E-commerce has been growing steadily over the past two decades, and the current situation has only accelerated this tectonic shift from brick-and-mortar retail to online commerce. Today’s summary affords you a glimpse of what’s in store for both consumers and companies vying for their business. Retail’s future is both bright and harsh. Yet companies that embrace innovation and focus obsessively on their customers will win the day.
Recommendation
The e-commerce explosion is revealing the flaws of the retail store business model. Overhead and inventory hamstring brick-and-mortar stores’ efforts to compete with unencumbered online retailers. The consumer’s ability to go online easily to check the prices of competing products drives all prices down, so the price is less of a differentiating factor. Brands must compete on other merits. Digital experiences changed shopping. Virtual reality and other technologies are increasingly blurring the lines between the digital and physical worlds. The components of a retail environment and the way people purchase products will keep changing radically over the next few years, says retail expert Doug Stephens. People still want to go shopping, but they will demand stimulating experiences. We recommend his insights to marketers, store owners, entrepreneurs, investors and potential retail disrupters seeking a cogent, pragmatic overview of the future of retail.
Take-Aways
- Before long, e-commerce will weave into the fabric of everyday life, making every media interface a potential point of purchase.
- In 2012, Walmart’s sales were 16 times greater than Amazon’s. Now, it must compete with Amazon, a technology and data powerhouse that “also happens to sell things.”
- In 2015, China had twice the number of Internet users as the US has citizens and only half of China’s population was online.
- Virtual and augmented reality allows consumers to experience products digitally.
- The problem with advertising is advertising – it’s content consumers don’t want.
- People enjoy physical retail environments, but they also want stimulating experiences.
- A good shopping experience provides jolts of the pleasure neurotransmitter dopamine.
- Technologies will displace millions of retail and factory workers.
- Nike envisions a future where customers will print their products.
- Innovative companies do three things that put them ahead of their rivals: “They build networks, they benchmark laterally and they engineer everything.”
Summary
“Retail Is Dead”
Walmart was at the top of retailing in 2010, practically synonymous with the retail sector. In the 1990’s it opened more than 3,000 stores for a total of 4,393 outlets. In 2012, Walmart’s sales were 16 times greater than Amazon’s, and Walmart could afford not to worry about building a competitive advantage online. But by 2015, Walmart was struggling, weighed down by its big-box footprint. It paid a cost for focusing on physical growth at the expense of digital expansion.
“In the future, the only real certainty is that someone is going to completely reinvent what you do.”
As Amazon’s market value eclipsed Walmart’s, the chain worked to catch up online. Amazon beat it on price, selection and customer service. Amazon – a technology and data powerhouse that “also happens to sell things” – now threatens Walmart and many chains once thought bulletproof. Its Prime subscription gives members a “golden key” to a “service ecosystem” with extensive content, free shipping and data storage. Amazon is remaking retail while disrupting other businesses.
“Frankly, if your strategy doesn’t make you a little queasy, it’s probably not that innovative.”
In 2015, China had twice the number of Internet users as the US has citizens, and at the time only half of China’s population was online. Chinese businessman Jack Ma launched online retailer Alibaba in 1999. By 2016, it racked up $5 billion in sales in the first hour of the annual November 11 Chinese shopping holiday Singles Day – twice the volume of all US retail sales on Black Friday. India’s online market also will grow exponentially as shoppers come online. In India, online sales may shortly surpass all other commerce. Lean, hungry start-ups are constantly throwing monkey wrenches into commerce in innovative ways. Unilever paid $1 billion for the disruptive Dollar Shave Club with its subscription base of three million customers. Online wholesale is undermining the need for wholesale stores like Costco. Amazon continues to chip away at delivery and shipping through testing a drone carrier system, putting robots in warehouses and promising “anticipatory shipping.” Traditional brick-and-mortar retail must evolve or die.
Advertising
In the past, to reach more buyers, retailers bought more ads. Now television viewers no longer heed commercials. They interact with their laptops and mobile devices during ads. These distractions make TV advertising almost useless. The problem with advertising is advertising itself; it’s often content consumers don’t want. The customer’s journey is now mostly out of advertisers’ hands.
“Great retailers of the future will build their shopping spaces…as remarkable places that put story at the nucleus of the shopping experience.”
Retailers are spending increasing amounts on social media advertising, but with little return. Social media links to external websites have only an ineffective 2% to 5% click-through rate. Melbourne Business School professor Mark Ritson notes that social media is designed “for people…not for brands.” To build community, brands need their platforms.
“Instead of aisles of cans and boxes, could the grocery space of the future feature chefs, nutritional consultants, cooking classes and health care facilities?”
Online shopping has changed human thinking and the retail experience. Compare the ease of finding what you want on Home Depot’s website with searching for the same item in its warehouse store. Retailers need to post helpful, well-organized points of information in stores – as they do online – to help customers make informed choices.
Media Have Become the Store
Shoppers no longer need to travel to stores to make purchases. Before long, e-commerce will weave into the fabric of everyday life, making all media interfaces into potential points of purchase. The “replenishment economy” removes routine buying decisions from the consumer’s consciousness. By 2025, at least 25% of consumers’ purchase decisions will be automated as households, businesses and individuals increasingly buy products by subscription, signing up for scheduled delivery of goods they want to arrive automatically.
“Recreating the unique alchemy of people, place, purpose and production that forms a wicked brand experience is more difficult, if not impossible, to copy.”
Bots, such as automated customer service programs, are becoming ubiquitous. Often, retailers use this artificial intelligence (AI) programs to process customer inquiries. Bots capture and mine information. Consumers in China can interact with an online adviser named Xiaoice. She chats with customers, and they share stories with her. But she’s not real. Xiaoice mines the data of billions of online interactions, helping Microsoft better understand communications between humans and machines.
“Creativity is undoubtedly one of the least measured and most misunderstood assets a company possesses.”
At some point, humans will interact with AI devices as if they are human. AI-based retail relies on natural language conversations with digital assistants. Amazon’s Echo device, which uses its Alexa Voice Service, maybe the best-known example. Facebook is banking on chatbots becoming the primary form of human-to-computer interaction, even as messaging is eclipsing email. When Facebook let brands use its Messenger service, companies deployed more than 11,000 bots in the first two months. With such technologies, will stores still need to exist?
Virtual Reality and Augmented Reality
Facebook CEO Mark Zuckerberg believes virtual reality (VR) is the next big platform. It will enhance gameplay, education, live events, and more. In 2014, Facebook acquired Oculus VR, the premiere VR hardware innovator. Imagine virtually looking through a celebrity’s closet and buying what you like or virtually shopping for foreign-based brands with no language barrier.
“For each incremental dollar spent in the North America retail market as a whole, Amazon takes nearly a quarter.”
Pokemon Go uses augmented reality (AR), which superimposes a layer of digital information on the viewable world to bring real users to real places seeking virtual game pieces. IKEA uses AR to help customers imagine furniture in their homes; AR practically eliminates the line between reality and digital to show buyers exactly what they’re getting. Stores use this technology to reduce merchandise returns and build customer engagement.
“Imagine a future where Amazon ceases to be a digital catalog and instead becomes an expansive virtual world that you can step into.”
Nike envisions a future where customers will print their products in Nike stores or at home. Constantly improving 3D print technology gives this power to small firms so they can compete with larger rivals. For example, Phoenix-based Local Motors can print a customized 3D auto in hours.
Stores Have Become the Media
Shopping is like crack to the brain. A good shopping experience provides jolts of the pleasure neurotransmitter dopamine by fulfilling the need for comfort. Facebook, Netflix, Spotify, and most social media platforms use algorithms to give you more of what you liked before – while limiting your exposure to new things.
“Facebook’s ever-increasing ability to track and mine information about its users is enough to make the National Security Agency look like amateurs.”
Retail spaces enable customers to interact with products – like tech devices at Apple stores. Stores promote brand awareness, which enhances online sales. No shopping event beats the buzz and anticipation of an iPhone release. Customers filled with anticipation wait in long lines. A crowd provides the ultimate “social proof.” Online shopping can’t replicate the excitement of a mass of consumers in one place yearning for the same product at the same time.
“Networks…are capital-light, structurally lean and able to scale rapidly.”
Just as media have become the store, the store has become the media. Digital reduces the need for physical space. Makeup retailer Sephora gives shoppers access to online reviews at the point of purchase. Retailers must think in terms of “moments” that charm customers rather than “channels” that engage them. How a shopper first encounters a brand is a moment, whether digital or physical. As you identify the moments that create a customer’s journey, make it easy for people to pay you at each point in their experience.
“This influx of revolutionaries has brought with it a distinct culture shift in retail.”
The wholesale-retailer relationship is breaking down as brands sell directly to customers instead of leaving retailers in charge of “brand perceptions.” Nike, Kate Spade, and Coach have “direct-to-consumer channels.” Smaller, less-established brands now can build a direct customer base to compete in niche markets. Consumers’ quest for variety creates opportunities for retailers who can delve deeply into a product category.
“The world desperately needs ‘how’ you sell what you sell – the unique, remarkable and ownable experience you design around your product.”
Data points such as “anonymous facial tracking, interactive signage and tagging,” and “membership identification,” will give store managers crucial information. Essentially, the function of retail is shifting from sales to marketing. Technology will affect retail jobs. Talking robots from Simbe Robotics in California are more accurate – and cheaper – at tracking inventory than workers are. Warehouse robots can pull orders faster than a person and can cut labor costs by up to 80%. Retail must continue to rely on the human touch for fine motor skills and creative problem solving, but that will make retailing more of a profession than a job.
The Younger Generation
Millennials – born between 1984 and 2004 – will contribute a third of total spending by 2020. They graduate from college in debt and put off major life events, like marriage, that once led to greater consumer spending. Millennials cluster in urban areas and turn to “mobile-first.” This makes it harder for retailers, including big boxes, to reach them with old methods. Yet millennials relish the physical retail experience. They provide live events with record-breaking participation.
“If you want to visit the Champs-Élysées…you will go, shop and return without ever leaving your desk.”
Millennials seek visceral, exciting experiences and find most stores boring. Unfortunately, retailers’ obsession with “sales per square foot” means stores won’t risk more varied offerings. They stock only merchandise that sells well enough to justify its floor space.
“Re-engineering Retail”
Retailers must change their metrics of a store’s success. Stores need to provide brand visibility and welcome customers into the brand’s ecosystem. Outdoor gear retailer Globetrotter has giant pools where customers can try scuba and sailing products. Shoppers can test cold-weather gear in simulated Arctic conditions, camp overnight in the store to test products and even get their travel immunizations.
Pirch stores seek to revolutionize home-improvement retail by offering immersive product experiences. Their showrooms invite shoppers to engage. You can test the shower heads if you bring a swimsuit. Yoga and fitness apparel retailer Jennifer Bandier offers in-store yoga classes with celebrity teachers. Uniting her customer community put her five locations on track to surpass $20 million in in-store plus online sales. She made her store its ultimate advertisement.
Retail’s future is both bright and harsh. For brands to make the digital transition, they must recognize that no one needs their specific product. Customers have choices. If you want loyal customers, what you sell matters less than how you sell. If you can’t move fast and be a disruptor, you’ll get left behind. Most companies claim to value creativity, but few support it. To build organizational support for innovation, accept that it means introducing something new, not just improving an existing idea. Apple didn’t invent the smartphone; it created a paradigm-shifting iteration. To support innovation, get comfortable facing the unknown – something few firms embrace. Product iterations can help ease the way.
Companies rarely work hard to identify creative employees, but creative adults need nurturing. Reward innovation for its own sake, even if it leads to failure. Risk will eventually reap rewards. Innovation starts with being curious and asking what-if questions. Disrupt the preconceived script of how situations will play out, as Uber did when it challenged cabs. Build quick prototypes and test them rapidly. Google uses a five-step “design sprint” to define the purpose of an innovation. Ask each participant for a solution and compare the ideas against established criteria. Insurgent businesses challenge incumbents by dismantling existing market paradigms. With vision and a clear purpose, they focus obsessively on their customers.
Innovative companies do three things to leap ahead of their rivals: “They build networks, they benchmark laterally and they engineer everything.” In the past, the large, rich monolithic corporations succeeded in their categories because sheer size protected them from competition. But in the post-digital world, strength is in networks. Being marginally better than your category rival isn’t enough. You must offer the best experiential option in every category because that’s what draws customers. Successful companies obsess over the details of engineering delightful customer experiences.
About the Author
Retailing expert Doug Stephens founded the Retail Prophet consultancy. He also wrote The Retail Revival: Reimagining Business for the New Age of Consumerism.
