The New Retail Brand Frontier: Disruptive Innovation

As we enter a new year in a slow-growth economy, it's worth considering which retailers may excel in this competitive environment and those which may fall behind. With limited opportunities for growth, it takes something extra to stand apart from the pack. In a word, it takes disruption.

"Disruptive innovators" are essentially game changers — think Amazon.com, Facebook, Apple. Whether creating an entirely new market, offering a better product or service than anyone else, or even producing a "good enough" product or service at a much lower price, these companies take advantage of underpenetrated positions in large markets, and can grow much faster than the general economy.

At a broad level, three distinct forms of disruptive innovation impact our world today:

• high-quality innovation;
• low-end disruptive innovation; and
• new market creation.

High-quality innovators focus on meeting the demand for higher-quality products, services and experiences from consumers willing to pay more for the improvements. Disney, for example, has pulled customers away from existing competitors by offering superior content and a higher-quality experience (at a higher price).

Conversely, low-end disruptive innovation is when a company introduces a disruptive product or service at a lower price to a large existing market that's already overserved in terms of satisfying demand. Wal-Mart, which pioneered the "superstore" concept emphasizing convenience and affordability, is a classic example of this type of innovator.

The third form of disruptive innovation refers to the creation of entirely new markets through the introduction of products or services meant to address unmet demand. One of the best examples for new market creation may be Apple's iTunes, largely responsible for the explosion of the digital music market.

The disruptive innovation of e-commerce presents the biggest challenge to traditional retailers. No company exemplifies the power of this threat more than Amazon, which first disrupted the bookselling market when it launched in 1995, and continues to transform the way people shop today.

Amazon is that rare company that's managed to deploy all three forms of disruptive innovation. First, from the outset, Amazon has consistently beaten its competitors on price and convenience (low-end disruptive innovation). Without the overhead costs of brick-and-mortar stores, Amazon can sell the same goods at a lower price, and deliver them right to consumers' doors.

Second, Amazon's Reviews feature, which allows consumers to both provide and read feedback on all types of goods, represents a form of high-quality innovation. Previously, consumers had little access to information regarding the quality of the products they saw on store shelves.

Today, consumers expect an appraisal of most items — from books to electronics to washing machines — by way of fellow consumers who have already tested these out. This feature provides consumers with a better shopping experience than what was previously offered by traditional retailers. Finally, through newer products such as the Kindle, Amazon is creating entirely new markets in the electronic books space and beyond.

While market share for Amazon and other e-tailers continues to grow at a high rate, traditional retailers and the broader economy have remained fairly stagnant. In order to remain viable, brick-and-mortar retailers must offer something unique that, at least for now, can't be approximated online. For example, retailers may want to focus on providing top-notch customer service or transition to selling goods that people still prefer to purchase in-store, such as apparel, home décor, or food — items people like to see, touch or taste themselves.

Like most disruptive innovations, e-commerce isn't going away. Traditional retailers must find a way to weather the storm of expanded online offerings and a slow-growth economy, otherwise many may find that their future New Year's celebrations are numbered.

Ebrahim Busheri is managing director, emerging growth group, at Manning & Napier Advisors, an investment management firm.