Can 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.
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.