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Retail needs a reboot to survive

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“Customers will not pay literally a penny more than the true value of the product” — Ron Johnson, former senior vice president, Apple Retail, and J. C. Penney’s new CEO

Profit margins of Wal-Mart, Amazon, Best Buy, Target, Home Depot and Apple over the past decade.

While some may view the wholesale destruction of numerous brick-and-mortar segments as inevitable, we all have a vested interest in seeing the retail industry reboot itself for the modern age. Because as Main Street goes, so does America.

This is no mere platitude when you consider that 13.3 percent of all jobs in the U.S. are in retail (that’s 14.7 million jobs in all, according to the Bureau of Labor Statistics), and retail is deeply tied to consumer spending, the same spending bracket that accounts for two-thirds of the U.S. economy. This doesn’t even factor in the natural synergy between our domestic manufacturing base and Main Street retail as a sales channel for that base.

To say that our society and the American economy have undergone a prolonged period of disruption and change is an understatement. We are three-plus years removed from the onset of the Great Recession, a decade beyond the burst of the Internet bubble, and it’s almost five years since the rise of the iPhone, which signaled the true beginning of the always-on era.

In the big picture, the economic and technological shifts have created a discriminating consumer who is simply smarter about how they spend their dollar, both out of financial need and by virtue of having deep product and market intelligence at their fingertips.

Mobile ubiquity, in turn, has led to “showrooming,” where consumers use their nearby retailer as a personal testing ground to try before they buy — and as often as not, make a purchase on Amazon instead of at the retail store. And broadband is transforming entire categories of products (music, video, books) that were once exclusively analog to digital, and boundary-less.

Obviously, the game has permanently changed for brick-and-mortar retailers (see Best Buy CEO Brian Dunn’s recent letter), and companies must evolve to survive.

Three routes to survival

I’d argue that offline retail stores have three primary paths to avoid extinction (note: my first career was in retail real estate asset management).

1. The first, and least appealing, is to compete on price. The hard truth is that in the age of the connected consumer, the real cost of a product is transparent. In the most commoditized of segments, this means that retailers have to live within Walmart (3.4 percent) or Amazon (less than 3 percent) profit margins, or they will die.

This is an incredibly challenging strategy to execute over the long-haul. Even at low-margin price points, consumers expect educated pre-sales service, functional post-sales support and seamless logistics from store to home.

2. The second path is to embrace a store-within-a-store model, where retailers focus on a few key product lines. With this approach, retailers and manufacturers work hand-in-hand to ensure that their products are meaningfully differentiated from the competition and that sales personnel are trained to articulate these differences.

Target is beginning to experiment with this via two different avenues. One is to work with Apple to create mini-Apple stores within Target locations, with a goal of tapping into everyday consumers who might not otherwise be looking for electronics. And under the name The Shops at Target, the company has partnered with specialty boutiques to co-create affordable, limited-edition collections.

3. The last path is to focus the totality of the business on creating products and experiences that are proprietary and unique. This, of course, is the Apple story. Apple focuses every fiber of its being on transformative solutions that blend design, development and distribution.

There are numerous innovation strategies that retailers can pursue on this path. For example, creative marketplaces like Kickstarter and Etsy could evolve into R & D farms for retailers. The upstarts get symbiotic funding, incubation, distribution and joint marketing, and the retailer gets exclusivity and a low-cost way to seed R & D.

Retailers can also build brand loyalty by retooling their manufacturing processes so that consumers can participate in product creation. Nike is doing some amazing things with their Nike ID system, which helps people design their own custom shoes and updates customers as their shoes are being made.

By perennially thinking beyond conventional wisdom about product categories and logistical boundaries, Nike has grown its stake of consumer mindshare, and it’s done so profitably through differentiation.

Applying this same ethos, retailers can optimize their entire supply-chain to achieve real-time agility within the markets they serve. With this approach, companies produce smaller lot sizes, tailor their inventory to suit local geographies and change inventory as rapidly as tastes change.

This strategy has served fashion retailer Zara extremely well. Zara’s “fast fashion” model has been a game-changer for the company, enabling new designs to move from the catwalk to its stores in two weeks (the industry average is four to six months). This helps Zara stay in sync with the latest fashion trends, and the new designs create a sense of exclusivity. The net effect is that 85 percent of their clothes sell at full-retail price, and the company now sees dramatically higher return visits by customers.

The critical point here is that each of these approaches goes way beyond platitudes about “delivering better customer service.” Instead, each path focuses on innovation, integration and extension to deliver a retail experience that is more than the sum of its parts.

Mark Sigal is an eight-time entrepreneur, whose ventures have sold to Apple, IBM and Intel. He is chief product officer at Unicorn Labs, an eBooks and eLearning platform provider.

Carousel image courtesy of Flickr user teofilo.

16 Responses to “Retail needs a reboot to survive”

  1. Tom Napier

    Great article!
    I think one of the points missed and maybe to be considered point #4 is the implement a convergence of e-Comm w/ Retail brick and mortar. Inventory carrying charges reduction and customer satisfaction increases would be greatly changed if we, the consumer could get the products we’re looking for at the time we want them, instead of the store vs. store competition currently seen. How about sending the product via e-Comm from the brick and mortar retail outlet if its not in stock or the right color, etc? There’s still this disconnect driving the overall good, of teamwork within Retail, or maybe its the management that doesn’t encourage it.

  2. Yoko Pricing

    Retailers need adequate tools to compete in a world where prices are transparent. Even private label products often compete head to head with other private labels. A competitive pricing tool, when properly used, can give online retailers significant competitive advantage. Not only to compete on price, but also to find opportunity areas to increase margin.

  3. Michael Ash

    Your primary path #1 has a big problem. You want brick & mortar retailers to run on 3-3.5% profit margin yet recruit & keep knowledge sales people that can explain, demonstrate, & sell the product– then provide customer assistance with that product once the consumer needs help after the sale (not to mention the “tax” vs “no-tax” disadvantage for brick & mortar stores). Good luck with that. One of the very reasons customers “showroom” is because they want to see handle & learn about a product before they buy it on-line. That’s a very myopic approach to shopping. If brick & mortar stores disappear because of “showrooming” there will be no place to “showroom” prior to making an on-line purchase.

    • One approach for appliances and maybe plumbing is manufacturer showrooms that do not sell only display. It is expensive, but allows the product to be shown in the best light and to be presented by salespeople who know the product. Then it can be purchased wherever and however.

      Although to that end, Miele appliances was so frustrated with the state of the installation of their products that they now sell their products on an installed basis. They charge a fee, a fair fee, and at least know that the product will show as it was intended. Could that be the future?


      • netgarden

        Certainly, the idea of outcome-orientation has a lot of merits. As Miele’s experience shows, delivering a great product only to see it butchered at the installation stage does not put their best foot forward.

        Back in the days of the PC wars, Apple learned the hard way that having a disinterested, uneducated, undifferentiated sales force (e.g., CompUSA) was a recipe for consumers having no idea why a Mac was worth more than, or even better than, a Windows PC, which gave rise to Apple Stores.

        Relative to your first point about re-thinking the relationship between manufacturers and showrooms, I think that it has a lot merits, but raises two related questions.

        One, what does the logistics chain look like, and two, how does the re-segmented market look like in terms of manufacturers, display-only showrooms, bricks-and-mortar retailers, online commerce sites, contractors, designers, etc?

        FWIW, here is a piece I wrote some time back on the topic of market segmentation, as it pertains to Apple:

        Apple’s Segmentation Strategy (and the Folly of Conventional Wisdom)

        Check it out, if interested.


  4. Why does NOBODY bring up tax policy when it comes to internet sales? Here a couple things to ponder…
    Brick and mortar retailers have to pay taxes. The taxes they pay are derived from the revenues on sales, thus part of the price the consumer pays.
    Our public roads and services are slowly eroding due, in part to lack of municipal revenues (taxes). If fewer and fewer businesses are contributing to municipal revenues, where will our roads and services be in 2 years? 5 years? 10 years?
    Applying sales tax to internet sales will help stabilize the downward spiral of municipal revenues and help even the playing field for the brick and mortar retailer.
    If you are insistent on NOT paying ANY taxes, GET OFF MY ROADS!

  5. netgarden

    @Dave Jenkins, I hear what you are saying, but that’s akin to arguing that just because the patient is sick is no reason for it to be saved. I think that we fall into these types of false dichotomies to our own detriment as a society. There is a big difference between being sick but curable (the case in numerous industries) and being sick but incurable (the case in some industries). The appropriate/ideal protocols for each case vary greatly. Similarly, while it may be comforting to default to axioms like “short-term pain,” the reality is that pain may be felt over 10-15 years, which could impede our economy for that timeline. Netting it out, my argument is that there are multiple segments and approaches that retailers can embrace to fortify their viability and differentiation, AND that we as a society have a vested interest in the outcome, given how many jobs, local economy and ecosystem elements are impacted by same.

  6. Dave Jenkins

    While your recommendations for what retail must do to survice sound like good actions to take, your initial appeal as to why retail must survive is logically flawed: just because some significant portion of the population relies on that part of the economy for work is an insufficient reason to “save” that part of the economy. Two hundred years ago, we could have made the same case for whaling, or farming, or blacksmithing, or woodworking… you get the picture.

    Retail is becoming drastically more efficient. From an economics point of view, this is a very good thing for everyone, although there will be some short-term pain with the loss of low-skilled retail workers.

  7. Can I push back on fundamental levels of customer service.

    – Tesco have gone backwards by combining Customer Service with Lottery and Cigarette’s leading to queue’s during the day, huge ones on a Saturday
    – ASDA have gone backwards by6 removing the single over-night cashier, who now act’s as a self-service jockey, and attends at twice the effort putting a trolley through self serve, as just doing it via a normal till. The checkout staff know this is bonkers, and aren;t shy of saying so.

  8. To add one more thing, I find that many ambitious startups today are attempting to solve problems that don’t exist. J. Hilburn and warby parker both want to sell items that are infrequently purchased and require a lot of fitment etc. I don’t think the model for buying suits is all that broken. I go to brooks brothers and call it a day every 2 years or so. Same with prescription glasses.

  9. netgarden

    @alex, thanks for the thoughts, and I agree. A core takeaway of the piece is that brands needs to codify and execute their differentiation strategy, as the market will be ruthless about separating the wheat from the chaff.

    @ronald, trust and authenticity is a core part of brand. Merely being loud is a poor substitute for having an earnest, clear purpose.

  10. What about trust?
    We hear a lot about trust as a differentiator for media companies. Some of the Stores seem more like attention driven headline producers with no substance or depth.

  11. The story here is that resellers will be hurt, however I feel retailers that have proprietary products will be fine. Fashion comes to mind, there’s no reason to check your phone for a deal on j.crew goods if they’re only sold at j.crew. bestbuy is commodity and high cost inventory, hence impulse buys are infrequent. Cvs is super convenient so that would be safe as well.

  12. Brick and mortar retailers have some cost advantages and disadvantages: they don’t have to pay for shipping and they don’t have to pay for labor to retrieve products for the customer (or for machines to do that). Their real estate is more expensive, though. They offer one plus for some customers that web retailers cannot match: instant delivery. For some people, this will be worth paying extra, but not most. What this means is that physical stores must shrink in size, breadth of products offered, and number of locations.

    It’s evolution of commerce.