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McKinsey Insights — How Retailers in the Middle East Can Regain Profitability?

For much of the past two decades, Middle Eastern retailers—especially the ones operating in the GCC region—have enjoyed favorable macroeconomic conditions. From electronics to apparel, grocery, and several other retail sectors, every division has witnessed remarkable returns and profitability. In fact, the returns were above the global industry average.

But today, the retail landscape in the region is swiftly evolving. Thanks to the macro issues like geopolitical instability, the decline in oil prices, and advances in technology, everyone has suffered, including the governments, consumers, and businesses. And the retail wasn’t an exception. A significant decline in growth was recorded in almost every segment as the margins squeezed out.

To navigate through the new retail reality, retailers in the Middle East are required to undergo both operational and commercial transformation. Fortunately, the retail businesses in the GCC haven’t embraced a lot of changes that have remained effective for merchants in other parts of the world.

To help you out, here FootMetrics has highlighted three important changes from McKinsey & Company’s research that will help retailers improve their financial performance. The study claims that the potential impact of embracing these changes can grow your sales by 15-20 percent and earnings by 5-10 percent.

Commercial and Operational Shifts

Your commercial and operational fronts require major structural shifts to gain positive output. The good news is retailers in the GCC haven’t tapped into most of the areas. For example, they fail to keep up with their international peers when it comes to modernization and labor productivity.

The chasm between the United States and the Kingdom of Saudi Arabia is 66% in wholesale labor productivity and retail. More than 80% of grocery sales in the United Arab Emirates account for modern-day trade but in KSA and other parts of the region it’s below 60%. Bearing these statistics in mind, the following three major shifts seems imperative if you want to achieve a dominant position in the market:

  • Creating a unique value proposition
  • Gaining strategic advantage in one or more functional areas
  • Focusing on instant sources of value

To rise above the pack in a competitive market and adjusts to the shifts in the retail segment, vendors in the Middle East should look to deliver customer-centric offerings that will set them apart from others. And the best way to do that is by understanding your customers, pricing, Omnichannel services, and promotions model.

Example of Effective Assortment Optimization

A consumer-focused assortment is one that offers a unique value proposition. Unfortunately, many retailers end up making assortment decisions that favor suppliers than consumers. They stock brands and products that are offered by the suppliers at low prices.

Instead, vendors should strive to reward their consumers by allowing them to choose what they want to buy, which products they favor over others, and what matters the most to them when buying certain products.

You can gather this precious information through market research, predictive analytics tools, and using your loyalty card data. Insights gathered through these sources will allow you to offer a perfect consumer-centric assortment because it will cover the needs of the local customers.

Gain Strategic Advantage in One or More Functional Areas

Another avenue to restore retail profitability in the Middle East is by outshining your competition in one or more functions. But the choice will fairly hinge on the competitive landscape. For example:

  • Which functional areas a generally neglected by your competitors?
  • Which areas have more potential and can truly distinguish your business?

Let’s say, the retailers in the Middle East might take bold steps in hiring and keeping top talent, strategic sourcing, and building analytics and digital capabilities.

Example of Successful Supplier Negotiations

Successful supplier negotiations can reduce risks, unlock cost savings and provide you the opportunity to innovate. One high-impact capability that paves the way for successful supplier negotiations is shifting focus on strategic sourcing. Data mining can greatly help you with that. Not only it could cut the costs of goods sold but also improve profit margins by 3-5 percent. Allowing you to reinvest the proceeds in initiatives that drive innovation and business growth.

The best practice for retailers is to develop comprehensive playbooks that list vendors and categories with detailed vendor profiles, analytics, margin & sales data, and discounts. Together, this information will help you create numerous performance-based questions and arguments. This will also make things more transparent,  be it pricing performance, promotions or associated vendor funding.

Many prominent retailers are investing in advanced analytics and consumer data so they can successfully negotiate with suppliers by effectively tackling their claims regarding the significance and role of brands. Also, they make sure their category managers develop negotiation skills through frequent couching, training, and certifications.

Focus on Instant Sources of Value

An ideal way to capture quick wins is that retailers in the Middle East should create momentum and promptly reset their business for the new normal. They should launch initiatives that could make a valuable and eloquent difference to the top and bottom lines within a time frame of three to six months. Measures like optimization of selling, lean store operations, and general & administrative costs are a few operational initiatives that can deliver fast results.

Example of Measuring Marketing-Spend Effectiveness

Experts at McKinsey and Company have seen Middle Eastern retailers cut their SG&A costs by almost 20-30 percent. And several merchants have realized that maximizing marketing-spend effectiveness is something that instantly offers value. Not only it lowers your SG&A spending but also improves sales by strengthening customer relationships. Here’s what some notable retailers do to achieve effective marketing-spend:

Maximize Value Through Smarter Procurement Spend:

Last but not least, leading companies monitor and refine their process of procuring marketing services. They review agency contracts and renegotiate to merge dispersed accounts. This helps them reduce their marketing spend and increase their marketing power.

Highlight Working Spend:

The entire marketing budget used to purchase media space or time, which includes both above-the-line and below-the-line ads, should emphasize working spend. Nonworking spend includes advertising expenses like creative fees, the amount spent on creating advertisements. Topnotch companies make sure their nonworking spend shouldn’t surpass 20% of the total marketing spend. In the light of these facts, review your marketing mix and reallocate more funds towards working spend to see a direct impact on your reach.

Reallocate Marketing Dollars to Important Brands & Channels:

Too often, retailers allocate a major portion of their marketing funds to established and older brands or channels than newer and high growth digital channels and brands. Consequently, they fail to achieve the desired results. Instead, it’s best to measure your marketing-spend time and again and reallocate funds to strategically important brands and channels.  

A top electronics retailer that has allocated most of its marketing dollars to television and newspaper inserts, was seeing poor traffic despite having an above-average advertisement-sales ratio. By adopting a granular marketing-mix model, the retailer reduced its underperforming media spend and reallocated budget for digital marketing, particularly paid search. The ROI of its marketing spend spiked by more than 20%, while the sales increased by more than $40 million. Although the company reduced its overall advertising budget by 15%.

 

Implementation Speed Matters

Depending on how fast the change occurs, retailers can embrace different implementation models and continue to advance at different speeds. Vendors who have an above-average performance might think about taking certain actions in prudently sequenced phases, with each lasting 3-6 months. They should make the most of the existing structures and systems by improving them rather than creating something from scratch.

Besides this, retailers must also pay heed to develop capabilities during implementation, which will lead to lasting change. Retailers struggling to improve their bottom lines must urgently pay attention to implementation. Because they may require a full-scale transformation that might take over 12-18 months when it’s necessary to make several changes at the same time. In this situation, a transformation team would manage the program, and a different owner will be taking care of each initiative.

 

 

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