In a recent Financial Times article Robin Wigglesworth wrote the obituary of the traditional retail industry. The terminally ill department store business model will lead the way in the US, where it has been steadily losing sales to eCommerce. Is there hope for a radical transformation that will save the retail industry?
Brick and mortar retail is a byproduct of post-war economic growth and the introduction of mass manufacturing. Spurred by a growth in disposable income, retailers and brands quickly opened numerous stores to get products close to their customers, and where that wasn’t possible or economically sound, malls concentrated foot traffic and leveraged network effects to serve consumers.
In 2000 the brick and mortar model generated $ 230 billion in revenues from US department stores alone, in 2016 that figure has declined to $ 157 billion, losing a third of its value in 15 years. During the same period the online retail sales have grown at an average of 20% per year according to Euromonitor, and Forrester expects $1.8 trillion of online and web-influenced retail sales by 2017.
The advent of the digital economy has undermined the very pillars on which this industry was built; a single online store can cover the entire country and offers a huge selection of products with the convenience of next day shipping. By leveraging data collected, online stores can also drive product discovery across categories much more efficiently than store associates ever could.
Shocked by these structural changes, brick and mortar retailers responded by reducing their footprint, shifting to off-price formats and trying to embrace a multi-channel model, but this proved to be too little and too late for many retailers.
Retail is not dead. Mediocre retail is dead.
Is retail doomed? Neil Blumenthal, of Warby Parker, famously said “Retail is not dead. Mediocre retail is dead” so what does it take for a retailer to escape mediocrity? To answer that question we must first understand how consumer purchasing behavior has shifted in the past decade:
- Baby boomers and Gen.X fueled the retail industry growth through a strong connection to brand names, embracing the sense of belonging that marketing suggested; on the other hand, Millennials have shifted their trust from brand names to community recommendations, due in large parts to the advent of online communities, social media and peer review sites. This shift in trust has undermined the effectiveness of traditional marketing methods; according to Euromonitor 62% of consumers cited friends and family as the primary source of purchasing influence. This shift has contributed to the creation of a “brand living” phenomenon where consumer have become a brand’s strongest advocacy generators and net promoter score have become the key metric of a brand’s success.
- Modern consumers value individuality, millennials believe that products should enhance their individuality rather than conform them to a brand ideal or social status. They value authentic brand values and products that reflect the company history and culture, especially if those values are reflected in a sustainable product.
- Consumers are increasingly choosing products based on experience, purchasing and ownership experience are becoming increasingly important criteria for product and channel selection. Consumers expect brands to support them in achieving their personal goals, when this happens consumer develop an emotional connection to the product.
- The widespread use of connected devices has also contributed to a shift in consumer behavior; in the past transactions were initiated and concluded either online or in the store, nowadays consumer expect to be able to initiate a transaction online and pick up a product in the store, or return an online purchase in the store.
To escape mediocrity and enable their physical channel to achieve their full potential, retailers must adapt to this shift in consumer behavior by developing competencies in three key areas:
- Retailers must first develop brand awareness through a strong narrative leveraging their brand history, values, iconic content and customer testimonials. For example, Sony recently created an in-store museum showcasing the history of its Walkman products to create brand awareness through its history of product innovation while Victoria Secrets broadcasts their fashion shows in all stores, across formats, to leverage its iconic content.
- Stores need to support transactions with interactions and become living locations by organizing special events for customers and prospects to create a community of like-minded people. Two brand that have embraced this concept are Nike and Lululemon organize running clubs for their customers to associate positive community experiences with their stores.
- Store associates must play the role of “missionaries”, they must communicate brand values while adapting their messages to the local communities, at Warby Parker store associates are trained to recognize the customer needs and adapt the product suggestion to the community, from hip Brooklyn to stylish LA.
- Store formats must evolve to become experiential and emotional so that all activities conducted within its walls can generate positive emotions for the consumer; whether it’s a prospect testing a product or a customer returning a purchase. Nespresso greets their customers with a testing area where the coffee aroma is sure to generate a positive emotion.
- Store associates must use engaging and interactive tools to guide potential customers through product discovery, while seamlessly collecting sales leads. At Bonobos store associates collect customer preferences while creating a virtual profile that the customer can later use to make purchases online.
- In-store workshops and 1-to-1 meetings must be leveraged to share educational narratives and create emotional equity for the products, Eataly has shown that involving customers in cooking demonstration and telling the stories behind the products results in increased sales and more loyal customers.
Digital & Omnichannel
- Retailers need to deploy a seamless customer journey across channels to enable consistent and continuous interactions with clients and prospects. Throughout its journey the customer must be assisted by a relationship manager able to bridge the digital / physical divide to ensure a consistent experience online and in store
- Loyalty programs must be designed to ensure relevant and coherent benefits across channels, leveraging proximity marketing to reward store visits, delivering in store promotions and prioritized customer service, in the same way customer carie must be consistently administered online and offline, with the ability to seamlessly transition between channels
- Mobile devices can help store associates deliver a seamless journey while helping to build intimacy with the customer – according to Forrester, 69% of consumers expect that store associates be armed with a mobile device in order to perform simple and immediate tasks such as looking up product information and checking inventory.
Once consumers embrace the brand and its values (through brand living competencies) and develop an emotional connection to the store and its associates (through customer engagement competencies), they will become advocacy generators across their own communities. This will lead to additional prospects joining the conversion funnel and brands need to leverage their digital & omnichannel competencies to convert them.
The key challenge for retailers will be to transition from being product-focused organizations to customer-centric ones; developing the competencies is only half the game, their greatest test will come from implementing the change management programs necessary for their successful execution.