The New Rules of Retail

The Death of Retail Is Greatly Exaggerated

The retail industry is alive and well, despite the stories of doom and gloom that have dominated headlines. Yes, some sectors, namely the big box, department stores and some apparel-focused retailers, are in doom-and-gloom territory. And “alive and well” does not mean that any sector can avoid the fundamental strategic and structural transformation necessary to survive. Major consumer cultural and behavioral shifts, empowered by technology and the internet, continue to press on and accelerate retailers’ need to change in response to these shifts. So, the death of retail may be exaggerated, but the urgency to kill and replace all of the old models is not. Let’s dissect the retail business and take a long view of the past few years in terms of performance, based on the accompanying portfolio of metrics.

Legacy Brands Reboot

Larger format stores must continue to find ways to expand the business rapidly without the weight of new inventory investments and the steep learning curves that would typically be required as a result of adding new business categories or models. For example, Marc Lore’s acquisition strategy has Walmart picking up a slew of successful, entrepreneurial niche businesses. On the surface, this may seem like a smart strategy, allowing the mega-giant to acquire high-margin and differentiated products, along with business intelligence and proven business models, but the proof of concept will only be delivered if there is an underlying well-thought-out strategy that is sustainable for Walmart to leapfrog into the digital future.

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Keep in mind, the first step with a strategy as bold as the one being executed by Walmart is humility. The world’s largest retailer (by far, with no close second place) openly admitted they are significantly far behind in the online race (I will not say dead last, but close). Walmart admitted it is slow out of the starting gate, helping to clear the path to the total empowerment of Marc Lore as the head of the .com business. Larger-format stores must continue to find ways to expand the business rapidly without the weight of new inventory investments and the steep learning curves that would typically be required as a result of adding new business categories or models. For example, Marc Lore’s acquisition strategy has Walmart picking up a slew of successful, entrepreneurial niche businesses.

For department stores, the legacy mentality, hierarchy and infrastructure need a jumpstart (or springboard) that catapults them over and beyond the innovation happening within the niche brands. Simply copying what niche brands are doing only makes department stores followers. Remember when they used to be leaders? Imagine what Steve Jobs did for the music industry by catapulting over all the competitors in the space of CD hardware; apply this to what department stores must do for the big box format.

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Electronics Store Deep Dive

The electronics retail sector has been challenged the last few years with a large portion of the business moving to online and discount retailers. Measuring business competitors can be difficult, as the pure-play electronic stores have dwindled, making competitors less transparent within the general merchandise store category or unknown niche players. Many electronic brick-and-mortar stores have a focus on building strategies around optimizing the shopper journey and creating deeper loyalty with their customers. Best Buy illustrates the reversal of fortune in this category representing 35 percent of the electronics and appliance store sales with only 11 percent of sales derived from online. The domestic growth has been a challenge over the past five years, but positive sales trends were achieved in both 2015 and 2016. The strategies are representative of the transformation of retail with a focus on the customer journey, continued investments in multichannel endeavors, and collaborations with business vendors. Strategies include addressing the knowledge deficiency gap with their own associates by giving them the tools to be trusted advisors to their customers and enhancing the store environment with home theater set-ups. The company piloted an in-home advisor program, further building customer loyalty and creating an additional customer touchpoint. The in-home advisor program will become more relevant in the next few years as home IoT device usage continues to grow. The exit of larger competitors over the past few years has been a positive factor for Best Buy. Efforts moving forward will also focus around the smart store and connected home.

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A Call to Action

In a retail landscape experiencing a great transformation, the winning strategies for the future include the five trends outlined below. Regardless of format, service level or location, these strategies can help today’s retailer move ahead of its competition. Today the price of entry for all retailers will be the necessity to identify and execute several sustainable competitive advantages, including greatly differentiated, and/or value-driven products, awesome experiences, and ubiquitous and immediate distribution.

Purvey of Product

Even in our current techno-engaged environment, one thing remains constant in the world of retail and has, in fact, been the edict since I studied fashion over 30 years ago, and that is “product is king.” Even with the plethora of enabling technologies driving the retail experience forward, the fundamental cornerstone of the industry remains retailers continuing to be the purveyors of product. Based on whatever the target markets may be, the acquisition of product through collaboration, negotiation, cost containment or differentiation will be the key unlocking the door to the future of retail. Quite simply put, technology cannot replace the merchant and finder of product. Enabling technologies will be there to aid and make all of us better merchants, but make no mistake that offering product relevant to your target market is critical to the success of the brand. Algorithms are a major new enabler but still not the ultimate decider.

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Ten Thousand Steps: The Shopper Journey

Malcolm’s Gladwell wrote in Outliers that it takes 10,000 hours of “doing” to perfect an action, and that can perhaps never be more fully illustrated than by today’s shopper, who has not only perfected the shopping journey over time and iteration, but is now leading the journey ahead of—and showing the way to—retailers. Understanding, measuring and putting action into optimizing the shopping journey is pivotal for physical retail. This journey includes the three factors of values, pitfalls and relationships.

Value

Understanding the value of every shopper through technologies measuring shoppers’ footfall at the entrance, the journey through the store, and the interactions with employees provides retailers with the ability to make data-driven decisions to improve the journey. Measuring the shopping journey provides retailers the ability to benchmark performance and understand specific metrics that drive topline growth by store.

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Pitfalls

Today’s digital footprint changes the ways people shop. Amazon’s Alexa (Echo), for example, basically trains customers to shop conveniently, pain-free and effortlessly, and is a gigantic wake-up call for physical retailers. Removing the pitfalls and pain points of in-store shopping is now a game-changing edict every retailer must prioritize. Examples are, unfortunately, countless, including queues (anywhere), checkout processes, finding products, knowledgeable staff, etc. Utilizing enabling technologies to solve these pain points is key, and as 2018 rolls in and Gen Z starts earning its own money, be warned they will have less tolerance than older millennials and other shopper generations for a store’s “pitfalls.”

Relationships

Two-way communication between customers and brands, including retailers, is essential for building loyalty and the trust required for a conversation to transcend from “talk” to “transaction.” Shoppers want to be “brand managers” and help retailers run the business. So, let them. Two-way communication means listening, responding and taking action. This goes beyond a store’s four walls, to multiple shopping channels and social media sites. Be vigilant about responding and diligent with action. A deeper level of communication can exist with two-way exchanges of information. Give shoppers more control of the journey through apps, machine learning and social media venues, and collect deeper data insights, providing better opportunities to create the most relevant actions.

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Smart Store: Synergistic Ecosystems

Large retailers have traditionally embraced new technologies by bringing them in-house and developing their own spin on the output. For example, staffing systems introduced on a broad scale 25 years ago are now being brought in-house where internal IT departments are customizing their own systems to better accommodate their specific needs. This allows more control and perhaps even reduces costs for retailers. However, today the number of new technologies on the market with tremendous specialization has moved the in-house mindset of “we can do it alone” to a partner mindset of collaborating with the out-of-house experts.

IT departments do not have the time, resources and dollars to recreate the array of technologies current business decision-makers need. Creating synergistic ecosystems and SmartStores through collaborative partnerships with enabling technology companies solves this dilemma. It also provides two benefits. First, the business can seek out and utilize a variety of technology experts for improving the operations and customer experience. Second, these partners also collaborate in the growth of the business.

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Obviously such partnerships require the outside experts to understand totally the entire brand’s ecosystem and they must fit into the culture. Technology companies who have an open system are ideal, as these companies can either provide a comprehensive view across all partnering stakeholders in the ecosystem or provide data into a current business intelligence tool. Ideally, information exchange is mutually beneficial, so both brand and technology gurus can perform iterative insights and actions. SmartStore ecosystems include cross-functional involvement across the enterprise, particularly marketing, operations and merchandising.

Shared Intelligence

The sharing economy will change the retail landscape in a multitude of ways, including how shoppers buy, how much they buy and when they buy—or not buy. Collaborative consumption continues to grow as companies like Airbnb, Zipcar and others help consumers own less and yet still have access. Collaborative consumption models have even expanded beyond physical products and into the digital world, as Netflix has somehow emerged as a national hobby.

Retailers and brands can work together to share intelligence about their areas of expertise to better deliver experiences relevant to today’s shoppers. For example, real estate developers, as experts at space development, can partner with retailers, as experts at purveying and selling products, to develop unique spaces to draw shoppers in and to facilitate the purchase. Or vloggers and bloggers, who are experts at influencing their viewers and readers, will partner with the brands’ product development experts to enhance communications and expand target markets. Lastly, Silicon Valley technology companies, experts at software development, will partner with traditional retailers, the experts of trade, to develop artificial intelligence and virtual reality to enhance the consumer engagement.

Portfolio Strengthening

No crystal ball is needed to forecast the necessity for many physical retailers to close underperforming and unprofitable locations. I know firsthand from having to close stores for two major retailers that it’s always a difficult decision, particularly when taking into consideration the associates who will be let go, and how loyal customers will be affected. However, in today’s fierce environment, businesses can’t afford to hang on to marginally profitable entities, particularly in the interests of shareholders.

In some cases, retailers will make lemonade out of lemons by taking dollars freed up from these locations to fund growth in the digital channel and for innovation in the healthy locations. Additionally, funds can be redirected into globalization and supply chain efficiency improvements.

Consumers Are Creating the Future

The consumer has always been in power and has driven all of the major changes that retailers have had to make over the last half century to survive. But now, with the rapid rate of new technology enablers and consumers’ adaptation of them, their power is on steroids. And so far, technology has enabled the consumer to a much greater extent than retailers’ ability to keep up. Smart retailers will fully engage with their customers through a lens of humility and with a genuine intent to learn from them. The customer has always been king; however, today they actually “own” the brands and retailers. They are co-creators and partners with them. Businesses now work for the consumer. Retailers who continue with legacy thinking, strategies and structures will be those who are closing stores. Similar to boomers and Gen Xers needing to learn from millennials and Gen Zers, the legacy stores need to learn from the niche and nimble segments. Traditional brand and retail formats need fundamentally transform their models, and quickly.

And those that work for, and listen to, the consumer will know what needs to be done. Those who do not will be a footnote in history.

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