial structures, they’re gaining the efficiencies of centralized management without losing the responsiveness of district authority. The greatest benefit of moving from standardization to localization is strategic. Standardized offerings daunt experimentation also are easy appropriate to competitors to copy. (Sam Walton openly referred to Kmart as the “laboratory” he copied while period as|during the period that} growing Wal-Mart.) Customization encourages district experimentation also is difficult appropriate to competitors to track, let alone replicate. When expertly executed, localization strategies can provide a hard-wearing aggressive edge appropriate to retailers also goods manufacturers alike.
Reinventing the Big Box
Although standardization has been a powerful strategy inside consumer markets, it’s reached the point of diminishing returns. Customers are becoming extra diverse, according to studies by geodemographers, persons who study the population characteristics of particular geographic areas. Measuring ethnicity, age, wealth, urbanization, housing styles, also stable family structures, the demographic business Claritas resolute inside the 1970s that 40 lifestyle segments were enough to define the U.S. populace. Today, that number has grown to 66, a 65% increase.
Diversity is not the one nail inside standardization’s coffin. Many great chains own erected so numerous stores that they’re literally sprinting away of room to expand. They can’t open recent outlets without cannibalizing old ones. Standardized chains are also gathering with more constraints: Where seductive locations are motionless available, attempts to build stores often features fierce opposition from society activists. From California to Florida to New Jersey, neighborhoods are fleeting ordinances that say the sizes also stable architectural styles of recent shops. Building extra of the same—long the key of retailer growth—has been tapped away as a strategy.
Finally, standardization can perform the nearly all strategic damage by forcing products also practices into molds. The resulting homogenization of trade tends to undermine innovation, all the way up the supply chain. Managers come to be so focused on top of gathering tight operational targets—and stamping away exceptions—that they begin to consciously stop the experimentation that leads to seductive recent products, services, also processes. In the end, standardization erodes strategic differentiation also leads relentlessly toward commoditization—and the under increase also profitability that lead it.
The good news is that there’s a way away of standardization’s dead end. Technological advances, from checkout scanners also data-mining operating system to Internet stores also radio recurrence identification (a wireless technology that uses minute electronic tags to place also track objects), are providing retailers also their suppliers with big perception into district preferences also buying behaviors. For the earliest time, mismatches inside supply also request at separate stores can be pinpointed immediately. The recent details make it viable to “localize” stores, products, also services with unprecedented precision. (For an example of the recent insights technology can deliver, note the sidebar “Mining the Internet.”)
Our analysis of 30 localization leaders, containing Best Buy, Tesco, also VF, documents these benefits. Even Wal-Mart, the sultan of standardization, is moving toward localization. The business has made customization the key of its “store of the community” strategy, announcing that it plans to couturier formats also products to the district clientele inside each and every outlet inside its chain.
Wal-Mart uses a rigorous means to ensure that customization does not undermine its traditional efficiency. That means begins when a outlet is motionless on top of the drawing board. Company real-estate teams deeply investigation the district customer base when scouting appropriate to locations. Designers then cause the store’s arrangement by combining appropriate templates—stores close place of work parks, appropriate to example, with prominent islands highlighting ready-made meals appropriate to busy workers. Templates allow Wal-Mart to maintain considerable economies of scale. The business has also developed a advanced logistics system, encompassing 110 delivery centers inside the United States alone, to manage complex delivery schedules swiftly also efficiently.
Through its Retail Link program, Wal-Mart works with suppliers to couturier outlet goods with alike precision. Built on top of a vast database, Retail Link provides both district Wal-Mart managers also vendors with a two-year the old days of each and every item’s daily sales inside each and every Wal-Mart store. Using the Retail Link Web portal, Wal-Mart also its suppliers can cause maps of district customer demand, indicating which goods should be stocked when also where. For example, Wal-Mart stocks on 60 types of canned chili but carries one three nationwide. The sleep are allocated according to district tastes. Five years ago, Wal-Mart used recently five planograms (diagrams showing how also where products should be placed on top of retail shelves) to adjust its broth choosing to district preferences. Today, with the back of Retail Link, Wal-Mart also its suppliers employ extra than 200 finely tuned planograms to match broth assortments to every store’s request patterns—raising soup’s increase rate by several points inside the process. Product companies also employ the system to track their sales also inventory levels inside Wal-Mart’s stores also delivery centers also to develop pricing also PR programs to boost sales.
Thinking inside Clusters
As Wal-Mart also more leaders own discovered, successful localization hinges on top of getting the balance right. Too much localization can bent the brand also lead to ballooning costs. Too much standardization can take stagnation, dooming a business to dwindling market portion also shrinking profit.
Striking the correct balance means understanding which elements of a trade should be considered appropriate to localization, how expensive they are to customize, also how much influence they will own from one outlet to another. Far from individual an all-or-nothing game, localization can take spot inside myriad ways (see the reveal “What, Where, also When Should We Localize?”). For one retailer, it force make sense to own a highly localized staffing approach but a standardized goods mix, while period as|during the period that} an extra retailer may warrant the opposite. Similarly, a manufacturer force specify goods features inside one area also retailer incentives inside another. While it may be prohibitively expensive to customize a goods to numerous locations, it may be viable to gain alike benefits by tailoring the product’s wrapping or promotions at a far under cost. Wal-Mart found that while period as|during the period that} ant also roach killer sells expertly inside the southern United States, consumers inside the northern states are turned out by the word “roach.” After labeling the pesticide as “ant killer” inside northern states, the business has seen sales increase dramatically, according to John Westling, senior vice president.
What, Where, also When Should We Localize?
Of course, customization has its limits. Even with rich data, a business can’t customize each and every part of its trade inside each and every location. The sheer complexity would be overwhelming, leading to spiraling costs, assuming not paralysis. That’s why leading localizers own begun using clustering techniques to make simpler also even decision making, focusing their efforts on top of the relatively minute number of variables that usually drive the bulk of consumer purchases.
Rather than letting district managers’ decentralized decisions piece economies of scale, the pioneering companies own developed a body of knowledge of analyzing details on top of district buying patterns to place communities that reveal similarities inside demand. For example, American Eagle Outfitters, a retailer of popular casual have on with 740 U.S. stores, found that customers inside western Florida exhibited seasonal purchasing patterns also cost elasticities that closely matched those of convinced communities inside Texas also California. By tailoring assortments also promotions to such clusters of locations as opposed to than to separate stores, companies same as American Eagle can benefit from customization while period as|during the period that} holding on top of to nearly all of the efficiencies of standardization.
The customization-by-clusters strategy, which Bain earliest applied to grocery stores inside 1995, has proven successful inside drugstores, section stores, mass merchants, big-box retailers, restaurants, clothing companies, also a variety of consumer stock manufacturers. Clustering sorts things into groups, or clusters, so that the associations are powerful among members of the same gathering also weak among members of dissimilar clusters. Clusters permit manageable, modular operations—think another time of Wal-Mart’s outlet templates—that catch nearly all of the benefits of customization while period as|during the period that} also simplifying decisions also protecting economies of scale. Consider a goods head who has to decide how to holdings 100,000 items inside 1,500 stores appropriate to 365 days every year. If she wanted to customize the mix, she would own to make on 54.8 billion decisions (100,000 x 1,500 x 365), numerous of which would be based on top of such minute example sizes that the predictions of stable advanced models would be meaningless. If, however, the goods could be clustered into 2,500 classifications, the stores could be clustered into 20 alike types (for example, Latino line locations or upscale suburban places), also the timing (back to school, winter holidays) could be broken into 52 weeks, the number of decisions would be reduced to 2.6 million, which a present computer representation can optimize fairly easily. (For a talk of a particularly powerful statistical way used inside sorting via numerous variables, note the sidebar “CHAID: Clustering by the Numbers.”)
Best Buy is using clustering to transfer away from a standardized big-box strategy. It has revamped close to 300 of its 700 U.S. stores, introducing “customer-centric” formats to appeal to district shoppers. The business identified five representative types of customers. First, there’s “Jill,” a busy mother who is the head consumer appropriate to her home also wants quick, special back navigating the world of technology. In Eden Prairie, Minnesota, the business designed a outlet that caters to the needs of this busy suburban moms segment. The business found that this group of previously untapped consumers offered the leading opening appropriate to expansion inside the region. To interest this group, the outlet has an uncluttered layout with wider aisles also warmer lighting, also technology-related toys appropriate to children. Personal shopping assistants educate technology neophytes on products, also there’s extra ground space allocated to home appliances. Although the outlet motionless serves other, extra traditional electronics shoppers, the business hopes the outlet can boost its sales by attracting a put of district customers that own felt overwhelmed inside a Best Buy store.
Other stores are individual designed about the remaining quartet types of customers also are based on top of district request patterns. For example, there’s “Buzz,” a technology user who wants the latest mechanism appropriate to entertainment also gaming. Stores catering to Buzz own lots of interactive displays that allow shoppers to try away recent apparatus also media. Then there is “Barry,” an affluent, time-pressed professional is looking appropriate to high-end apparatus also special service. Stores tailored to his needs feature a store-within-a-store appropriate to pricey home-theater setups. Stores made with “Ray” inside mind emphasize reasonably priced goods with seductive funding plans also commitment programs appropriate to the family man on top of a budget who wants technology that can enhance his home life. Finally, appropriate to small-business customers, there’s a put of stores with specifically trained staffs, considerable displays of place of work equipment, also movable “Geek Squads” of service technicians.
While the chain plans to phase away these separate names beneath its banner, the terminology helped Best Buy take shape the image of every target customer appropriate to every gathering of stores.
By customizing stores inside clusters, as opposed to than individually, Best Buy has been able to maintain numerous of the scale economies that own long underpinned its success. So far, the recent strategy is delivering powerful results. The 85 Best Buy stores that had been localized as of in beforehand 2005 posted sales gains two times the company’s average. Encouraged, the business is accelerating the conversion, with plans to alteration above all its U.S. stores inside three years also specify outlets inside more countries as well.
So how perform you get started with clustering? Begin by collecting as numerous details as viable on top of key elements of your trade appropriate to every store. (Use the reveal “What, Where, also When Should We Localize?”) If some details is missing or hard to get, don’t stay appropriate to it to be collected. Use what’s readily ready to launch the analysis, recognizing that clustering regularly gets better above time. Use the details to develop clusters also place customization opportunities. Then estimate the economics (including both sales also costs) of localizing the nearly all promising elements of the customer offering—using as one or two clusters as possible. A clothes retailer, appropriate to example, force turn up that localized markdown policies offer seductive returns also that weather is the key variable influencing markdown decisions. Further analysis may determine that a minute number of outlet clusters—three, say—will be enough to gain the ideal economic benefit. For goods mix, by contrast, the key variable force be customer lifestyle, which may require a dozen clusters to get the maximum payoff.
Diversity inside the Product Line
As big retailers drift away from standardization, the ripple effects will reshape the entire consumer supply chain. Consumer stock companies will need to introduce extra variations into their lines, collaborating closely with retailers to place the correct products inside the correct places at the correct times with the correct pricing also upgrading programs. Manufacturers inside general own been sluggish to make this change. Although they conduct considerable consumer investigation to develop specialized products appropriate to distinct segments, they own not much belief that rigid retailers will sort, merchandise, also market practice products to the correct customer clusters. Products developed appropriate to senior citizens will pile up inside college communities—slowing inventory turns, forcing expensive markdowns, also often leading retailers to drop potentially profitable niche products.
Nevertheless, as growing numbers of retailers are rolling away their own versions of Wal-Mart’s Retail Link—including Lowe’s (LowesLink) also Target (Partners Online)—a handful of consumer goods companies are seizing the advantage by study to localize. When one food business introduced low-calorie versions of some of its snack foods, it shipped additional cases to stores close Weight Watchers clinics. Cadbury more kiwi-filled chocolate Cadbury Kiwi Royale inside New Zealand. Kraft developed Post’s Fiesta Fruity Pebbles ready-to-eat cereal largely appropriate to Hispanics. Coca-Cola has developed quartet canned, ready-to-drink coffees appropriate to Japan, every formulated appropriate to a particular region. Procter & Gamble introduced Curry Pringles inside England and, later, Spanish Salsa flavor inside England also more parts of Europe also Funky Soy Sauce Pringles inside Asia. Frito-Lay developed Nori Seaweed Lay’s potato chips appropriate to Thailand also A la Turca corn chips with poppy seeds also a dehydrated tomato flavor appropriate to Turkey.
One of the leading localizers is consumer products giant VF, a $6 billion clothing producer that owns such well-liked denims brands as Lee also Wrangler as expertly as upscale labels containing Nautica also North Face. VF integrates numerous details sources to place customization opportunities—to the delight of retailers also consumers. “It is not unusual appropriate to localization to enhance sales by 40% to 50% while period as|during the period that} together reducing outlet inventories also markdowns,” says Boyd Rogers, VF’s president appropriate to supply chain. “We consider our localization capabilities to be one of our nearly all powerful aggressive advantages.”
VF combines third-party geodemographic also lifestyle details with daily store-level sales data, considerable consumer research, also competitor analysis to develop localization strategies with retailers, such as Kohl’s. VF has found, appropriate to instance, that while period as|during the period that} numerous buyers at the moment desire lighter-weight denim, male Hispanics motionless prefer heavier weights. Women inside southern California tend to buy shorter denim skirts than those inside northern California. Even stores inside the same urban area can reveal very dissimilar request patterns appropriate to denims also more clothes. A outlet inside a society with a great immigrant population, appropriate to example, will tend to own greater request appropriate to smaller-size clothes than a outlet surrounded by nonimmigrant Americans—a subtle testament to America’s obesity problem.
For one U.S. chain, VF created 40 clusters, based generally on top of consumer lifestyle segments also purchasing patterns. Product assortments, PR strategies, also supply chain systems are tailored to every cluster. VF uses rapid details exchanges to study every store’s daily point-of-sales data—not recently to replenish shelves but also to discover recent request trends inside colors also styles also foster innovation. Through such efforts, VF also its retailers are boosting sales substantially while period as|during the period that} also avoiding markdowns also returns.
Central Control, Local Touch
A drift to localization raises big management also managerial challenges. The in good time movers are, inside fact, breaking via the old “centralization/decentralization compromise.” But it’s tricky. Executives’ earliest instinct is often to empower district managers, giving them control over, say, the choosing of products on top of outlet shelves or important promotional programs.
Such decentralization often backfires, appropriate to two simple reasons. First, district managers lack the depth of data, also often the skill, to make consistently smart decisions on buying, merchandising, also operations. Second, giving district managers as well much leeway can introduce expensive complexity also instability into a business. Indeed, our investigation found that great manufacturers are smaller willing to collaborate with, or offer their leading terms to, highly decentralized retailers.
J.C. Penney discovered this the hard way inside the late 1990s, when it ran into problems by allowing outlet managers to determine instruct quantities. Local managers turned away to be as well conservative. Seeking to reduce risk, they would buy a broad variety of stock as opposed to than concentrate on top of burning items. As a result, the stores ran away of well-liked products swiftly also were left with enlarged stocks of sluggish sellers. And because headquarters lacked details on top of what was inside every store, central managers couldn’t stable note the problems. Between mid-1998 also the close of 2000, Penney’s holdings cost plummeted from $54 to $8.
Then, inside 2000, Penney’s embarked on top of a successful turnaround program below the course of its then-new CEO, Allen Questrom. Penney’s went from a decentralized business whose buying also markdown decisions were made at the stores to a centralized, data-driven organization. The management team classified stores into seven clusters on top of the basis of size also customer request patterns, developed goods also fixture modules, also consolidated purchase orders. It also developed demand-based optimization techniques—allowing goods also cost ranges, replenishment policies, as expertly as the timing also depth of markdowns to be tailored to outlet clusters. Over the next five years, Penney’s holdings cost extra than tripled. Comparable section outlet sales (sales of stores open appropriate to 12 consecutive months), having eroded 2.3% inside 2000, rose 3.4% inside 2001 also 5% inside 2004.
As Penney’s discovered, successful localization requires that nearly all decisions be coordinated centrally, by managers with a wide thought of request patterns also enough store-level details to distinguish real insights from spot noise. To support headquarters decision makers, leading retailers are house advanced details systems that draw from numerous sources—census also more demographic research; details from outlet scanners also commitment cards; consumer surveys also unsolicited comments; Internet sales data; details from third-party syndicators same as ACNielsen; also intelligence on top of competitors. Local managers also employees are also crucial sources of information—often picking up signals that computerized systems can’t see. When Wal-Mart, appropriate to example, introduced kosher food to its outlet inside Berryville, Arkansas, it was performance on top of a proposal from the outlet manager. The company’s more details sources had not uncovered the nearby Jewish community.
Central coordination is also essential to forging close relationships among retailers also goods suppliers. Product manufacturers own big understanding on how stock dispose of over all stores inside a region. Retailers own equally big understanding on how products dispose of over their networks of stores. Combining those two troves of details allows appropriate to a much extra comprehensive understanding of both district request patterns also the way they may gathering over regions.
Leading from the center does not mean that district managers come to be thoughtless robots. In fact, by centralizing data-intensive also scale-sensitive functions such as outlet design, goods assorting, buying, also supply chain management, localization liberates outlet employees to perform what they perform best: Test novel solutions to district challenges, engage with outlet guests, also forge powerful bonds with their communities. Wal-Mart’s outlet managers are celebrated appropriate to highlighting burning items also responding to district pricing challenges. Best Buy encourages outlet employees to cause also check hypotheses also portion what they own learned throughout the chain. One Best Buy employee recently hypothesized that she could move up outlet sales by making iPods easier to find. She moved a present to the front of the store, created a shirt that said, “iPods here,” also raised the store’s sales ranking from 240th to 69th. 7-Eleven knows that collective headquarters could never forecast a busload of football players arriving on top of a Friday night, but the outlet head can. Combining the efficiencies of a state chain with the entrepreneurial touches of a mom-and-pop convenience store, 7-Eleven has created a system that it calls “centrally decentralized.”
A World of Difference
Localization isn’t free. The drift requires greater investing inside details collection also analysis. And however advanced the clustering effort, some economies of scale will need to be sacrificed—in purchasing, marketing, manufacturing, also outlet construction. Most companies will want to focal point their initial efforts on top of areas offering the greatest also quickest return. For example, the investing is typically under also the payback faster on top of localizing markdowns (typically smaller than one year) than localizing base prices (often two years or more). But as localization skills grow, so perform localization opportunities. The systems, data, also managerial processes that earliest permit a company’s leap to localized markdown strategies much ease subsequent steps to the localization of pricing, promotion, also PR programs. (For examples of retailers pushing the frontiers of localization, note the sidebar “Extreme Localization.”)
Ultimately, all companies serving consumers will features the provocation of district customization. It’s often been assumed that globalization implies ever-greater homogenization of businesses also their products also services. The world, inside this view, will be filled with the same big boxes dealing the same stock also services to everyone. But a look at the emerging localization strategies of the leading companies inside consumer markets—companies that once shunned customization but at the moment embrace it—reveals how incorrect this assumption is. We are advancing to a world where the strategies of the nearly all successful businesses will be as diverse as the communities they serve.
A version of this story appeared inside the issue of Harvard Business Review.
https://hbr.org/2006/04/localization-the-revolution-in-consumer-markets
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