{"id":78962,"date":"2018-09-18T08:38:06","date_gmt":"2018-09-18T15:38:06","guid":{"rendered":"https:\/\/www.esri.com\/about\/newsroom\/?post_type=wherenext&p=78962"},"modified":"2021-11-19T13:42:03","modified_gmt":"2021-11-19T21:42:03","slug":"the-secret-formula-behind-one-of-the-worlds-biggest-business-expansions","status":"publish","type":"wherenext","link":"https:\/\/www.esri.com\/about\/newsroom\/publications\/wherenext\/the-secret-formula-behind-one-of-the-worlds-biggest-business-expansions","title":{"rendered":"The Secret Formula behind One of the World\u2019s Biggest Business Expansions"},"author":501,"featured_media":0,"parent":0,"menu_order":0,"template":"","format":"standard","meta":{"_acf_changed":false,"sync_status":"","episode_type":"","audio_file":"","transcript_file":"","podmotor_file_id":"","podmotor_episode_id":"","castos_file_data":"","cover_image":"","cover_image_id":"","duration":"","filesize":"","filesize_raw":"","date_recorded":"","explicit":"","block":"","itunes_episode_number":"","itunes_title":"","itunes_season_number":"","itunes_episode_type":"","_links_to":"","_links_to_target":""},"categories":[1001,381312,791,971],"tags":[55412,1161],"department":[476812,476792],"wherenext-category":[],"industry":[],"class_list":["post-78962","wherenext","type-wherenext","status-publish","format-standard","hentry","category-commercial","category-cxo-priorities","category-digital-transformation","category-location-strategy","tag-growth-insights","tag-retail","department-business-growth","department-cxo-priorities"],"acf":{"short_description":"How does a company decide where to locate 2,500 new stores in one year\u2014and ensure profitability? One retailer reveals the answer.","pdf":{"host_remotely":false,"file":"","file_url":""},"flexible_content":[{"acf_fc_layout":"content","content":"Any successful business aims for growth. It\u2019s all about increasing sales, improving the bottom line, adding new locations, and beating last year\u2019s performance.\r\n\r\nThat may take the form of a modest goal, such as opening a new store, or a more aggressive one\u2014say, launching a dozen outlets. But what if the ambition is far greater? What about opening 2,500 stores in one year, even in a global economy that\u2019s bending toward online sales and away from brick-and-mortar retailers?\r\n\r\nThat\u2019s the task facing Igor Pletnev and his colleagues at X5 Retail Group, which is traded on both the London and Moscow stock exchanges. They discovered the only way for their company to dramatically expand was to ramp up its technological capabilities.\r\n\r\n\u201cIn the last several years, we have managed to make a tremendous leap forward in terms of the numbers of opened stores,\u201d says Pletnev, the company\u2019s strategic business development director. \u201cThose newly opened stores were good openings, high-quality openings. The percentage of mistaken decisions is very low, so we are very much satisfied with the result.\u201d\r\n\r\nThat performance has helped make X5 the top retailer in Russia by revenue, with a market cap of more than $6 billion.\r\n\r\nIn the past two years alone, X5 has opened more than 5,000 grocery and convenience stores\u2014a 50-a-week pace it intends to continue this year and into the future. The growth acceleration, which outstrips anything in the US retail market, has raised X5\u2019s total store count to more than 13,500.\r\n\r\nBut until recently, X5 was lucky to open 500 stores a year. The key to the company\u2019s explosive growth, Pletnev says, has been its extensive use of location intelligence\u2014a form of business intelligence<\/a> that helps a company see and predict trends in geographic areas. X5 draws its location intelligence from a geographic information system (GIS). That technology, Pletnev says, is helping the company make more profitable decisions about how and where to grow."},{"acf_fc_layout":"quote","image":79022,"text":"Location intelligence forms the backbone of X5\u2019s growth plans, contributing to the top and bottom lines in interesting ways. For instance, executives and managers use insights from location analytics to stock stores with the right products and negotiate more favorable lease rates from landlords.","author_name":"","author_profession_organization":""},{"acf_fc_layout":"content","content":"Location Intelligence Drives Profitable Expansion<\/strong>\r\n\r\nGrowth at such an impressive scale is fraught with risk and ripe with opportunity. To mitigate the risk and bolster the potential, X5 uses location intelligence to create what it calls high-quality openings."},{"acf_fc_layout":"form","form_type":"aside","form_position":"Left","form_title":"THE ESRI BRIEF","form_desc":"A biweekly email connecting senior executives and business leaders with thought-provoking articles on location intelligence and critical technology trends.","form_button_label":"Sign up now","form_content":"https:\/\/go.pardot.com\/l\/82202\/2017-10-12\/jw1bmb","form_tag":"low-commitment-form\/sign-up-form"},{"acf_fc_layout":"content","content":"With GIS as its mapping platform, X5 analyzes potential locations for single stores as well as groups of outlets across a region. And location is everything when the goal is to place 2,500 stores in one year.\r\n\r\nLeading retail companies often rely on GIS to assess the demographics and psychographics<\/a> in areas of potential expansion. If residents of the region match the profile of those the company seeks to serve, executives may opt to open a new store. X5 takes that analysis to a new level, making hard-dollar predictions that guide decisions.\r\n\r\nThe publicly traded company uses GIS to create two critical decision support tools: a heat map and a development roadmap. Together, these maps form the basis for X5\u2019s three-year growth plan.\r\n\r\nThe heat map shows an automated calculation of a potential store\u2019s revenue. Would-be stores are color coded, with green representing most profitable, followed by yellow and red. Under the hood of those simple displays are complex analytics capabilities (see image). The estimates inform the development roadmap, steering X5 toward profit and away from risk. And it seems to be paying off: the company\u2019s 2015 profit was 14.2 billion rubles<\/a>\u2014$233 million at the 2015 exchange rate. By 2017, it had grown to 31.4 billion<\/a>, or $538 million in 2017 dollars.\r\n\r\n\u201cThe most important extra function is this estimation model, which assesses the amount of revenue for a potential site,\u201d says Alina Prigozhina, who was head of X5\u2019s GIS team from 2014 to 2018. \u201cIt can count how many people live around this potential site. It can estimate how competitors affect this exact site.\u201d"},{"acf_fc_layout":"image","image":79042,"image_position":"right","orientation":"horizontal","hyperlink":""},{"acf_fc_layout":"content","content":"Every February, two teams of managers from every region\u2014one representing development, the other operations\u2014up to 300 people gather to update the heat map with marketplace changes not captured by prior calculations. The new heat map shapes the development road map with target revenue for possible stores. That document becomes the foundation for the three-year development strategy, Pletnev says, which guides the entire company.\r\n\r\n\u201cThe system helps us to choose the best-case scenario in relation to a group of stores, which is important [for] understanding them holistically,\u201d he notes.\r\n\r\nUsing location intelligence not only to assess an area\u2019s potential but also to predict a store\u2019s revenue is a sophisticated technique, according to Tom Horan, dean of the business school at the University of Redlands.\r\n\r\n\u201dOur research<\/a> shows that 20 percent of companies are spatially mature, which means they leverage location intelligence to improve decisions across the organization,\u201d Horan says. \u201cX5 stands out even among those leaders. Their use of GIS to predict the business impact of location decisions is a model that other businesses are likely to follow.\u201d\r\n\r\nDemocratizing Data to Propel Growth <\/strong>\r\n\r\nOnce the growth committee determines a master plan, it falls to a group of regional directors to scout new store locations. Each regional director\u2014there are 170 across X5\u2019s geographic footprint\u2014oversees a portfolio of 80 to 110 stores. Their focus, Pletnev says, is on quality, not quantity.\r\n\r\n\u201cWe want a regional director to focus the attention of the whole operating team on a high-quality opening of each new store,\u201d he explains."},{"acf_fc_layout":"sidebar","layout":"standard","image_reference":null,"image_reference_figure":"","spotlight_image":null,"section_title":"","spotlight_name":"","position":"Right","content":"

The Bedrock of Growth <\/strong><\/h2>\r\nGrowth on the scale achieved by X5 Retail Group is propelled by digital tools that automate traditionally manual processes such as site selection. To learn how other leading companies have benefited from digital transformation, explore the eBook, Making Sense of Digital Transformation<\/em><\/a>.","snippet":""},{"acf_fc_layout":"content","content":"To do that, they use GIS to analyze a proprietary blend of location data, including income levels of area residents, travel distances to a proposed store, and the area\u2019s competitive dynamics.\r\n\r\nThey also use GIS to determine whether an alcohol license can be obtained from the government. A store that\u2019s close to a school, for example, would not be a candidate to sell beer, wine, and liquor, which can otherwise be lucrative.\r\n\r\n\u201cOur model,\u201d Prigozhina says, \u201ccan sum up all these factors and predict the amount of revenue that we can expect, based on the benchmarks of nearby stores we can forecast potential profitability level. It helps a lot to make decisions about this point.\u201d\r\n\r\nDecentralizing X5\u2019s development efforts\u2014and expanding employees\u2019 access to GIS\u2014has accelerated the company\u2019s growth rate by a factor of five, Pletnev says.\r\n\r\nAcross the company, some 800 professionals access location intelligence generated by GIS each day, he says. That includes individual employees on the ground looking at possible locations, middle managers such as regional directors who crunch potential sales numbers, and the committee that makes final investment decisions. This represents almost every department in the company, from operations and marketing to supply chain, finance, and development."},{"acf_fc_layout":"image","image":79002,"image_position":"right","orientation":"horizontal","hyperlink":""},{"acf_fc_layout":"content","content":"\u201cEach person who takes part in the decision-making can see the same data,\u201d Pletnev says. \u201cSo nobody can send different letters to different people containing different information about the same object.\u201d\r\n\r\nDivergent Markets <\/strong>\r\n\r\nRussia\u2019s grocery and convenience store business is markedly different from its US counterpart, which has numerous regional, national, and international brands fighting over a relatively stagnant marketplace<\/a>.\r\n\r\nBuffeted not only by online retailers but also by a glut of brick-and-mortar space, American store owners are shuttering locations, including 105 million square feet in 2017. Yet the U.S. still has the highest rate of retail space in the world, according to Credit Suisse<\/a>: 21.5 square feet per person. Runner-up Norway has just under 10 square feet per capita, while Russia has 1.3 square feet per capita.\r\n\r\nIn the US, discount chains like ALDI and Lidl are moving in<\/a>, ramping up the competition and putting more pressure on the bottom lines of major chains such as Kroger and Publix.\r\n\r\nBut in Russia, X5, Magnit, and other food retailers are rapidly growing and competing in various local and regional markets. In many cases, there is plenty of room to expand, especially in less populated regions like Siberia. X5 has large concentrations of stores in Moscow, St. Petersburg, the Urals, and Central Russia."},{"acf_fc_layout":"quote","image":79012,"text":"It\u2019s important that we can believe in the result of our revenue forecasts for new sites. We have seen accuracy of 90-95 percent from this forecast. ","author_name":"Igor Pletnev, X5 Retail Group","author_profession_organization":""},{"acf_fc_layout":"content","content":"Location Intelligence Reveals Best Store Format<\/strong>\r\n\r\nX5 offers three types of stores in Russia. The Pyaterochka string of convenience stores makes up the largest segment of the company. The Perekrestok chain consists of supermarkets. And the Karusel hypermarkets offer both groceries and department store items. (See the sidebar, \u201cCatering to the Customer\u2019s Mission,\u201d for more information.)\r\n\r\nLocation intelligence helps managers select the right store format for each location\u2014a practice known as best-use analysis. In some areas with strong economic and demographic trends, GIS might indicate that all three stores can coexist and still yield a profit. But in less affluent locations, that mix won\u2019t work because one brand likely would cannibalize the sales of another, Pletnev says.\r\n\r\nDirectors use GIS to help make the call on the type of store X5 opens by delving into per capita income, population density, and the all-important availability of parking. Parking matters less for convenience stores, which are located within walking distance of most customers. But for supermarkets and hypermarkets, parking is crucial in determining a successful store location.\r\n\r\nX5 planners also use location data to optimize current outlets. They analyze each location\u2019s sales volume, shoppers\u2019 buying patterns, and data on where customers live or work. This analysis has led to the renovation of more than 3,000 stores across the country, Pletnev says. In some cases, X5 changes store layout and concept; in others the company downsizes. It all depends on what the location data shows.\r\n\r\nRight Products, Right Location, Right Price <\/strong>\r\n\r\nLocation data even determines which products are stocked in each store. \u201cIt helps us to better adjust assortment of the store,\u201d Pletnev says, \u201cand avoid keeping a long tail of products or items which may be in lower demand in that particular store because they do not fit generally the store's mission.\u201d\r\n\r\nAs part of that process, the X5 team uses location technology<\/a> to plot what Pletnev calls \"geographic markers.\" For example, if there are parks or leisure areas nearby, a store will carry picnic foods and refreshments. Regional and local customer preferences are important too, and are added to the product mix. That has resulted, Pletnev says, in a line that is roughly one-third locally sourced."},{"acf_fc_layout":"sidebar","layout":"standard","image_reference":null,"image_reference_figure":"","spotlight_image":null,"section_title":"","spotlight_name":"","position":"Left","content":"

Catering to the Customer\u2019s Mission<\/strong><\/h2>\r\nX5 stores typically fulfill at least one of four customer missions:\r\n