Brick and mortar isn't dead, but innovation is...
Ben Silver
Co-Founder + COO at ivee / Managing Director, BeamBox Ventures
There's one word that scares traditional retail more than any other, Amazon. What started as an online bookstore in 1994, has been driven to become a business behemoth with a relentless growth rate and an unabating desire to touch every traditional retail vertical, whilst utilising a scorched earth policy and a limitless supply of capital. What was seen as unfathomable a few years ago, something that Amazon "would never go into" is now becoming reality, brick and mortar. So, what now for it's competitors?
We've seen over the last couple of years brick and mortar retailers drop like flies in the US and other markets, driven to a watery grave by plunging customer and sales figures, unrelenting pressure on margins and the retail business model, and an inability to move fast enough to effect change before their lifelines run out. Much of this is due to an inconceivable amount of naivety within the vast amount of management structures, in addition to the old world "philosophies" that if they carry on, business as usual, cut operational expenses, fabricate profits by closing stores or launch a new credit card, everything will be okay.
History (both recent and over the decades) is littered with the corpses of companies that played the dunce, and suffered a slow and painful death; Circuit City, Radio Shack, HHGregg, Borders, Comet (UK), to name a handful. Many more have filed for Chapter 11 in a bid to stave off the creditors and revive flagging business; American Apparel, Kmart and Brookstone immediately come to mind. Sears, Target, Macy's et al, are all teetering, beholden to these crippling inefficiencies.
A few weeks ago, Target announced the inexplicable decision to shutter most of their innovation divisions, including the Store of the Future & Goldfish initiatives, amongst others, in an attempt to focus on their core business. Mindblowing. A few weeks later financial results were announced sending Target's shares down 13%, clearly demonstrating exactly why it is that innovation is the most critical component to theirs (and others) survival.
Amazon is the grim reaper, and it's demonstrable ability to move on a dime is truly frightening and breathtaking at the same time. To counter this, and to survive, all retailers need to be innovating, and quickly. There are numerous parts of the retail flow that need change, and I'll dive into the first three changes below:
Technology Mindset
Innovation needs to be removed from the small 50 person labs and instead executives need to set about the proliferation of technology across the whole organisation. Amazon treats retail in a technological mindset, every piece of the organisation uses data, automation and constant testing of new concepts. Throw it against a wall, see if it sticks, if it doesn't, can it. Everyone in technology understands this philosophy of continuous iteration.
Traditional retail thinks like a real estate company; where's the prime real estate? How many products can I jam into the store? How much supplier advertising can I get on my website?
For a start, this mindset needs to shift. Technology is a tool that retailers should be embracing across all facets of the business. Retailers have hoards of consumer data, and utilising it in the right way is crucial. Data is key in deciding which products to bring in, how to dynamically price goods, and to understand consumers behaviours on a granular level. Digitising and automating many parts of the supply chain is critical. Why do range changes happen twice a year? Why do promotions take so long to set into motion at a store level? All these processes can be automated with system software that's readily available today.
Supply Chain
It utterly and completely baffles me the disparate nature of supply chains, the archaic software, and seemingly brazen ignorance of the people who run these systems. Retailers supply chains are a web of mess, multiple systems to do the same job, new systems that don't integrate with old, new portals that aren't interconnected to other new portals. Supply chains should be automated, they should be interconnected, and they should not be asymmetrically and individually updated without consequence for the other systems on the supply chain. There's been a ton of innovation in this space, from logistics, to vendor portals, to merchandising, and retailers should be leveraging these technologies to streamline their supply chains.
From a supplier perspective, if I want to engage from scratch with a retailer (except Amazon) it currently takes months to setup as a vendor, months to setup a product, I need another system for invoicing, another system for logistics, another system for merchandising etc. You get the point.
I'll never forget logging into a supplier portal of a very large retailer only to be told that I need to downgrade my browser to IE7.
By intertwining all of these systems, centralising and automating them, retailers will significantly be able to reduce huge operational expenses associated with running multiple systems that are incompatible.
Product Assortment
I've run out of shampoo, I walk into my favourite retail store and what do I see? 20, 30, 40 different brands and SKU's of shampoo. How do I decide?
There's a figure that goes around that the average Target store has 120,000 products in an average superstore, but 20000 of those account for 90% of revenue. So why do you need the remaining 100,000 products. I can't verify this figure, but it's hard to not see the overarching predicament. Choice. It's the firm belief that the more choice a consumer has the better, but contrarily this leads to a problem first coined by Alvin Toffer, and further explored by renowned Columbia professor Sheena Lyengar, the "Choice Overload Problem". Whilst this doesn't necessarily detract from the fact that consumers have favourite brands and will still likely buy a product, it does mean that suppliers are overburdened in their inventory expenditures, and the vast operating expenses of fulfilment warehouses and hubs, just to carry another brand of shampoo that won't necessarily boost division sales.
Retailers should swing the emphasis to data, and use data models to predict the likely success of an individual product before it goes into store and not just rely on buyers and merchandisers to draw up loose forecasts. By using data, retailers will be able to get insights at a granular level on a per store basis as to which products they should or should not be stocking based on quantifiable metrics and driven by local buying behaviours. Driving inefficiency out of the product mix is crucial to reducing operational expenses and inventory costs which will liberate much needed cash flow to focus on improving other parts of the business.
Management
It starts at the top, and I truly believe that technological change and innovation is consistently shuttered, paused, overlooked or given meagre budgets because of generational and cultural proclivity of many seasoned CEO's and executive teams. Too many large co. CEO's are focused on pandering to shareholders, happy with stagnant growth, ignorant to the granular details of their business and with methods stuck in the 70's.
Look at Walmart's purchase of Jet.com, not just as a desperate move to buy growth at their nascent e-commerce offering, but more so to overhaul huge skill deficiencies within their digital teams. Bring in Marc Lore, a seasoned technology veteran, embrace change, overhaul the teams and fingers crossed results will come. It might be desperate but it's a quick way to overhaul a management team that had run out of ideas.
Change is hard, change is disruptive, but change is necessary. In order to survive, retailers need leaders who aren't afraid of change. Buy companies, bring in top talent, do what is necessary, but don't stand still, don't "focus on your core business" and then shut down your innovation department and time warp back to the 00's.
I want to make something clear, brick and mortar is not dead, consumers' fundamental habits will render physical stores a key part of the economic landscape for a long time yet. Amazon also clearly sees physical as strategically important, with their Amazon Go and Bookstore concepts. What has happened, is that physical retailers have lost their ability to innovate, befallen to the big corporation mentality and are stuck in the past. There needs to be some radical changes from the front to the back.
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