F.W. Woolworth is closing its five-and-tens. Montgomery Ward is in Chapter 11. Once-prominent names like B. Altman, Alexander's, and Gimbel's are long gone from the scene.

The retail industry has been shaking out and consolidating for more than a decade. The big have become bigger and the race, more than ever, is to the swift—the supply chain leaders who get the right merchandise to the right store at the right time, the retailers who react rapidly to changes in the marketplace.

Truly, the entire dynamic of retailing has changed. Today, every successful marketer realizes that identifying—and then efficiently fulfilling—consumer demand almost always works better than trying to create demand by pushing merchandise onto the market. The only problem is, the wants and needs of a 40-year-old working mother in Minneapolis are probably very different from those of a 25-year-old single woman in Miami. Throw in other variations, such as ethnic background, income level, and even dress size, and the challenge for marketers and supply chain managers becomes even more formidable.

While possible future scenarios may go so far as the implementation of mass customization, or creating goods for a "market of one," the main goal of retailers today is to improve the availability of merchandise—the right merchandise—on at least a store-by-store basis. And to accomplish that, the overriding strategy among the giant retailers is the efficient and effective management of the supply chain, using electronic data interchange/Quick Response (EDI/QR) tools to help identify and forecast sales trends, thereby ensuring that both inventories and stock-outs are kept to a minimum.

As Kurt Barnard, president of Barnard's Retail Marketing Report, a forecasting service, puts it, "The goal is to sell to the consumer and not the shelf."

Indeed, technological advances in supply chain management, particularly in the soft-goods arena, have resulted in enormous benefits at all levels of the chain. According to a recent study commissioned by the Voluntary Interindustry Commerce Standards (VICS) Association and conducted by consulting firm Kurt Salmon Associates (KSA), Quick Response has delivered more than $13 billion in annual savings to retailers and manufacturers since its implementation 10 years ago. Comparing total supply system models between 1985 and 1997, the study found that today's supply chain is providing the consumer with better product availability, better selection, and lower prices than 12 years ago.

Notes Jeff Stiely, manager of KSA's New York office in the Performance Enhancement Group, "With QR and EDI systems in place, there have been measurable improvements over the past 10 years, including a 60-percent improvement in stock-outs. But it's still not where we need to be.

"Research has shown that 66 percent of consumers walk into a store with a good idea of what they want, but 50 percent walk out empty-handed, because they don't find the item in their size or in the right color," he adds. "Increasingly, customers aren't tolerating stock-outs. And that sets the stage for a trend toward better store-level marketing, to forecasting and assorting merchandise on a store-by-store basis. The technology is there to do it. And the cost is far outweighed by the benefit of improved stock-outs, which leads to increased productivity and increased consumer satisfaction."

Add into the equation the rapidly changing demographics of the U.S. population—plus the impacts of lifestyle, age, and ethnic background on everything from the type and style of merchandise to its size and color. It then quickly becomes evident that the retail behemoths have their work cut out to implement internal cost-reducing logistical programs, all the while satisfying the needs of an increasingly diverse customer base.

It is a challenge starting to be addressed by at least some of the major retailers—those that recognize the bottom-line benefits of micro-merchandising to specific segments of the consuming population. And although Wal-Mart is undoubtedly the leader in electronic supply and replenishment systems that target Middle America in terms of having the right goods in the right place at the right time, retailers like Sears Roebuck and JCPenney are carving out their own areas of expertise. Nowhere is this any more evident than in their efforts to satisfy the wants of Hispanic, African-American, Asian, and other ethnic groups within individual markets. That strategy can be a winning one, but only if the supply chain infrastructure is in place to support it.

Sears has emerged as a leader in micro-merchandising to ethnic customers. But before the venerable retailer could fine-tune its systems to execute this strategy, it had to upgrade the entire logistical operation—no small task considering the company's network of more than 800 mall units and another 800 off-the-mall stores that sell furniture, major appliances, home electronics products, plus automotive and hardware supplies.

That process began not so long ago, on Nov. 1, 1993, to be exact, when Lieutenant General (Ret.) William "Gus" Pagonis joined the company as executive vice president for logistics. Pagonis, who also handles Sears' vendor relations, was the single point of contact for all logistics (food, shelter, fuel, ammunition, transportation, and so forth) during the Gulf War.

At Sears, he found himself in the midst of another battle, this time to efficiently move in excess of 50,000 stock-keeping units or SKUs (actually 250,000, taking size and other variations into account) from more than 4,000 vendors to the merchants in a timely fashion. To perform that mission, Pagonis once again became the single point of contact for all logistics, combining functions that were previously under five executives.

After four years, Pagonis is satisfied that Sears is moving in the right direction. "My goal, and the goal of my team," he says, "is to have total asset visibility, to flow—not store—goods, and to keep goods as high up in the chain as I can. This allows me to divert them to the parts of the country that need them. The lower it goes down the chain, the more costly it is to move around, because you're backhauling.

"You want to have as little inventory as possible," he emphasizes. "You don't want to pay the interest, the cost of warehousing. You don't want it sitting around gathering dust and becoming inactive. The company that's going to be successful is the one that can pull this off. We're pulling it off now. We're just going to get better at it. Logistically, that's where we're headed."

Pagonis believes that Sears now is at the leading edge of logistics. "We're saving SG&A (sales, general,- and administrative expenses); we're taking the cost out so that when sales come down logistics isn't killing everybody," he states. "I'd say I'm about 85 percent of where I want to be. The nice thing about it is, I'm not going backwards. We're sustaining the wins we've had. What you have to be careful about in logistics is that you may have a great win in 1994, and then in '95 that win goes away and you're starting over. So, sometimes just being able to sustain your operation is as good as moving forward."

Pagonis does have the ability to laugh at himself. In his zeal to achieve 100-percent EDI accounts-payable capability (it took a year to get that done), he says, "I blew it, because it used to take four days for checks to clear. Suddenly I was paying the vendors four days early."

The signs of progress are everywhere. For example, today when trucks with fashion goods pull up to a location, there is one scan of the manifest—no checking of the boxes, no counting. The merchandise goes right to the floor. "The stock-out situation is excellent," Pagonis reports. "We want to have about 96 percent of the goods in the stores. In some places, it's 100 percent."

Without a doubt, the emphasis on logistics improvements has contributed to the 110-year-old company's continuing growth. In 1996, its net income rose 24 percent to a record $1.27 billion, while revenues climbed to $38.2 billion from $35 billion in 1995.

An Ethnic Micro-Merchandising Strategy

At about the same time that Pagonis came on board, Sears began to look at the potential of the ethnic market. The retailer had been differentiating its inventories at the store level for many years. But that was determined largely by geographic differences, including climate and local culture, as opposed to ethnic and cultural demographics.

Indeed, tailoring merchandise to different stores is not a new phenomenon, at least at a basic level. Many department store chains, for instance, have designated their individual outlets as A, B, or C stores, altering the assortment to be slightly more or less upscale based generally on customers' average income, lifestyle, and other criteria at each level.

Merchandising specifically to an individual market goes a step further. And while it is not yet a widespread strategy among retailers, it is one poised for growth. KSA's Stiely reports that 85 percent of retailers surveyed recently said that store-level planning was important. Moreover, retail guru Barnard notes shifts in the traditional merchandise mix for big stores. What typically had been about 80 percent "cookie-cutter" lines and 20 percent special goods is rapidly approaching 65 percent general goods versus 35 percent tailored merchandise.

Of course, meeting specific ethnic needs takes the micro-merchandising concept even further. Sears has taken that extra step, relying heavily on the streamlined supply chain organization that Pagonis and his organization have developed to achieve the sales objectives.

Generally, the company focuses on Middle American families. More specifically, it targets women ages 25 to 54 with an average family income of $37,500, who are the chief purchasing agents of their home. This group is responsible for more than 69 percent of the purchases made at Sears.

But seeing the rise in purchasing power of minority populations, the store created the Sears Ethnic Marketing Team to attract these populations. It has developed advertising campaigns for each group, including ads in several Asian dialects, and includes bilingual signage in many of its stores in select markets.

The company also uses focus groups to gain customer feedback as well as direct-response electronic surveys and Sears charge card transaction information. The card has a customer base of 50 million households nationwide, with more than 30 million holders making at least one card transaction a year. More than 60 percent of purchases are made with the card, giving Sears access to the data needed to stock its stores with the products those customers are likely to buy.

Boyle Heights: A Case In Point

Knowing what your customers in any given store want and buy, however, is only half the battle. The next question is, how do you get those goods into the stores?

Some of that responsibility falls under Pagonis' purview. "We do pre-allotments," he explains. "A store manager can order the sizes he needs. We don't send him carte blanche sizes. The stores will tell the store merchants what they need and the merchants will tell me. If they need small sizes, they'll get them. We have centralized control, decentralized execution."

Small sizes are a good example, particularly for Sears' Boyle Heights outlet in California's Orange County. In fact, it could be the archetypal ethnic neighborhood store. Its immediate trading area is approximately 90- to 95-percent Hispanic, most of whom are immigrants from Mexico and Central America.

The company was considering closing the 70-year-old, under-performing unit, when Lawrence Viands became Los Angeles district general manager in 1994. Viands believed it could be turned around. Now Orange County district manager with responsibility for 17 stores, the 25-year Sears veteran was assigned to the region just as the chain was beginning to talk about trying to tailor assortments to fit ethnic communities.

Viands felt that if corporate could deliver on the new local market approach, the store would become successful. It did, and sales rose to $50 million last year, with profits increasing 30 percent between 1995 and the end of 1996. The outlet is now one of the most profitable in the east Los Angeles region.

One of the first things that Viands did was to see that more Spanish-speaking sales associates were brought in. "We wanted the customer to say, 'This store was built for me,'" he explains.

Getting with the ethnic program didn't mean throwing out all of the goods the store carried. Rather, it meant getting rid of some of the merchandise and understanding the size differences, color preferences, and cultural diversity among the core buying group. "We sell the same Levi's jeans here that we sell in Nebraska," Viands says, "but the inseams are different, the waists are different."

Then, there was the case of the missing bras. Although Hispanic women prefer wearing black bras, none were in stock before the merchandising focus shifted to the local market. They are in stock now, and not just in the Boyle Heights store. Viands says, "In LA...probably every store is 30-percent Hispanic, and minority business is being developed."

Which brings us to shoes. Viands notes, for example, that the Boyle Heights footwear inventory must be heavily skewed toward the smaller end as opposed to a bell-curve distribution. Even with that knowledge, he says, too many large sizes still find their way through the pipeline and into the store and have to be cleared out. "A size 12 man's shoe in Boyle Heights isn't worth a penny on the dollar," he states flatly. "I can't give them away. We still have some of those challenges, although we get better at it all the time."

The district manager forthrightly observes that the supply chain isn't perfect, saying, "We're still missing things, and we're working with the company to correct and tailor our assortments."

The gregarious Viands, making other comparisons between a Sears mall store and Boyle Heights, says, "If a typical outlet has 15 racks of petites, we might need 50. And if 50 is the number, is even that enough? That is very different from the company norm. Every time we push the envelope further, we find out we still have some more business to develop."

In addition to apparel, there are hard-lines issues that have to be considered. Tractors, at one time advertised prominently for the Boyle Heights store, for instance, are out. "When I was in New Jersey," Viands observes, "we sold more tractors in each store than we sold in this entire district. Here, the customers tell us they want chain saws, edgers, things like that."

In fact, the local market strategy encompasses more than catering only to ethnic populations. Viands reports that while Orange County is a major vacation destination, the store failed to stock any tourism-related items like T-shirts with "Malibu Beach" and similar logos. As soon as these items were stocked, Viands reports, they started selling "like hot cakes."

Another gain in that regard was the decision to enter the school-uniform business. The district manager amplifies: "A majority of the elementary and junior high schools require students to wear uniforms. We sold none of that merchandise three years ago. Three years later, we do several million dollars. We were one of the first to jump all over that. I don't know of any other Sears in America that carries school uniforms."

Aside from Boyle Heights, where signs are in Spanish, signage is a sensitive issue for local market planning. This fall it became corporate policy to use bilingual signs in stores as they get closer to a Hispanic majority. Those decisions previously were made locally.

Getting the right mix of product for a local market—particularly in a company that centralizes purchasing to enjoy economies of scale—takes skillful coordination. So district merchandising teams work with Chicago-based headquarters to buy for their regions. The buyers in the Los Angeles area, many of them of Hispanic descent, help the corporate buyers. Though there are glitches and size 12 shoes do slip through, Viands reports that the replenishment process is improving all of the time.

With more than 1,200 stores across the United States and in Puerto Rico, Mexico, and Chile, JCPenney also serves a widespread and diverse population. And differentiating store stock based on local market needs is something that has been done "forever," according to Bev Anderson, fashion segment manager for the retailer's Women's Apparel Division.

While the tailoring of merchandise to meet the needs of specific ethnic groups within the stores' trading area is part of the strategy, many other demographic and psychographic attributes factor into the equation. "It's not only ethnicity," as Anderson explains, "but also lifestyle issues, income issues—a whole range of regional issues that come into play and that people in those stores have the best handle on. So our store management and merchandisers within each store are the ones with the pencils; their responsibility is to alter the mix and make it appropriate for their own market."

JCPenney, which recorded $15.7 billion in sales in 1996, is perhaps unique in its structure. Merchandisers at the store level actually make the final decision on what goods will be sold in their department. That is not to say, however, that each store has totally free rein to seek out and purchase products. Certain core merchandise, which includes such items as underwear and basics and the retailer's private-label brands, is carried in all stores.

For all merchandise, the corporate buying staff at the chain's headquarters in suburban Dallas creates a recommended plan, based on its knowledge of fashion and industry trends, key brands, private-label goods available, and other research. That merchandise plan, encompassing a huge array of goods from approved suppliers, then is presented to the store managers and merchandisers, who can pick and choose among the offerings, skewing the mix to fit their customer base.

"In some stores, I could even say many stores, the corporate merchandise plan is absolutely the right plan," Anderson notes. "But in many other stores, the needs will be different, based on climate, cultures, and sub-cultures. There are so many things that make one market different from another."

Even two stores whose customer base may, on paper, reflect a similar ethnic mix can have dramatically different merchandise needs, Anderson points out. For instance, the products desired by a heavy Hispanic population in New York City or southern California will differ from those of the Mexican-American population in south Texas, which is strongly affected by the whole Texas lifestyle and Western-wear influence.

But ethnicity alone does not necessarily determine product wants and needs. "It's not so much that different ethnic groups want to look totally different from others," Anderson explains. "They're probably reading the same fashion magazines and may love the same styles, the same sleeves, and silhouette. But if their skin is darker, they may prefer brown to pink. Or in an Asian area, they may prefer jewel tones and need a garment in a petite size. So it often comes down to variations in colors and sizes more than anything else."

The retailer does, in any case, fully recognize the importance of the blossoming ethnic populations. According to company literature, the fashion segment manager positions—one for each of the retailer's five divisions: women's apparel, women's accessories, men's, children's and family shoes, and home and leisure—were created in the early 1990s to help identify appropriate merchandise for select stores "that have diverse ethnic populations within their customer base."

In essence, the fashion segment team works with the buyers and brand managers to ensure that the merchandise offered to the individual stores meets the diverse needs of all markets. As Anderson puts it, "If the buyers offer a T-shirt in pink, blue, and yellow, and we see that one market always sells red and another needs brown, we'll make sure they expand the offering within the core merchandise to include those colors."

While some of the information regarding the special needs of an individual market are empirical, based on store managers' knowledge of their region and their customer base, the most important comes from data gathered electronically at the point of sale. This information can be shared up and down the supply chain. Sales can be tracked and reported at different levels, from style; down to style and color; and further down to style, color, and size. With vendor systems in place from the corporate level down, orders can be placed by and drop-shipped directly to the individual stores.

An automatic merchandise-replenishment system continues to improve in-stock availability, while maintaining and in some cases even lowering inventory. The system replenishes year-round items by color and size. It automatically reorders merchandise based on actual sales, responding closely to real-time consumer demand.

Bronx Store Epitomizes Diversity

Those supply chain systems can be viewed as the key to the success of what could be the JCPenney store with the most diverse customer mix of any: its new store in the Bronx, opened in April 1997. "Our customer base really epitomizes diversity," says Bronx store manager Ed Solczak. "It touches the entire spectrum. Not only does our assortment have to address different taste levels, such as colorations, merchandise blends, and national brands, but also sizing, which is a key element. It's a market comprising strong African-American, Hispanic, and Asian populations; and our ability to micro-manage, to target our merchandise mix to the wants and needs of our customers, has been critical."

According to Solczak, the results to date at the Bronx store have been "spectacular," with the branch generating record-setting sales. Part of that success stems back, again, to identifying customer needs and creating a supply chain to efficiently respond to those needs. In studying the competition, for instance, certain national brands that had not been part of the JCPenney mix were seen to be important; that information was shared with the corporate buyers. By the time the store opened, those brands were on the shelves.

Furthermore, since the opening, the mix has continued to be adjusted to match the trends identified through customer feedback and point-of-sale data. For instance, even though store management thought it had a good handle on the range of sizes necessary, it found the mix needed to be finessed even further, both up and down the scale. Plus, the need to present a broad spectrum of color was even greater than anticipated, with perhaps seven or eight colors necessary for making a merchandise statement, rather than four or five.

"There is a lot of technology that supports the store on a day-to-day basis," he says. "That technology can track rates of sale and anticipate needed inventory on basic items. And in anticipation, it can replenish basic goods, such as hosiery, socks, and towels. Through technology we can also recognize colors that increase or decrease in importance, which helps us stay at the leading edge."

If the retailer lived solely off of historical information, Solczak adds, colors would never change. With point-of-sale data, on the other hand, if a home merchandiser introduces a new color towel and it takes off far more than anticipated, the technology tells the merchandiser, so he or she can adjust reorder levels. "It keeps turnover levels where they should be, and lets us adjust our mix to our own sales," states Solczak.

Retailer/Vendor Collaboration

As far as Sears and JCPenney have gone in tailoring merchandise to the individual store level, micro-merchandising in general is still only in its infancy. But with competition for consumers' disposable income and loyalty intensifying each year—not to mention the various ethnic population segments continuing to grow in size and purchasing power—it is a strategy other retailers increasingly will investigate and implement.

At the same time, while the benefits of store-level merchandising to target ethnic and other markets are abundantly clear—including improved in-stock positions, reduced inventory, and enhanced customer satisfaction—without the technology and appropriate reporting systems in place to back up the process, it could be a logistical nightmare. The potential problems for suppliers are particularly acute.

As Stephen Schlehuser, principal of KSA, points out, "There are a lot of issues to address. Part of the recognition with Quick Response is that you need to have a size and color for everybody you want to serve, versus the old days of doing just a few colors in a few sizes. That means manufacturers are having to supply more SKUs than ever before and having to replenish more. If there are no surprises, they can do quite well. But that means that forecasting is critical, the key to being successful."

For effective forecasting, there obviously must be effective communication between retailers and vendors, and a sharing of point-of-sale data that will allow manufacturers to track and predict trends for their own lines. While the use of EDI to track general sales and order information—currently being done by more than three-quarters of the industry—is a first step to micro-merchandising, its use to gather store-level data is far less widespread.

Yet the technology is there and the level of effort is increasing. The trend is certain to accelerate, experts agree. And if there is any doubt, one need only look at the examples of Sears and JCPenney, which have gone from offering a broad line, homogeneous mix of merchandise in all their stores to targeting merchandise to meet the needs of individual stores' own specific and diverse customer bases. A consumer-focused supply chain is central to that effort.