Triple Threat to Retail: Time to Close the Innovation Gap

Traditional retailers are under tremendous pressure from online and other forces. But how bad is it? And what can retailers do to remain competitive? Formerly successful retailers like Borders, Aeropostale, RadioShack and Payless Shoes have gone bankrupt under the online onslaught. Just recently, the “category killer” Toys"R"Us filed for bankruptcy. While other retailers are keeping their heads above water for now, the signs are ominous for others, as major retailers like Sears, J.C. Penney, Macy's and Kohl's continue to close hundreds of stores.

Fung Global Retail & Technology predicted a new high in yearly store closings, forecasting a total of 9,452 for 2017. This is a year-over-year increase of 361 percent. Although this sounds bad, and it is for a lot of retailers, some of this is due to retail being “overbuilt,” fueled in part by low interest rates. And while the closings are concentrated on clothing and department store segments, many retailers, especially discounters, are growing. Dollar General opened 1,290 new stores in 2017, and plans 900 more in 2018. Dollar Tree, Aldi and Lidl are also opening new stores. Tellingly, it’s the discounters that are making the biggest inroads; those best priced against their online rivals.

There are a number of factors applying pressure to retailers, but the three most impactful ones involve:

1. Shifting Consumer Trends

Consumer habits have changed dramatically in the last few years. The emergence of social media and smartphones has had a huge impact on consumer behavior, leading to the shop anywhere-anyhow-anytime-consumer. This has accelerated the shift to online shopping, which gives e-commerce retailers a distinct advantage.

Today’s consumer is accustomed to the ease and convenience of shopping online, and having a wide assortment of “always in stock” products at their fingertips. And when they place an order, they expect it within a day or two. Retailers are challenged to meet these high expectations or risk seeing their customer migrate to their more agile competitors. While retailers cannot control consumer behavior, they can better align operations around it. This means they must become even more in sync with customers than ever before. It also means meeting them in their preferred channels, with a mobile-friendly website and an engaging social presence.

To accomplish this, retailers have to establish or upgrade their online environments to meet the higher consumer expectations. This is particularly important given most expect to be able to order online and pick up in-store, or have their order delivered. Retailers must also invest in e-commerce to provide customers a convenient way to shop, anytime, anywhere. Combined with targeted online advertising and social media, it’s also a great way to attract new customers.

In-store pick up should be a given, but retailers should consider adding home delivery as an option as well. Many customers will gladly pay a premium to preserve their time and avoid the hassle of picking up an order. New services are offering last-mile delivery for retailers that can outsource delivery by adding these options to the checkout process. This is a quick way to improve their service without extending operations beyond their expertise. The key is to anticipate and be responsive to customers’ needs. Retailers need to ask themselves and, more importantly, their customers how they can make their shopping experience easier and more convenient both in-store and online.

2. Influx and Growth of Discounters

Besides the online onslaught, there are retailers like Aldi and Lidl that are entering the U.S. market and pressuring retailers on the physical front too. These discounters are skimming a lot of customers from mid-priced retailers as many consumers look to cut costs.

At the same time, the traditional giants of retail, like Walmart and Target, are improving their processes and online stores. Walmart has used its acquisition of Jet.com to full advantage, driving a 50 percent increase in online sales in the last three months.

Retailers don’t have to go toe-to-toe with the discounters on price. That’s a bad idea. But they do have to differentiate themselves to counter the lure of low prices that can siphon off customers.

Retailers should focus on providing exceptional customer service. Most companies would crawl over broken glass to acquire a customer, yet they neglect the ones they already have, which have proven their value and usually offer long-term recurring revenue if treated right. On the other hand, one misstep can cause lasting damage to reputation and revenue. Ensure staff members are properly trained; procedures are documented and followed; then monitor and continue to refine.

Another key strategy is countering commoditization. Don't be an interchangeable product or service in a sea of sameness. Retailers must seek new ways to differentiate in factors like selection, quality, brand, customer experience. Just about any product or service can be differentiated. After all, what could be more commoditized than coffee, but Starbucks built an empire on it. The Republic of Tea is doing the same for tea via e-commerce, selling premium teas with unique packaging, creating an exclusive customer experience.

3. The Technology Deficit

This is a big one, because it can have a profound impact on company performance, and yet it's often overlooked. It can also help companies anticipate and react to changing consumption patterns, and cut costs to help fend off discounters.

Many of today’s most successful retailers were born in the digital age, and that gives them a big advantage. Without physical stores to maintain and staff, pure e-commerce players like Amazon and Zappos have far lower costs, and are able to invest in and exploit the latest cloud-based technology, putting them ahead of their traditional counterparts.

The Basic Problem Sabotaging the Retail Supply Chain

In order to bridge the gap and create a better experience for consumers, retailers have to better allocate the inventory they have, and work more closely between online and offline stores and distribution centers. They need to work closely with suppliers and logistics partners to monitor point-of-sale (POS) data and inventory in real time, identify patterns, and anticipate demand. This will enable them to move product from where it is to where it's needed, quickly and efficiently.

However, this is almost impossible to do with traditional, enterprise-centric systems that are the norm in retail. These systems weren't designed to work seamlessly across companies to support today's fast-moving and globally connected supply chains. As a result, critical information like POS data, consumption patterns, inventory levels and shipments are not available to relevant trading partners in real time.

Instead, the data lies siloed and stagnant. When this stale data is used, it fuels bad decisions which undermine the efficiency and responsiveness of the entire process. Separate systems and batch processing also lead to supply chain planning that's disconnected from execution, and both planning and execution suffer as a result. Plans are formulated based on stale data, and execution unfolds based on history rather than how things stand now. Imagine if Uber ran on days-old data, sending supply, or in this case drivers, to pick up passengers based on yesterday’s demand? The result of delays and disconnects is major supply and demand mismatch. This leads to stock-outs in some areas, high inventory levels in others, and high logistics costs to resynchronize supply and demand. Costs escalate while service levels and customer satisfaction falls.

Why Retailers Must Close the Innovation Gap

While online and omnichannel retailers like Amazon and Walmart continue to invest heavily in technology, most retailers haven't kept pace. IHL Group reports that while industries like finance and banking invest up to 6 percent of revenue in IT, retailers historically have only invested an average of 1 percent to 2 percent of revenues in technology. For grocery retailers, it's less than 1 percent.

A breakdown of IT spend within the retail sector by RIS News and IHL Group supports the view that retailers that invest more in IT enjoy higher growth. Leading retailers spend 8.8 percent of revenue on enterprise IT, average retailers spend 3.8 percent, and below-average retailers spend 1.3 percent.

With the rise of new consumer-driven networks, lagging retailers have the opportunity to leapfrog the leaders.

Connecting to Consumer-Driven Networks

Like the business-to-consumer network model of Uber, consumer-driven networks connect companies in a business-to-business network, connecting the entire end-to-end supply chain in real time back to the consumer. They eliminate complex and costly integrations, siloed and stale data, and sluggish batch transfers that drag down efficiency and service levels.

These networks maintain a single version of data in the cloud, and distribute this data from the consumer and POS to all nodes in the network, enabling end-to-end visibility and aligning supply to demand. The most advanced networks use artificial intelligence to optimize and autonomously execute many functions, such as adjusting forecasts across the trading tiers based on real-time sales data, and updating orders accordingly. Like a plane on autopilot adjusting to shifting winds, forecasts and orders on a consumer-driven network are adjusted on the fly automatically as conditions change. This means supply remains tightly coupled to demand, minimizing stock-outs and excess inventory along with expediting costs.

Another major advantage of the consumer-driven network model is that companies have an entire ecosystem of potential trading partners to tap into, from suppliers to carriers, distributors and other retailers. And this partnering potential for mutual benefit is huge.

Because these companies share the cost of the network, each member’s cost is significantly lower than with installed enterprise software. Since all companies on the network are already onboarded, connecting with other businesses is easy as well. Similar to LinkedIn, accepting a connection request can happen instantly, rather than initiating a costly point-to-point integration project.

Becoming Consumer-Centric and Connected

Retailers have a major opportunity to connect more closely with their customers and their supply networks, while better serving their customers at lower cost. Consumer-driven networks play a vital role in focusing the retail network on the one thing that matters; the consumer. Retailers can create a more customer-centric experience, use smart technology to anticipate and sync supply and demand, and remain profitable and competitive at a time when every dollar counts.

Nigel Duckworth is marketing strategist at One Network Enterprises, a global provider of a secure and scalable multiparty business network. For more information, contact the author at nduckworth@onenetwork.com.