ECR and grocery retailing: An exploratory financial statement analysis

Journal of Business Logistics, 2001 by Brown, Terence A, Bukovinsky, David M

First, most ECR adopters did not exhibit the positive results forecasted by ECR proponents. As a group, adopters' inventory efficiency, asset efficiency, and cash cycle generally deteriorated in relation to non-adopters. This outcome might help explain the different perspectives of those who believed ECR would work well, and industry journalists who looked for results and didn't find them.

Second, the gross profit percentage of the adopter group grew slightly during the study period. This may mean that adopters increased forward buying which would tend to negate or reduce the inventory and cash cycle benefits of ECR. This finding is consistent with the comments of some industry executives and might help explain why adopters experienced worse inventory and cash cycle efficiency during the study period.

Third, the adopter group tended to be much faster growing than the non-adopters and this might also help explain the reduced inventory and cash cycle efficiency adopters experienced during the study period. New stores often take a year or more to reach the inventory to sales ratios of established stores (Knight 2000).

Fourth, three of the adopters did experience improved inventory and cash cycle efficiency in spite of their fast growth and increased gross margins. Also, some adopters did not grow rapidly but still had worse inventory and cash cycle efficiency. Thus, the impact of growth in sales and gross margin on inventory and cash cycle efficiency is not clear. It might have an effect, but clearly does not determine the outcome completely. One other explanation is that implementation success may be critical to improved performance. Implementation in this sense refers to how effectively ECR initiatives were adopted as well as how many initiatives were adopted. (Note again that efficient promotion has not been widely implemented.) Further research will be necessary to clarify these relationships.

Fifth, gross margin (and net profit) are positively related to firm size; i.e., the larger the firm apparently the lower the price charged by suppliers. This phenomenon may tend to encourage mergers, and makes it difficult for small companies to compete on the basis of price. Thus, small grocers face a managerial challenge in finding ways to satisfy customers without offering the lowest prices.

Sixth, ECR was adopted more by large firms than by smaller grocers. This may reflect difficulties in attracting capital, greater advantages of technology for large firms, and/or other factors.

ACKNOWLEDGMENT

We would like to acknowledge the help of Dr. Robert K. Larson, CPA in the preparation of this work. Any mistakes or omissions are those of the authors alone.

NOTES

Bowersox, Donald J., David J. Closs, Theodore P. Stank, and Devin C. Shepard (1999), Supply Chain Management: Differentiating Through Effective Logistics, Washington, D.C.: Food Marketing Institute.

Collins, Richard (1997), "ECR-Breaking China in the US Supermarket Industry," Supply Chain Management, Vol. 2, No. 3, p. 92.