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How Retailers Can Escape Their Kodak Moment in the Threat of the Retail Apocalypse

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One retailer leveraged the most cutting-edge technology, sold every product available, and innovated the way goods were sold across the US. The company was Sears and the year was 1886. Sears used the railroad and the mail-order catalog to sell to customers in the comfort of their homes. They opened their first brick-and-mortar location in 1925 and, until they were surpassed by Walmart, dominated retail sales until 1989. Sears, like Macy’s and Kmart are now on the edge of extinction in what the media are calling a Retail Apocalypse.

Society itself is changing and that can bring about catastrophic changes for retailers who are not innovating and adapting to the new business model.

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How Retailers Can Escape Their Kodak Moment in the Threat of the Retail Apocalypse

  1. 1. One retailer leveraged the most cutting-edge technology, sold every product available, and innovated the way goods were sold across the US. The company was Sears and the year was 1886. Sears used the railroad and the mail-order catalog to sell to customers in the comfort of their homes. They opened their first brick-and-mortar location in 1925 and, until they were surpassed by Walmart, dominated retail sales until 1989. Sears, like Macy’s and Kmart are now on the edge of extinction in what the media are calling a Retail Apocalypse. Society itself is changing and that can bring about catastrophic changes for retailers who are not innovating and adapting to the new business model. The younger generations are leading the charge when it comes to changing shopping habits. About 78 percent, or more than three out of four Millennials say that they would choose to spend their money on experiences rather than things, and they have $1.3 trillion to spend annually1 . But this is just a shift for all of society away from owning to experiencing as younger people’s desire for shareable experiences is permeating the generations that come before and after them. It may be a surprise to learn that eCommerce sales only account for around nine percent of all retail sales2 . The number is small, but it is increasing year over year and m-commerce, or mobile commerce, is accounting for about 20 percent of that percentage and that is also expected to increase exponentially. Amazon garnered 43 percent of all ecommerce sales in 2016 in total, mobile or otherwise, compared to 33 percent in 2015. They are also responsible for 53 percent of US online sales growth for 20163 . Mall visitors have been on the decline for years, as have customers visiting traditional department stores. In the US, stores are big, malls are even bigger, and there may just be too many of them. Between 1970 to 2015 malls grew twice as fast as the US population even as mall visits declined 50 percent between 2010 and 20134 . The US has 23.5 square How Retailers Can Escape Their Kodak Moment in the Threat of the Retail Apocalypse 1. http://eventbrite-s3.s3.amazonaws.com/marketing/Millennials_Research/Gen_PR_Final.pdf 2. https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf 3. http://www.businessinsider.com/amazon-accounts-for-43-of-us-online-retail-sales-2017-2 Online Retail Market Growth 33% 43% Ecommerce market 2015 Mobile or Other 2016 US Online Sales 2015 53%
  2. 2. feet of shopping space per person as compared to second-place Canada with 16.4 square feet5 . The truth is, the US just has too much retail space. But if brick and mortar is dying, no one told eCommerce titan Amazon, who recently opened a brick-and- mortar bookseller and convenience store, Amazon Go. Online retailers Birchbox, Warby Parker and Modcloth all have opened physical stores in target markets. But these and other innovative retailers are doing things differently and people are responding to it. In fact, The National Retail Federation expects retail sales, both online and offline, to grow from 3.7 percent to 4.2 percent in 20176 . Retailers need to adapt to the changing landscape with a new business model that is truly customer centric and data driven and establish a culture of innovation and agility that enables them to rapidly innovate and pivot easily. We identified four core business strategy alternatives that the winning online and offline retailers embrace and you should follow if you want to survive: Customer Experience Design, Convenience, Customization and Personalization at Scale. CUSTOMER EXPERIENCE DESIGN Some retailers are designing customer experiences rather than typical retail spaces. Target recently opened their connected home experiential space next to their downtown San Francisco store. They enlisted the help of multi-media experiential designers, Local Projects, to create a state-of-the-art space to showcase their IoT offerings. This space doubles as an event space for startups and entrepreneurs to connect with potential customers and test their prototypes. IoT is expected to be a $1.7 Trillion industry by 2020 and getting ahead of that and specializing in that market is in Target’s business plan. Technologies such as geolocation and in-store sensors provide a more contextual experience for customers. Using data mined from customer experiences, retailers can design a better, more valuable customer experiences both online and for brick and mortar, and can even blend the two. Warby Parker’s West Hollywood retail space includes a green screen photo booth and costumes for a fun shopping experience. 4. https://www.youtube.com/watch?v=3MOwRTTq1bY&feature=youtu.be 5. https://www.voanews.com/a/sales-slump-seen-reflection-changes-retail-landscape/3810829.html 6. https://nrf.com/news/retail-predictions-2017 7. PSFK The Future of Retail 2017 Target Open House in San Francisco is a showcase for IoT and the Smart Home. Photo Credit: Target of Online Customers expect prompt and personalized service within five minutes. 75% of Offline Customers will abandon a purchase and leave the store if they do not receive prompt customer service. 85% of Customers prefer knowledgeable sales staff. 40% of Customers want real human interaction rather than digital channels to resolve customer service issues7 . 83%
  3. 3. In the face of growing customer impatience, retail salespeople must be more than cashiers. Self-checkout, and checkout using mobile devices are a cost savings that can elevate the role of the sales associate rather than replace them. Educating sales associates to be subject matter experts not only helps with customer brand loyalty, but can alleviate the hassle of customer returns, purchase abandonment and dissatisfaction both online and offline. Perhaps this is why the big players like Walmart are investing $2.7 Billion in associate training for 2017 alone. Equipping sales associates and customer service representatives with the tools and education needed to solve customer problems at scale is the best way to create a more customer-centric shopping experience. Just because customers prefer human interactions doesn’t mean that AI does not have its place in retail. Lowes and Macy’s are both employing AI to help with tasks and to predict customer frustration. Lowe’s AI “Lowebot” was beta tested in their San Francisco location to great success. The robot can perform tedious tasks, such as product location in multiple languages, which frees up the in-store sales associates time to help with more detailed queries. Macy’s partnered with IBM Watson and have recently launched a pilot program called Macy’s On Call, a cognitive web tool that can help customers navigate Macy’s stores and can also alert sales associates to provide assistance. While these technologies are in the pilot stage, time will tell if they will be fully implemented in their stores, modified, or scrapped altogether. AR/VR can make the in-store experience more immersive. Companies like North Face and Chevrolet are already using VR technology to provide their customers the experience of using their products prior to purchase. As these technologies become more mainstream, the ability to have small, retail experience stores for customers to virtually test drive products will become more economical. Some stores are taking experiential design to the extreme, not by looking forward using technology, but by looking back at retail history. Wingtip in San Francisco is not just a retail store and website but also has an on-staff barber, two distinguished tailors, a shoe shine bar, a fly-fishing expert and boasts an impressive wine, spirits and cigar selection. They also integrated an amazing social club with top-shelf food and beverages, VIP events and even a rentable workspace and meeting rooms. Part of the membership fees are banked to purchase products in the retail space. This type upscale personalization comes with a price, but it is one way to be able to afford to sell upscale clothing and goods in the middle of the most expensive real estate markets in the country. The personalized service offered at Wingtip coupled with the membership to the social club, creates the kind of loyalty that only exclusivity can buy. The shopping experience, either online or brick and mortar, needs to be seamless. The combination of usability and psychology with good metrics will create an immersive and engaging experience that will drive consumer trust and brand loyalty. IoT beacons can track customer movement throughout the experience and encourage customers to log into an app on their mobile phones while shopping. This data can help test different experiences to help ideate and innovate the customer experience design process. Different beacons use different technologies but essentially they are a tracking pixel utilizing Bluetooth that smartphones and other Bluetooth-enabled devices acting as a “cookie” to collect those interactions. Beacons with extra technologies such as accelerometers, light or movement sensors can be used passively, to track customer movement within a space. Otherwise, the best interactions encourage customers to download an app that will interact with the customer and provide education, directions, promotions and rewards. The “LoweBot can perform tedious tasks which frees up the in-store sales associates time to help with more detailed queries. Photo Credit: Lowes
  4. 4. CONVENIENCE Customers know that when they order from Amazon, they will get the product they need in a matter of days, and sometimes hours. Uber’s delivery options, Amazon’s Prime Now and the myriad of other delivery services are growing because of customer demand. Amazon’s Alexa and Dash are teaching customers that whatever they want is just a word or a motion away. The biggest barrier to customer convenience is outdated and outmoded supply chains and manufacturing forecasts. Smart manufacturers and retailers like Amazon and Walmart have been trying to solve these big problems for years, and it is only a matter of time before someone disrupts supply chain with a big idea beyond that of Artificial Intelligence (AI) or robotics8 . Target has modernized and optimized its Omnichannel supply chain so that products can basically be shipped from the closest location to the customer directly9 . Other stores, like Gamestop are fulfilling online orders from local stores to decrease shipping times. Click and Collect is another solution retailers like CVS are using to help customers get the products they want in the shortest time possible. Amazon is also playing with the idea of predictive sales and on-demand clothing and apparel manufacturing to shorten their supply chain to the customer even further10 . Customers want additional services such as tech support and on- demand customer service whether they purchase their product online or in the store. AI Chatbots are clearing the path to purchase by assisting customers when they navigate e-commerce sites. Eventually, AI Chatbots will perform even more services such as basic warrantee issues,repairswhichwillalleviatecustomerserviceinequalitypotentially decrease customer returns. In lieu of actionable AI to take on more complicated customer service issues, Amazon, Xerox, CVS, American Express and others are hiring thousands of work-at-home customer service agents across the United States11 . These customer-centric businesses are investing in human capital to better meet the needs of their customers. Mastercard recently partnered with Subway, Cheesecake Factory and Fresh Direct to employ an AI Chatbot, powered by their payment app MasterPass that makes mobile ordering and payment simple. Customers can be fickle and sales can be lost if there are delays in the checkout process. Entering credit card information online, or setting up an account can become a sales barrier if it is overly complicated or takes too much time. Like Amazon and their one-click purchase and payment options, other successful retailers are utilizing technology to make check out simple. Customers can use Google Wallet or Apple Pay but they also have new options. MasterCard is already making the checkout process easier and more secure for customers. The future of payment lies not in a card or even a chip and pin, but in biometrics and Iris Recognition for authentication and mobile payments12 . AI Chatbot powered by MasterPass makes mobile ordering and payment simple. photo credit: Mastercard One of the many perks of the Wingtip’s social club are the many private meeting rooms. Photo Credit: Wingtip 8. http://www.supplychain247.com/photos/10_supply_chain_trends_for_the_next_10_years 9. http://www.scdigest.com/ontarget/16-03-22-2.php?cid=10453&ctype=content 10. https://www.recode.net/2017/4/18/15338984/amazon-on-demand-clothing-apparel-manufacturing-patent-warehouse-3d 11. https://www.inc.com/bill-murphy-jr/amazon-is-hiring-5000-people-to-work-from-home.html 12. http://www.pymnts.com/in-depth/2015/mobile-pay-players-focused-on-biometrics-authentication/
  5. 5. Cosmetic and personal product industries are capitalizing on consumer’s desire for convenience as well as personalized experiences and, in some cases disrupting their industry altogether. For example, Dollar Shave Club is having the largest impact as we see them eroding industry power-house Gillette’s overall market share. They made it more convenient and less expensive for men (and women) to purchase razors online. This business model is so successful that other razor companies, and other retailers, are duplicating the experience for customers13 . Customers want the convenience of being able to purchase anywhere. This is where mobile experiences are key. Younger shoppers expect to be able to engage with a brand or a retailer via their mobile device, especially when they are in the store. This is where retailers can deliver an end-to-end branded experience for customers to share through their social networks. Developing an integrated Omnichannel strategy requires communication and collaboration from many departments: IT, Marketing, Customer Service, Executives and Sales. Once you create a holistic multi-platform integration, it is easier to manage and scale. UK clothing retailer Oasis is an Omnichannel success story. The company’s mobile app, ecommerce site and brick-and-mortar locations work together seamlessly. Store associates are armed with IPads to help deliver customer education, locate and order product if necessary and also for check out purposes. The ecommerce site has a similar feature called Seek and Send which locates a product in one of the retail stores and ships it directly to the customer. Returns are not only free, but convenient: free shipping is paired with the option to return product via a network of over 5000 drop-off points in Oasis stores, convenience stores and grocery stores. Amazon Go, the newest e-commerce giant’s iteration, is basically an employee-free convenience store that utilizes RFID to allow Amazon Prime customers to grab products on the run without the hassle of checkout. All products they remove from the store are charged to their Amazon account. This is another example of how Amazon testing the different technologies to deliver a fast and efficient shopping experience to their customers. Of course, once they perfect this RFID-driven technology, they will offer it to other retailers at a price and in a package that insures the customer-centric experience Amazon demands. But data-driven Amazon will most likely own the data the technology collects14 . The test-and-learn opportunities for convenience strategies are endless. Capturing and using the data, especially how, where and what device sales are happening is crucial to help innovate for the future. CUSTOMIZATION Consumers have more choices than ever and the average consumer has far more sophisticated tastes and is more knowledgeable about what they purchase than even ten years ago. Chinese citizens have more purchasing power than ever and they love to purchase quality European and American goods15 . Mass market goods may have helped feed and clothe the Baby Boomer generation, but now the target demographic is far more discerning. 13. https://www.inc.com/bill-murphy-jr/amazon-is-hiring-5000-people-to-work-from-home.html 14. https://www.cbinsights.com/blog/amazon-strategy-teardown 15. https://www.ft.com/content/321cb1be-2d4f-11e6-bf8d-26294ad519fc Customers want the convenience of being able to purchase anywhere.
  6. 6. New retailers that provide customized products and experiences are trying to establishing themselves as more than just niche. Customers can design their own shoes, their own clothes and even their meal plans all at the click of a button. They can input what they want into a website and receive a box full of products tailored to them and their lifestyle. Customers are more comfortable having their clothes custom tailored. Custom tailored goods are not a new concept, especially for the very wealthy, but new technology is making it more cost effective for customers of more modest means to have clothing custom fitted just to them. Old and new technologies are helping to transform the retail space from mass market goods to customizable products. Consumers have been entering their customization preferences into online interactive product configurators for years but now these tools are now far more agile. Consumers used to be limited to a few customization options which often required the assistance of a human salesperson. Now, because of product visualization tools and more adaptive software, it is easier and more fun for consumers to customize their online purchases. Online retailer Shoes of Prey uses these tools to allow customers to customize shoes and through the product visualization, consumers can view their purchase and the site displays the visualizations on their “trending now” page as inspiration for other consumers. Recommendation engines are another older technology that are being used to aid in customization. Instead of just recommending another product based on a previously purchased product, recommendation engines can be employed to recommend customized ingredients, colors and styles. 3D Scanners can take better body measurements than even the most seasoned tailor. Companies like Styku are can provide 3D body shape and measurement visualization to be used by fitness companies, medical and aesthetic purposes, weight loss, and made-to-measure clothing. Mostly, the company is catering to the medical industry, but they are poised to help retailers move into the future of customized clothing. Flexible manufacturing systems help make these customized products possible in a cost-effective way. Ironically, the auto industry is at the forefront of this movement away from mass manufacturing. Ford and General Motors have invested in automation that can retool itself automatically with a series of interchangeable machinery without slowing down the production line. This technological innovation can help manufacturers customize even more products at a lower cost in the future. 3D printers are more sophisticated and less of a novelty product. At Retail’s BIG Show, Jodie Fox, co-founder and chief creative officer for Shoes of Prey, talked about the benefit of on-demand manufacturing and 3D printing capabilities: “You can have infinite SKUs without the hassle of having all this inventory sitting around.”16 3D printing is helping manufacturers bring goods to market faster and helping retailers provide customized products that consumers demand. The takeaways from a customization strategy is that customers will continue to seek out ways to customize the products they want. Mass market products, including fast fashion from popular stores like H&M, could become less and less popular over time in exchange for products with multiple functions or custom designs. Technology for rapid prototyping and customized manufacturing is becoming more affordable. The data and feedback collected either explicitly from customers or through their behaviors should be used for research and development of new products and customer experiences. Amazon Go, a cashier-free bodega is open to Amazon employees only during the beta phase. Photo Credit: Amazon 16. https://nrf.com/news/mass-customization-and-the-future-of-retail
  7. 7. PERSONALIZATION AT SCALE Personalized VIP service used to be reserved for the very wealthy. However, technology is the great democratizing force in the market including allowing more customers to enjoy personalized services at scale. Loyalty programs, subscription services and special V.I.P.-only events are driving the customer experience. Customers enjoy data-mining loyalty cards, but the successful loyalty programs provide more than just a discount. Loyalty points that customers can cash in for special rewards are not a new idea, but smart retailers are adapting their programs attract the kinds of customers they want. Customers are not completely averse to being targeted: Nordstrom provides stylists on demand and special sales-preview shopping events and smaller stores bring in special off-hours wine-and-cheese-style shopping events to get customers in the door. Online retailers do the same, sometimes with special limited-time access to pop-up stores or special online discounts. Similar subscription clubs like athleisure wear company Fabletics and clothing company Just Fab keep customers coming back with VIP-only deals for a recurring monthly subscription payment. Within the ecommerce space, 48 percent of customers spend more when their experience is personalized and will volunteer personal information in exchange for a more personalized experience.17 For retail in general, 64 percent of customers feel that a great customer experience is more important than price.18 Big Data helps retailers know their customers and eliminates the need to be everything to everyone. Retailers can now know who is coming in the door or coming to their site and can collect data from social media sites, email campaigns analytics, and in-store beacons, RFID and other Internet of Things (IoT) devices. These technologies and the data they capture can help even the smallest retailer create personalized experiences and programs for their customers which aids in brand loyalty and customer retention. The data also provides valuable insight to where customers drop out of the sales funnel and allows retailers to tailor programs to aid in conversion. Customers want competent, knowledgeable sales staff who can guide them through the purchasing process. With technology, retailers can capture the data from loyalty programs and can help gauge brand sentiment. Inexpensive tests with new products or services can be done without setting up much more than a sales associate survey or a coupon code. THE NEW RETAIL BUSINESS MODEL Not having a customer-centric business model, rather than price, is increasingly becoming a barrier to sales. Perhaps this Retail Apocalypse is a retail evolution. Some of the big dinosaurs unable to adapt will die off, but that will leave room for the more innovative, customer-centric retailers to thrive. Sears relied on an outdated business model even as they closed stores and lost revenue. In 2012 they had revenues of nearly $40 Billion and in 2016 had revenues of only $22 Billion. Their total assets in 2012 were $19 Billion, and that has dropped to $9 Billion today and they have closed nearly half their stores in just four years.19 Contrast this with companies like Amazon who are in a constant state of innovation. Amazon is an example of using customer-centric strategies for to survive the changing retail landscape. Jeff Bezos, Amazon CEO, says that their vision statement is their guiding principle: “Our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.” of customers are amenable to having retailers track their data in exchange for more personal, experiences. 49% 17. http://www.targetmarketingmag.com/article/48-consumers-spend-more-after-personalized-e-commerce-efforts-survey/ 18. PSFK The Future of Retail 2017 19. http://searsholdings.com/docs/investor/SHC_2016_Form_10-K.pdf
  8. 8. Day 1 Day 2 Stasis Irrelevance Excruciating Painful Decline Death Day 1 Because of this, Amazon is a data-driven company and is always innovating for the customer. They are working from a large cache of data and they use that data to test, learn and innovate. When they innovate, they may not even have a viable product but they learn from their failures. The motto “Fail Fast, Fail Often,” is employed at Amazon and permeates everything they do. When companies are afraid to fail, they are also afraid to innovate. But when you are collecting the necessary data and using that to test new initiatives, the bar for success is lower than if you are innovating in a vacuum. Of course, Amazon reinvests profits into innovation which no doubt has prompted Walmart to change focus from low prices to a more customer-centric mindset, investing into training and education for their associates, and diverting profits into investments in ecommerce and automating and optimizing their supply chain to get the right products to their customers faster. When you look at the successful retailers with customer-centric business models, with what is happening to Sears and other established retailers, perhaps it is because they lost site of the adage: The customer is always right. Retailers that innovate on behalf of their customers and use new and emerging technologies to provide customers with what they demand will thrive in today’s environment. Jeff Bezos is famous for stating that it is always “Day 1” at Amazon, because “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.” He wrote this in his 2017 Shareholder letter. He further stated his clarification for the company to remain customer obsessed as a business model: There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality. Being customer centric means knowing that customers will demand more customized, personalized, and convenient shopping experiences and they want them in spaces and places designed to immerse them in the customer experience. This set of strategy alternatives make up the base for the new business model for successful retailers. (c) 2017 Simplify Business Innovators 1714 Stockton Street, San Francisco, CA 94133 Uhlandstrasse 137 10717 Berlin menlopark[at]simplify- innovators[dot]com berlin[at]simplify- innovators[dot]com (650) 468-0545 +49 (30) 55579553