Weekly Update

The New Digital Retail Revolution

Nearly three decades ago, Wal-Mart Stores revolutionized the science of retailing by deploying information technology on a massive scale to track inventory, measure sales by the minute and allocate shelf space among competing vendors. Apart from making Wal-Mart more efficient, the retailer’s vast databases gave it enormous leverage over manufacturers and marketers, who no longer had a monopoly on information about consumer behavior and preferences, inventory levels throughout the supply chain and pricing. Wal-Mart used that leverage to pressure manufacturers for ever-lower prices that gave the chain an edge over competitors.

Today, a new information revolution is stirring in the retail world, but this time it’s not confined to a single merchant. Social networking platforms like Twitter and Facebook, as well as new mobile apps like Milo and Krillion, which link consumers with real-time retail inventory information using geolocation technology, are changing both how consumers shop and how retailers merchandise products in ways that could eventually have as far-reaching an impact on marketers and manufacturers as Wal-Mart’s information revolution had.

Online retailers like Amazon.com and Netflix have long used the data they collect to provide personalized recommendations, customer reviews and other types of cyber-merchandising. And search engines have given consumers the ability to comparison shop online. But social networks and mobile apps are allowing brick-and-mortar merchants to get in on the action as never before.

Last week, Black Friday saw a surge in retailers’ use of Twitter to blitz shoppers with updates on store openings and inventory reports from the sales floor. Many also used Facebook to preview limited-time deals and specials pegged to the Black Friday rush. According to a survey by the National Retail Federation, 47 percent of retailers said they plan to increase their use of social media this holiday season.

The biggest change, however, is from consumers’ own use of social networking to share information about Black Friday bargains. Twitter threads like CheapTweet and BlackFridayWeb offered updates on prices for products not featured in retailers’ newspaper ads or circulars, links to sites comparing retail offerings and other tools for bargain hunters.

While it’s unclear whether the phenomena are related, retailers reported an uptick in crowds on Black Friday but a lower average ring at the cash register, suggesting that consumers were paying keen attention to prices in making purchase decisions.

More broadly, services like Milo and Krillion allow shoppers to gather real-time inventory and pricing information at any time from nearby brick-and-mortar merchants using the geolocation feature built into their smartphones.

In short, consumer-directed information technology is starting to do to traditional brick-and-mortar retailing what search engines and aggregation tools have done to cyber-retailing. What we used to call “shopping” is becoming less about browsing store-window displays and more like a reverse auction, in which multiple sellers compete in real time for the attention of individual buyers. And as any Economics 101 student knows, reverse auctions tend to drive prices down.

Thirty years ago, Wal-Mart used information about its own customers’ purchasing patterns to make its own supply chain and inventory management more efficient and to reverse the traditional power relationship between vendor and retailer.  That led to lower prices for consumers but forced manufacturers to alter how and where they design, build and market their products.

Today, consumers are using technology to gather ever-more information about retailers, forcing sellers to change how they merchandise and promote their wares. It’s too soon, yet, to know what all the implications of that change will be, especially as consumer spending overall remains constrained by the recession. But its impact is sure to felt throughout the pipeline, just as the changes wrought by Wal-Mart were.

Question of the week

What impact do you think new information tools will have on brick-and-mortar retailing?