Retailers and their suppliers comprise the world's largest industry  and perhaps its most unpredictable: successful retailers have to learn to constantly adjust to people's buying habits, even in a recession. Yet retailing remains a fragmented business, based on millions of transactions in thousands of local outlets. Even with the consolidation of recent years, the industry is ripe for transformation.

Most large retail chains are wrestling with a similar, overriding challenge. To generate the kind of buzz (and revenue) that fuels the industry, they must grow the business. But at the same time, CEOs must improve their return on invested capital.

"When the industry was largely family owned, it was relatively lean and invested with great discipline," notes Peter Child, a director in the Paris office. "Paradoxically, once the family fortunes were made, the more professional management teams that came in paid less attention to the return on capital. They focused more on operating costs. Of course, CEOs must think about both operating and capital costs. Ambitious growth initiatives – whether through national or international expansion or new retail formats – must pay for themselves."

Furthermore, retailers must grow in ways that sharpen rather than dilute their brand image. That requires greater customer insight and more tailored offerings, not simply more locations or generic loyalty programs.

CEOs can use four levers to deliver more capital-efficient, customer-centered growth.

	Lean retailing. Extensive supply chains, complex stocking processes, large, semi-skilled work forces, and other hallmarks of retailing have clear counterparts in manufacturing environments. Techniques pioneered by the world's most efficient factories can dramatically reduce stores' cost structures, improve stock availability, and help finance growth.
	Format renewal. New store concepts and layouts – for instance, smaller more specialized variations on a retailer's core market – can grow revenue, keep the brand fresh, and allow more cost-effective, targeted expansion.
	Sourcing and supply management. As retail networks grow, it's important to know how, when, and where to relocate links in a supply chain. Late or defective merchandise can wipe out the potential savings from overseas suppliers. In addition, retailers must maintain collaborative relationships with key suppliers, even while pushing for lower costs.
	Delivering customer value. Retailers need not necessarily promise the lowest prices. But they must provide distinctive value in something – for instance, quality, fashion, or novelty. Convenience, location, selection, excitement, and service also are part of the value equation.

To sustain growth, retailers ultimately must build relationships with the customer, not just sell them goods. "When consumers trust a retail brand, they are willing to purchase a stunning variety of goods and services," says Child. "For example, we now see leading grocers branching into financial services, travel services, telephony, utilities, even car sales. A few market leaders in every segment are pulling away from the crowd – in terms of innovation as well as scale of operations. Those that don't respond will have a hard time catching up."