Retail's Revolution

Retailers are rethinking the rules Retailers are rethinking the rules that have shaped their business for decades. Breakthroughs in digital and mobile technology, as well powerful emerging forces, such as smart-device-empowered consumers, are forcing retailers to re-imagine the fundamentals of retail, including a glut of brick-and-mortar space. And when it comes to the profession, it’s the most creative consulting solutions that are flying off the shelves.

For all of the complex opportunities (same-day delivery), innovative breakthroughs (click-and-collect) and steep challenges (omni-channel) rippling through retailers today, the industry’s most notable focal points are surprisingly fundamental: Power. Space. Time. Money.

“We’re really in a period of disruption—and investment,” says PwCs’ U.S. Retail and Consumer Sector Advisory Leader Ron Kinghorn, “It’s really going to change the landscape as we know it over the next decade or two.”
Given the essential nature of these challenges, retail consultants must do more than deliver rigorous analysis, deep industry expertise, hard-earned operational knowledge and strategic savvy. It turns out that creativity is an increasingly valuable retail-consulting skill. There is ample “room for imagination” in crafting solutions, asserts Thierry Chassaing, The Boston Consulting Group Senior Partner and Managing Director who leads his firm’s global retail practice.

The imagination Chassaing describes is evident in a numerous locations, including:
* In France, where the click-and-collect operations of grocery chain E.Leclerc’s (among other retailers) lets shoppers order and pay online and then, within three hours, pull up to a drive-through collection point to stuff their trunks with goodies;
* In brick-and-mortar shops, where previous Internet pure plays, like Amazon (which just announced plans to open a New York store) and men’s fashion retailer Bonobos, are establishing physical operations to deepen their relationships with customers;
* Online, where brick-and-mortar behemoths, like Wal-Mart (which recently added Instagram’s 30-year-old CEO to its board), are seeing revenues soar (at a rate of 20 percent in 2014, by far the retailer’s fastest-growing business area); and
* In print, where consulting firms are sharing their resourceful guidance—as Bain & Company Partner Darrell Rigby did in the September Harvard Business Review in an article devoted to why and how retailers should go “digical” by fusing their e-commerce and brick-and-mortar operations.

Although terms like “digital,” “analytics,” and “omni-channel” crop up quickly and frequently in discussions with leading retail consultants, these practitioners also emphasize that retailers are rethinking many of the ground rules that have governed their business for decades thanks to breakthroughs in digital and mobile technology and to powerful new forces, including smart-device-empowered consumers.

“These dynamics,” notes Jon Weber, Managing Director and head of the Retail and Consumer Product practice at L.E.K. Consulting, “are challenging all retailers to rethink not just the roles of their physical and digital channels or marketing and consumer engagement strategies, but also their fundamental business strategy and why they exist.”

Fundamental Rethinking

The rethinking that Weber describes is taking place in several areas, most notably related to:
POWER: The availability of pricing information has changed the retail equation. “The consumer can now be a lot pickier about products,” explains Rodney Sides, a Principal with Deloitte Consulting and leader of the firm’s retail and distribution practice. “Consumers are much more informed, but they also have an essentially unlimited number of places to go for products—places that were not available five or 10 years ago.” Weber agrees, noting that the financial crisis also continues to affect the behavior of consumers across the socioeconomic continuum. “The expectation for great value is enormous,” he points out. “Many people, including the most affluent consumers, consider it foolish to purchase anything at full price. Their mindset is: If it’s not at discount today, it will be soon.”

SPACE: When Chassaing moved to the U.S. from Europe more than a decade ago, the first observation he shared with the firm’s CEO was that there was “just too much retail space, and it’s going to get worse.” He was right. Today, many traditional retailers are closing stores, redirecting customers to other stores and trying to shrink their existing physical footprints— which requires significant time and money.
But size is only one facet of the space challenge. Physical stores remain a convenient, competitive and profitable channel for some retail segments, like dollar stores. And some retailers, including fast-growing Internet pure-plays, are hungry for a bricks-and-mortar presence—albeit a relatively small shop in a convenient location—to fortify customer relationships. “Our retail spaces combine the snappy ease of online ordering with the fun and serendipity of real-life shopping (with a photo booth or two),” reads a tag line on eyewear-seller Warby Parker’s Internet site. “We can’t wait to meet you!”

MONEY: The use of online and mobile buying is exploding among consumers, yet most retailers are not investing appropriately in response to this shift, notes Elizabeth Spaulding, a Bain & Company Partner who heads the firm’s digital practice. Sides agrees. He says that while most traditional retailers have online channels, few have figured out how much capital to invest in this fast-growing business (and more are taking hard looks at how to best restructure their previously separate online and physical businesses). Pricing marks another money issue retailers want help addressing. Yes, Amazon places great pricing pressure on traditional retailers—but not on all product segments (low-ticket items), and not on all traditional retailers. “The way pricing is conducted today generally is not very sophisticated,” notes Chassaing. For example, higher-priced items likely should be priced differently, by the same retailer, depending on whether the item is sold online or in a physical store.

TIME: Among all of the areas retailers are rethinking, time may be the most disruptive element. “Speed is very important,” asserts Chassaing. In some ways, he says that everything one needs to know about retail today boils down to the notion that “location is less important while speed and price are more important.” The click-and-collect trend marks an enticing way traditional retailers can compete against Internet pure-plays by giving customers their products within two hours. “People are looking for convenience and the lowest prices,” Chassaing emphasizes. “Before, location played a big role. Now, it has become less important because you can stay in your car.”
The Art, Science and Math of Retail Opportunities

Jill Puleri, the Worldwide Retail Industry Leader for IBM Global Business Services, recently visited with two different clients who reached the same conclusion—and it must have been music to her consultants ears. “They said, ‘We don’t have the staff to be able to do this,’” Puleri recalls. That’s because “this”—deriving consumer insights (as opposed to product insights alone) from mounds of data—involves a lot of moving pieces and new skill sets. “For a time, there was a question as to whether retail was an art or science,” Puleri continues. “Today, I think retail is art and science and math. You really need to take a sharp look at the math component—the statistics.”

That means, for example, taking two years of transactional data and then developing and running a nifty algorithm that rifles through numerous purchasing variables and produces insights that help retailers sell more profitable items to higher-value customers. “That requires math,” Puleri adds, “and not necessarily someone who knows why yellow shirts are selling more than orange shirts. We’ve been a gut-feel type of industry for a long time. Now, we need to help retailers become more fact-based.”

The data analytics work that occupy one of Puleri’s and IBM’s sweet spots spills into numerous different types of consulting opportunities. That said, many other opportunities extend beyond big data, including several of the following areas of growing demand:

Big data and customer analytics

“The technology play is the [trend] that we think of as being the most disruptive and as having the biggest promise,” says Kinghorn. “We all hear a lot about big data, and we all know that most of the leading retailers have access to a significant amount of data.”
What they need help with, Kinghorn continues, is using their data to develop a deep understanding of their different customer segments and how those segments use different sales channels. For more retailers, this understanding includes the fact that more consumers are shopping across multiple channels: PwC’s latest holiday forecast survey indicates that roughly two-thirds of shoppers are omni-channel consumers.

This type of clarity does not come easy, however. That’s in large part because big data inside traditional retailers is bigger than they can handle. This data stretches back to the 1970s when shops started scanning products. The challenge is to comb through this data and mine it for insights in a repeatable and agile manner. “Consumers want [physical] retailers to remember their past purchases, so that they can make recommendations or provide promotions that are based on something they’re likely to buy,” Puleri notes. “That’s how online retailers work. But it’s very difficult to get that to happen.”

Omni-channel structure and experience
The term “omni-channel” is so ubiquitous these days that it’s appearing in USA Today headlines about the state of retail. “We’ve gone from ‘bricks and mortar’ to ‘multi-channel,’ which has since blurred into what everyone is calling ‘omni-channel,’” Sides says. “I think the term itself is starting to feel over-played. What everybody is calling ‘omni-channel’—honestly, today, that’s just ‘retail.’”

Or how about “digical?” That’s a Bain term that describes the way retailers should fuse the digital and physical customer experiences they deliver – as Bain Partner Darrell Rigby describes in a September Harvard Business Review article, “Digital-Physical Mashups.”. Achieving this fusion requires attention to five areas, Spaulding notes: vision, operating model decisions, infrastructure/supply chain, culture and organization, and change management.
“All retailers are dealing with omni-channel and the ability to connect with customers in a more personalized way by using data to better understand their behavior and shopping patterns,” confirms Mark Sullivan, Grant Thornton’s retail practice leader.

Rebuilding loyalty
Better informed customers are less loyal customers, so retailers are looking for new ways to rebuild customer loyalty in an era of pricing transparency. “If you don’t have a compelling value proposition for why consumers should buy from you as a retailer, it’s very difficult to capture their spending,” Weber notes, adding that alternative, predominately online retailers have sprung up in most industry segments. “The pervasive use of digital technologies is increasing competitive pressures and making it harder than ever to stand out in front of consumers.”

These forces are driving retailers to reinvent how they conceive and cultivate customer loyalty—what it is and how to cultivate it. “The traditional notion of loyalty was one where you measured repeat purchases,” Puleri says. “But the digital world has allowed consumers to have a voice and to be a part of the process.” Look at Pinterest, where consumers behave as de facto marketers by posting pictures of products and promoting them through their own networks. “Customers are very vocal,” Puleri adds. “So why aren’t we crowd-sourcing consumer input?”

Going mobile
When a shopper who has previously purchased handbags strolls down the handbag aisle of a physical store, Spaulding asks why she isn’t receiving a targeted handbag promotion on her cell phone. “This is a nascent area for many retailers,” she adds.

Sides agrees, noting that recent Deloitte research indicates than more than $1.1 trillion worth of transactions are influenced by mobile devices. This influence includes comparing prices, mapping store locations, checking product inventory and, to a lesser extent, making purchases. “How consumers use their mobile devices ought to inform how retailers develop and design their mobile applications,” Sides says. To date, most retail apps have lacked this level of thoughtfulness. Many mobile apps are either an e-commerce channel or simply a smaller version of a web site. Sides emphasizes that mobile applications can have many different uses, and that these types of functionality ought to be selected based on customer behaviors and preferences.

“It’s not about more functionality on that mobile device, it’s about getting the right functionality on the mobile device,” he says. “And that should then inform what you need to do in the store from a digital perspective.”

Going global
As U.S. retailers consider how to grow their business, more are turning to consultants for help in identifying new markets to enter. “They’re asking questions like: ‘Where should I go? When? Should I be thinking about mature or emerging markets, or both? What investments will I need to make? What are the risks? How do I do all this?’” reports Weber. “And if they’re already international, they’re asking: ‘How do I maximize the value from what I’m doing? Grow faster? Make more money? Focus on the biggest and most promising markets?’” sides says. And his colleagues are fielding similar questions. “Everyone has determined that going global is important for their strategy,” he notes. “Very few retailers we talk to are not contemplating that.”

Getting more innovative
Despite the need to respond—quickly and creatively—to new competitors, many traditional retailers remain committed to an old-school innovation cycle: develop new products once a year, or once a season. Today, more retailers are looking for help in expanding the scope of their innovation-management work beyond products and beyond traditional time periods.

Spaulding notes that Facebook CEO Mark Zuckerberg’s “move fast and break things” philosophy may be gaining appeal among retailers. “How do you build much more rapid innovation into organizations that have traditionally managed innovation on an annual basis?” Spaulding asks. The answer involves a major dose of change management, a retail-consulting area keeping her firm very busy these days, Spaulding reports.

Bain is hardly alone. When asked to identify a few representative projects to provide a sense of what retailers want from their consulting partners, Clarkston Consulting Partner and Retail Practice Lead Jenny McLean rattles off a list that includes: advisory services, process improvement, e-commerce platforms, operational efficiency work, enterprise systems implementation, network and asset optimization, human capital management, big data and predictive analytics, seamless consumer experience across channels, product lifecycle management, M&A integration and change management.
Amid all of the fundamental rethinking and complex challenges roiling retailers, the range of assistance for which they’re seeking help from consulting partners is pretty simple: just about everything.

Sidebar: CONSULTING BEYOND RETAIL TRANSFORMATION

As the retailers plunge deeper into a period of historic change, they risk neglecting several less dramatic but vitally important issues—namely, intellectual property (IP) protection, regulatory compliance and inventory optimization.
Strides in digital technology pose “the most powerful disruption to the retail industry in the past 50 years,” asserts Elizabeth Spaulding, a Bain & Company Partner who heads the firm’s Digital practice. Jill Puleri, the Worldwide Retail Industry Leader for IBM Global Business Services, says the industry is grappling with a fundamental transition, from a product-centric philosophy to a customer-centric mindset.
Mark Sullivan, Grant Thornton’s Retail Practice leader, agrees that retail is undergoing massive changes that present consulting opportunities for very large consulting projects—especially those with big data and analytics components.
But even as his firm and other firms pursue those opportunities, Sullivan points to several other less dramatic areas where retailers need consulting help, often more so than they may realize:

► INVENTORY:
Ask retail CFOs if they’re happy with their inventory shrinkage, and you’re far more likely to hear “We’re around the industry average” instead of “You bet we are.” Sullivan challenges clients to challenge this status-quo thinking. After all, any reductions in shrinkage go right to the bottom line. A successful shrinkage-reduction engagement at a mid- to large-sized retail chain can produce a profitability gain on par with opening a new store.

► COMPLIANCE:
As more retailers become global companies, new regulatory compliance challenges arise. During the cost-cutting that followed the global financial crisis, many retailers trimmed compliance staffs, which remain lean in many organizations.

This can lead to compliance management problems as well as misconceptions about other risks they may face.
For example, some retailers believe that if they are not a publicly listed company, they are immune from compliance with the Foreign Corrupt Practices Act (FCPA).

“Which is false,” says Sullivan, who notes that other retailers believe their FCPA compliance risk is minimal because the company doesn’t deal with foreign governments. That’s also false in most cases, given how many government interactions are involved with moving goods through customs, interactions with taxing authorities, obtaining building permits and the like.

“Compliance may seem like a big distraction for many retailers,” he adds, “but many companies in the industry really need to beef up their compliance capabilities.”

► COUNTERFEITING:
“When you enter certain [geographic] markets, you see more counterfeit products,” reports Sullivan, who is also one of his firm’s top forensic and investigations experts.
“You even see counterfeit stores. People are building a store that looks just like your brand, but maybe the name is spelled a bit differently or the logo is slightly off.”
Meanwhile, Sullivan says that addressing counterfeiting and gray market risk “takes a lot of time, effort and resources to do effectively.”

Sidebar: FASHION FORWARD

Clarkston Consulting Partner and Retail Practice Lead Jenny McLean sounds a bit like “Project Runway” star Tim Gunn when she dispenses advice. Her intelligent, constructive and tasteful guidance to retailers: Take note of how specialty retailers, especially those in fashion, navigate industry challenges.

As more power shifts to consumers, “branded retailers appear to be better positioned for the next phase of retail with small-format destination outlets that afford them ongoing consumer interactions, edgy brands with consumer equity, and better online performance,” explains McLean.

She describes the same drivers of industry change that most other retail consultants cite, including rapid changes in consumer behavior (driven by digital disruption and demographic shifts), mounting margin pressure, global pressure on sourcing and manufacturing, and growing opportunities in emerging markets.

Specialty fashion retailers contend with most, if not all, of these issues. And McLean suggests that companies in other retail segments can learn by watching how specialty fashion retailers address three current needs in particular:

► Strengthening lean inventory practices in the face of intensely seasonal buying patterns and whimsical fashion tastes;
►Get out of a discount cycle that has been driven by consumers who are increasingly conditioned to lower prices; and
►Developing the right combination of talent, culture and technology infrastructure while expanding operations and evolving business models.

There may be other specialty-fashion case examples worth monitoring in the near future. McLean also notes that consumers are demanding greater participation in the design process, which will increase pressure on retailers to develop and deploy agile sourcing, design and supply capabilities.

—E.K.

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