Evolution of Modern International Retail Industry Practices

Modernisation and Internationalization of Retail and Grocery Retailing owe its origin to the ECR initiatives that brought about sweeping changes in the industry in 1990s. The changes led to a complete overhaul of the supply chain and the industry norms both in Europe as well as US. The relationships between Suppliers & Manufacturers with Retailers began to change. The entire supply chain began to shift towards a process oriented and product replenishment supply chain that focussed on reduction of inventories at all stages. Technology enabled the Retailers to gain hold of and establish their own Regional Distribution Centres and consolidate the various cargos, warehouse them centrally and establish a centralised distribution system. All these initiatives began to yield monetary savings and benefits to the Retailers and such advantages gave further impetus for improvement.

Technology was a major enabler that helped usher the new revolution in the industry. Furthermore what helped the new initiatives was the emergence of ABC method of costing or Activity Based Costing. Before the introduction of this concept, the industry lacked any specific costing method and all costs borne through the entire supply chain was considered to be a channel cost with no differentiation or specific details being arrived at, to understand the cost components and owners.

Activity based costing on the other hand brought about sweeping changes in the way the cost assumptions were made by the Retailers. First and foremost it provided transparency to each and every leg of the supply chain and the costs therein. The Retailers could now differentiate between Supplier related costs, Logistics Costs, Warehousing and Cross Docking costs to Secondary Distribution and Store related Costs. The Activity Based Costing enables the Retailers to make an apple to apple comparison on all cost factors and be able to identify and eliminate non productive operations. Secondly the costing method helps control the cost increase on all fronts. As Retail grocery business is volume driven, the activity based costing method helps the Retailers to work on better Consolidations, Optimum Utilisation of Freight Capacity as well as Warehousing Capacities and keep the costs under control and negotiate better with the Suppliers as well as Logistics Service Providers.

Though the cost elements remain the same in the industry whether in Europe or US, we see that the costs are not the same everywhere. In the US, the cost of land and building is cheaper and the fuel costs are cheaper too as compared to Europe. However they are set off against the huge distances that need to be covered in terms of vast geographical territory. In Europe too, the cost structures vary amongst various countries. The cost of land is very high in Europe where as in France and Germany, the land and building costs are relatively cheaper. However the cost of fuel as well as the cost of labour and more importantly the cost of finance vary amongst the European countries leading to higher logistics costs and differences in the Total Costs.

Activity Based Costing in such situation helps bring about a transparency to the entire activity and helps management understand the differences and aids in decision making as well as in developing further initiatives to develop further Supply chain solutions that yield cost advantages. Outsourcing of Logistics Operations including Warehousing and RDC management emerged as the solution to controlling the increasing Logistics costs. Investing into IT and Softwares by the Retail giants to automate and increase their transaction management capacity was another area that came about as a result of the ABC method of costing, for the companies could now extrapolate transaction cost data from the Systems and consider the productivity gain they could expect from such investment. Overall we can say that the way Retail industry looked at the costs, financials and their balance sheet with reference to owning assets and infrastructure investments underwent a major change.

Companies like Tesco and Ahold that invested in IT infrastructure and ECR initiatives to modernize their supply chain and retail operations standardized on new processes over a period of time. When the time came for them to expand their network through acquisitions as well as opening new store locations (Expansions were mainly in European countries including Norway, Ireland, Poland etc), they began to transfer and extend the same knowledge and standardized processes to their new locations too. Thus began the internationalization of Retail Industry.