A Framework for Digital Transformation in the Retail Industry..(2/2)

“Our environment embraces a lot of change — we have to, because the internet is changing and the technologies we use are changing… for somebody who hated change, I imagine high tech would be a pretty bad career. It would be very tough. There are much more stable industries and they should probably choose one of those more stable industries with less change. They’ll probably be happier there.” – Jeff Bezos Chairman and CEO – Amazon, May-2016

The retail carnage continued over the last month with more household names such as Macy’s, Michael Kors, JC Penney, Abercrombie & Fitch et al announcing store closures. Long term management teams are also departing at struggling Retailers – who are unable to make the digital cut. It is clear now that players that are primarily brick and mortar need to urgently reinvent themselves via Digital Innovation. This is easier said than effectively done as delivering an transformative customer experience in such a highly competitive industry requires a cultural ability embrace change and to thrive in it. From a core technology standpoint, the industry’s digital divide between leaders and laggards manifests itself across four high level dimensions – Cloud Computing, Big Data, Predictive Analytics & Business Culture. Investments in these areas are needed to improve customer value drivers – Increased Consumer Choice, Better Pricing, Frictionless Shopping & Checkout, Ease of Payments, Speedy Order Fulfillment and Operations. In this blogpost, we will discuss a transformation framework for legacy retailers across both of these dimensions – business and technology.

Digital Reinvention in Retail..

We’re taking a look at the reasons for the Storefront pullback in Retail industry. For those catching up on the business background, please read the first post below.

Here Is What Is Causing The Great Brick-And-Mortar Retail Meltdown of 2017..(1/2)

Amazon, the Gold Standard of Retail..

We have seen how an ever increasing percentage of global retail sales are gradually moving online. It then follows naturally that a business model primarily focused on Digital e-commerce capabilities is a must have in the industry.  Amazon is setting new records for online sales – selling an increased online catalog of products (including furniture), generating record revenues from other seemingly unrelated areas of it’s business (e.g AWS, Alexa, Echo). The ability of Amazon to continue generating cash is critically important as it increases it’s financial ability to compete with incumbent retailers such as Walmart. According to a research report by the ISLR [4], as of end of 2016, Amazon had a market cap twice that of it’s biggest competitor – Walmart – even though it (Amazon) only reported around $1 billion in profits over a financial reporting period. Walmart generated about $80 billion around the same five year timeframe. Amazon plows everything back into growing it’s diverse businesses and aims to grow market share at the expense of quarterly profits.

Amazon’s market cap is worth more than all major brick and mortar retailers put together. (Credit – Equitykicker)

Amazon is the envy of every retailer out there with it’s mammoth sales of almost $80 billion in 2016. Walmart and Apple are a distant #2 and #3 with sales of $13.5 billion and $12 billion respectively [1].

Why has Amazon been and will continue to be successful?

I should confess that I am an Amazon fan going back several years. Please find a backgrounder on their business strategy written over two years ago.

Amazon declares results..and stuns!

Amazon has largely been successful for a few important reasons. The biggest reason being that using technology, it has completely rewritten the rules of Retail across the key processes – Consumer Choice, Frictionless Shopping & Checkout, Ease of Payments, Fulfillment and Innovation.

Consider the following –

1. Platforms and Ecosystems – Amazon has built platforms that serve a host of areas in retail – ranging from books to online video to groceries to video games to virtually any kind of e-commerce. Across all of these platforms, it has constantly invested in business strategies that offer a superior customer experience from choice to fulfillment. Be it in free shipping (Amazon Prime) to innovating on drone based delivery.
2. Constant Platform Innovation -Amazon has given its customers the largest (and ever growing catalog) of products to choose from, instant 1 – click ordering, rapid delivery via Amazon Prime and online marketplaces for sellers etc. By diversifying into areas like streaming video (via Amazon Prime Video), it is also turning into a content producer.With the launch of storefronts such as Amazon Go, it is striving to provide a seamless multichannel (digital and physical) experience so consumers can move effortlessly from one channel to another. For example, many shoppers use smartphones to reserve a product online and pick it up in a store.
3. Always Push the Envelope on Advanced Technology -Digital product innovation implies an ability to create new products and services that meet changing customer demands. Such capability implies an ability to bring products to market faster, and then to refine such approaches based on customer feedback. Amazon supplements every platform it builds with ecosystems based on advanced technology. For instance, customers can now try any of the hundreds of voice control apps being built on Amazon Alexa to order products across Amazon’s huge catalog.  In April 2017, Amazon launched Echo Look which is a Digital Assistant which can perform various functions – order a ride via Uber, order pizza from Domino’s etc. But in addition to just obeying commands and reading out news etc, it also comes with a camera that can take pictures and perform advanced image recognition. Owners can even try a few outfits, upload them to the device and the Style Check function will tell you which combination looks best. [5]
4. Create a Data Driven Customer Experience -Using data in a way that improves the efficiencies in back end supply chains as well as creating micro opportunities to influence every customer interaction. Amazon leverages big data and advanced analytics to better understand customer behavior. For example, gaining insight into customers’ buying habits—with their consent, of course—can lead to an improved customer experience and increased sales through more effective bundling.
5. Streamlined Operations – Finally, Amazon’s operations are the envy of the retail world.With Amazon Web Services (AWS), Amazon is the Public Cloud leader. Amazon has constantly proved it’s capabilities in automating operations and digitizing business processes using robotic process automation. This is important because it enables quicker shipping times to customers while cutting operating waste and costs. As an example, in the earnings call in 2015, their CFO touted Amazon’s use of robotics in its large warehouses to lower costs. “We’re using software and algorithms to make decisions rather than people, which we think is more efficient and scales better,”[3]

Retail Transformation Roadmap

Outlined below are the four prongs of a progressive strategy that Retailers can adopt to survive and thrive in today’s competitive marketplace. Needless to say, the theme across these strategies is Amazon-lite i.e leverage Digital technologies to create an immersive & convenient cross channel customer experience.

How can Retailers transform themselves to better compete in the Digital Age

Step #1 Develop a (Customer Focused) Digital Strategy..

This is a two pronged phase. Firstly, Customers across age groups are using a variety of channels such as mobile phones, apps, in-store kiosks, tablets etc to purchase products. Secondly, despite all of the attractive features around convenient ordering, frictionless payments and ease of delivery – the primary factor driving purchase in certain channels is price. Thus, it is key to identify the critical focus channels, customer segments based on loyalty & other historical data, their willingness to pay based on the channel and product mix in defining the overall digital strategy. Once defined, at the board level, key metrics which drive top line growth need to be identified.

It is important to understand that brick and mortar sales will continue to lead for a long time. Thus, investing in highly efficient store layouts, performing customer traffic analysis and in-store mapping of applications etc is highly called for. Brick and Mortar retailers have a significant ability to drive higher customer foot traffic based on their ability to deliver in-store pickup after online ordering etc. These are advantages that need to be leveraged.

There are four questions at this phase every Retailer needs to ask at the outset –

• What customer focused business capabilities can be enabled across the organization?
• What aspects of these  transformation can be enabled best by digital technology? Where are the current organizational and technology gaps that inhibit innovation?
• How do we measure ROI and Business success across these projects? How do we benchmark ourselves from a granular process standpoint against the leaders?

Step #2 Accelerate Investments in New Technology..

The need of the hour for legacy Retail IT is to implement such flexible digital platforms that are built around efficient use of data , real time insights and predictive analytics. Leaders are driving platforms based on not just Big Data Analytics but are also adopting Deep Learning. Examples include Digital Assistants such as Chatbots, Mobile applications that can perform image recognition etc. What business capabilities can be driven from this? Tons.

The ability to offer quicker product tests and to modify them per customer feedback is fast becoming the norm. Depending on the segment of Retail you operate across (e.g. Apparel), the need is to make customer tryouts more convenient with the aid of both technology and humans – knowledgeable sales associates.

Further, an ability to mine customer, supplier and partner data implies the ability to offer customers relevant products, a wide ranging catalog of products, promotions & coupons and other complementary products such as store/private label credit cards.

The Three Core Competencies of Digital – Cloud, Big Data & Intelligent Middleware

Step #3 Use Data to Drive Operations

It is no longer sufficient to just perform brand studies that only understand historical customer transaction and behavior history. There is a strong degree of correlation between customer purchases and products recommended across their social networks – such as Facebook, Pinterest and Twitter etc.  Such advanced analytics are needed to drive product development, promotions and advertising.

Demystifying Digital – the importance of Customer Journey Mapping…(2/3)

The tremendous impact of AI (Artificial Intelligence) based approaches such as Deep Learning & Robotic Process Automation are beginning to be felt across early adopter industries like Banking.

Retailers playing catchup need to re-examine business and technology strategy across six critical prongs –

1. Product Design
2. Inventory Optimization
3. Supply Chain Planning
4. Transportation and Logistics
5. IoT driven Store design
6. Technology driven warehousing and order fulfillment

Step #4 Drive a Digital Customer Experience..

We have discussed the need to provide an immersive customer experience. Big Data Analytics drives business use cases in Digital in myriad ways – key examples include  –

1. Obtaining a realtime Single View of an entity (typically a customer across multiple channels, product silos & geographies) – this drives customer acquisition, cross-sell, pricing and promotion. 
2. Customer Segmentation by helping retailers understand their customers down to the individual as well as at a segment level. This has applicability in marketing promotions and campaigns.
3. Customer sentiment analysis by combining internal organizational data, clickstream data, sentiment analysis with structured sales history to provide a clear view into consumer behavior.
4. Product Recommendation engines which provide compelling personal product recommendations by mining realtime consumer sentiment, product affinity information with historical data.
5. Market Basket Analysis, observing consumer purchase history and enriching this data with social media, web activity, and community sentiment regarding past purchase and future buying trends.

Demystifying Digital – Why Customer 360 is the Foundational Digital Capability – ..(1/3)

Conclusion..

Retail as an industry continues to present interesting paradoxes in 2017. Traditional retailers continue to suffer with store closings while online entrants with their new approaches continue to thrive by taking market share away from the incumbents. The ability to adopt a Digital mindset and to offer technology platforms that enhance customer experiences will largely determine survival.

References..

[1] “Amazon and Walmart are the top e-commerce retailers” http://wwd.com/business-news/financial/amazon-walmart-top-ecommerce-retailers-10383750/

[2] “Four Reasons Why Amazon’s stock will keep doubling every three years ”  https://www.forbes.com/sites/petercohan/2017/04/28/four-reasons-amazon-stock-will-keep-doubling-every-three-years/#45a4b68923c8

[3] “Wal-Mart, others speed up deliveries to shoppers” http://www.chicagotribune.com/business/ct-faster-holiday-deliveries-20151016-story.html

[4] Report on Amazon by the Institute of Local Self Reliance (ILSR) – https://ilsr.org/wp-content/uploads/2016/11/ILSR_AmazonReport_final.pdf

[5] “How Amazon stays more agile than most startups” –https://www.forbes.com/sites/howardhyu/2017/05/02/how-amazon-stays-more-agile-than-most-startups/#76ab2b572103