Technology Isn't Driving Retail Disruption — Customers Are

Most people think technology and Amazon.com are driving retail disruption. To address this concern, retailers have invested heavily in e-commerce and now delivery technology such as self-driving cars, robots, automated warehouses, etc. But the retail decline hasn’t stopped. Consider Macy’s. The company started its digital transformation in 2010 with an omnichannel strategy which allowed customers to order online and get it delivered at home or pick up at a store. Despite being a pioneer in digital strategy, Macy’s revenue and profit decline continues.

However, companies like TJX (parent company of TJ Maxx, Marshalls, HomeGoods) and Inditex (parent company of Zara, a European retailer) are doing great both in terms of revenue growth and profitability. See the chart below. TJ Maxx and Zara have some online presence, but their focus is to get consumers into their stores by continually updating their merchandise. However, they go about doing it in very different ways.

Credit: 10Ks

TJX buys its products from major brands at a discount and then sells them in its stores. What’s available in-store last week may not be available this week. Shopping at TJ Maxx or Marshalls is always a treasure hunt. This has created a loyal group of customers who keep coming back to see what’s new. TJX University trains the company’s buyers in the art of deal making. They're empowered to make millions of dollars in deals that, in other companies, would require approval from top management. In its nearly four-decade history, TJX has had only one year of negative same-store sales.

On the other hand, Zara focuses on getting catwalk design into its store in less than two weeks, while it takes other retailers nine months to 12 months. To achieve this remarkable feat, Zara produces close to markets and not in far off countries, leaves room for extra capacity, and manufactures in small batches. Production in limited quantities allows Zara to command a higher fraction of the full retail ticket price (an estimated 85 percent) compared to the industry average (60 percent to 70 percent). Zara’s profitability is significantly higher than the rest of the industry.

What Can Retailers Do?

Step 1: Identify the right customer focus strategy.

Department stores like Macy’s use generic strategies such as a flashy storefront, big sale signs, and standardized products that don’t help them connect with customer needs. Retailers have to identify customer needs for their targeted segment and devise strategies to address them. For example, customer needs in the apparel industry are fit, fabric, fashion and affordability. If an apparel retailer is focusing on teenagers or fashion-conscious customers, fashion and affordability are probably most important. Zara targets this segment with speed, while TJX does it by affordability. However, when consumers are looking for a business suit, fit and fabric are probably more important. A Suit That Fits, a U.K. based company, targets this segment with bespoke suits or by personalization. The demand for apparel is slowly moving from standardized products to personalization, as can be seen from slowing growth of fast-fashion companies like Zara. It’s a great opportunity for all apparel retailers.

Step 2: Create operations that support the strategy.

Once a retailer has figured the right strategy, its operations should be able to support the business strategy the way Zara and TJX have done. Much of the retail operations are run based on old industrial age philosophies of standardized mass production in far off countries. Flexibility and speed will become important to support customers’ changing needs.

Step 3: Enable with technology.

Once retailers have figured out their operations, it’s time to choose the technology to enable business operations and connect with customers. Not the other way around.

Conclusion

It’s time retailers realize that customers are driving disruption. Their blind pursuit of technology isn't winning them customers. Consumers will only purchase if their needs are met. This means retailers will have to identify the needs of their targeted segments, find a better way to address those needs, and then keep improving. Technology is an enabler if selected appropriately; otherwise, it can become a distraction.

Suman Sarkar is a partner with Three S Consulting and an international consultant who has advised more than 40 Fortune 500 companies in strategy and operations. His new book, "Customer-Driven Disruption," (Berrett-Koehler, 2019) is a blueprint for showing how companies must adapt to ever-changing global demographics and markets.