Technology and changing demographics are driving the retail industry toward innovation, or bust.
By Meghan Laska
When the Jay H. Baker Retailing Center was launched 10 years ago, many of the most significant trends in retail revolved around malls, big box stores and category clubs. Stores such as Circuit City, Best Buy, Home Depot and Toys“R”Us were “category killers,” offering a large assortment of products and value pricing. On the other end of the spectrum were successful niche players in malls like Gap, Abercrombie & Fitch, Ann Taylor and American Eagle Outfitters. Today, these trends are “morphing,” says Barbara Kahn, director of the Baker Retailing Center and the Patty and Jay H. Baker Professor in the Marketing Department.
Primarily, the rise of Internet shopping is the root. A decade ago, online shopping accounted for a relatively small fraction of sales, but in 2012 e-commerce sales topped $1 trillion, according to eMarketer.
“Customer needs are the same—they still want large assortments at cheap prices—but the category killers of yore are being replaced by online retailers like Amazon, which can offer vast variety at a much cheaper price by getting rid of some of the costs of physical stores,” Kahn says.
As for the strategy of going after specialized markets, the Internet now allows retailers to reach a global niche segment.
Kahn adds that creative new concepts remain popular today. Ten years back, the club stores such as Costco were offering an exciting shopping experience with low prices and a treasure hunt. Today, the new concept landscape includes the excitement of “innovative retailers”—for instance, Warby Parker, LEGO and American Girl—she says.
“It’s a pretty thrilling time in retail because there is so much going on,” says David Jaffe, W’81, C’81, CEO of Ascena Retail Group and a member of the Baker Center Advisory Board. “Up until the last 10 years, the changes were more gradual, but the drivers behind the trends today, like technology, have really upset the apple cart of retailing.”
The “Endless Aisle”
One of the biggest trends enabled by the Internet is a move toward an “omnichannel” model. This refers to customers’ ability to interact with a retailer in the same way, regardless of whether that interaction is online or in person, whether it is a sale or a return. As Kahn explains, customers have come to expect it. While retailers are striving to become omnichannel, most of them aren’t there yet.
“It’s like internationalization and globalization,” Kahn says. “If your business started in the U.S. and then went to France, you could call it international. But to be global, you have to think of the world as one marketplace. Being omnichannel involves that same type of mindset.”
Jaffe, whose retail group includes dressbarn, Justice and Lane Bryant, agrees. The model requires the creation of an “endless aisle,” he explains.
“If you go to a store and they don’t have what you want, the store can order it for you from the endless aisle, which is online,” Jaffe says. “The lines are all blurred, and out-of-stock items can always be ordered.”
Neil Blumenthal, WG’10, co-CEO and co-founder of eyeglass retailer Warby Parker, observes that the omnichannel model is becoming so much the norm that he expects the term “e-commerce” to fall out of use in five to 10 years.
“E-commerce will just be assumed,” he says.
Blumenthal, a member of the Baker Director’s Council, attributes that five- to 10-year delay to “antiquated” legacy platforms still in use by some older companies. It was national news, he points out, when a few years ago Nordstrom integrated the inventory in its online warehouses with stores. “Some big retailers haven’t prioritized technological innovation as much as they need to. This is why so many insurgent companies have been able to come in and take so much market share so quickly,” he says.
Denise Incandela, WG’92, chief marketing officer and executive vice president of Saks Fifth Avenue, says that being omnichannel is a “major strategic initiative” for her company as well as many other department stores.
Incandela, also a member of the Baker Advisory Board, describes her company’s approach to omnichannel as involving multiple aspects, such as the customer experience, inventory, marketing and organization. For example, through its marketing Saks aims to be agnostic about a customer’s shopping channel by integrating its multimedia campaigns and providing an “omnibenefits” loyalty program. “From an organizational point of view, employees’ performance reviews and compensation are based on omniperformance rather than individual channels,” she adds.
Another significant trend: The Internet is mobile. Retailers should assume that all consumers are armed with smart technology, whether mobile phone, tablet or both, enabling them to price shop, make purchases and interact with retailers at any time.
“You can be in a Bed, Bath & Beyond and look up whether you can get a certain spatula in pink on Amazon. Mobile devices are used all the time to influence purchases,” says Beth Ferreira, C’96, WG’04, COO of Fab.com, an online design store.
Ferreira, who sits on the Baker Director’s Council with Blumenthal, claims that some retailers downplay the importance of mobile sales. Her company, on the other hand, sees more than one-third of its sales from phones and devices. Fab.com’s top customers are on mobile, she adds, so those transactions are often more valuable.
“We make it completely seamless, whether customers come from the Web or mobile,” Ferreira says.
Mobile is very important for Saks too, Incandela says—with a massive percentage of its sales coming through mobile and 85 percent of that through tablets.
“We also use mobile point of sale (POS), so you can pay with a device when standing in the store and don’t have to wait in line at the cash register. We’re constantly working to optimize the user experience across all devices,” she says.
Snapdeal.com, now one of India’s largest online marketplaces, also focuses on the mobile experience for customers. While tablets aren’t as common in India, Snapdeal’s founder Kunal Bahl, W’06, ENG’06, says that the use of mobile phones for transactions has exploded.
“There are now more mobile phone users than PC users, so this is a big market,” he says.
For Snapdeal, that has translated to mobile phone sales numbers jumping from 3 to 30 percent in the past year.
It is no secret that online shopping is increasing around the world, but Bahl points to an interesting companion trend: the gravitation of new e-commerce companies toward a “marketplace” model. Rather than buying products to sell directly through a website, many online businesses like Snapdeal, he says, are finding success acting as the conduit to connect buyers and sellers. Americans got familiar with this model with eBay and, more recently, Amazon. Now, sites in India, China and Latin America are marketplaces. Bahl cites MercadoLibre in Latin America (in which eBay has an 18 percent stake) and Taobao in China as examples. According to China Internet Watch, Taobao sales exceeded 1 trillion yuan ($163.4 billion) in 2012; Daily Finance reported that MercadoLibre’s second-quarter profits in 2013 were up 18 percent and revenue up nearly 40 percent.
Overall, e-commerce is leading to a “flattening of the world like we’ve never seen before,” Bahl says. It is destroying traditional geographic and political boundaries. He has seen a dramatic increase in the global demand for B-to-C commerce, which he expects to overtake B-to-B commerce by “many multiples.” He credits improved logistics, including more cost-effective shipping of individual packages around the world, for this trend.
Jaffe points out that globalization is impacting physical stores as well. Consumers in different regions have different needs and tastes.
“Sometimes, it’s obvious like not sending wool sweaters to stores in Florida, but stores need to plan for varying attributes,” he says.
Globalization can result in the opposite. Take the case of high-end luxury and fashion group LVMH Group, where up to 70 percent of the clientele at its Paris brick-and-mortar stores consists of international, nonlocal shoppers.
Says Pierre-Yves Roussel, WG’93, chair and CEO of the LVMH Fashion Division and a member of the Baker Advisory Board, “We have to organize ourselves to sell to them efficiently, which means thinking about languages, seasons, tastes and even the ways people shop based on culture.”
Socially Media Conscious
As anyone on Facebook, FourSquare or Pinterest already knows, social media platforms have become integral tools for retailers. In addition to providing valuable word-of-mouth marketing, social media platforms also allow retailers to engage with customers in a new way.
“It’s much less expensive to send out an email or post about a sale than mailing paper. It’s also more efficient if I can tailor it to the type of content a customer wants, which goes to customization. The key is making the message relevant to the customer so that it’s informative and not overly pushy,” says Jaffe.
One way Saks leverages social media, according to Incandela, is with in-store screens that show customers “social feedback.” For example, customers in the shoe department might see a Twitter feed scrolling on screens with relevant information about the shoes. Customers also can scan bar codes with their mobile phones to access product reviews.
She adds that sales associates are encouraged to engage with customers via social media. “It’s a tremendous opportunity to enhance relationships and directly connect with customers via all social media platforms.”
The Rise of the 360° Customer
Driving many of these trends are the millennials, the generation typically defined as people born from the 1980s to 2000. According to Barron’s, this group makes up the largest population cohort ever in the U.S. and accounts for an annual $1.3 trillion of consumer spending—21 percent of the total.
With this wave of spending come new norms, new attitudes.
“There is a cultural shift happening where people used to judge each other by the type of car they drove or size of a house, but those things no longer have the same value in society,” Blumenthal observes. “Attitudes are changing, and people are valuing experiences more, which you can see on millennials’ Facebook and Instagram postings when they talk about a vacation or an amazing meal.”
“We call this a move to emotional commerce. They are looking for more meaning in every purchase,” Ferreira agrees (though adds that some of this might be driven by more value-consciousness by many shoppers, not just the youth).
For brands that do want to make that emotional connection, a focus on design is key. This means attention to everything from the design of a façade to a website to a store’s interior.
Blumenthal says that when you walk into Warby Parker’s flagship store in New York, it feels more like a library than an optical store, with 18-foot ceilings, the appearance of book stacks and terrazzo floors with rolling ladders.
“It’s an experience that people want to talk about and post on Instagram,” says Blumenthal.
Incandela describes how Saks is creating “a playground” for millennials in its stores.
“We’re constantly challenging ourselves to ensure our store experience is animated and engaging,” she says.
Current examples include mobile POS to avoid waiting in lines, in-store Wi-Fi, those aforementioned scrolling screens displaying relevant social media posts, the ability to scan bar codes with mobile devices for product reviews and in-store iPads to access Saks online.
Beyond design and fun, engagement also comes down to better customer service to connect emotionally with customers—sometimes customer service of the oldfashioned, personal variety.
Warby Parker hires graduates from top universities like Penn to staff its customer experience team.
“People think we’re crazy to invest so much in hiring talented people, but it’s an important touch point with customers, and when we provide an awesome experience, it comes back 10-fold. Word of mouth is over 50 percent of our business,” Blumenthal says.
“Luxury brands have offered it for years, but now it’s become more the standard in the retail industry,” LVMH’s Roussel observes about customer service.
He adds that shoppers want the full “360 degrees” experience.
“In particular, they want to experience a meaningful connection with the brand (either physically or online). Our staff in the stores plays a major role in making that connection, building the relationship,” Roussel says.
The Pressure to Change
Given these inexorable trends—technological, global, demographical—retailers stare down the reality that innovation is essential for survival, much less success.
Roussel explains it this way: “When you go without changes for a long time, then it becomes that much harder to do something different. Meanwhile, the bar gets that much higher. Sometimes innovation requires radical changes.”
He cites the closure of the department store La Samaritaine in Paris, established in 1870.
“We got to the point where we felt it was better to start from scratch, closing all operations in 2008 and reinventing the new department store of the 21st century targeted toward mostly international customers, which will reopen in 2014.”
In China, Roussel’s company depreciates investments in stores every three years to gain “flexibility.”
“It’s a fast-changing market in China, so we have to shorten the life cycle of retail concepts and be able to redeploy assets/ change locations rapidly,” he says.
For Incandela, future innovations could come in the form of ever-more-amazing and engaging technology, such as mobile wallets, magic mirrors to virtually try on clothes, and digital mirrors and hangers that display product reviews and social media “likes.”
“In the end, though, the more things change, the more some things stay the same,” says Wharton’s Kahn. Retailing is about creating customer value, understanding customer needs and providing something that they are willing to pay for. Whether it’s global, omnichannel or mobile, retailers need to figure out how to get consumers to go to the store and buy.”