Bending The Cost Curve in Brick-And-Mortar Retail
Bending The Cost Curve in Brick-And-Mortar Retail
Bending The Cost Curve in Brick-And-Mortar Retail
January 2020
Making money in retail—particularly in physical for 40 percent of retail growth in the United States
stores—is becoming harder and more complex since 2016. A recent McKinsey survey found that
each year. Many retailers around the globe have 82 percent of US consumers reported spending
addressed many of the possible efficiencies in money online over the preceding three months,
labor productivity and process automation. It is and 42 percent of millennials report they prefer
time to consider the next generation of thinking to shopping online to shopping in store.² Still, the
make a meaningful difference in brick-and-mortar in-store experience is far from obsolete. McKinsey
economics and remain competitive in an ever- projects e-commerce will constitute just 21 percent
changing retail environment. of total retail sales and 5 percent of grocery sales
by 2023.
Our colleagues have discussed how an integrated
view on cost can help consumer-goods companies Second, brick-and-mortar stores are contending
optimize operations costs across the value chain.¹ with increasing SKU complexity; in a world of ever-
In this article, we take a closer look at how retailers shorter product cycles and rapid innovation, SKUs
can benefit from a similar end-to-end perspective. have proliferated rapidly.
The goal is to help traditionally siloed departments,
from store operations to supply chain to merchan- Third, stores are facing increased customer service
dising, understand the total cost of each SKU by and experience expectations, requiring both more
disaggregating the product’s journey from end to time dedicated to customers and better-trained
end. This understanding can enable retailers to make frontline staff to serve today’s highly digital, well-
better decisions about what products to purchase, informed customer. In addition, the proliferation
when to transport them, how to display them, whether of omnichannel experiences is changing the
to offer a sale—and, all along, how to make best use very purpose of a physical store.³ Stores are
of their employees’ time. increasingly expected to offer a variety of omni-
channel services, including in-store fulfillment and
While traditional store efficiency programs returns of online orders.
focused on in-store labor productivity can save
5 to 10 percent in overall costs, in our experience Finally, retailers’ traditional labor pool is dwindling
a more comprehensive cost approach can enable due to low unemployment and rising labor costs.
retailers to realize two to three times more savings, For example, the United States is experiencing
bending the cost curve more toward meaningful record-low unemployment.⁴ And to date, states
impact than the traditional incremental approach. that account for 30 percent of US workers have
committed to phasing in a minimum wage increase
that will ultimately reach $15 an hour—more than
Case for change: External environment double the federally mandated wage of $7.25.⁵
Even retailers with stable balance sheets face
mounting cost pressure due to several factors,
including decreased foot traffic, increased SKU What retailers can do
complexity, higher customer expectations, and To remain viable in this environment, retailers
rising labor costs. must constantly improve their store economics
by simplifying, eliminating, or automating routine
To start, consumers shop from the comfort of activities. Most retailers have implemented several
their couches rather than traveling to the nearest rounds of lean cost-improvement programs, such
shopping center; e-commerce has accounted as automating simple activities (reporting and
1
Philip Christiani, Sebastian Gatzer, Daniel Rexhausen, and Andreas Seyfert, “How to untap the full potential: An integrated—not isolated—view
on cost,” September 2019, McKinsey.com.
2
Praveen Adhi, Tiffany Burns, Andrew Davis, Shruti Lal, and Bill Mutell, “A transformation in store,” May 2019, McKinsey.com.
3
Raj Kumar, Tim Lange, and Patrik Silén, “Building omnichannel excellence,” April 2017, McKinsey.com.
4
“Employment situation summary,” Bureau of Labor Statistics, October 4, 2019, bls.gov.
5
Chris Marr, “States with $15 minimum wage laws doubled this year,” Bloomberg Law, May 23, 2019, bloomberglaw.com.
Category and product promotional Extra shelf space is added for fast-moving Product is purchased from vendors,
profitability is adjusted to account for SKU A to enable stocking all product at shipped, and stocked in shelf-ready
store labor costs to replace price tags and once. The store labor savings are greater packaging, which makes it easier for
build promo displays. This makes some than the lost margin from removing SKU stores to handle and outweighs the extra
promotions unprofitable, and they are B’s shelf space. vendor costs.
discontinued.
SO SC SO SC SO SC
M M M
The store receives less frequent deliveries The business case on whether to invest Promotional displays are built upstream in
to optimize transportation cost—the in distribution-center automation is the distribution center or at the vendor,
savings outweigh the extra labor needed amended to include store savings from reducing the time it takes store employees
to manage bigger shipments. stocking product that arrives in better- to set up.
organized pallets.
SO SC SO SC SO
M M SC M
The total cost of handling a product is determined by considering cost at each step of the
value chain.
Introduce to
Review category Create planogram Plan demand distribution center Receive and stock
and prepare to ship
Example New SKUs to Number of facings Safety stock Location in the Store processes
decisions introduce distribution center for stocking
Shelf depth Minimum for new SKU
Number of stores presentation
Space for category Placement of
for new SKU quantity Mode of shipping overstock (eg,
introduction to the store (case back room vs top
or individual) shelf vs elsewhere)
Frequency of
store delivery
Impacted cost Cost of goods sold, Store labor cost to Distribution center Store labor cost from Store labor cost
components write-offs, shrink replenish between picking cost based stocking full cases to stock product
shipments based on amount of vs individual units on shelves and
on shelf capacity product shipped return overstock
to back room
Inventory holding
cost of safety
stock and minimum
presentation
In addition, the business owner of this new process Each SKU’s journey should be mapped and
should be selected with care. Ideally, they should broken down into cost-component steps. Each
reside outside of functions that own a meaningful step includes multiple iterations based on how it
number of cost components; finance is often a good is executed. For example, in–store labor cost is a
option because it lacks a direct stake in where costs component with at least two iterations based on
are incurred. Store operations is another viable how a product is stocked—as a full case or individual
option, as it is furthest downstream in the process. units. Identifying where a product goes and stocking
Praveen Adhi is a partner in McKinsey’s Chicago office, where Aneliya Valkova is an associate partner; Vishwa Chandra is a
partner in the San Francisco office; Karl-Hendrik Magnus is a partner in the Frankfurt office.