After twenty years focused on retail strategy, I took a two-year hiatus in an attempt to make my Internet riches with a software start-up. When I returned to consulting in late 2012 (alas, sans riches), I returned to a significantly changed retail landscape. The Internet was certainly important in 2010, but not nearly as integral. Well into the late ‘00s, stores always mattered more. Today, few retail decisions are made without consideration of digital. And for most retailers, digital is their fastest growing and most profitable channel, for both marketing and transactions.
Digital has altered both supply and demand
With the Web and its related enterprises, starting a new retail business has never been so cheap or so easy. The result is a flood of competition, from existing retailers’ sites, pure plays (e.g., Zappos), ecom malls (Amazon), shopping engines (AutoTrader), consolidators (Overstock), auction (eBay), flash sales (Gilt), manufacturer direct (P&G eStore), and to purchasing options on style (Polyvore), social networking (Facebook), and crowd funding (Kickstarter) sites. Amazon is approaching the size of Target; Etsy’s sales will soon overtake Ann Taylor’s.
Digital has not just created more competition, it has also changed the game. Business is 24-7; reads and reactions are real time; retailers are broadening categories, assortments and sizes and expanding the number of countries served. They’re adding online outlets and flash sales. Some alter prices in real time to optimize margin dollars by IP address. Rules – like Black Friday actually occurring on Black Friday – are routinely broken. What’s happening in ecom is of course also happening in eMarketing: eSpending, eChannels, eMethods have proliferated. Marketing is increasingly social, mobile, native, and auctioned.
On the demand side, the Web commoditizes the shopping experience for the consumer. Regardless of a brand’s investment in site aesthetics, in the 2D world, she is far more interested in speed, convenience and price. With competitors and price comparisons just clicks away, brand equity and brand experience matter less.
Retailing has become much more complex
More competition and less loyalty means that no market position is protected and no “unique value proposition” is permanent. In this digitally disrupted environment, retailers with substantial bricks and mortar investment find it difficult to navigate between overreacting and missing the boat. Most — by adding assortment, channels, deliveries, reads and reactions — have made their operations geometrically more complex, often with declining marginal ROI. And what about those high-flying pure plays, who now realize they need bricks and mortar to realize their brand and growth visions? All are facing new imperatives that were just not so imperative a couple years ago.
A New, Hybrid Strategy
The GAFO (general merchandise, apparel and accessories, furniture and other sales) retail environment has changed markedly since Michael Porter’s Competitive Strategy (1980) and David Aaker’s Building Strong Brands (1995). When Porter was writing, the big boxes battled for dominance. The sectors led by Kmart, Sears and Federated sold many categories under many labels, and competed mostly on location, selection and price. Strong shopping center development and robust economic growth then fueled much of the rise in the retail economy. Company strategies were very much shaped by broad industry and socioeconomic forces.
By Aaker’s time, Wal-Mart and big box category killers had absorbed much of the hardlines businesses, while national, vertically integrated specialty fashion concepts wrested control of the mall apparel business. Retailers like Gap, Abercrombie & Fitch, and Talbots succeeded in creating sharply defined lifestyles, and, in doing so, became fashion authorities for their targeted consumers. Rather than be at the mercy of broad industry trends, they created their own markets by building strong brands.
Neither Porter’s nor Aaker’s approach taken alone is sufficient in today’s hypercompetitive, slow-growth environment. Building brand equity is more important than ever for cutting through the clutter, but any advantage it confers is likely to be short-lived without a deliberate and aggressive competitive strategy. A hybrid approach, combined with digital savvy, is needed.
Here are some preliminary ideas:
Remember the once-essential brand discipline “stick to your lane”? Well, your lane is more crowded today, shrinking market share potential. In this environment, more is generally better: retailers are broadening their offers and expanding their reach. Many are building or acquiring new lanes.
Not to get all quantum on you, but another dimension of “more” is time. Consumers buy further ahead and deeper into the post-season. While stores necessarily restrict delivery timeframes, 2D shopping invites plowing through virtual racks of new, pre-new, old, vintage and whatever-this-is. Some retailers are creatively exploiting the time warp: Burberry allows customers to pre-order from its runway shows; J.Crew features some of last-year’s best sellers in its factory outlet channel; others have tablet-wielding associates who will now preview and pre-order “coming soon” product with customers on the floor.
The Web warps, but also speeds, time. While the competition swarms, consumers increasingly take their cues from fashion bloggers and Facebook friends. Social networking can magnify marketing efforts at electron speed, but may just as likely ignore them. The conversation is immediate and uncontrollable, causing shorter-lived trends that burst into fashion but then quickly dissipate like Internet memes. One consequence is that retailers are shrinking product development times, buying shallower, delivering more often and sourcing more from the market. Limited Brands (oops, L Brands!) built its 1.4 million square-foot Beauty Park facility in its backyard, dramatically cutting fill times for many of its personal care products, thereby speeding responses and reducing missed sales and markdowns. Quick reflexes and speed-to-market will confer competitive advantage.
And same-day delivery may catch on. Online order with in-store pickup is becoming increasingly routine. Store-free Amazon will attempt same-day delivery in select urban areas. And Walmart wants to recruit customers to deliver online orders to their neighbors. (Want it even faster? Make it now on your 3D printer!)
Remember in the 1980s when Boston Consulting Group was selling “Time-Based Competition”? It’s returning at Web speed.
As retail becomes more complex and faster paced, there is the growing danger of merchants and marketers losing their connection with the target customer. And because customers today are less likely to see brands as authorities, it’s that much more important to stay close. Customer intimacy and emphathy allows a brand to speak in her voice, be her advocate, develop an emotional connection, anticipate her needs and design her wants. We’ve all seen it when a marketer or merchant loses this connection: he loses confidence, relies too heavily on LY, wants more testing, and copies the competition.
There is no single formula for staying close. Some companies conduct frequent consumer research and/or author aspirational customer personas. In many companies, executives spend their evenings and weekends studying what their target customers read, watch, listen to, shop, buy, and do for fun. The accessory retailer Claire’s constructed “customer rooms” at its headquarters for each of their four target personas (close-knit kid sisters at different ages/life stages), decorating each in her individual aesthetic and filling it with her wardrobe, accessories, sports gear, prized possessions and reference reading, bookmarked websites, TV shows and iPod playlists. A good customer intimacy program will ensure decision-makers keep current and on the same page with the target customer’s culture and purchase influences.
“Sticky” describes the ability of a brand to be favorably and forever remembered; “contagious” is the degree to which the brand gospel is spread by its new disciples. (Both concepts have been the subject of recent business books, drawing on the latest in behavioral economics and neuroscience.) When executed properly, sticky and contagious brands counteract and exploit the Web’s frictionless environment.
Lululemon may have succeeded simply by offering the market’s best yoga and running gear. But the company aggressively made itself part of, and became a strong advocate for, the yoga culture more broadly. With a distinctly feminine and empowering voice, the company establishes in each market partnerships with yoga studios, fitness clubs, and health and wellness resources, planting deep roots in the community. Each store has its own Facebook page run by “brand ambassadors.” And despite – or because of – clearing store floors for early morning yoga classes, their average sales productivity is over $2,000 per square foot.
Warby Parker is another example of a brand that might have been satisfied with a great value proposition: providing stylish-and-high-quality-yet-inexpensive eyewear. But Warby Parker’s young-ish founders also market a strong hipster persona, plopped its headquarters and call center in Soho, opened small showrooms in ultra-hip retailers like Imogene+Willie in Nashville, and completely co-opted the blogosphere. They tout their business model as something they’ve created for us all, and, as if to further prove their good intentions, donate a pair of eyeglasses to impoverished communities overseas for every pair purchased.
Lessons? Start with a killer value proposition, and then add voice, emotion, advocacy and contagious communication to sustain growth.
Though there are few examples today of a profitable omni-channel investment, the integration across stores and ecom channels is both inevitable and necessary. It is inevitable because consumers are swiftly coming to expect a seamless experience. It is necessary because it is the best way, for now, to simplify and improve the efficiency of the complex business model the Web has forced us to adopt. With apologies to John Maynard Keynes, we are all omni-channelers now.
That is, until, big data realizes its promise and helps us automatically optimize each channel discretely for each consumer on all occasions on all items. Only in that future — when by then our 3D-printers-with-built-in-microwaves can quickly make us a soothing cup of hot tea — will we be able to sit back, relax and truly enjoy managing the more-faster-closer-sticky-contagious beast that specialty retail has become.
Digital has profoundly changed retail. Does your retail strategy reflect it?