Migros Management - Case Study Example

Migros Case Study March 26, MKT 6510 & Channel Management INTRODUCTION Migros is a vertically and horizontally integrated retail chainanchored by food products (72%) and the balance of group sales in consumer products and services. Migros is a cooperative owned by customers. The cooperative’s core values include only selling healthy items, no alcohol or tobacco, and keeping prices low through excellent management and controlling the supply chain. From the humble beginnings of selling reduced price local goods from the backs of trucks, to establishing a food processing group to ensure a reliable supply, to fragmenting the company as a defensive strategy in World War II, Migros has historically responded aggressively to competition. The current market penetration demonstrates 40% of households shop exclusively at Migros for food and 92% of households shop once per week. Given recent developments, the competition appears poised to move into Migros’ territory; and Migros management plans to anticipate the encroachment with appropriate strategies. This report responds to that potential encroachment with strategies and recommendations for action, and a plan for implementation. First, the situation is defined. COMPETITIVE SITUATION Migros is currently the top performer in Switzerland. Coop is the second largest retailer. With fewer retail stores, Migros earned 25% market share of food and 18% overall consumer goods. Coop, with twice as many outlets, enjoys a 15% market share. Three large international companies plan intrusions into the Swiss market. Carrefour, from France, Europe’s largest retailer, currently operates 12 supermarket locations in Switzerland and envisions several more in the near term. Two German firms, Aldi and Lidl, expect to attempt to gain entry into the Swiss market. Legal and regulatory issues confound foreign entry; however, the European Union agreements may lead to loosening of those restrictions. The three new competitors compete on price utilizing the low service, big box retail concept. As Europe’s largest retailer and second in the world to Wal-Mart, Carrefour has the financial strength and management systems to compete. Aldi and Lidl view the 8% discounters’ share of the market incredibly appetizing compared with Germany’s 40% share. That gap looks exploitable from their positions. Traditionally, and certainly among the top retailers now, qualitative competition has been the standard. New regulations and new competitors, independently or combined, may lead to price cutting and poorer agricultural standards in the food supply. Migros must prepare to respond. Migros management has identified three strategies in response to the challenge these competitors present. First, improve operational efficiency, logistics, purchasing or organizational structure and pass the cost savings to the buyer. Second, expand the budget line of vertically integrated products and develop cost leadership. Third, compete on premium lines and increase sales of ethical/environmental products. In response to these strategies, this report offers the following logic. The third strategy is sound, but not responsive to the threat of discounters. The investment required to continue growing the engagement and premium lines is insignificant compared to returns so far. Migros not only owns the Swiss premium market among large retailers, these products are a growing source of export business. Stay the course on premium products seems like the best advice. The second strategy involves expanding the budget lines, providing broader choices of products at budget pricing bears investigation, and responds to the price cutting competitors. The first strategy is quality business thinking at all times; can we be more efficient? Migros surpasses the other competitors for efficiency in management and operations now. It is unlikely significant gains would come of an operational audit. This chart demonstrates the point. Migros is second only to Coop in gross profit as a percentage of gross sales. Migros is second to Wal-Mart in net profit as a percentage of gross sales. Wal-Mart is a publicly traded profit oriented company that answers to investors, and the economies of scale are staggering in Wal-Marts favor. PRIMARY KEY ISSUES/PROBLEMS The current Swiss retailing conditions invite price competitors. If deregulation in agriculture occurs, the gates open to the big box retailers. The required store size and the availability of that space may be a hindrance to market entry, but that seems more a stumbling block than a brick wall. The financial capacity to engage the price competitors is crucial to victory. The Migros cash position needs to improve. The last available accounting records show about a 40 day supply of cash and 30 days of inventory on hand. With Migros management, local sources and logistics in place, the inventory does not seem to be problematic. The 40 day supply of cash is less than comforting to enable quick response to unexpected tactics. SCENARIOS If Migros chooses to do nothing about these data, the best case scenario is status quo or the foreign companies replace the smaller retailers as competition. Migros’ consumer loyalty is well earned and its market leadership is undeniable, so Migros may not suffer from the competition. The worst case scenario involves the price cutters coming in force and swallowing the 32% of the discount market they perceive, and purchasing Coop, the Carrefour stores, other chains or combinations of these options to create a quick presence. In a down economy, this scenario is disastrous. The likely scenario is Carrefour expanding its beachhead as their supply line allows, and probably entering the megastore discount market. The German retailers will soon enter the market as discount retailers on some scale. The discount market is probably not 40% of the market share, but it is certainly greater than 8% during poor economic conditions. Smaller chains, regional and local retailers will suffer most first; but the introduction of three new, large, moneyed competitors will ultimately reduce the market share for all current businesses. In business, it is wise to plan for the worst, certainly try to avoid it, and hope for the best. It is wiser to plan several alternatives to ready the company for the future. ALTERNATIVES In a pre-emptive strategy, open two warehouse type, reduced service retail locations. The best locations are one in Zurich and one in Geneva based on the population density demographics, and locations close to the gateways to France and Germany. Convert an MMM store or literal warehouse already in these urban areas to keep capital cost low. Just as Wal-Mart rebranded some retail space as Sam’s Club, this alternative is a “Gottlieb’s Club”. The name reminds the customers of the company history, those trucks bringing budget items to the people while insisting on quality, the core ethic of Migros. The metrics for successful launch would be quick recovery to the prior sales level or above and a return to store profitability. A successful launch erodes the potential market share available for competitors. An unsuccessful launch dissuades competitors or at least makes them readjust expectations. And, the Migros retail outlet is easily reconverted to an MMM location. The major disadvantage to this alternative is failure, not because the market rejects the discount, but Migros customers reject Migros as a discounter. It is difficult for one brand name to stand for two products. In store, the perception may be a choice of price and quality. Migros standing for “discount warehouse store” and “high standard customer service store” may be more difficult for customers to reckon. The second disadvantage involves just losing money. A weakened cash position might invite more competition. The second recommendation is a wait and see attitude. This alternative is more reactionary, but the primary advantage involves increasing the cash position before undertaking any change in operations. During the wait, management can spend time considering the logistics regarding switchovers of current locations to discount stores. Certainly, a smooth transition will decrease down time of the location. If the German companies move in and succeed, Migros can then react with its own discount outlet. This disadvantage, Migros surrendering its leadership position, also conflicts with the company core ethic. One advantage is the competition may never enter the market. Preparing for their entry, though, is crucial. The third alternative is to make a joint venture deal with one of the two retailers, providing that retailer with supply infrastructure and management, particularly human resources. New employment laws and regulations and different company culture can derail an operation as it crosses the border. This alternative reduces the probability that both German firms would enter the market. The one with local knowledge and resources would have a competitive advantage difficult to overcome. This alternative changes the organic growth attitude of the past, but it is relatively low risk and potentially profitable. RECOMMENDATIONS The decision criteria are: what would Gottlieb do? The core values that built the business, the responsiveness to our customers and maintaining quality choices at low prices are required in any decision. The financial loss or gain in the long run is more affected by abandoning these ethics than any short term cost of overreacting might. The Migros name stands for leadership and integrity. The core ethic of low price and quality products created this coop. The company can afford to lose money more than integrity. The cost to convert two stores as a market trial is low compared to allowing competition to thrive unchallenged. While the competition is years away from opening, Migros can convert two stores in months. If the format succeeds, Migros anticipated their customer needs one more time. If it fails, Migros erred as it did moving into France. The founder took initiative when faced with tough competition; the company should continue that attitude. It is recommended that Migros pre-empt the foreign competition and enter the discount retailer market. By pre-empting the foreign move, the depth of the required discount is controlled. Instead of 20%-30%, perhaps 10%-15% would suffice the market demand, and assuage the foreign appetite for market entry. A successful launch suggests adding breadth to the M-Budget line to expand choice at the Gottlieb’s Club locations. None of this suggests losing the core ethic of quality, healthy products. Migros integrity cannot be duplicated quickly by competitors. The other two alternatives reject core values of Migros. The owner/customer relates to that mystique of a coop that does the right things for the right reasons. Joining the competition or following the competition does not fit the corporate image established for so long. The stores should be selected for size and location quickly. The first two stores should be converted within six months. The layout reconfiguration can be completed in about two weeks with crews working three shifts at a cost of about €150,000 per location. The goal is to recapture the costs and the past profits within 18 months of reopening. The benefits include market leadership, offering an alternative to current customers, increasing the customer base with discount shoppers and controlling the depth of discount required for the store under competitive conditions. IMPLEMENTATION/ACTION PLAN The regional boards of Genève and Zurich must be informed of this recommendation and embrace the idea as feasible. The marketing manager of each region selects likely locations for store conversions, and reaches consensus with relevant stakeholders. One location in each region is selected. Appropriate permits and applications are identified. This phase must be completed within one month. A design, which will be very bare indeed, is drawn keeping in mind the increased volume anticipated for points of sale. These stores are built for volume sales, not a great service. The design permit phase is allowed two months. The physical asset management group takes over the project and permits the fit up, arranges contractors and sets a schedule. Once the doors close for remodeling, the site should be moving toward completion 24 hours/day. Inside construction allows three shifts rain or shine. This group is allowed six weeks preparatory time and two weeks remodeling. The in store managers will be allowed one week to restock the merchandise, test run the new systems and fix any glitches. This schedule allows two weeks slippage; however, the construction time is limited to two weeks, so assure the supplies delivery before the start. The measurement for success is on time and under budget. Each location should cost below €150,000, or one and a half days average receipts. Time is of the essence. Of course, Migros must budget twice that in case the store converts back to MMM status. Permitting issues, inspections and construction time can become issues. The boards of either region may not fully embrace this concept. A successful launch requires complete commitment. Closing a store for any period of time is expensive. Keep this to a minimum. A successful launch indicates a wider range of M-budget products, and reduced foreign competition. CONCLUSION Migros current market advantage was achieved through hard fought competition from the first day of operations. Migros stands for good stewardship of the company and the environment, community service and integrity. These ethics, if honored within every decision, will continue to provide profit and growth. Read More