Innovating to parity

Let’s face it, most traditional retailers aren’t very good at innovation. There is no such thing as an R&D budget at most of them. Many barely even have any real process or tangible goals centered on bringing new things to market. Labeling your typical large retailer “reactive” when it comes to innovation is being generous and polite.  Not surprisingly, most of the useful disruption in the retail space has come from outsiders and start-ups.

Recently we have seen a number of sleeping giants begin to awaken to the need to raise their game and pick up the pace. The digital transformation that has swept through retail, and the resulting blurring of the channels, makes it impossible for even the most conservative of brands to sit idle.

Yet, here’s the problem. Most of these retailers are merely focused on closing the gap between them and the obvious or emerging leaders. Once some new technology or marketing technique or experiential dimension begins to prove itself out, then these companies kick into action. Apple starts doing untethered checkout, a couple of  years later mobile POS starts springing up nearly everywhere. A few brands have success with order online, pick up in store, and soon that is on everyone’s list of 2015 projects.

There’s nothing inherently wrong with being mindful of which new strategies are gaining consumer and economic traction and positioning yourself to be a fast follower. And to be sure, if a company finds itself in trouble, it is completely sensible to find the areas of innovation that can quickly deliver the greatest near-term leverage.

But most of these brands are really just innovating to parity. By the time their innovation efforts get to scale, the next big thing is beginning to emerge and once again they themselves behind. It’s the proverbial difference between skating to where the puck is, rather than skating to where it’s going to be.

It’s great that more companies are embracing innovation. But it’s not enough to merely step on the innovation treadmill.

Winning in today’s environment requires a commitment to anticipate, to leap, to experiment, to fail, to refine and get up and try again.

Leading from behind has never worked.

And hoping to lead from parity probably won’t cut it either.

 

 

 

 

The future of omni-channel will not be evenly distributed

While many brands were slow to drink the omni-channel Kool-Aid, failing to recognize a fundamental shift in consumer behavior that began over a decade ago, most are now throwing gobs of money at various cross-channel marketing and “seamless integration” initiatives. Breathless pronouncements fill industry presentations and press releases. CEO’s throw around terms like “channel agnostic” and “the blur” as casually as they talk about the most recent quarter’s earnings per share. Many have even created new positions with “omni-channel” featured prominently in the titles.

As someone who has been beating the one brand, many channels drum for a long, long time, I’m hardly one to criticize the thrust of these efforts. Yet as many brands invest people, technology and dollars in search of a cohesive blended channel, frictionless commerce strategy, one very critical consideration must be kept front and center. I call it omni-channel’s migration dilemma.

The growth of online commerce and digital marketing impacts different brand’s marginal economics differently. We know for sure that building out e-commerce, mobile and other digital capabilities is expensive. Investing in consumer friendly technology like order online and pickup in store requires costly technology and process redesign work. If all that happens is that companies spend a bunch of money to merely spread the same amount of revenue over their traditional and digital sales channels, profits gets worse not better.

The story is even more depressing if a company sells lower priced items. In most cases, the marginal profitability of selling an item online is lower than selling it in a physical store. Every sale that migrates from a brick and mortar location to e-commerce not only lowers the productivity of the store that lost the sale, but it erodes total company profitability. This can actually be the start of a cycle of store closings and assortment narrowing that is almost certain to end badly.

Some companies clearly understand this phenomenon and have either gone slowly into digital commerce and cross-channel integration or have basically sat on the sidelines. H&M and Primark are some examples. While this may have short-term financial benefits, long-term it’s hard to imagine how these brands can ignore a fundamental and profound shift in consumer dynamics.

The implications of all this are two-fold.

First, most retailers must think of enabling their omni-channel strategy as necessary, but not sufficient. And rather than blindly embracing all things omni-channel, they need to have a deep understanding of their core customer segments priorities and their relative competitive position against those needs. Armed with this information–and rooted in an understanding of the underlying economic drivers–a phased, multi-year and well-reasoned roadmap can be implemented.

Second, and by far most importantly, if a brand lacks a compelling value proposition that generates above average, incrementally profitable future growth, moving into the omni-channel future will only portend lower returns on investment and, potentially, a trip to the retail graveyard. The dynamics of an omni-channel world can be a source of competitive advantage, but only if the underlying brand promise and delivery is relevant and remarkable. Far too many brands are treating omni-channel capabilities as a panacea, when in fact it may ultimately be poison. Unless you’re Amazon (and let’s remember Amazon has never earned a profit) you can’t and shouldn’t avoid being thrust into a blended channel world. But how you do it matters a great deal and you can’t use au courant new tools and technologies to mask problems with your core business model.

The future of omni-channel will not be evenly distributed. Those brands with strong value propositions and compelling economics will use leadership in customer-centricity and frictionless commerce to extend their competitive positions, create strong brand advocates and generate extraordinary financial returns. Those brands that already suffer from a lack of customer connection and relevance will only see their weaknesses made more obvious by the sea changes that are sweeping the industry. Investing in omni-channel may allow them to continue to tread water for a bit, but eventually they will go under. Brands that are stuck in the vast, undifferentiated middle need to pick a lane and get busy. Without breaking out from the pack, investment in omni-channel may allow them to hold serve, but they will never win the game.

 

 

Wall Street’s simple, surefire–and mostly wrong–strategy to fix retail

Show me a struggling retailer and I’ll tell you what many Wall Street analysts will say is that company’s quickest path to new-found prosperity. Close stores. Or better yet, close a whole bunch of stores.

This was supremely evident with the frenzy that erupted on Twitter prior to JC Penney’s Analyst Day last week. Here’s a paraphrased exchange I had with one “famous”–mostly for posting photos of crappy Sears stores–Wall St. type.  Note: this is highly edited and paraphrased for brevity (and perhaps levity).

HIM: Penney’s is about to announce a bunch of store closings.

ME: I doubt it.

HIM: But they must close stores, lots and lots of stores!

ME: No they don’t. (I proceed to tell him why).

HIM: You don’t understand. They must close stores, lots and lots of stores! They need to have the same number of stores as Macy’s!

ME: That’s dumb.

HIM: You’re dumb.

The Analyst Day presentation concludes. Penney’s announces no store closings.

ME: I don’t want to say ‘I told you so’ but…

HIM: Hey, want to see my photos of really crappy Sears stores?

Now don’t get me wrong. Overall, the retail industry is over-stored. And the growth of e-commerce is causing a fundamental re-think of the number of stores a retailer requires, the size (and configuration) of these stores and how these stores need to operate. A contraction and re-working of gross retail space is inevitable.

But the knee-jerk reaction in favor of wholesale store closings is focused on the wrong problem. Struggling chains like Radio Shack and Sears aren’t in dire trouble because they have too much retail space. They are struggling because their overall value proposition isn’t working. If Radio Shack and Sears had a business model that was fundamentally sound, their needed store count overtime wouldn’t necessarily be dramatically different from what they have today. Show me a nationally branded, omni-channel retailer that is closing a lot of stores and I’ll show you one that is likely on the way to extinction.

What many on Wall Street often don’t get is that the cost of real estate for many of these established retailers is really quite low, making it easy for even chronically low productivity stores to be cash positive. And while Wall Street likes to cite the growth in e-commerce as the reason why store counts need to shrink dramatically, the reality is that for any decently integrated retailer, stores help drive the online business–and vice versa. Total customer and cross-channel economics need to be taken into account when doing a store closing analysis. When you do this analysis, along with the cash flow calculations, it turns out that closing a lot of store often makes things worse.

As for JC Penney, they are certainly far from out of the woods. They have a ton of work to do to refine and execute a merchandising and customer experience strategy that can regain share in an intensely competitive sector of the market. They are rightly focused on honing a new brand positioning and strengthening their omni-channel capabilities. My educated guess–having done this sort of analysis for other department store retailers–is that with conservative sales growth assumptions, only around 5% of Penney’s stores would be sensible candidates for near-term closure. Penney’s management is likely watching this list closely as they see how new strategies take root and they better understand the omni-channel effect.

For me, if Penney’s were to announce a large number of stores closings in the next year–say 75 or more–it wouldn’t be evidence that they are smart managers, it would be a sign that their overall strategy isn’t working.

 

 

Unified. Personalized. Amplified.

More and more, the customer is in charge. More and more, your best hope for superior growth–much less staying in business–requires stealing share from the other guys.

Unless you compete primarily on price–and your cost position allows you to win the inevitable race to the bottom–I suggest focusing on three guiding principles if you want to win in an ever noisier, omni-channel world.

Unified.

The lines between shopping (and media) channels grow more blurry by the day. The growth in mobile is making the demarcation between e-commerce and brick & mortar a distinction without a difference. Increasingly, the blended channel is the only channel.

For companies that hope to thrive, this means taking a sledgehammer to silos. Customer data silos. Inventory silos. Organizational silos. This requires eliminating the friction that exists throughout the consumer’s decision and purchasing journey. It necessitates an intense focus on integrating the way the customer interacts with your brand and connecting all the dots on the back-end.

Ultimately, you may tell yourself you have many channels, but from the customer’s perspective there needs to be one brand and a completely unified experience.

Personalized.

One-size-fits-all marketing strategies are becoming less and less effective. An explosion of choices means the battle for share of attention grows ever more intense. For many brands, it’s the end of mass and the beginning of us.

Understanding us–and consistently delivering remarkably relevant experiences and offers to us–puts a premium on deep customer insight. It requires developing ways to address us uniquely and in context. It requires a commitment to experimentation.

The notion of 1to1 marketing has been with us for some time now. At last, the tools to deliver on the promise are becoming readily available at scale. More importantly, the customer expects us to know them, show them we know them and show them we value them as individuals. Ultimately, he who gets closest to the customer wins.

Amplified.

In many industries there is a pervasive sea of sameness. Similar products and services. Nearly indistinguishable (and relentless) sales and promotions. Undifferentiated branding campaigns. Look-alike designs.

It’s always been a solid strategy to have a unique selling proposition. For a long time we’ve known that word-of-mouth is a brand’s most effective advertising. But in today’s world it’s harder and harder to separate the signal from the noise. Without the remarkable–without your purple cow–at best you’ll tread water. At worst, you are out of business.

Without something meaningful and relevant to amplify about your business it’s hard to imagine why anyone will pay attention for very long.  And without a remarkable story to share, it’s hard to imagine how your customers will help amplify your message.

 

Omni-channel’s migration dilemma

The shift in retail to a more omni-channel world is dramatic and profound. And since the term “omni-channel” gets thrown around a lot–often vaguely or carelessly–let me be clear about what I mean: more and more customers are becoming engaged in utilizing multiple channels–stores, mobile, online, social networks and the like–to explore, research and transact.

One important implication of this phenomenon is that many consumers are becoming what I call “blended channel” customers; sometimes choosing to transact in physical stores, sometimes buying online. And they commonly use multiple sources to aid in the decision journey, regardless of where their ultimate transaction may be recorded.

Their loyalty is to the brand, not a channel.The pressure, therefore, is on retailers to become more channel-agnostic, break down their operational silos and create a frictionless experience across channels if they hope to win over this growing cohort.

So, at one level, it’s easy to understand the retail industry’s frantic quest for so-called omni-channel excellence. But the success from omni-channel will not be evenly distributed–and for reasons that go beyond a given company’s willingness to invest or their capability to execute well.

What many leaders and analysts fail to appreciate is that as customers migrate even a small portion of their purchasing from physical stores to digital channels, a number of important dynamics come into play, and a huge dilemma may emerge.

It’s important to understand that the transaction economics of physical stores and direct-to-consumer (D2C) are quite different. Brick and mortar is mostly a fixed cost business characterized by lots of capital tied up in real estate and the supply chain, married with some relatively high costs just to stay open and staff the store during typical open hours. By contrast, above a basic scale, D2C is highly variable. In most cases, it costs more or less the same to take an order, process it, pick it out of central inventory, pack it up and ship it, regardless of whether the item is priced at $15 or $150. Generally speaking, the higher the average order size, the greater the profitability. If you sell cheap stuff on-line–particularly if you can’t recover your shipping costs from the consumer–good luck making any money.

So if the variable economics of the digital channel are superior to brick and mortar–everything else being equal–the more customers become omni-channel in their behavior, the better a brand’s economics become. This is one of the reasons you’ve seen brands with higher average order sizes (e.g. Nordstrom, Neiman Marcus) investing aggressively in building out their e-commerce capabilities for over a decade.

If the marginal economics of the digital channel are worse than bricks & mortar AND the brand is growing slowly or not all, a real dilemma emerges. On the one hand, changing consumer preferences essentially demand investments in omni-channel capabilities. And this is no cheap date. Yet as customers migrate from stores to online, the overall economics deteriorate in the aggregate. Worse still, a dramatic shift away from physical stores to e-commerce will make many stores questionable economic propositions. Yet, closing those stores may cause the loss of some or all of a blended channel customer’s business. It’s easy to see this as the start of a downward spiral (I’m looking at you RadioShack).

From a consumer’s point of view, the deployment and improvement of omni-channel capabilities is a bonanza. From a retailer’s point of view, the rush to all things omni-channel–without a clear understanding of the underlying economics, the different behaviors by different customer segments and how physical channels interact with digital channels to deliver a remarkable total customer experience –can lead to some very serious mistakes.

 

Note: For an insightful and data rich discussion of many of these issues, I wholeheartedly recommend Kevin Hillstrom’s blog: http://blog.minethatdata.com/

“Chief Silo-busting Officer”

We’ve all heard the term “customer-centric” ad nauseam. And “omni-channel” is quickly reaching similar status.

My inbox and RSS reader are chock-a-block with articles, white-papers and sales pitches, all promising the keys to omni-channel success. Some extol “a single view of the customer.” Others opine on cross-channel inventory visibility or similar elements of a supposed seamless customer experience.

By now, the building blocks of what I like to call “frictionless commerce” are well-known. By now, if you’ve been paying attention, you know what to do. Yet it’s not getting done. We all know it and the customer data proves it.

The simple fact–the blindingly harsh reality–is that a bottoms-up strategy takes too long. The business world is not short on well-intentioned VP’s and Directors each pushing their particular agendas to act on behalf of the customer. Yet despite their passion and clever PowerPoint presentations, they all hit the wall at similar points.

Time and time again, over and over, the barrier to customer-centricity, omni-channel success–or whatever the heck you want to call it–starts and ends with organizational silos: silo-ed systems, silo-ed customer data, silo-ed inventory, silo-ed metrics, silo-ed incentives and on and on. When customers don’t care about channels, yet brands remained anchored in channel-centric thinking and structures, the gap between expectations and reality remains stubbornly large.

Some more forward-thinking companies have put senior executives in charge of “omni-channel.” Others have named Chief Customer Officers.  Good for them. Necessary perhaps, but not sufficient.

The hard, essential work of moving towards remarkable customer-centricity and true frictionless commerce requires an all-in, top-down strategy. And that, my friends, means it must be owned and driven by the CEO, supported by the Board of Directors.

Until the Chief Executive Officer becomes the Chief Silo-busting Officer all the talk about omni-channel this and omni-channel that is really just that. Talk.

 

HT to Suzanne Smith at Social Impact Architects. She addresses this issue for the social sector in a recent post.