The Secret Behind Retail Mega-Growth With a Geographic Information System
How does a retailer decide where to locate 2,500 new stores in one year, and at the same time have confidence that all of these new locations will be successful? And how do you do it in a country as vast as Russia? This is the challenge that faces X5 Retail Group, one of the largest retailers in Russia, every day. X5 is a retail success story. For the past several years, it has been opening over 2,500 stores a year. However, X5 leadership faced significant challenges: how can they be confident that locations being considered for stores will be successful? How can they be sure that they accurately assessed location market conditions and are using the most relevant and precise data available to make decisions?
Challenges of this magnitude are not new to retail. For every retailer, top-line sales growth and gross margin are key indicators of company health. When a company is faced with such a massive growth opportunity, it's important that its leaders are confident they have selected the best possible locations. To meet this challenge, X5 has successfully leveraged a geographic information system (GIS).
GIS for Retail
Many retailers are beginning to employ new technologies to improve business operations and outcomes. Tools like artificial intelligence (AI) and predictive analytics are empowering them to consume, analyze and find insights in data at an unprecedented level of granularity. This is coupled with massive, continuous growth in the amount of data that’s available for retailers to interrogate. GIS is a sophisticated location intelligence tool which enables retailers to consume and analyze massive and disparate data sets by using location as a common index key. The application of geography to data enables unique insights about why things happen where and when they do. Furthermore, through the use of maps and real-time, geographic visualization and real-time dashboards, the results of these analyses can be shared across their enterprises using intuitive and interactive visualization tools.
With GIS, retailers can better determine what influences customer preferences and behavior through data. It can help them understand why transactions happen where they do by plotting a location against transactions and then aggregating the transactions to find patterns in the data. Location intelligence enables retailers to make make smarter decisions when it comes to inventory, sales and marketing by helping them better understand their customers. Across their enterprise, location intelligence helps them understand and improve their supply chain performance and operate their stores more efficiently.
How X5 Successfully Used GIS
X5 Retail Group successfully has used GIS to determine optimal locations for over 5,000 grocery and convenience stores in only two years. Imagine opening 50 stores a week. And the good news is there's no sign X5 is slowing down! The business problem for X5 is how can it accurately evaluate new sites at this scale, and have confidence that it's making the right decisions in each neighborhood it's considering across a country as massive as Russia. X5 began using GIS when company leaders realized that the only way they could hope to understand very local data in order to predict performance was to improve their location intelligence technology to support localization capabilities.
Unlike many retailers in the United States, X5 doesn't have ready access to massive amounts of demographic and spending data aggregated from government agencies. This makes a GIS tool an imperative to model the data available to create customer segment profiles and model trade areas. Based on these analyses, X5 executives were able to make informed decisions at a very local level about where to put a new store location.
X5 is a publicly traded company, which means that it's critical to make well-informed decisions based on real return on investment. To understand revenue by location, X5 created a GIS heat map using an automated calculation of a potential store’s revenue. Would-be stores were color coded with green to represent most profitable locations, followed by yellow and red codes for less profitable locations. The heat map is supported by complex analytics which operate under the GIS-hood and are seamlessly captured without the need of spreadsheet reports. From those insights, X5 creates its development road map, which forms the basis of its three-year growth plan.
Incorporating GIS Into Retail
X5 uses location intelligence to bring together many disparate data sources about its current and prospective locations in order to apply analytics that helps it make informed, precise decisions to support its aggressive growth strategy. However, there are many other uses of location intelligence in retail. Supply chain optimization, store operations, customer segmentation and assortment planning are a few key examples. The more you know about the customers shopping in your stores, the better chance you have to meet their needs, every store and customer at a time.
Location intelligence isn't just critical for large retail organizations like X5. Every retailer, every e-commerce company and all of their suppliers need to know who and where their customers are, where their competition is, and when and how there are changes in their trade areas that will affect their business. It’s how best-in-class retailers, like X5, are able to meet the needs of an increasingly demanding customer, who has more information about products and more options to purchase than ever before. It’s how retailers are able to make store- and location-specific decisions with confidence, using local, precise data to ensure the decisions they make reflect the conditions and customer preferences at the store and neighborhood level.
Gary Sankary is an industry marketing strategist, retail, at Esri, an international supplier of geographic information system software, web GIS and geo-database management applications.
Related story: Retail's Drive to Store: Why Brick-and-Mortar Still Matters