Value Creation in Future of Retail

Executive Summary:

The networked world has transformed the ecosystem we live in. It wouldn't be an exaggeration to say that we live in the most revolutionary times after the Industrial revolution. The highly informed consumer is more empowered than ever and that is posing both challenges and opportunities to firms engaged in business. This article explores some of the ways in which key players in Retail industry could respond to the changes and how the future of retail might look like.

Disruption in Retail

e-Commerce retailers, with their focus on reducing fixed costs, have had a major impact on big box retailers for a while now. The ubiquitous smart phones in the hands of the consumer have lead to show rooming, where the consumers check out a product physically in store, look up the product on their smart phones for the lowest price offered elsewhere and leave the store to order it online. Advances in back end connectivity have also resulted in integrated supply chain management and retail firms are able to source goods globally. This has meant more choices to the consumer. In such an environment, the consumable goods tend to become a commodity at a much faster pace and good manufacturers have to think of innovative ways to differentiate their products. The consumer’s choice of items is no longer limited by the merchandize in the retailers present around their zip code. Consumers can order any item they want online. On such a landscape, how will the retailers differentiate themselves?

Value creation in Retail

In order to create and add value to the customer during the retail process, some of the questions that Retailers better ask themselves are - What will make the consumer to shop with them over their competing big box retailers or e-Commerce rivals?

Competing on Price

Should the consumer come to get a better deal for the items they shop? If offering reduced prices is the key, how will I keep up the margins? How can I cut costs? Am I sourcing from the most efficient suppliers? Which is more cost effective – sourcing locally or globally? If I lower prices, how will the affluent consumers perceive my brand? How will my rivals react to my reduced pricing strategy? If I get into a price war with my rivals, will I be able to sustain my lower prices for a longer period of time?

Targeting the right Customer Segment –

No retailer can expect to serve all the customer segments all the time. Retailers need to focus their offerings to a target customer segment. Advances in Business Analytics are a boon in this regard. Customer browsing histories from the web, their social media behavior (including likes, dislikes, favorite brands, activities, places of interest), their buying behavior from the credit card companies, income data from payroll providers such as ADP, sales data from stores & e-Commerce websites, loyalty programs, response to discount sales, etc., all provide invaluable data. What is the demographic profile of our target customers? What is the shopping profile of my target customer? What part of our brand appeals to them the most? What value added services can I provide in addition to merchandize as part of my offerings? What time of the year do they prefer to shop? Which is the most preferred channel for purchasing – in store or web or mobile? How interested are they in potential new offerings?

Data regression analysis could be performed on the gathered information and correlation models can be created. Analysts that understand the business side as well as data modeling techniques can help formulate useful predictive analysis models. Data scientists can be employed to mine the data and feed into these predictive analysis models.

Brand Building –

High volume of social media usage and smart phone availability places more power in the hands of the consumer. Retailers can no longer rely on the broadcast type of advertizing. Any consumer with phone and access to social media is your brand ambassador. Or if you run out of luck, he/she could be your brand killer. So it’s very critical for the firms to manage and build their branding among the target customer market. The decision to be known as either the lowest priced retailer or coolest brand retailer or ethically sourced retailer or sustainability oriented retailer or one stop shop or specialty retailer or wide network retailer has to be made by the firm. The actions taken by the firm has to be in line with their perceived brand image, for its easier for consumers to spot if the retailers are not walking the talk.

Reduced Barriers to Entry –

Globally connected network has lowered, if not removed, the barriers to entry for new retailers or manufacturers that want to sell directly. Although retail can be considered to be fairly mature market, it has been in existence since forever, it still behaves like a high growth market for those that can create a new need for the consumer. Any product that makes the life of a consumer better by addressing an existing problem or creating new opportunities provides a path for growth. Reaching out to new customers across the globe can be achieved via the web. Access to a broad distribution channel could prove to be the differentiators among competing retailers.

Macro Economic Factors –

The world is slowly recovering from the after effects of the great recession of 2008. While USA seems to have finally turned a corner with respect to GDP growth, the European countries still seem to be held back in their economic growth. The inter-networked globe also brings with it certain disadvantages. The credit crisis of 2008 had a contagion effect on the world economies and whole globe went into a recession (at least most of the developed economies did). Historically retailers with presence in global developed markets had their risk portfolio diversified since there was always some developed country (market) that was continuing to grow while few other countries were in recession. The retailers could allocate more capital in growing markets and make up their revenues. But when all the major developed economies go into a recession at once, there is a lack of demand across the broad. This forces retailers to look for other areas, outside the developed economies, for future growth. Emerging economies, such as the BRICS countries – Brazil, Russia, India, China and South Africa- provide markets for achieving growth. No retailer, with global intentions, can afford to overlook Chinese and Indian economies that each has a billion people residing. A major chunk of this population is entering the middle class and is expected to drive the demand in the 21 century. The higher growth also comes with associated risks. The markets in these countries need to be regulated and the red tape has to be cut down. Having a government that can cut red tape and provide easy access to markets in these emerging economies will be invaluable for the retailers. The retailers need to work with these governments to help formulate effective regulations and address their valid concerns about sourcing locally in those countries. The retailers can get a head start and create an eco system of sustainable, low cost supply in these countries. This will not only help the retailers to reduce cost but will also help lift more people into the middle class, thereby creating new classes of consumers.

Future of Retail –

The future of retail seems to be exciting and it will undoubtedly have a technology focus. The retailers could have a combination of store plus online presence. The stores could be utilized to provide personalized information about products to those customers that like to physically see the products before purchasing. The online channel could be used to fulfill the orders. By eliminating storage in stores, retailers can cut back on inventory costs, helping to reduce price. As emerging and developed markets alike make investments in improving infrastructure, integrated supply chains and efficient distributed channels would make faster delivery of products to customers a reality. Retailers that can provide uniform customer experience across channels can differentiate themselves. The millennial customers are willing share their data but expect personalized service to be delivered to them. By tailoring products that better suit’s customer needs, the retailers can win. With the looming resource crunch due to the addition of 4.5 billion people into the middle class worldwide, as per a McKinsey Study, those retailers that can sustain-ably source will be able to leapfrog the competition. All in all, it’s an exciting time to formulate the next strategy for retailers.

P.S: This post was originally posted on LinkedIn by me on 10/14/14