“Customers will not pay literally a penny more than the true value of the product” — Ron Johnson, former senior vice president, Apple Retail, and J. C. Penney’s new CEO
Profit margins of Wal-Mart, Amazon, Best Buy, Target, Home Depot and Apple over the past decade.
While some may view the wholesale destruction of numerous brick-and-mortar segments as inevitable, we all have a vested interest in seeing the retail industry reboot itself for the modern age. Because as Main Street goes, so does America.
This is no mere platitude when you consider that 13.3 percent of all jobs in the U.S. are in retail (that’s 14.7 million jobs in all, according to the Bureau of Labor Statistics), and retail is deeply tied to consumer spending, the same spending bracket that accounts for two-thirds of the U.S. economy. This doesn’t even factor in the natural synergy between our domestic manufacturing base and Main Street retail as a sales channel for that base.
To say that our society and the American economy have undergone a prolonged period of disruption and change is an understatement. We are three-plus years removed from the onset of the Great Recession, a decade beyond the burst of the Internet bubble, and it’s almost five years since the rise of the iPhone, which signaled the true beginning of the always-on era.
In the big picture, the economic and technological shifts have created a discriminating consumer who is simply smarter about how they spend their dollar, both out of financial need and by virtue of having deep product and market intelligence at their fingertips.
Mobile ubiquity, in turn, has led to “showrooming,” where consumers use their nearby retailer as a personal testing ground to try before they buy — and as often as not, make a purchase on Amazon instead of at the retail store. And broadband is transforming entire categories of products (music, video, books) that were once exclusively analog to digital, and boundary-less.
Obviously, the game has permanently changed for brick-and-mortar retailers (see Best Buy CEO Brian Dunn’s recent letter), and companies must evolve to survive.
Three routes to survival
I’d argue that offline retail stores have three primary paths to avoid extinction (note: my first career was in retail real estate asset management).
1. The first, and least appealing, is to compete on price. The hard truth is that in the age of the connected consumer, the real cost of a product is transparent. In the most commoditized of segments, this means that retailers have to live within Walmart (3.4 percent) or Amazon (less than 3 percent) profit margins, or they will die.
This is an incredibly challenging strategy to execute over the long-haul. Even at low-margin price points, consumers expect educated pre-sales service, functional post-sales support and seamless logistics from store to home.
2. The second path is to embrace a store-within-a-store model, where retailers focus on a few key product lines. With this approach, retailers and manufacturers work hand-in-hand to ensure that their products are meaningfully differentiated from the competition and that sales personnel are trained to articulate these differences.
Target is beginning to experiment with this via two different avenues. One is to work with Apple to create mini-Apple stores within Target locations, with a goal of tapping into everyday consumers who might not otherwise be looking for electronics. And under the name The Shops at Target, the company has partnered with specialty boutiques to co-create affordable, limited-edition collections.
3. The last path is to focus the totality of the business on creating products and experiences that are proprietary and unique. This, of course, is the Apple story. Apple focuses every fiber of its being on transformative solutions that blend design, development and distribution.
There are numerous innovation strategies that retailers can pursue on this path. For example, creative marketplaces like Kickstarter and Etsy could evolve into R & D farms for retailers. The upstarts get symbiotic funding, incubation, distribution and joint marketing, and the retailer gets exclusivity and a low-cost way to seed R & D.
Retailers can also build brand loyalty by retooling their manufacturing processes so that consumers can participate in product creation. Nike is doing some amazing things with their Nike ID system, which helps people design their own custom shoes and updates customers as their shoes are being made.
By perennially thinking beyond conventional wisdom about product categories and logistical boundaries, Nike has grown its stake of consumer mindshare, and it’s done so profitably through differentiation.
Applying this same ethos, retailers can optimize their entire supply-chain to achieve real-time agility within the markets they serve. With this approach, companies produce smaller lot sizes, tailor their inventory to suit local geographies and change inventory as rapidly as tastes change.
This strategy has served fashion retailer Zara extremely well. Zara’s “fast fashion” model has been a game-changer for the company, enabling new designs to move from the catwalk to its stores in two weeks (the industry average is four to six months). This helps Zara stay in sync with the latest fashion trends, and the new designs create a sense of exclusivity. The net effect is that 85 percent of their clothes sell at full-retail price, and the company now sees dramatically higher return visits by customers.
The critical point here is that each of these approaches goes way beyond platitudes about “delivering better customer service.” Instead, each path focuses on innovation, integration and extension to deliver a retail experience that is more than the sum of its parts.