This month we will be looking at a value-creating activity to analyse and separate out value and cost drivers and draw from a case study on supermarket trolleys, which is a sub-activity of customer service.
We can define value drivers as anything outside or within the business that generates cashflows directly or indirectly, now or in the future. Examples of value drivers could be branding, superior product quality, a surge in customer demand, or the increased recognition of the importance of something.
Cost drivers can be defined as anything outside or inside the business which generates cash outflows directly or indirectly, now or in the future. Examples of cost drivers could be economies of scale, complexity, poor quality, inefficiency, capital costs, etc.
Notice these definitions cover not only direct, but also indirect value and costs, and therefore include systemic properties. Also, they may incorporate future value and cost drivers.
Another important element is that often they are at bottom behavioural in nature. Customer demand is very much influenced by emotional factors, even in the business-to-business market. Equally, a lot of cost drivers are behavioural and reflect such barriers as resistance to change and inflexibility.
Value and cost driver trees
To get a better understanding of value and cost drivers it is useful to represent them pictorially. Take the case of investing in a supermarket trolley that is guaranteed to go in a straight line. The diagram shows that value creation is segmented, initially into the two main stakeholders: customers and company. This is then broken down into the types of value added – for example, customers will find new trolleys less irritating to use. The next level down then offers some idea of how the value might crystallise; for instance, in reducing the number of lost customers, or attracting new customers. This is the ‘value indicators’ level.
By drilling down inside value creation, we then get to a point where we can collect data to confirm that value is real – and estimate what that value is, albeit approximately. Carrying out this process is rather like being a value detective and involves bringing data together from many sources – customer, competitive, operational, behavioural and even attitudinal, as we will see in the case of coin-locked trolleys.
Space prevents showing the cost driver tree, but in the supermarket trolley example it would show investment costs split from ongoing costs, with the latter further split into retrieval, damage, losses, ecological costs, etc.
In 2008, 450,000 trolleys were sold in the UK at £50 each – a market of £22.5m. Approximately 90,000 of them – around 20% – were equipped with locks. In continental Europe, by comparison, 98% of trolleys have locks, which is a puzzle.
In the UK, though, with the exception of the lower-priced supermarket chains, coin locks on trolleys are used only where losses have become acute. With coin-locked trolleys’ penetration of the UK supermarket market limited to 20%, the question arises of what the limiting factors are?
The costs of loss and damage or mismanaged trolleys are around 50% higher in the UK than in most European countries, so finding out why more UK trollies are not coin-locked is clearly of value.
Economic value of coin locks
We will take a look at the value and cost drivers of coin-locked trolleys and then examine the differences between coin-locked and conventional trolley sites and the impact on customer value, retrieval costs, damage and losses, and the environment.
The key value drivers of coin locks on trolleys include:
longer economic lives for trolleys;
- a less cluttered car park;
- ecological value from fewer rusting trolleys;
- avoidance of customer irritation at trolleys that don’t naturally go in a straight line;
- publicising the ecological benefits might boost the supermarket’s green image.
The value destroyers of coin locks on trolleys are:
- customer irritation arising from not having a pound coin;
- engendering a downmarket feel that could make customers switch to other stores;
- the perception of poor customer service or a supermarket cutting corners to save money.
Cost drivers for coin locks include:
- the resources spent on retrieving misplaced trolley;
- damage and losses to existing trolleys;
- investment in new trolleys;
- a larger than necessary fleet of trolleys.
Impact on customer value
Market data collected on two stores indicated that resistance to the introduction of coin-locked trolleys would not be very substantial as long as the move was well explained and implemented.
One surprise was that 75% of customers at the coin-locked site didn’t mind the coin locks. None said they would definitely switch store. This was a crucial behavioural factor in the study, alongside sensitivity to ecological issues – one which could outweigh any negatives.
Neither customers nor staff at the coin-locked site had any real idea of the scale of losses, so publicising this could help reduce even further the residual negativity towards trolleys.
Data was collected for all value and cost drivers from many sources. Here I will only deep-dive on selected numbers due to space considerations.
If an average trolley retriever can move a maximum of eight trolleys at a time (a limit imposed by health and safety factors), then industry estimates suggest that an average employee will retrieve 48 trolleys per hour. A trolley employee is paid £9.33 per hour, so the unit cost of retrieval is around: £9.33 per hour divided by 48 trolleys = 19p per trolley
Assuming that the average supermarket shop – using a trolley – is around £40, then the 19p cost of retrieval is as much as 0.475% of revenues; if major savings could be made here, that would be significant in terms of margin impact. If the cost of trolley retrieval could be cut by 50%, the revenue saving would be 0.24%. Interestingly, if we assume that supermarket margins are around 5% of revenue, then this saving could drive up the chain’s margin by around 4.7%.
The time spent in trolley retrieval across an average store can be calculated on the basis of Tesco’s Royston store in the study. Here the roster added up to five shifts per day of full-time equivalents, or 35 full days deployed each week: 35 x 8 x £9.33 an hour = £2,612 per week.
Annually this cost amounts to no less than £135,844 (that’s the £2,612 weekly cost multiplied by 52). However, Tesco Royston is a round-the-clock operation and a smaller store would have no night shift, reducing costs to, say, around £94,000.
The time required just to gather the trolleys together is ‘easily 50% of the time we spend’, according to staff. So if a chain of 700 smaller stores were to put coin locks on all its trolleys it would potentially halve its trolley retrieval costs: £47,000 per store x 700 sites = £32.9m.
Damage and loss
Other major factors to consider are damage and loss (see table). Factoring in that £10,000 saving per store gives us the following: £47,000 + £10,000 = £57,000 per year.
The annual investment cost for new replacement trolleys was estimated as being from £21,000, so the payback period would be five months. The (undiscounted) ratio of cash inflows over five years to outlay was at least nine – a no-brainer investment decision. For a major supermarket chain the benefits of full implementation of the system (assuming there are very few in place as yet) could easily be of the order of £50–£60m+ a year.
Not only do abandoned trolleys potentially damage the environment, but they are also very visible. Besides constituting waste they suggest that an area is not a desirable one.
A lot of energy is used in trolley manufacture and distribution, so lost trolleys have an indirect carbon footprint. About 27kg of carbon dioxide is generated by the manufacture of a new trolley. The metal wasted every year in lost trolleys is estimated as being enough to make 30 jumbo jets.
One of the reasons why a lot of trolleys don’t go in a straight line is because they have been damaged by being left lying around the car park.
If customers were educated as to the reasons for undertaking a review of trolleys, the benefits of coin locks, and the ecological logic, then resistance should melt away.
If we take all these factors into account, the continuance of non-coin-locked systems in the UK is a puzzle.
This case study gives some fascinating insights into the hunt for economic value added (EVA). The value and cost driver trees both guided the investigation and enabled some surprising cost structures to be uncovered. Before the study, retrieval costs weren’t really on some of the players’ menus – they are now. A copy of the study along with detailed back-up information was sent to the top management of a number of the biggest players. In 2012 one company that was strongly against coin locks made a major purchase of them.
Far from being a dry process, EVA can be used to influence stakeholders, help the buying process and facilitate change. It should also drive a far more powerful business case and win over stakeholders who should cringe at the ecological waste uncovered here.