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

“Amazon and other pure plays are driving toward getting both predictive and prescriptive analytics. They’re analyzing and understanding information at an alarming rate. Brands have pulled products off of Amazon because they’re learning more about them than the brands themselves.” — Todd Michaud, Founder and CEO of Power Thinking Media

By April 2017,17 major retailers announced plans to close stores (Image Credit: Clark Howard)

We are witnessing a meltdown in Storefront Retail..

We are barely halfway through 2017, and the US business media is rife with stories of major retailers closing storefronts. The truth is inescapable that the Retail industry is in the midst of structural change. According to a research report from Credit Suisse, around 8,600 brick-and-mortar stores will shutter their doors in 2017. The number in 2016 was 2,056 stores and 5,077 in 2015 which points to industry malaise [1].

The Retailer’s bigger cousin – the neighborhood Mall – is not doing any better. There are around 1,200 malls in the US today and that number is forecast to decline to just about 900 in a decade.[3]

It is clear that in the coming years, Retailers (and malls) across the board will remain under pressure due to a variety of changes – technological, business model and demographic.

So what can legacy Retailers do to compete with and disarm the online upstart?

Six takeaways for Retail Industry watchers..

Six takeaways that should have industry watchers take notice from the recent headlines –

1. The brick and mortar retail store pullback has accelerated in 2017 – an year of otherwise strong economic expansion. Typical consumer indicators that influence consumer spending on retail are generally pointing upwards. Just sample the financial data – the US has seen increasing GDP for eight straight years, the last 18 months have seen wage growth for middle & lower income Americans and gas prices are at all time lows.[3] These kinds of relatively strong consumer data trends cannot explain a slowdown in physical storefronts. Consumer spending is not shrinking to due to declining affordability/spending power.
2. Retailers that have either declared bankruptcy or announced large scale store closings include marquee names across the different categories of retail. Ranging from Apparel to Home Appliances to Electronics to Sporting Goods. Just sample some of the names – Sports Authority, RadioShack, HHGregg, American Apparel, Bebe Stores, Aeropostale, Sears, Kmart, Macy’s, Payless Shoes, JC Penney etc. So this is clearly a trend across various sectors in retail and not confined to a given area, for instance, women’s apparel.
3. Some of this “Storefront Retail bubble burst” can definitely be attributed to hitherto indiscriminate physical retail expansion. The first indicator is here is in the glut of residual excess retail space.  The WSJ points out that the retail expansion dates back almost 30 years ago when retailers began a “land grab” to open more stores – not unlike the housing boom a decade or so ago. [1] North America now has a glut of both retail stores and shopping malls while per capita sales has begun declining. The US especially has almost five times retail space per capita compared to the UK. American consumers are also swapping materialism for more experiences.[3]  Thus, an over-buildout of retail space is one of the causes of the ongoing crash.
   

   The US has way more shopping space compared to the rest of the world. (Credit – Cowan and Company)

4. The dominant retail trend in the world is online ‘single click’ shopping. This is evidenced by declining in-store Black Friday sales in 2016 when compared with record Cyber Monday (online) sales. As online e-commerce volume increases year on year, online retailers led by Amazon are surely taking market share away from the struggling brick-and mortar Retailer who has not kept up with the pace of innovation. The uptick in online retail is unmistakeable as evidenced by the below graph (src – ZeroHedge) depicting the latest retail figures. Department-store sales rose 0.2% on the month, but were down 4.5% from a year earlier. Online retailers such as Amazon, posted a 0.6% gain from the prior month and a 11.9% increase from a year earlier.[3]

   

   Retail Sales – Online vs In Store Shopping (credit: ZeroHedge)

5. Legacy retailers are trying to play catch-up with the upstarts who excel at technology. This has sometimes translated into acquisitions of online retailers (e.g. Walmart’s buy of Jet.com). However, the Global top 10 Retailers are dominated by the likes of Walmart, Costco, the Kroger, Walgreens etc. Amazon comes in only at #10 which implies that this battle is only in it’s early days. However, legacy retailers are saddled by huge fixed costs & their investors prefer dividend payouts to investments in innovations. Thus their CEOs are incentivized to focus on the next quarter, not the next decade like Amazon’s Jeff Bezos who is famously known to not evidence any signs of increasing Amazon’s profitability. Though traditional retailers have begun accelerating investments (both organic and via acquisition) in the critical areas of Cloud Computing, Big Data,Mobility and Predictive Analytics – the web scale majors such as Amazon are far far ahead of typical Retail IT shop.

6. The fastest growing Retail industry brands are companies that use Data as a core business capability to impact the customer experience versus as just another component of an overall IT system. Retail is a game of micro customer interactions that drive sales and margin. This implies a Retailer’s ability to work with realtime customer data – whether it’s sentiment data, clickstream data and historical purchase data to drive marketing promotions, personally relevant services, order fulfillment, show-rooming, loyalty programs etc etc.On the back end, the ability to streamline operations by pulling together data from operations, supply chains are helping retailers fine-tune & automate operations especially from a delivery standpoint.

   In Retail, Technology Is King..

   So, what makes Retail somewhat of a unique industry in terms of it’s data needs? I posit that there are four important characteristics –

   • First and foremost, Retail customers especially the millennials are very open about sharing their brand preferences and experiences on social media. There is a treasure trove of untapped data and similar out there. Data needs to be collected and monetized on. We will explore this in more detail in the next post.
   • Secondly, leaders such as Amazon use customer, product data and a range of other technology capabilities to shape the customer experience versus the other way around for traditional retailers. They do this based on predictive analytic approaches such as machine learning and deep learning. Case in point is Amazon which has now morphed from an online retailer to a Cloud Computing behemoth with it’s market leading AWS (Amazon Web Services). In fact it’s best in class IT enabled it to experiment with retail business models. E.g. The Amazon Prime subscription at $99-a-year Amazon Prime subscription, which includes free two delivery, music and video streaming service that competes with Netflix. As of March 31, 2017 Amazon had 80 million Prime subscribers in the U.S , an increase of 36 percent from a year earlier, according to Consumer Intelligence Research Partners.[3]
   • Thirdly, Retail organizations need to become Data driven businesses. What does that mean or imply? They need to rely on data to drive every core business process – e.g. realtime insights about customers, supply chains, order fulfillment and inventory. This data however spans every kind from traditional structured data (sales data, store level transactions, customer purchase histories, supply chain data, advertising data etc) to non traditional data (social media feeds as there is a strong correlation between the products people rave about and what they ultimately purchase), location data, economic performance data etc). This Data variety represents a huge challenge to Retailers in terms of managing, curating and analyzing these feeds.
   • Fourth, Retail needs to begin aggressively adopting the IoT capabilities they already have in place in the area of Predictive Analytics. This implies tapping and analyzing data from in store beacons, sensors and actuators across a range of use cases from location based offers to restocking shelves.
     

     ..because it enables new business models..

     None of the above analysis claims that physical stores are going away. They serve a very important function in allowing consumers a way to try on products and allowing for the human experience. However, online definitely is where the growth primarily will be.

     The Next and Final Post in this series..

     It is very clear from the above that it now makes more sense to talk about a Retail Ecosystem which is composed of store, online, mobile and partner storefronts.

     In that vein, the next post in this two part series will describe the below four progressive strategies that traditional Retailers can adopt to survive and favorably compete in today’s competitive (and increasingly online) marketplace.

     These are –

   • Reinventing Legacy IT Approaches – Adopting Cloud Computing, Big Data and Intelligent Middleware to re-engineer Retail IT

   • Changing Business Models by accelerating the adoption of Automation and Predictive Analytics – Increasing Automation rates of core business processes and infusing them with Predictive intelligence thus improving customer and business responsiveness

   • Experimenting with Deep Learning Capabilities  –the use of Advanced AI such as Deep Neural Nets to impact the entire lifecycle of Retail

   • Adopting a Digital or a ‘Mode 2’ Mindset across the organization – No technology can transcend a large ‘Digital Gap’ without the right organizational culture

     Needless to say, the theme across all of the above these strategies is to leverage Digital technologies to create immersive cross channel customer experiences.

References..

[1] WSJ – ” Three hard lessons the internet is teaching traditional stores” – https://www.wsj.com/articles/three-hard-lessons-the-internet-is-teaching-traditional-stores-1492945203

[2] The Atlantic  – “The Retail Meltdown” https://www.theatlantic.com/business/archive/2017/04/retail-meltdown-of-2017/522384/?_lrsc=2f798686-3702-4f89-a86a-a4085f390b63

[3] WSJ – ” Retail Sales fall for the second straight month” https://www.wsj.com/articles/u-s-retail-sales-fall-for-second-straight-month-1492173415