Retailers are feeling significant pressure as digital takes a greater and greater hold of the industry. Many say that digitization actually brings demonetization. This will result in a massive shift in the share pie for retailers. What once was a great traditional retail business, will become a much smaller primarily online business. I thought I’d take a stab at visualizing that. Thoughts?
“Shawn Harris, N.A. Retail & Hospitality Industry Lead, Zebra Technologies: Retailers should look at last year as a turning point, where more shoppers chose online vs. offline on Black Friday 2015. This means they should go leaner on in-store inventory (don’t worry, the majority of shoppers will start with your website anyway), ensure their websites can truly dynamically scale to meet load, use broadcast media to create theater and excitement in combination with personalized targeted ads on social platforms, and deliver what they say they will deliver.”
I believe that 97.5 percent of today’s traditional retailers will NOT survive the earthshaking transformation that is currently occurring in their industry. Changes in the customer shopping behavior and preferences, rise of on-line shopping, local and state government push to increase minimum wage, and uncertainty in the global economy have placed quite a few obstacles in front of retailers.
In 2016, a significant number of store closings and bankruptcies are an indication of both shifting consumer preferences, and an unsteady economy. U.S. retail is an approximately $5 trillion dollar industry, and approximately 16 million people are employed in the U.S. retail industry according to the U.S. Bureau of Labor Statistics. An estimated two-thirds of the U.S. gross domestic product (GDP) comes from retail consumption. Therefore, store closings and openings are used an indicator of how well the U.S. economy is doing overall. However, total annual U.S. retail sales have increased an average of 4.5 percent between 1993 and 2015, with 2015 being effectively flat with ~3 percent growth; according to the U.S. Census Bureau.
Roughly 30 percent of the annual sales of the largest U.S. retail chains and almost 20 percent of the U.S. retail industry’s annual sales come from the Christmas holiday shopping season. This past holiday season, 2015, saw for the first time more shoppers choosing to shop on-line than in-store with 103m choosing on-line, vs 102m in-store; over the holiday shopping “opening” Black Friday weekend. Internet sales rose about 23 percent in 2015. Amazon continues to dominate U.S. retail. Amazon represented 51 percent of every growth dollar in on-line sales, and 26 percent for retail as a whole, up from 22 percent last year. Also, Amazon is far and away the most dominant mobile shopping app out there, boasting installation on 36 percent of all U.S. Android devices and ranking first in shopping app searches on Google Play during the critical holiday and Super Bowl selling seasons (October 2015-February 2016. If this rapid transfer of business from store sales to the Internet continues, and it seems it will, traditional brick and mortar retailers must look closely at their current business structure and decide where to cut/add administrative staff, which stores to close and where to open, in order to survive.
Labor represents approximately 30 percent of a retailers operational expenses. After years of national debate about the need to raise pay so families can earn a living wage, there is a push across the country to increase minimum wage rates. In July 2015, New York Gov. Andrew Cuomo announced a plan to raise the minimum wage for fast food-chain employees statewide to $15 an hour over the next few years. Over the past year, several other states have raised minimum wages, but all fall below $10 an hour, according to the National Conference of State Legislators. The city of Seattle is phasing in a plan to raise its minimum wage to $15 per hour, as has California. Going to $15 an hour represents a 50% rise from California’s current minimum pay of $10, and a 67% jump for New York. This certainly is a double edge sword for retailers, whereas on one end they should see an increase in consumption in these communities; they will also have to accommodate an increased cost component to operating their business.
Uncertainty and pessimism have dominated the economic and business news in recent months. While at face value the mood seems justified as many negative factors (China’s financial gyrations, volatility in oil prices, and the further weakening of the US economy) are colluding, the recent developments by themselves do not yet signal an imminent global economic recession. In the U.S., Solid domestic demand will help overall GDP growth at 2.0 percent in 2016, which is slightly lower than 2015 growth rate. In Europe, despite increased political risks, the short-term economic environment has actually improved faster than expected. As is the case in the U.S. economy, the European domestic demand continues to drive the current moderate recovery. In Asian, the growth rates of China, India and Southeast Asia are unlikely to see significant improvement in 2016 compared to last year. Chinese growth in 2016 is expected to stay the same as that of 2015 at 3.7 percent. In Latin America, rapid declines in oil and commodity prices negatively impacted Latin American economies, and exacerbated the ongoing troubles in the biggest economy in the region, Brazil. Africa is looking positive but uncertain. The prolonged decline in commodity prices, as well as weak growth in Nigeria and South Africa, will cause overall growth for the region in 2016 to come in at 3.7 percent – which is, though still an improvement from 2015, well below the average growth of the last few years. When it comes to international expansion, retailers need to maintain a sharp focus on those regions that will afford the greatest top-line growth for their core business.
Although the U.S. retail industry is slowly expanding, not recessing, the lingering effects of the Great Recession of 2008 can be seen in the dramatic shift in consumer buying habits and preferences. The post-recessionary retail industry is all about the empowered consumer. Traditional retailers are aggressively trying to meet the needs of today’s shoppers by implementing a number of service capabilities under the umbrella of Omnichannel, working to make broad based system changes to integrate various departments, leveraging Unified Commerce platforms, and reimagine the store at a reduced sq. ft. “experience center.” The most successful U.S. retail chains will need to be able to deliver what consumers expect or die.
I’m a student of retail history and disruptive innovation theory, and neither are favoring retail incumbents. In 1960, 316 traditional department stores existed. This included the likes of Macys, Dayton-Hudson, etc. Well, in 1962 discounters started to dominate the market (e.g. Zayres, Arlans, Gibson’s, Masters, Two Guys, Korvette). Of the original 316 traditional retailers, only 8 survived the insurrection of the discounter (2.5 percent). Many traditional retailers also tried to operate both a traditional model and discount model; all but one failed to make this transition. The only one of the 316 traditional retailers that successfully transitioned into a discounter, was Dayton-Hudson, which created the separate business unit named “Target.”
What many of the traditional retailers tried to do was effectively disrupt themselves; rule #1 of disruptive innovation theory is “an organization cannot disrupt itself.” The reason why an organization cannot disrupt itself is because at its core, a disruptive innovation must be separated from the core business, it cannot happen within the existing organization’s Resources, Processes, and Profit-formula (RPP) – RPP determines what a company can and cannot do:
- Resources: Usually people or things – they can be hired and fired, bought and sold, depreciated or built, includes cash.
- Processes: Include the ways that products are developed and made and the methods by which procurement, market research, budgeting, employee development and compensation, and resource allocation are accomplished. Your company’s culture is process manifested.
- Profit-formula: The profit formula is how organizations internally determine which projects to select. Often consists of specific ratios targets, i.e. X% gross margin, IRR of Y, etc.
There are three main types of innovation:
- Sustaining Innovation: Offering ever better products, to sell at ever better margins, to your very best customers; Incumbents fight new entrants; Innovation aligns with existing business model.
- Low-end Disruptive Innovation: Offers “good enough” but not much more; targets “over-served” customers; figured out a fundamental different business model.
- New-market Disruptive Innovation: Targets “non-consumption.” people who did not have ability or access to incumbent product; Make profit for lower price-per-unit sold than incumbent tech. Think dollar vs percentages; Product provides lower performance for the existing market but higher performance for non-consumers.
An innovation is not inherently disruptive, it gains the disruptive designation based on its deployment. In the case of ecommerce to traditional retail, ecommerce has elements of both a low-end and new-market disruptive innovation to traditional retail. In that it serves an over-served consumer with an option that allows for the purchase of goods and services at a lower than average price, with good enough service with respects to delivery service’s SLAs; while also making retail goods and services accessible to non-consuming customers due to the ubiquity of Internet access and through leveraging existing delivery services (USPS, FedEx, UPS).
Traditional vs. eCommerce
In the mid to late 90’s to early 2000’s, when retailers initially launched their fledgling ecommerce initiatives they established the new channel as a separate business unit. At the time, the idea was that it was such a foreign and high-risk initiative that it made more sense to keep it separate, and thus easier to dissolve without impacting the core business being brick and mortar. Now retailers have adopted an ideal that integrating ecommerce into their core business will help them in servicing the customer. There is a lot that is true with this ideal. If you have a single view of your customer, products, and inventory then theoretical you should be able to orchestrate a consistent experience indifferent of the consumer interaction medium (stores, on-line, mobile, social, games, devices, or call-center). In the early days of an ecommerce initiative taking place within a traditional retailer, where it receives secondary focus and contributes sub-par revenue, this can work. It will still have inefficiency, but scale has a way of masking waste. However, as customers engage more with a retailer’s ecommerce business, causing leadership to encourage more internal attention be paid to it, yet it still does not compare to traditional sales profitability, the impact of the diverging resource needs, processes, and profit-formula start to weigh heavy.
Leaders in traditional retail organizations need to rethink their corporate structures, allowing for their traditional and digital businesses to be separate business units. This will allow the ecommerce business to develop the resources, processes, and profit formula needed to win! If a disruptive innovation is moved into the “old” business, the existing business will implement the innovation in a way that serves the existing company, making it a sustaining innovation, or ruin the innovation that was built/acquired.
This may be painful; there is a possible path to divert this existential issue. If retailers continue down the path of putting their ecommerce business under the same roof as their traditional business there is a high likely hood that it could cause both businesses to fail, or otherwise be negatively impacted. Retailers should take the initial step of taking a deliberate strategy of separating the two businesses, allowing them to operate independently with their own resources, processes, and profit-formula. Given the particular nature of the customer interaction, each business should focus on the customers’ “Job to be done.” A job-to-be-done is a circumstances-based description of understanding your customers’ desires, competitive set, anxieties, habits and time-line of purchase. This is key to aligning on the customer and being customer centered organizations. Provide your traditional and ecommerce business units with “Good money,” which is money that encourages a focus on driving growth and profits, respectively. The two businesses should have independent administrative functions, including finance and HR. However, they should share customer data, product information, marketing assets, inventory insights, and fulfillment services. All interorganizational shared services should be accessible via discreet web services. In addition, ecommerce should leverage the core business’ supply chain where appropriate; augmenting to meet its unique needs, up to and including leveraging services like Amazon’s Fulfillment by Amazon (FBA), in order to support scaling. On this last point, the amount of capital and complexity of Amazon’s supply chain/fulfilment services should not be underestimated, and retailers should take a serious look at how Amazon should best be leveraged for success.
In taking the Disruptive Innovation course through Harvard Business School, one of the first things that Prof. Christensen presented was that it’s surprising how many brilliant managers dismiss disruptions to their industry, or business, until it is too late. Omnichannel is possible; I believe that there will unfortunately be a large number of organizations who will not execute an effective deliberate strategy [top-down, thoughtful and organized initiatives], and will dismiss emergent opportunities [unplanned initiatives that bubble up from within]. If you want to see the real strategy of a company, don’t listen to what they say; watch what they do. It is the profit-formula (not leadership) that controls the resource allocation process. Leadership must understand that managing the resource allocation planning criteria is key as it will guide what you do; do not believe that as leadership what you say will just happen. Strategy is temporary. Never believe that the strategy that helped you to be successful, will always be the strategy that keeps you successful. Skate to where the puck is going.
- http://www.forbes.com/sites/walterloeb/2016/01/04/every-sign-is-saying-retailers-must-restructure-in-2016/# 5ac3339e5f94
- http://www.encyclopedia.com/topic/Discount_ Stores.aspx
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