Efficient Consumer Response

Efficient consumer response (ECR) is a landmark in marketing channels. As a movement it has wrought radical change in the U.S. grocery industry, and that change is spreading to other sectors and other countries. Its success is surprising, given how different it is from the usual operating methods of most channels. Indeed, ECR is so successful that some critics are now declaring it outdated and looking for a new movement to replace it.

The source of ECR is fear. In 1992, the U.S. grocery store industry was feeling threatened by the rapid growth of non grocery outlets, such as drugstores.23 these “alternative format” (alternative to a supermarket) stores were aggressively adding food to their assortments, and the consumer was responding positively. A principal threat was seen to be Wal-Mart, which was moving from mass-merchandising to a hypermarket concept (merchandise and groceries). This is why, in 1992, two grocery trade associations commissioned a study of grocery methods. The report strongly criticized existing grocery channels and proposed a radical and complex series of changes to these channels. This program of change was named according to its objective: to achieve efficient (as opposed to wasteful) consumer (the final buyer) response (supplying only what is desired).

As initially proposed, the idea is to focus on four areas where the industry as a whole had and still has great potential for improvement. How great? The United States grocery industry converged on an estimate of $30 billion annually, or 5 percent of retail sales. Interestingly, a similar figure (£21 billion, 5.7 percent of retail sales) is being suggested for European grocers.24 The four areas are

• As initially proposed, the idea is to focus on four areas where the industry as a whole had and still has great potential for improvement. How great? The United States grocery industry converged on an estimate of $30 billion annually, or 5 percent of retail sales. Interestingly, a similar figure (£21 billion, 5.7 percent of retail sales) is being suggested for European grocers.24 The four areas are
• Efficient pricing and promotions A scourge of the industry is poorly calibrated promotions that wreak havoc with pricing and buyer behavior. At the consumer level, excessively generous promotions (such as one free for one purchased) create demand spikes and degrade brand equity. Non-targeted promotions encourage price comparisons and brand switching purely for temporary price cuts. At the wholesale level, manufacturer promotions lead to huge demand spikes. These push factory production up too high, then down too low. This, in turn, pushes inventory up too high (resulting in spoiled food) or down too low (running out of stock).
• Changes in product introduction Thousands of new- product introductions, most of which fail, are endemic to grocery retailing ECR calls for combining market research commissioned by channel members in order to forecast new-product success better on a store-by-store basis, or based on reasonable store groupings (store clusters).
• Changes in merchandising This is the same idea (combine research) for the purpose of finding better ways to merchandise brands and their associated categories (e.g., snack foods, pet food, soups) store by store, or cluster by cluster.

Over time, these ideas have been developed and expanded. ECR has become an umbrella term that now encompasses a variety of means by which pure grocers combat alternative format stores. Some major operational features of ECR follow.

Category Management and Efficient Promotions

Historically, grocers think of what they sell in terms of how they buy: one brand of one type of item (e.g., Frito-Lay Taco Chips). Category management is the principle that a higher level of aggregation is called for. A consumer’s shopping list is com- posed of product categories (“remember to buy two bags of salty snacks”). Therefore, a grocer should think in terms of a product category, and manage it as a whole, rather than managing each product-brand and letting the collection of items amount to a category. Further, in the spirit of ECR, retailers and suppliers should work together to understand each category’s dynamics as perceived by the consumer.

The rationale is that any item competes with any other item for shelf space. Consumers think in categories, and some as a whole merit more space than do others. Depending on the store, the diaper category, for example, may merit (on a contribution per-space basis) more space than it is getting, whereas the laundry detergent category might merit less. This conclusion may not emerge from analyzing items one by one. And what should be in a category? The principle is to look for groupings that seem natural to a consumer. Thinking in category terms is made easier by advances in activity-based costing (ABC). The cost of slow-moving items is often surprisingly high, and ABC helps point out these items.

The category management focus is related to the idea of an efficient assortment: Having what the customer wants and skipping the rest. For groceries, skipping the rest is of great importance. It is widely believed that brand managers have proliferated SKUs to lock up shelf space and brand share, with the result that consumers are overwhelmed with unsought variety. For example, P&G claims that in the laundry category 40 percent of SKUs could be eliminated, yet 95 percent of consumer needs would still be met. Some manufacturers believe that having fewer SKUs actually increases overall sales.26 this paradoxical observation might be explained by the idea that buyers aren’t motivated to sift through multiple options in low-involvement product categories. Bewildered by more variety than they want, consumers depart with fewer purchases. A simplified display enables faster information processing, thereby increasing consumer confidence and motivation to purchase.

Category management sparks thinking about efficient promotions. These can be defined as limited-time offers that are win-win for all parties. This means that they

• Move product (the manufacturer’s concern),
• Drive store traffic and category sales (the retailer’s concern), and
• Provide added value (to the targeted consumer)

This third objective masks the real concern of many manufacturers: that their promotions do not offer value to their brand-loyal shoppers, nor do they build brand loyalty within the segment of consumers who rely solely on promotions to decide what to buy.

Efficient promotions use data about consumer behavior to discover what is selling, at what price, and to whom. Retailers, wholesalers, and manufacturers work together (often by commissioning a market research firm) to make sense of reams of transaction data or market research data. The purpose is to discover win-win promotional opportunities for a store or a cluster of stores. For example, in Italy, manufacturer Kraft Jacobs Suchard and retailer Groopo GS have jointly analyzed loyalty card data to target consumers in a single attitude-based segment labeled “seeking healthy relaxation.” As the label implies, it is no easy matter to identify these people. Similarly, in Spain, manufacturer Elida Faberge and retailer Auchan have jointly analyzed panel data to identify a mutually interesting growth opportunity: susceptible consumers who are secondary customers of Faberge and who are secondary shoppers at Auchan.

Continuous Replenishment

Continuous replenishment planning (CRP) is the practice of replacing stock based on speedy knowledge of consumer “withdrawals” (Le. sales). More precisely, in SCM the term means partnering between distribution channel members in order to replace the traditional practices (push systems, stocking to forecast) with a pull system. In this pull system, a retailer’s stock is replenished based largely on actual sales data from the end of the supplier chain (the consumer).

The goal is to automate the process related to warehouse fulfillment and shipping, using consumer demand (captured by scanners) to trigger just-in-time restocking. By automating, ECR practitioners seek to cut errors and processing costs, which are substantial. For example, British grocer Sainsbury’s estimates that one-quarter of the chain’s supply chain management budget is spent confirming the location and movement of inventory.

Continuous replenishment is an arduous task. In CRP, a supplier (perhaps a distributor, perhaps the manufacturer directly) takes complete responsibility for monitoring and refilling the retailer’s inventory. In the grocery industry, CRP is often accomplished by charging the manufacturer with managing the downstream channel member’s inventory. In most of these cases, powerful retailers have obliged manufacturers to make the significant expenditures necessary to perform continuous replenishment. Intriguing, albeit preliminary evidence suggests the biggest winners of this exercise are consumers (lower prices, fewer stock outs) and retailers (higher profits).

The profit benefits for manufacturers are somewhat difficult to document. Although many report sales increases, they also find that significant logistical complexities and costs have been moved back to their level. As oil industry analyst notes, just-in- time (JIT) often becomes just inventory shift (JIS). Perhaps the biggest benefit of CRP for manufacturers is that they remain suppliers to large retailers. CRP keeps them in the game. It may or may not yield increased profits.

Obstacles to ECR

The list of obstacles to ECR is formidable.32 At a physical level, ECR requires agreement on codes and on a huge number of ED I choices. In general, it requires standardization of methods. For example, the delicate exercise of cross-docking is difficult to pull off if channel members cannot agree on a number of issues. ECR implementation is a long and expensive affair.

One of the greatest barriers to ECR is the necessity of trusting other channel members. Trust and good working relationships are necessary for the information exchange, joint planning, and joint actions that underpin efforts to make the entire grocery channel respond to consumers while cutting waste. And trust is essential for continuous replenishment. The idea of making another party responsible for one’s own stock, and doing so without an abundant safety stock, is a very difficult one for many industries to accept.

Trust is based on equity. The fundament of ECR is not that channel members share risk and information to produce gains for the channel as a whole, but that they then share the gains equitably. Opportunism (reneging on a promise to compensate all players fairly) is fatal to ECR.

And yet, ECR exists. Although not the norm in grocery retailing in the United States, it has made great progress. If imitation is the most sincere form of flattery, sincere compliments of ECR abound. Trade publications of many industries overflow with discussions of how to create ECR in their sectors. For many, ECR has become synonymous with supply chain management, which is attracting considerable attention in Europe.

Demanding customers seem to create excellent supply chain operations-albeit painfully. The auto giants and1he major retail chains not only know what they want, they are determined to get it: delivery to a tightly specified time slot, in exactly specified quantities, at near-faultless quality; and “faultless” is extended to cover not only the products themselves but also the associated planning, delivery, and invoicing systems. In these industries, that is now the entry ticket to the game, not a differentiator. And the word is spreading.

That ECR began in the grocery industry is miraculous. When the initiative was unveiled at a trade conference in 1993, few in the audience were confident that the traditionally adversarial relations in these marketing channels could be set aside. The cooperation and transparency that ECR requires had to be brought into being. The power of example is critical, and here the example used is the now-legendary arrangement between Wal-Mart and P&G (Chapter 11 on strategic alliances). Ironically, Wal-Mart’s entry into the food business drove the grocery industry to devise ECR in the first place.

ECR also requires considerable change in the internal operations of a channel member. Jobs are lost and roles are redefined when EDI rationalizes supply chains. People representing many different functions in the organization (sales, marketing, purchasing, production, shipping, warehousing, and accounting) must work together in project teams to create tremendous organizational change. And teamwork becomes permanent. Salespeople and purchasing agents, for example, are replaced by multifunctional teams on the buyer’s side and the seller’s side. And each side is expected to understand the other’s business. These are wrenching changes.