When customers leave and don't come back, a company's sales can collapse rather quickly. Just ask BlackBerry, which was surprised when it found out that its customers no longer valued secure communications and a good typing pad as much as they once did. At the other end of the spectrum, there are retailers such as Kroger (KR 2.66%), Steven Madden (SHOO +1.63%), and DSW (DSW 1.82%) that have found specific ways to limit their customers' risk exposure to the minimum.
Know your customers
As of October 2013, Kroger, the largest supermarket chain in the U.S., has posted positive same-store sales growth for 39 consecutive quarters. Even when the industry as a whole registered negative same-store sales growth for three straight quarters in 2009, Kroger still bucked industry-wide trends and delivered positive same store sales. Kroger's impressive decade-long track record of consistent growth was made possible only by its intimate knowledge of its customers through its loyalty-card program.
Kroger doesn't always disclose details of its loyalty-card program, but when it does the numbers are stunning. As of September 2010, Kroger's shopper cards were carried by almost half of the country's households, and its loyalty cards were used in more than 90% of its transactions.
Last year, Kroger sent out more than 9 million quarterly mailings to its members. Kroger worked closely with its customer-analytics vendor Dunnhumby to customize 8.5 million of these mailings with offerings catering to unique customer preferences.
Kroger leverages heavily on its ability to collect and analyze customer-purchase data, enabling it to align its products with ongoing customer trends. One example is its launch of Simple Truth, its natural and organic food brand, in September 2012, in response to customers' claims that labeling for such foods was confusing.
Armed with such valuable customer insights, Kroger made sure that its Simple Truth product lines used highly visible category markers (e.g., USDA organic seal) and simple-to-read ingredient statements. Kroger also realized that consumers were averse to artificial preservatives, and it put an emphasis on the "free from 101" tag line, stressing that its products were free from 101 artificial preservatives. Results have been encouraging thus far, with Kroger calling Simple Truth 'a billion dollar brand in the making.'
Test and react
Collecting customer data tends to be a good indication of what they want now, but not necessarily what they may like in the future. This is where retailers with the courage and creativity to test new product offerings have the edge over their competitors. Experimentation becomes cheaper and more effective with footwear and accessories retailer Steven Madden's unique customer-experimentation model, aptly named as test and react.
Steven Madden's test-and-react model boasts of production lead times of six-to-eight weeks, way shorter than the industry average of three-to-four months. It works like this: Steven Madden has an idea for a new shoe and makes a finished prototype in a day at its sample factory. If it looks good, Steven Madden makes a few more and sends them to select stores. Assuming weekly sales figures show that it has a hit on its hand, Steven Madden asks its overseas suppliers to commence production. Within a month or two from idea conception, it is selling these new shoes in all of its stores.
Under its test-and-react model, Steven Madden enjoys a huge competitive advantage over its competitors. It is usually the first in the industry to leverage the latest fashion trends because of its speed to market. Furthermore, Steven Madden pays a smaller price for experiments that don't work out by producing samples with its in-house factory.
Customers know best
Sometimes, it is really difficult to know exactly what customers really want. If you have really no idea about customers' preferences, the alternative is simply to provide them with as much choice as possible and allow them to make their choices in a most hassle-free environment.
Another footwear and accessories retailer, DSW, runs on an assisted self-select service model that allows its customers to try the shoes they like on their own, without overzealous sales staff breathing down their necks. Moreover, DSW's broad assortment of footwear across different brands and price points means there is something for everyone. The results speak for themselves. DSW has increased its market share of the adult-footwear market from less than 2.5% in 2004 to almost 4% in 2010 and tripled its net income over the same period. It is not resting on its laurels, and has set an ambitious target of doubling its 2010 earnings by 2015.
Final Foolish thoughts
It doesn't matter whether you are selling groceries or shoes -- profitable retailers are those who know their customers and keep them satisfied. All three retailers listed above have successfully minimized customer risk with their respective strategies; all of them having grown their revenues in every single year for the past decade. Their revenue stability and low customer risk make them perfect investment candidates for a low-risk investment portfolio.
