Responding to the new realities of retail
The retail industry faces disruption from all sides. If you embrace digitalization now, your company can stay ahead of the curve and avoid becoming obsolete.
On a weekday morning like any other, Clare awakes to the sound of her favourite song streaming from her Amazon Echo. She slips on her smart-top and brushes her teeth while the garment calibrates and measures her vital indicators. She is in good shape and ready to start her day. She asks Alexa, the personification of Echo, about any messages that may have arrived overnight. Good news: one of her favourite clothes brands has just launched a new range! As a loyal customer she was given a virtual tour of the range ahead of time – she ordered her selection on her smartphone and Alexa just confirmed that Amazon will deliver it by drone in 30 minutes. Since Amazon and Facebook merged, Clare finds most of her needs are now met within the digital platform. Of course, she likes to develop her own distinctive style and will happily support cool startups outside the system that resonate with her, such as Eckhaus Latta, another cool clothing brand.
All these capabilities exist today. Of course, some innovations will be more successful than others. Technology that makes our lives easier – like Amazon Echo, Airbnb and Uber – that extends choice and helps us navigate our lives efficiently, will continue to spread rapidly. Markets where consumers are tech-savvy and open to experiment will be in the forefront of the digital challenge, which will sooner or later engulf all our industries. The retail industry, which has in recent years experienced unparalleled pressure through consolidation and the growth of online retail, will be revolutionized.
Let’s start by looking at the fundamental challenge facing the sector.
Retailers strive to match customers’ needs with the right product in the right amount and at the right time. As the diagram shows, too much product leads to high inventory costs, discounting and margin erosion. Too little product means foregone revenue, high per-item costs and consumer frustration.
By producing faster and more accurate information, technology can help retailers make better business decisions, which means that:
• customers get the products they want when and where they want them at a price they are willing to pay
• retailers maximize sales, retain good margins, minimize inventory costs and discounting
Unlike this neat diagram, optimizing supply and demand in the real world is challenging. In fashion retail, for example, fashion trends are often driven by celebrity behaviour and can change very quickly, whereas supply chains – especially global ones – don’t respond fast enough to consumer desire for fashion immediacy. Yet digitization can beat obsolescence. Here are four ways.
1. Supersizing customer data
Retailers like Tesco and Walmart have for years blazed the trail in capturing and analysing information about customer needs. The challenge now is to create a much more finely grained picture of customer needs, by integrating data from all sources to create a single customer view. This means that patterns of online consumption can be combined with information on retail purchases as well as other sources of information to create a truly connected enterprise. For example, video cameras can now capture data on the gender and age of shoppers in shopping centres, which means that retailers can shape the layout of space and match the timing of different promotions to patterns of consumer behaviour. This is a win-win. These insights allow retailers to sell more goods and services, but customers also benefit because offerings are targeted to their needs. The main constraints to this have been the lack of analytical talent and the inability of legacy systems in established businesses to work well together.
Improved connectivity and increasing processing power coupled with device miniaturization have enabled startups like Berlin-based Lesara to show the way. It uses algorithms and artificial intelligence to analyse online trends. By locating close to manufacturers, it is able to transfer ideas into products in a matter of days, which means it can also eliminate stockpiling and costly discounting.
2. Personalizing customer service
Retailers have largely addressed the challenge of mobile commerce by developing mobile-friendly websites and improved product availability and delivery options. Now the key transition is towards virtual commerce. A single cloud-based system creates an omni-channel that is able to connect and respond consistently across all the channels it contains. This is the era of the ‘always on’ customer, who is checking and cross-checking products and services through multiple channels. Retailers need to ensure that all brand touchpoints (product, store, service, marketing) align, as the customer increasingly becomes device (smartphone, desktop, tablet) and channel (web, store, social) agnostic.
The omni-channel encompasses a number of touch points. A customer services function delivers the customer promise and tailors services using machine-learning technology, such as IBM Watson’s cognitive advertising, that allows two-way conversations between brand and consumer, while eliminating pain points like call wait time. Digitally-enabled stores offer smartphone-based self-checkout and in-store assisted sales, personal stylists and social media experts. Social media can be used for brand storytelling; and apps to encourage differentiation through loyalty rewards. Increasingly, gamification is used to create an exciting and compelling user experience – games that are fun to play, while giving insights to the retailer. This also encourages customer loyalty and advocacy. Customer acquisition and retention can be optimized through using search engines and loyalty channels that target individual customers based on browsing and purchase history. Even the website is no longer purely transactional – it also enables research online and purchase offline (Ropo).
An example is the Ministry of Supply, a Boston-based clothing line, which is installing 3D-printing technology that will enable shoppers to design and produce custom-knit blazers in the store in 45 minutes. Augmented reality is already being used by companies like Ikea, which use it to show customers how pieces of furniture would look in their own homes on a smartphone before buying. The shift is from content that is focused on customers’ moments of need (solving problems with content), to creating immersive experiences that are personalized, timely and incite desire. This is aligned brand ‘pull’ through all channels rather than single channel ‘push’.
3. Offering smart products and services
The smart home has long been an aspiration for companies, too often defeated in reality by problems of system interoperability and siloes. Today, objects that were previously standalone can connect into an integrated system through sensors. Radio-frequency identification (RFID) uses electromagnetic fields to automatically identify and track tags attached to objects. The tags contain electronically stored information. Following the success of wearable products like Fitbit, smart clothing is now appearing that helps consumers monitor their health more closely. Lumo, for instance, produces sports clothing that measures posture and running cadence. But intelligent products have more to offer. LikeAGlove, for example, offers leggings which measure a wearer’s shape so they can shop for ideally sized clothes. The shift is from objects that are static and standardized, to solutions that are intelligent and respond to changing requirements.
4. Revolutionizing organizational design
Primary business activities – such as product development, marketing, manufacturing and service – will need to align and collaborate, as well as compete, to offer the best solutions. For example, if technology is an integral part of the product itself, such as the LikeAGlove leggings, then retailers will have to adopt new approaches to increase collaboration across their primary activities. Just as with the omni-channel touchpoints, there can be no gaps.
Privacy and data protection laws will enable customers to take back control of their digital identity through publicly accessible windows into cyberspace that record their interactions with retailers (e.g. purchase transactions, marketing correspondence and personal details). This means that the way retailers deal with customer data will need to be open and transparent.
Blockchain technology (see Dialogue Q4 2016, page 16) will allow secure distributed transactions, which means that companies will no longer need so many internal checkpoints and conventional support services, such as HR, technology and procurement. While these internal services reduce in value, the digital revolution will require new capabilities to be developed, such as data analytics, supply chain logistics and cybersecurity. Conventional forms of organization and the way business is conducted are quickly becoming obsolete.
The challenge facing retailers
Retailers with physical presence are vulnerable to online companies that have lower overhead costs. Now we see new competitors with asset-light business models, like Uber and Airbnb, disrupting traditional sectors. This is not just about reducing costs or unlocking the value of underutilized assets. It is also about harnessing deep insights to solve customer pain points. Uber scores not just on the cost of its service, but also by providing the simplicity of a cash-free transaction fixed up-front with the driver, a choice of cars and immediate, trackable – thus safe – access to transport.
The threat of uberization is that customers will increasingly prefer to transact with a trusted platform that excels at meeting and anticipating their needs. China shows how this could go. Tencent’s WeChat (Dialogue Q2 2017, page 64) service has risen from being a simple chat platform, to becoming the single most trusted e-commerce platform in Asia. WeChat’s billion users use it for professional and personal purposes, and in some cases never venture outside the company’s ecosystem. Key to its success was the development of a secure online payment system. Unlike competing services like Facebook Messenger and WhatsApp, WeChat earns large profits for Tencent, by earning fees when consumers shop at one of the more than 10 million merchants that have official accounts on the app. It was estimated to be worth over $150 billion in 2016. Once users attach their bank cards to WeChat’s wallet, they end up indulging in more transactions every month than Americans do on their credit cards. A virtuous circle is operating. As more merchants and brands set up official accounts, it becomes a buzzier and more appealing bazaar. The more users sign up on the platform, the larger the treasure-trove of insights into their preferences. That, in turn, makes WeChat much more valuable to advertisers keen to target consumers as precisely as possible.
The other threat is from new entrants like Zady or Everlane going direct to consumers and avoiding intermediaries like distributors or retailers altogether. They offer value through lower prices, as they remove intermediaries and high inventory costs; or by focusing on specific segments like tailored services; or by diversifying. These strategies are hardly new, but these companies differentiate themselves by focusing on values and securing the loyalty of customers who perceive an affinity with their brand
and purpose. For example, Everlane promises radical transparency, showing their true costs and their markup, which is considerably lower than that typically offered by retailers with physical premises.
Retailers must respond
Life will be increasingly tough for retailers who fail to adapt to the new realities (see checklist). Even companies that have built successful franchises over many years will need to test that their value proposition is still valid. The advance of digitization has raised the bar in customer expectations. In a world of radical price transparency, cost will rarely provide a sustainable source of competitive advantage. Existing players need to reinvent themselves for the digital age. Fortunately, digital can enable companies to use their products as windows into the souls of their customers. By understanding their customers’ needs and speaking to their values they can create sustainable businesses, with loyal customers.
Checklist for the new reality
Nine strategic questions every retailer must answer:
1. Which set of smart, connected product capabilities and gestures should the company pursue?
2. How much functionality should be embedded in the products and how much in the cloud?
3. Should the company pursue an open or closed system?
4. Should the company develop the full set of smart, connected product capabilities and infrastructure internally, or outsource to vendors and partners?
5. What data must the company capture, secure and analyse to maximize the value of its offering?
6. How does the company manage ownership and access rights to its product data?
7. Should the company fully or partially disintermediate distribution channels or service networks?
8. Should the company change its business model?
9. Should the company enter new businesses by monetizing its product data through selling it to outside parties?
An adapted version of this article appeared on the Dialogue Review website.