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2 13 2012
»The Reality of New Retail

The Reality of New RetailCan anyone meet customers’ Amazonian expectations? The cards seem stacked against big-box retailers that are rapidly becoming showrooms for the online giant. Can brick and mortar survive?

By Eric Krell

In December, Amazon offered a $5 discount to consumers who reported how competing retailers were pricing products also available through the retail king’s flourishing site. The move incited a backlash the retail community had not experienced since Wal-Mart’s reign a decade ago. One of the “Occupy Amazon” buttons that cropped up in response to Amazon’s offer featured a picture of Amazon CEO Jeff Bezos, sporting devil horns (a clever Photoshopper’s twist on the company’s curved arrow logo).

The scary thing for many traditional retailers is that Amazon’s offer was essentially unnecessary, the equivalent of a touchdown end zone celebration during a blowout. Customers already compare prices on their smartphones, and Amazon customers usually enjoy a price discount.

“Best Buy is becoming a showroom for Amazon,” says a top U.S. retail consultant. “Bricks-and mortar-bookstores are showrooms for Amazon.

If you are Best Buy, OfficeMax or another large retailer with a massive investment in store space, you should be very worried today.”

The big picture in the U.S. retail industry is disconcerting for many; it is also confusing and rapidly changing for most. “In the past year, I think most retailers’ eyes have been opened wider than they have been during the previous 10 years,” notes Sandeep Chugani, a Boston Consulting Group senior partner who leads the firm’s retail practice in the Americas.

Customers, like Amazon, are more powerful than ever before; this is primarily because, like Amazon, they rely more on technology than ever before. Customers also rely on their social networks for brand and retail guidance—as well as for broadcasting their shopping behavior (if you haven’t lost three hours of your evening mesmerized by YouTube “haul videos,” you haven’t lived).

Customer behavior continues to change, thanks to demographic shifts and macroeconomic issues. Customers also continue to surprise: Despite high unemployment and historic economic uncertainty in Europe and elsewhere, U.S. consumer spending hit an all-time high in the fall, and these same shoppers spent significantly more on holiday buying (and significantly more online) in 2011 than they did in 2010.

While this qualifies as positive short-term news for traditional retailers, the longer term poses significant challenges and threats, which require genuinely “transformational” responses that should have retail consultants optimistic and excited.

“If you were to start a retail company today you probably would not build it, from an organizational infrastructure perspective, the way most retailers exist today,” observes John Rooney, retail and distribution practice leader for Deloitte Consulting. “I think we’re reaching the tipping point in what is about a 20-year transition between old retail and 21st Century retail.”

Economics, Demographics & Technologies

The major drivers of change within the retail industry are the same forces exerting the greatest influence on customer behavior: economic conditions, shifting demographics and the adoption of new technology (primarily mobile and social).

These drivers are influencing consumer behavior in unexpected ways. Consider the economy: The real income of the majority of consumers has largely remained unchanged for a decade or more.

The long-term growth in retail that ground to a halt in 2008 was driven by consumers pulling equity out of their over-valued homes. “Retailers largely were the beneficiaries of an overinflated housing market,” Rooney notes. Those sky-high home valuations and cushy home-equity lines of credit are not returning any time soon, nor is unemployment expected to decrease dramatically in coming months.

“That’s a drag on retailers,” says Rooney. “For a decade,” adds another retail consultant, “retail managers who looked pretty smart because their business was steadily growing may not have been as smart as they thought.”

Fortunately, consumers also behave in ways that run contrary to conventional wisdom. “Oddly enough, actual spending has bounced back steadily even though consumer confidence has remained flat or slightly declined over the past six months,” reports John Karonis, president of Kurt Salmon’s consumer group practice. “[This behavior] is defying gravity considering what the consumer’s thinking vs. what they‘re spending… This is sort of the new normal.”

For now, anyway. It remains to be seen to what extent baby boomers, who helped the country spend its way out of recessions in recent decades, will reduce their spending as they reach a stage in life during which previous generations curtailed their shopping activity.

What retail consultants refer to as “emerging and converging” technologies are also driving behavioral changes among consumers and posing new challenges.
“You really have to look at the cumulative effect of these drivers of change,” Rooney suggests. “The end result is that consumers have more and better information than they’ve ever had—and more power.”

Three years ago, IBM retail consultants realized that their annual survey of global retailers was not producing sufficiently comprehensive research and insights, primarily because the focus was neglecting a growing source of power.

So, Big Blue’s retail practice launched an equally ambitious annual survey of consumers “because the power has changed,” explains Jill Puleri, vice president and global retail leader for IBM’s Global Business Services. “Over time, the power has shifted from the manufacturer to the retailer and now it‘s in the hands of the consumer… Everything is exposed thanks to the Internet, mobility and social media.”

IBM’s 2011 consumer survey found that 80 percent of customers rely on technology when they shop, and one-third of these respondents use three or more different types of technologies (e.g., Internet, mobile devices, social media) to support their decision-making concerning purchases.

“It’s not just about the Internet any more,” Puleri says. “It’s about the Internet and. The Internet is the ante to get into the game.” Consumers also are driving retailers to ask how they can to use social media and mobile technology to reach customers and enhance their experience. “The whole notion of listening to the noise on the wire [i.e., social media chatter] is important now,” Puleri says.

Last year, more than half of senior marketing executives reported that they shifted investments in traditional marketing to digital marketing projects, according to a Society of Digital Agencies survey. These executives also identified social networks as a top marketing priority. As they should.

About 5 percent of shoppers in IBM’s consumer study make a purchase when they visit a retail Web site. This conversion rate doubles to 10 percent among shoppers who visit the same site directly after visiting a social media site, the same research shows. “There’s a social media factor going on here, and it really matters,” Puleri asserts.

The same holds true for mobile technology; as more customers rely on their smart phones to make purchasing decisions, more companies are beginning to integrate mobile capabilities into their marketing, sales and customer service offerings. Three years, projections suggested that roughly 20 percent of e-commerce would be initiated via smart phones by 2015. Today, Chugani expects that figure to be closer to 50 percent.

Investing in Technology and Experience

The implications of these drivers of change are profound. “Every single CEO I’ve met with recently,” Puleri reports, “says the same thing: ‘Jill, I have no idea who my customer is.’ ”

Many of these same leaders are also seeking creative approaches to transforming their companies into 21st Century retailers. “There is a fundamental shift in the way the consumer behaves and in the experience the consumer expects from the retailer,” continues Chugani, who, like some of his competitors, mentions “retail reinvention” and transformation.

“The question is what does a retailer have to do to remain relevant? The retailer with a very large investment in bricks and mortar and an ancient supply chain is struggling to stay relevant. There is no short answer here. Everyone is dealing with this in a unique way.”

To compete with Amazon, a technology company that invested heavily in fulfillment and logistics during its early years (and was bashed by skeptical Wall Street analysts for doing so at the time), traditional retailers, which may currently invest 1 percent to 3 percent of revenue in their IT infrastructure, must find ways to cut more costs to fund technology upgrades as well as projects designed to create singular customer experiences.

As Chugani notes, there is no handy industry road map for this transformation. That said, there are several risks, opportunities and other challenges that most U.S. retailers confront. These issues, including the following (frequently overlapping) areas, produce ripe consulting opportunities:


“We still see many retailers struggling with the cost of their existing infrastructure,” Chugani reports, pointing to numerous large efforts to reduce costs related to store footprints, labor, supply chains and other facets of operations. “The question is,” he continues, “how do you squeeze costs out of the supply chain and operations to generate enough to make investments in technology and in-store experience that are necessary to compete with Amazon?”

One answer, says Janet Hoffman, managing director of Accenture’s retail practice, involves outsourcing. “We have seen an amazing surge in the outsourcing of non-core capabilities so retailers can redirect their attention to becoming that competent retailer the future,” she notes. Procurement (of items not sold to consumers), finance and accounting, customer analytics and elements of inventory planning and forecasting represent outsourcing areas of interest to retail customers, Hoffman reports.

Showroom Risk
Cost-cutting, of course, is easier said than done, which explains why many retailers are pursuing multiple, integrated solutions as part of their reinventions. “There is not a lot of fat in retail companies now,” Karonis says. “If there were, they wouldn’t be around.” Retailers are realizing that they cannot compete on price alone.  “Successful retailers have to drive toward … an intersection of where they offer a unique product and a compelling customer experience,” Karonis adds.

Consider the singular experience available in Apple stores. Or, look at department store Kohl’s less-hip yet similarly effective take on a unique experience: Customer can get the same brands available at higher-end stores in the mall, but for a lower price in a more convenient location.

“Retailers are saying that they don’t want to turn into a showroom or dressing room for today’s consumer,” says Puleri, who sees growing investments in promotions, communications, store layouts and many other facets of customer experience as a way to mitigate showroom risk.

“Our research indicates that 83 percent of retail executives consider the consumer experience as a major priority in the upcoming year,” Karonis adds.

Deal Mentality

The recent success of Groupon, LivingSocial, Rue La La, MyHabit and other deal-of-the-day and flash-sales sites and offers reflect the consumer’s attraction to low prices. While the sustainability of these models may soon be tested—smartphone-equipped and socially-networked shoppers may be able to find the best deals just fine on their own, thank you very much—retailers can learn from their success.

“Successful traditional retailers have maintained brand integrity yet offered products at price points where people of various levels of economic power can partake in the brand,” says Karonis.

Once more, it is instructive to look at Apple, which offers expensive, wafer-thin laptops as well as $49 content players.

‘Omni Channel’
A major electronics retailer ran television ads this holiday season promoting the fact that customers can return their online purchases to a physical store, if they desire (via a no-hassle and extended return policy). For many consumers, however, the offering seems so three years ago; it’s nice, but by now this option qualifies as table stakes as far as many customer expectations go.

“I think the game is beyond multichannel now,” Rooney notes. “It’s about operating above these multiple channels to deliver a consistent and seamless customer experience. This really requires some fundamental rewiring for the retailer.”

Many times online channels are managed as distinct entities from the store channel. Each channel features different systems, which do not interact, and different management approaches and business processes.

“The consumer demands better integration between different parts of the retailer’s business but they don’t know how to move quickly enough,” Rooney continues. “This notion of ‘omni channel’ involves operating above the channels and integrating them in a seamless way. It’s a scary time for retailers to think about how they are going to make that happen.”

Big Data
Retailers have always had access to loads of transactional data: point of sales data, names, addresses, additional demographic data and more. Today, that data supply looks absolutely quaint.

“Now there is social data and user generated content,” says Brant Barton, co-founder and chief innovation officer of BazaarVoice, an Austin-based software as a service with online ratings and reviews and other solutions. “Now you can not only know your customers by their address and past purchase activity, but you can also begin to understand the relationship that exists among them.”

Retailers may currently possess more customer data than any other industry besides healthcare. However, most of these companies, especially those that invest only a fraction of their revenue in IT capabilities, need significant help in churning this data into actionable insights to fuel more effective promotions, communications, loyalty programs and other decisions related to customer experience and overall strategy.

“This nets out to the fact that there’s a lot more data out there that data retailers can use to add texture to what they already know about their customers,” Barton continues. “From a consulting standpoint there is a massive data-integration opportunity… I’m thinking of those ‘merchant companies’ that need the most help grappling with all the data that’s out there that they can use to better understand their customers.”

Creativity is Key

The understanding Barton describes needs to be profound, as do the approaches, programs and capabilities retailers develop based on their newfound understanding of 21st Century customer expectations and behavior. 

“Whoever wants to survive has to be superbly creative,” Chugani asserts.

This requires more than clever slogans. Rather than occupying Amazon, consultants will be helping their retail clients operate in a new space defined by deep customer understanding and a singular customer experience across, and above, all channels.

Retail Risk Management: what if the customer is wrong?

A recent report from McKinsey & Company, “The Insight Trap: Why Customer Feedback Can Make Products Worse, Not Better,” raises a question that is relevant for retailers and brands: How much influence should customers wield now that they have more power via social networks and smartphones?

Jonathan Copulsky, a Deloitte principal and author of “Brand Resilience: Managing Risk and Recovery in a High Speed World” believes the right answer depends on the degree to which companies embrace a more risk-intelligent approach to brand- and reputation-management.
“The train has left the station as far as customer [brand] influence goes,” notes Copulsky. “Whether the influence is invited or uninvited, it’s going to happen… This is all about risk. When it comes to their brands, companies need to be risk-intelligent organizations. That means figuring out in advance what brand risks are acceptable and what risks are unacceptable, and then being prepared to take action.”

The approach Copulsky describes qualifies as more of a response than a reaction. Several companies have perhaps reacted rather than responded to customer insight in the social era. Both Tropicana and The Gap yanked brand redesigns when customer feedback immediately and passionately expressed resistance to the changes.

On the other hand, Frito-Lay’s response to backlash to its biodegradable SunChips bags might serve as a case study in brand risk management. Shortly after the bags appeared, a Facebook group called “Sorry, but I can’t hear you over this SunChips bag” attracted more than 40,000 followers who agreed that the new packaging created too much noise when handled.

Frito Lay’s initial response, posted on its site and on in-store shelf signage, was prompt and good-humored: “Yes the bag is loud. That’s what change sounds like.” But the bag-lash continued, and Frito-Lay soon pulled most of its compostable packaging. “Within a week,” Copulsky recalls, “there was a new set of Facebook groups, grousing about the demise of the bags.”

Yet, the SunChips brand team continued to assess the threats and opportunities related to its environmental friendly packaging, ultimately treating the customer feedback (both pro and con) as an impetus to embark on “a journey to developing a better bag.” The still biodegradable, yet quieter bag information is now available via a “compostable packaging” link on the home page.

The link explains how the bag was tested, why Frito Lay developed the bag, and how people can compost.

This information clearly demonstrates: A) the company’s rationale behind this brand decision; and B) even more important, how the company listened to, considered and incorporated customer input into the process.

These considerations are crucial components of brand risk management. Copulsky suggests that brand and marketing teams consider adhering to the following sequence of activities whenever an outcry over a marketing program, logo change or other “brand shock” materializes:
  • Log the incident
  • Describe what happened
  • Assign an investigative team
  • Focus on cause and prevention rather than assigning blame
  • Formulate the recommendation(s)
  • Assign implementation responsibility
  • Track the implementation progress and
  • Review your incident log regularly

If this process sounds overly systematic, it should. Copulsky asserts that brand resiliency in the era of social media requires the same process discipline that fuel effective enterprise risk management programs.


New Retail Means New Ideas...

Only a few years ago, retail consultants were talking about the implications of a bifurcation among customers: shoppers were either “buying down” to save money or, in fewer cases, buying luxury items because they had the money, stability and desire to do so. Retailers caught in the middle of this dynamic were in trouble. Today, the customer segmentation picture is, well, bigger. John Karonis, president of Kurt Salmon’s consumer group practice, identifies three segments that retailers should understand and respond to:
  • The unemployed and underemployed: This segment has little or no access to credit, and their loyalty to retail brands is pretty much nonexistent. “However, these consumers still have some loyalty to product brands,” Karonis explains. “They are shopping at the [discount] stores and where they can get basics at rock-bottom prices with variable loyalty to retailers.”
  • The at-risk middle class: These consumers have jobs, but many are worried about job security as well as the impact of macroeconomic volatility on their personal finances. “They are still brand conscious, but they’re not finicky about where they are getting the product,” says Karonis. “More than anything else they are looking for the experience and the price point that works for them.”
  • High-income consumers: “They are back at it,” Karonis asserts. “They are extremely active in spending on luxury brands, and they want their brands… That’s why so many of the luxury brands have performed well over the past year or so.” retailers as publishers

If certain retailers are depressed about their prospects given competition from Amazon, belt-tightening among consumers and the desperate need to invest in new technological capabilities, they might look to the publishing industry for some context—and ideas.

“Some online retailers are beginning to operate more like online publishers,” notes Brant Barton, co-founder and chief innovation officer of BazaarVoice, an Austin-based software as a service with online ratings and reviews and other solutions. “What I mean by that is that they are effectively turning [parts of their] their websites into advertising inventory.”

Barton is correct: click over to and you’ll see paid advertising for a Garmin GPS, Duracell batteries or another product company. The notion is not entirely new, Barton allows, but the potential for generating advertising revenue is growing. “Conversion rates [for online retail] have held relatively steady in recent years,” he continues. “Anywhere from 95 percent to 98 percent of site visitors are not making a purchase, but they are doing something relative to a future purchase.”

In other words, these visitors qualify as a valuable audience to advertise to because they occupy a high band of the purchase funnel, if you will.

Bricks and mortar retailers have long generated revenue by selling prestigious shelf real estate (think eye-level) to product companies. However, most consumers are not aware of these arrangements. Online, it’s completely different.

“Consumers feel like online is an extremely transparent place,” Branton adds. “Retailers may feel some hesitation about running ads on their site... but the economic reality is that retailers, large retailers in particular, have massive numbers of consumers visiting their site, most of whom they are not converting. And there’s money in that for the retailers.


Multinational Retail—What We Don’t Know About Washing Machines

When Janet Hoffman, managing director of Accenture’s retail practice, traveled to China last month, she invested a lot of time looking at washing machines. She had plenty of company.

“I visited a consumer electronics store that was four or five stories high,” Hoffman recalls. “The store had about 200 different washing machines on display. I couldn’t fathom the features and functions that would create the need for 200 different models, but there they were.”

This type of product selection qualifies as a major attraction for Chinese consumers, who treat their visits to the store as one part shopping research and one part entertainment. “As I talked to the store manager, I learned that customers will come and look at the washing machines for seven hours on a Saturday—it’s a family outing,” says Hoffman.

She tells the story to drive home her point that while China and other emerging markets offer highly attractive and potentially lucrative expansion opportunities for U.S.-based retailers, opening up shop in these locations “is not as easy as it looks, quite frankly.”

Consumer behaviors, consumer expectations, pricing philosophy and supply chains all differ markedly from the same dynamics and processes in the U.S. In India, for example, single-brand retailers could only operate one store per state.

While national legislation largely does away with this restriction, the new rules also gave individual states the power to decide to what extent to implement the new legislation in their jurisdictions. And most states balked. “In India, retailing is unorganized,” Hoffman says. “Ultimately, it will become disorganized. Clearly, India is a very different and difficult market due to its current regulatory environment, but the growth potential is huge.”

China’s supply chain issues can be similarly baffling to the uninitiated. “Domestic Chinese online retailers that are comparable to an Amazon favor a mode of delivery that requires 7,000 guys on bikes to deliver your package,” says a partner-level retail consultant familiar with China. Additionally, there are multiple ways to enter emerging markets: launching a retailer’s own online channel, going in under the umbrella of an existing domestic online conglomerate, penetrating one city with a flagship store, starting with bricks and clicks, etc.

These are forecasting, planning, regulatory and consumer behavior issues worth figuring out, emphasizes Hoffman and others.

“For some retailers,” notes John Rooney, retail and distribution practice leader for Deloitte Consulting, “demographic and economic conditions are causing them to seriously consider opportunities outside the United States. These companies are really exploring how to expand their presence internationally.”

Two-wheeled fulfillment networks, strange new regulations and surprising product mixes may soon seem like easier riddles to solve than reluctant U.S. shoppers.

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