How To Rapidly Scale A Profitable Chain Of Retail Stores
Earlier this year, I wrote about VkusVill, the Russian supermarket chain that is reinventing the retail industry. The Russian pioneer proves that you can rapidly scale a profitable chain of retail shops by letting frontline employees make all the important decisions. They do this with impressive results; the company is not only growing rapidly (CAGR 40%), it also manages to keep bureaucracy and hierarchy to a minimum, as upper management accounts for less than 10% of the total payroll.
One of the many remarkable things at VkusVill is how they routinely manage to reach break-even points for new retail stores in just a matter of days. They do this by pushing the decision-making that affects the opening and development of new stores (and the company's performance) all the way down to the frontlines.
But how does that work?
I recently talked with Nikolai Popovich (boardmember of VkusVill, responsible for innovation) to understand how this unique management model enabled the company to make the process of opening new stores an interesting challenge—not only for management, but also for the frontline employees that have to actually run the stores.
"Traditionally, the process of opening new stores is hard,” says Popovich. “Managers need to think of ways of opening new stores, find out which districts are the most promising in terms of potential customers, and identify how many competitors are within the proximity of the new store."
He then turned the conversation toward the different methods the company uses to solve two common challenges related to opening and running new stores, allowing VkusVill to rapidly scale a profitable chain of retail shops.
Challenge: Where to open new stores?
To better understand how these stores operate now, it’s helpful to consider the context of where they came from.
"Dating back to the last century, the Soviet Union background greatly affected how food companies opened their stores in Russia and ex-Soviet countries,” says Popovich. “Back in those days, the demand typically exceeded supply, and there was no need to promote stores. Customers had no other choice but to come to a nearby shop to do grocery shopping,” he continued. “Thus, grocery stores kept opening in different districts expecting customers to visit stores just as they are."
Eventually, after the dust settled from the ashes of the Soviet Union’s fall, customers no longer felt the obligation to stand and wait in the queue at the supermarket like in the old days. “Customers now tend to switch to different stores if something starts to annoy them,” Popovich says.
This totally natural change in customer behavior resulted in one of the first problems VkusVill faced in the early days of its existence. They could no longer simply open a store and anticipate a line forming, regardless of where the store was. The company opened new stores at an exponential rate, but the majority of the new stores were not profitable—which was obviously a big problem.
The problem itself was rooted in traditional silo thinking, especially between VkusVill's respective Development and Retail departments.
The Development department was responsible for finding new retail spaces, entering into new lease agreements, and opening new stores. Once a new store opened, they immediately handed the reigns over to the Retail department, who then assumed the responsibility of making the new store profitable.
This way of working resulted in some conflicts.
"New stores were usually not profitable during this time because the Development department would often choose a bad location,” says Popovich. “Sometimes, a complete district didn’t actually need a new VkusVill store, but it would still be opened anyway."
As you probably guessed, this resulted in many new stores getting closed, which created conflicts inside the company. The two departments started to blame each other for the consistent failures.
Shocking, I know.
Solution: Let frontline employees lead the way
The solution that solved this problem was quite simple.
The company decided that the Development department was no longer just responsible for opening a new store—it also had to make the new store profitable before handing it over to the Retail department.
"The key to success here was ensuring autonomy in the decision-making,” says Popovich. “The decisions regarding where to open new stores and how to promote them in the local market were pushed all the way down to the people that had to actually open the new stores and make them profitable—not from some manager that was far removed from the frontlines.”
The Development department eventually transformed into a team of highly motivated employees that managed to break-even new stores in a matter of days before handing them off to the Retail department.
This is the managerial approach VkusVill calls “Beyond Taylor.”
“Giving freedom of choice to the employees makes them feel as if they are part of the company’s actual growth strategy,” says Popovich.
“Because they definitely are. And the results speak for themselves”
Challenge: How should the stores be run?
The Retail department now faces the challenge of running the stores profitable in the long term. So how does this work?
Popovich provides some insight: "Traditionally, every shop manager wants to have a pool of employees dedicated to working 24/7. And each one of them wants their employees to develop new innovative ideas that generate increasingly higher profits for the company."
VkusVill was no exception to this, he said. "We also dreamed of highly-motivated teams, higher profits, and secretly, we desired less stress and control at every store."
This was another challenge they had to solve.
Solution: Let frontline employees decide
Again, VkusVill found the solution in their Beyond Taylor approach.
This means that the people who work in the stores decide how its run. "Store employees take responsibility in different ways,” says Popovich. “They decide what products to sell in the store, where to place them on the shelves, and which products to discount. They even decide themselves at what price to sell their goods."
"They also determine the inventory schedule, take care of the staffing table, and can choose to hire any freelancer as they wish."
"This may sound like a recipe for catastrophe for many traditional managers, but we believe strongly in our Beyond Taylor philosophy,” he continues. “We just encourage each store to focus on the needs of their customers and the quality of their service. And guess what? This results in higher profits."
VkusVill also encourages employees to take initiative on implementing ideas that may improve their stores. Furthermore, they are firmly against punishing an employee for an initiative that doesn’t work as it was supposed to.
"If an employee is afraid to suggest an initiative because he or she is afraid of being punished or fined if it fails, then no meaningful initiative will ever be taken," says Popovich.
"And the second lesson? Engage your employees in the whole process of running the store and support any initiative they take. You will always find that they perform way better in such an environment."
Corporate Rebels Academy
We are currently working on the development of a course about VkusVill for our Corporate Rebels Academy. So be sure to watch that space!